SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Three Months Ended March 31, 1996
Commission File Number 0-15330
AMVESTORS FINANCIAL CORPORATION
______________________________________________
(Exact name of registrant as specified in its charter)
Kansas 48-1021516
____________________________ _____________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
415 Southwest 8th Avenue, Topeka, Kansas 66603
_________________________________________ ___________________
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (913) 232-6945
________________
Indicate by check mark whether the registrant: (1) has filed
all reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the close of the period covered by this
report.
Class Outstanding March 31, 1996
_______ _______________________________
Common Stock, no par value 10,154,995 shares
AMVESTORS FINANCIAL CORPORATION
INDEX
PARTI. Financial Information:
Page Number
Consolidated Balance Sheets-
March 31, 1996 and December 31, 1995 2-3
Consolidated Statements of Earnings-
Three months ended March 31, 1996 and 1995 4
Consolidated Statements of Stockholders' Equity-
Twelve months ended December 31, 1995 and
Three months ended March 31, 1996 5
Consolidated Statements of Cash Flows-
Three months ended March 31, 1996 and 1995 6-7
Notes to Consolidated Financial Statements 8-23
Management's Discussion and Analysis of Financial
Condition and Results of Operations 23-28
PART II. Other Information 28-31
1
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1996 and December 31, 1995
(000's Omitted)
(Unaudited)
ASSETS 1996 1995
_______________________________________ ___________ _________
Investments:
Debt securities:
Bonds:
Available-for-sale (cost: $2,035,105 and
$1,947,777).......................... $ 2,063,146 2,044,606
Trading (cost: $1,650 and $1,489)..... 1,668 1,485
2,064,814 2.046,091
Equity securities:
Common stock:
Available-for-sale (cost: $1,347 and $1,047) 1,585 1,181
Preferred stock:
Available-for-sale (cost: $14,533 and $7,566) 15,016 7,733
Trading (cost: $1,074 and $619)........... 1,091 629
17,692 9,543
Other long-term investments.................. 34,515 39,491
Short-term investments......................... 427 436
Total investments......................... 2,117,448 2,095,561
Cash and cash equivalents...................... 12,512 48,281
Accounts receivable (net of allowance for uncollectible
accounts of $815 and $739)................... 275 454
Amounts receivable under reinsurance agreements..... 144,169 146,618
Amounts receivable on securities settlements in process 1,743 10,873
Accrued investment income.................... 29,501 29,357
Deferred policy acquisition costs.................... 163,812 140,476
Other assets....................................... 6,163 4,584
Total assets............................ $2,475,623 2,476,204
See notes to consolidated financial statements.
2
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1996 and December 31, 1995
(000's Omitted, except per share data)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
______________________________________ ______________ _____________
Liabilities:
Policy liabilities:
Future policy benefits.............. $ 2,296,246 2,259,028
Other policy liabilities........... 6,654 7,312
2,302,900 2,266,340
Notes payable..................... 7,000 7,000
Amounts due on securities settlements in process 3,400 1,438
Deferred income taxes......................... 6,443 22,901
Accrued expenses and other liabilities.......... 6,598 4,080
Total liabilities.............. 2,326,341 2,301,759
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 -
10,154,995
shares in 1996 and 10,140,738 shares in 1995.. 12,922 12,904
Paid in capital.............................. 64,371 64,284
Unrealized investment gains (losses)(net of deferred
policy acquisition cost amortization expense (benefit)
of $8,092 and $27,327 and deferred income tax
expense (benefit) of $7,234 and $24,431)..... 13,436 45,372
Retained earnings............. ............ 61,382 54,714
152,111 177,274
Less leveraged employee stock ownership trust
(LESOP) .................................... (2,829) (2,829)
Total stockholders' equity 149,282 174,445
Total liabilities and stockholders' equity.. $2,475,623 2,476,204
See notes to consolidated financial statements.
3
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three months ended March 31, 1996 and 1995
(000's Omitted, except per share data)
(Unaudited)
1996 1995
Revenue:
Insurance premiums and policy charges........ $ 2,457 1,904
Net investment income......................... 39,169 38,220
Net investment gains (losses)................ 7,627 (10)
Other revenue............................... 25 98
Total revenue................................. 49,278 40,212
Benefits and expenses:
Benefits, claims and interest credited
to policyholders......................... 30,620 29,000
Amortization of deferred policy acquisition
costs ................................ 4,970 2,988
General insurance expenses.................. 1,921 2,215
Premium and other taxes, licenses and fees..... 251 525
Other expenses................................. 60 54
Total benefits and expenses................. 37,822 34,782
Operating earnings.............................. 11,456 5,430
Interest expense.............................. 125 21
Earnings before income tax expense........... 11,331 5,409
Income tax expense.......................... 3,910 1,893
Net earnings.................................. $ 7,421 3,516
Earnings per share of common stock:
Primary:
Net earnings.............................. $ .71 .34
Fully diluted:
Net earnings............................. $ .71 .34
Average share outstanding:
Primary 10,427 10,251
Fully diluted........................ 10,493 10,292
See notes to consolidated financial statements.
4
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(000's Omitted, except share and per share data)
(Unaudited)
Unrealized
Investment
Common Paid-in Gains Retained
Stock Capital (Losses) Earnings LESOP Total
Balance as of January
1, 1995 $12,769 63,499 (7,813) 38,876 (3,135) 104,196
Net earnings........ - - - 16,599 - 16,599
Change in unrealized
investment
gains (losses)......... - - 53,185 - - 53,185
Cash dividends to
stockholders
($.075 per share on
common
stock)............ - - - (761) - (761)
Issuance of common stock:
upon exercise of
options 135 785<F1> - - - 920
Allocation of LESOP
shares - - - - 306 306
Balance December
31, 1995 12,904 64,284 45,372 54,714 (2,829) 174,445
Net earnings..... - - - 7,421 - 7,421
Change in unrealized
investment
gains (losses).... - - (31,936) - - (31,936)
Cash dividends to
stockholders
($.075 per share on
common
stock).............. - - - (753) - (753)
Issuance of common stock:
upon exercise of
options 18 87<F1> - - - 105
Balance March 31,
1996 $12,922 64,371 13,436 61,382 (2,829) 149,282
<FN<F1> Net of income tax benefit of $29 and $440 for the period ended March
31,
1996 and December 31, 1995, respectively.
See notes to consolidated financial statements.
5
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Three months ended March 31, 1996 and 1995
(Unaudited)
(000's Omitted)
1996 1995
Operating Activities:
Net earnings.......................... $ 7,421 3,516
Adjustments to reconcile net earnings to
net cash
provided by (used in) operating activities:
Interest credited to policyholders....... 30,835 29,242
Amortization of (discounts) premiums on
debt
securities, net...................... (241) (266)
Amortization of deferred policy
acquisition costs............... 4,970 2,988
Net investment (gains) losses..... (7,627) 10
Accrued investment income............ (144) 133
Deferred income taxes................ 737 2,411
Other, net.......................... 2,779 2,093
Net cash provided by operating activities 38,730 40,127
Investing Activities:
Purchases of securities:
Held-to-maturity................. - (612)
Available-for-sale................ (261,348) (40,042)
Trading........................... (6,332) -
Proceeds from sale of securities:
Held-to-maturity...................... - -
Available-for-sale................. 135,203 1,721
Trading............................. 6,290 -
Proceeds from maturity or redemption
of securities:
Held-to-maturity...................... - 4,793
Available-for-sale................... 38,558 25,131
Trading............................. 259 -
Other long-term investments, net..... 4,977 4,728
Short-term investments, net.......... 9 67
Capitalization of deferred policy
acquisition costs ..................... (9,071) (7,436)
Other, net........................ (984) (156)
Net cash used in investing activities.... (92,439) (11,806)
Financing Activities:
Premiums received..................... 97,144 75,768
Surrender and death benefits paid...... (93,786) (96,499)
Surrender and risk charges collected.... 1,880 1,507
Securities settlements in process....... 11,092 65
Cash dividends to stockholders...... (753) -
Issuance of common stock.......... 105 260
Other, net........................ 2,258 424
Net cash provided by (used in) financing
activities............................. 17,940 (18,475)
Increase (Decrease) in Cash and Cash
Equivalents...................... (35,769) 9,846
Cash and Cash Equivalents:
Beginning of year................ 48,281 10,621
End of year............. $ 12,512 20,467
See notes to consolidated financial statements.
6
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Increase (Decrease) in Cash and Cash Equivalents
Three months ended March 31, 1996 and 1995
(Unaudited)
(000's Omitted)
1996 1995
Supplemental schedule of cash flow information:
Income tax payments (refunds)........ $ 315 (1,272)
Interest payments....................... $ 118 -
Change in net unrealized investment gains
(losses)......................... $ (68,368) 19,792
Less: Associated (increase) reduction in
amortization
of deferred policy acquisition costs 19,235 (4,948)
Deferred income tax (expense) benefit.. 17,197 (4,161)
Net change in net unrealized gains (losses). $(31,936) 10,683
See notes to consolidated financial statements.
7
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
_______________________________________________
A. PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of
AmVestors and its wholly-owned subsidiaries American Investors Life Insurance
Company, Inc. (American), American Investors Sales Group, Inc. (American
Sales), and AmVestors Investment Group, Inc. (AIG) (collectively the
company). All significant intercompany accounts and transactions have been
eliminated.
B. ACCOUNTING PRINCIPLES AND PRACTICES:
The accompanying unaudited consolidated financial statements have
been prepared on the basis of generally accepted accounting principles as
promulgated by the American Institute of Certified Public Accountants. In the
opinion of the company, the consolidated financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary to
present fairly the financial position as of March 31, 1996 and the results of
earnings and the statements of cash flows for the three month periods ended
March 31, 1996 and 1995.
C. INVESTMENTS:
Debt securities held-to-maturity are carried at amortized cost,
except that those securities with an other than temporary impairment in
value, are carried at estimated net realizable value. Debt securities
available-for-sale are carried at estimated market value, with any unrealized
gains or losses recorded in stockholders' equity.
Investments are reviewed on each balance sheet date to determine if
they are impaired. In determining whether an investment is impaired, the
company considers whether the decline in market value at the balance sheet
date is an other than temporary decline; if so, then the investment's
carrying value is reduced to a new cost basis which represents estimated net
realizable value. The decline in value is reported as a realized loss, and a
recovery from the new cost basis is recognized as a realized gain only at
sale.
The estimates of net realizable value are based on information
obtained from published financial information provided by issuers,
independent sources such as broker dealers or the company's independent
investment advisors. Such amounts represent an estimate of the consideration
to be received in the future when the defaulted company's debt is settled
through the sale of their assets or the restructuring of their debt. These
estimates do not represent the discounted present value of these future
considerations.
Investments in common 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 company's share of the partner's estimated market value
with any unrealized gains or losses recorded in net investment income.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. Summary of Significant Accounting Policies (continued):
___________________________________________________________
D. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Estimated fair value amounts have been determined by the company
using available market information and appropriate valuation methodologies.
Due to the fact that considerable
judgment is required to interpret market data to develop the
estimates of fair value, the estimates presented are not necessarily
indicative of the amounts that could be realized in a current market
exchange.
The carrying values and estimated fair values of the company's
financial
instruments as of March 31, 1996, and December 31, 1995, were as
follows:
(000's Omitted)
1996 1995
Carrying Fair Carrying Fair
Value Value Value Value
Assets
Debt securities.. $2,064,814 2,064,814 2,046,091 2,046,091
Equity securities....... 17,692 17,692 9,543 9,543
Other long-term investments 34,515 34,524 39,491 39,546
Short-term investments..... 427 427 436 436
Cash and cash equivalents.. 12,512 12,512 48,281 48,281
Accounts receivable on
securities settlements in
process.................... 1,743 1,743 10,873 10,873
Accounts receivable and
accrued investment income.. 29,776 29,776 29,811 29,811
Liabilities:
Future policy benefits -
investment contracts..... 2,059,172 1,935,054 2,022,653 1,900,895
Other policy liabilities. 6,654 6,654 7,312 7,312
Notes payable............ 7,000 7,000 7,000 7,000
Amounts due on securities
settlements in process.. 3,400 3,400 1,438 1,438
Accrued expenses and other
liabilities.............. 6,598 6,598 4,080 4,080
DEBT SECURITIES - Fair values are based on quoted market prices or
dealer quotes, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
EQUITY SECURITIES - Fair value equals the carrying value as these
securities are carried at quoted market value.
OTHER LONG-TERM INVESTMENTS - For certain homogeneous categories of
mortgage loans, fair value is estimated using quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics. Fair value of policy loans and other
long-term investments is estimated to approximate the assets'
carrying value.
SHORT-TERM INVESTMENTS AND CASH AND CASH EQUIVALENTS - The carrying
amounts reported in the balance sheet approximate the assets' fair value.
AMOUNTS RECEIVABLE ON SECURITIES SETTLEMENTS IN PROCESS - The
carrying amount reported in the balance sheet approximates the fair value of
this asset.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. Summary of Significant Accounting Policies (continued):
___________________________________________________________
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.
OTHER POLICY LIABILITIES - The carrying amount reported in the
balance sheet approximates the fair value of these liabilities.
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.
AMOUNTS DUE ON SECURITIES SETTLEMENTS IN PROCESS - The carrying
amount reported in the
balance sheet approximates the fair value of this liability.
ACCRUED EXPENSES AND OTHER LIABILITIES - The carrying amount reported
in the balance sheet approximates the fair value of these liabilities.
The use of different market assumptions and/or estimation
methodologies could have a material effect on the estimated fair value
amounts.
E. 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 regulations 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 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.
F. 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
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. Summary of Significant Accounting Policies (continued):
___________________________________________________________
relation to the incidence of expected gross profits over the expected life of
the policies. For single premium life insurance, deferred policy acquisition
costs are amortized over the life of the policies, but not more than 20 years
for policies issued before January l, 1987, and not more than 30 years for
policies issued after December 31, 1986, based on the expected gross profits
for the amortization periods. The deferred costs related to traditional life
contracts are amortized over the premium paying period for the related
policies using the same actuarial assumptions as to interest, mortality and
withdrawals as are used to calculate the reserves for future benefits.
Net investment gains (losses) realized in the first three months of
1996 and 1995 resulted in the company experiencing investment margins greater
than those estimated. As a result, $2,147,467 and $3,731 of the unamortized
balance of deferred policy acquisition costs were expensed in the three
months ended March 31, 1996 and 1995, 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.
g. 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.
H. PARTICIPATING POLICIES:
The company issued participating policies in past years on which
dividends are paid to policyholders as determined annually by the Board of
Directors. The amount of dividends declared but undistributed is included in
other liabilities. Policy benefit reserves do not include a provision for
estimated future participating dividends.
I. 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.
J. 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.
K. EARNINGS PER SHARE:
Earnings per share of common stock are computed by dividing net
earnings by the sum of the weighted average number of shares outstanding
during the period plus dilutive common stock equivalents applicable to stock
options and warrants calculated using the treasury stock method.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. Summary of Significant Accounting Policies (continued):
___________________________________________________________
L. CONSOLIDATED STATEMENTS OF CASH FLOWS:
For purposes of reporting cash flows, cash and cash equivalents
includes cash and money market accounts.
M. NEW ACCOUNTING STANDARDS:
Effective January 1, 1995, the company adopted the provisions of SFAS
No. 119, "Disclosure About Derivative Financial Instruments and Fair Value of
Financial Instruments." This Statement requires disclosure about the amount,
nature, and terms of derivative financial instruments. Since the company has
no derivative financial
instruments as defined in the Statement, the adoption of this
accounting standard did not result in any additional financial statement
disclosure.
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.
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 affect on its consolidated financial
statements.
Effective for financial statements for fiscal years beginning after
December 15, 1995, 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 Option 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 Option 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.
N. RECLASSIFICATIONS:
Certain reclassifications have been made to conform the March 31,
1995 and December 31, 1995 financial statements to the March 31, 1996
presentation.
2. Investments:
_________________
A summary of investment income is as follows:
(000's Omitted)
For the Period
Ended March 31,
1996 1995
Debt securities.................... $ 37,781 36,199
Equity securities.................. 168 6
Other long-term investments....... 1,234 2,113
Short-term investments............ 715 435
39,898 38,753
Less investment expenses......... 729 533
Net investment income........... $ 39,169 38,220
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (continued):
______________________________
(000's Omitted)
For the Period
Ended March 31,
1996 1995
Net investment gains (losses):
Realized investment gains (losses):
Debt securities, available-for-sale.. $ 7,203 7
Debt securities, held-to-maturity.......... - 6
Debt securities, trading.................. 280 -
Equity securities, available-for-sale..... - 2
Equity securities, trading............ 115 -
Other............................... - (25)
Net realized investment gains (losses)......... 7,598 (10)
Unrealized investment gains (losses):
Debt securities, trading............ 22 -
Equity securities, trading........... 7 -
Net unrealized investment gains
(losses)....................................... 29 -
Net investment gains (losses)................... $ 7,627 (10)
Certain limited partnership investments are included in income from
other long-term investments. These funds (commonly referred to as hedge
funds) are managed by outside investment advisors. The investment guidelines
of these partnerships provide for a broad range of investment alternatives,
including stocks, bonds, futures, options, commodities, and various other
financial instruments. These investments were purchased with the strategy
that yields in excess of the S&P 500 Index may be obtained. The partnerships
are carried at an amount equal to the company's share of the partnerships'
estimated market value with related unrealized gains and losses recorded in
net investment income. In accordance with the permitted guidelines, the
investments purchased by these partnerships may experience greater than
normal volatility which could materially affect the company's earnings for
any given period.
The maturity of the company's debt and equity securities portfolio as
of March 31, 1996 was as follows:
(000's Omitted)
As of March 31, 1996
Available-for-Sale Trading
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
Debt securities:
One year or less $ 41,941 40,151 - -
Two years through five years 439,092 449,821 759 756
Six years through ten years 1,254,470 1,275,156 729 753
Eleven years and after 299,602 298,018 162 159
2,035,105 2,063,146 1,650 1,668
Equity securities 15,880 16,601 1,074 1,091
$ 2,050,985 2,079,747 2,724 2,759
These tables include mortgage-backed securities based on the estimated cash
flows of the
underlying mortgages.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (continued):
_____________________________
The book value, estimated market value and unrealized market gains
and losses of debt and equity securities as of March 31, 1996, and December
31, 1995, were as follows:
(000's Omitted)
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
March 31, 1996
___________________
Bonds, available-for-sale:
Corporate debt obligations
Investment grade..... $ 1,143,316 33,583 12,780 1,164,119
High-yield............ 162,099 2,771 2,471 162,399
1,305,415 36,354 15,251 1,326,518
U.S. Treasury obligations. 50,138 774 140 50,772
Mortgage-backed securities
Investment grade............ 671,010 14,134 5,695 679,449
High-yield................. 8,542 - 2,135 6,407
Bonds, available-for-sale... 2,035,105 51,262 23,221 2,063,146
Bonds, trading:
Corporate debt obligations
Investment grade.......... 1,489 23 3 1,509
High-yield........... 161 1 3 159
Bonds, trading........... 1,650 24 6 1,668
Total bonds................. 2,036,755 51,286 23,227 2,064,814
Equity securities......... 16,954 1,300 562 17,692
$ 2,053,709 52,586 23,789 2,082,506
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 21 52,664
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
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (continued):
____________________________
The preceding table includes the carrying value and estimated market
value of debt securities which the company has determined to be impaired (othe
r than temporary decline in value) as
follows:
(000's Omitted)
Accumulated Estimated
Original Write Carrying Market
Cost Downs Value Value
March 31, 1996 $ 7,545 7,545 - -
December 31, 1995 $ 7,545 7,545 - -
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 March 31, 1996,
and December 31, 1995 were as follows:
(000's Omitted)
Estimated
Amortized Unrealized Unrealized Market
March 31, 1996 Cost Gains Losses Value
Government agency mortgage-backed securities:
Planned amortization classes.... $ 64,212 401 - 64,613
Targeted amortization classes and
accretion directed classes........ 7,858 191 - 8,049
Pass-throughs......................... 29 3 - 32
Total government agency
mortgage-backed securities. 72,099 595 - 72,694
Government-sponsored enterprise
mortgage-backed securities:
Planned amortization classes. 433,709 11,001 4,323 440,387
Sequential classes............. 272 4 - 276
Pass-throughs.................... 3,230 20 - 3,250
Total government-sponsored enterprise
mortgage-backed securities........ 437,211 11,025 4,323 443,913
Other mortgage-backed securities:
Planned amortization classes.... 17,312 78 - 17,390
Sequential classes............. 140,782 2,428 1,372 141,838
Pass-throughs................. 10 - - 10
Subordinated classes........... 12,138 8 2,135 10,011
Total other mortgage-backed securities. 170,242 2,514 3,507 169,249
Total mortgage-backed securities........ $ 679,552 14,134 7,830 685,856
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (continued):
___________________________
(000's Omitted)
Estimated
Amortized Unrealized Unrealized
Market
December 31, 1995 Cost Gains Losses Value
Government agency mortgage-backed securities:
Planned amortization 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
Certain mortgage-backed securities are subject to significant
prepayment risk. This is due to the fact that in periods of declining
interest rates, mortgages may be repaid more rapidly than scheduled, as
individuals refinance higher rate mortgages to take advantage of the lower
current rates. As a result, holders of mortgage-backed securities may
receive large prepayments on their investments which they are unable to
reinvest at an interest rate comparable to the rate on the prepaying
mortgages. Mortgage-backed pass-through securities and sequential
classes, which comprised 21.2% and 23.4% of the carrying value of the
company's mortgage-backed securities as of March 31, 1996 and December 31,
1995, 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 77.0% and 74.6%
of the carrying value of the company's mortgage-backed securities as of March
31, 1996 and December 31, 1995.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENT-(Continued)
2. Investments (continued):
___________________________
As of March 31, 1996, 74.9% of the company's mortgage-backed
securities were issued by either government agencies or government-sponsored
enterprises, compared to 75.3% as of December 31, 1995. 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
$18,082,768 as of March 31, 1996, all of the company's investments in other
mortgage-backed securities are rated A or better by Standard& Poor's or Moody'
s.
The amounts shown as "estimated market" are primarily based on
quotations obtained from independent sources such as broker dealers who make
markets in similar securities. Unless representative trades of securities
actually occur at the balance sheet date, these quotes are generally
estimates of market value based on an evaluation of appropriate factors such
as institution-size trading in similar securities, yield, credit quality,
coupon rate, maturity, type of issue and other market data. Losses are recogni
zed in the period they occur based upon specific review of the securities
portfolio and other factors.
The consideration received on sales of debt and equity securities,
carrying value and realized gains and losses on those sales were as follows:
(000's Omitted)
For the Period Ended March 31,
1996 1995
Consideration received....... $ 180,312 33,873
Carrying value.......... 172,714 33,858
Change in unrealized gains (losses) on
trading securities................. 29 -
Net investment gains (losses)......... $ 7,627 15
Investment gains................... $ 8,365 15
Investment losses.............. (767) -
Change in unrealized gains (losses) on
trading securities.................. 29 -
Net investment gains (losses)....... $ 7,627 15
The above table contains no sales of securities which the company had
classified as held-to-maturity.
Net unrealized gains (losses) on debt securities held-to-maturity,
debt securities
available-for-sale, debt securities trading, equity securities
available-for-sale and equity securities trading changed as follows:
(000's) Omitted
Net Unrealized Gains (Losses)
Debt Debt Equity
Securities Securities Debt Securities Equity
Held-to- Available- Securities Available- Securities
Maturity for-Sale Trading for-Sale Trading
Balance as of January 1, 1995.. $ (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
1996 Net Change............... - (68,788) 22 420 7
Balance as of March 31, 1996... $ - 28,041 18 721 17
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (continued):
___________________________
At March 31, 1996, and December 31, 1995, investments with statutory
carrying values of
$2,026,957,262 and $1,956,343,973, respectively, were on deposit with
various insurance departments. These amounts exceeded the minimum required
deposits by $61,109,979 and $53,856,902 as of March 31, 1996, and December
31, 1995, respectively.
3. Other Assets:
________________
Other assets consist of the following:
(000's Omitted)
March 31, December 31,
1996 1995
_____________ ____________
Property and equipment at cost:
Home office building
(including land of $352)...... $ 4,559 3,643
Furniture and equipment........ 3,645 3,711
Automobiles.................... 99 99
8,303 7,453
Less accumulated depreciation.... (3,656) 3,650
4,647 3,803
Other......................... 1,516 711
$ 6,163 4,584
4. Reinsurance:
_______________
The company reinsures portions of insurance it writes. The maximum
amount of risk retained by the company on any one life is $150,000.
A summary of reinsurance data follows (000's Omitted):
For the Ceded to
Period Gross Other Net
Ended Descriptions Amount Companies Amount
March 31, Life insurance in force $ 305,699 234,692 71,007
1996 Insurance premiums and
policy charges.. 2,649 192 2,457
March 31, Life insurance in force... 324,030 252,801 71,229
1995 Insurance premiums and
policy charges.. 2,188 284 1,904
March 31, Future policy benefits.... 2,296,246 143,406 2,152,840
1996
December 31, Future policy benefits... 2,259,028 145,183 2,113,845
1995
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 likely.
The company had amounts receivable under reinsurance agreements of
$144,169,337 and $146,617,611 as of March 31, 1996, and December 31, 1995,
respectively. Of the amounts,
$142,507,965 and $144,965,371 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. Reimbursement received from ERC for amounts paid by the
company on the reinsured risks totalled $2,416,764 and $3,891,613 for periods
ended March 31, 1996 and 1995, respectively.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
4. Reinsurance (continued):
__________________________
The following table identifies the components of the amounts
receivable from ERC:
(000's Omitted)
__________________________________
March 31, December 31,
1996 1995
Reserve for future policy benefits..... $141,778 143,558
Reimbursement for benefit payments and
administrative allowance........... 730 1,407
$142,508 144,965
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 March 31, 1996 of 6.67%)
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 rate announced by First Chicago from time to time, and a
fluctuating rate equal to the weighted average of rates on overnight Federal
Funds transactions with members of the Federal Reserve System as published by
the Federal Reserve Bank of New York plus .50% per annum, or (ii) a
Eurodollar rate plus a margin ranging from 1.00% to 1.25%.
In addition to general covenants which are customary for facilities
such as this, the company has agreed to maintain minimum consolidated net
worth, a minimum cash flow
coverage ratio, minimum risk based capital for American, minimum
capital, surplus and asset valuation reserve of American and to maintain a
maximum debt to equity (including indebtedness) ratio.
Additional covenants include: (i) limitations on acquisitions; (ii)
maintenance of
current lines of business; (iii) limitations on additional
indebtedness; (iv) limitations on investments; (v) limitations on dividends
and stock repurchases; and (vi) limitations on mergers, consolidations and
sales of assets, typical of such facilities.
6. Retirement Plans:
____________________
The company sponsors an Employee Stock Ownership Plan (ESOP) for all
full-time
employees with one year of service. Qualifying participants may
contribute an amount not to exceed 10% of covered compensation. The company
made no contributions to this plan during either the three months ended March
31, 1996 or 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
an unpaid principal balance of $3,010,882 as of March 31, 1996, and December
31, 1995.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
6. Retirement Plans (continued):
________________________________
Each year the company will make contributions to the LESOP which are
to be used to make loan interest and principal payments. On December 31 of
each year, a portion of the common stock will be allocated to participating
employees. Of the 361,213 shares of the company's common stock now owned by
the LESOP, 118,996 shares have been allocated to the participating employees
with the remaining 242,217 shares being held by American as collateral for
the loan.
The unallocated portion of the company's common stock owned by the
LESOP has been
recorded as a separate reduction of stockholders' equity. Accrued
contributions to the LESOP were $81,738, and $76,391, for the three months
ended March 31, 1996, and 1995, 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 reach 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 $437,623, representing the present value
of future benefits, has been established. Charges (credits) to earnings
related to the plans were
$1,986 and $(1,395) for the three months ended March 31, 1996 and
1995, respectively.
Effective January 1, 1993, the company adopted an Age-Weighted Money
Purchase Plan for all full-time employees with one year of service. The full
cost of this plan will be paid by the company with qualifying participants
receiving contributions based upon their age at plan implementation and
current salary. Contributions to the Age-Weighted Money Purchase Plan for the
three months ended March 31, 1996, and 1995 were $67,249 and
$65,276 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, provided that such dividend
does not exceed its unassigned surplus (surplus profits) at the end 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 March 31, 1996, and December 31, 1995, American's statutory
capital and surplus was $97,433,060 and $98,288,590, respectively. Statutory
net income (loss) for 1995 was $5,984,601.
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.
20
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 ($5,533,000 as of March 31, 1996).
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 ($817,067 as of March 31, 1996).
On March 17, 1989, the Board of Directors of the company adopted the
1989 Nonqualified Stock Option Plan. These options have an exercise price
equal to the closing price of the company's stock on the date of grant and
none may be exercised beyond ten years from the grant date. A total of
832,084 options to acquire common stock are outstanding under the 1989
Nonqualified Plan.
The 1989 Nonqualified Plan is administered by the Board of Directors
and officers of the company and its subsidiaries. The terms of the options,
including the number of shares, and the exercise price are subject to the
sole discretion of the Board of Directors.
Changes during the periods were as follows:
For the Period Ended
March 31, December 31,
1996 1995
Options outstanding, beginning of period 841,341 859,837
Options granted......................... 5,000 87,500
Options exercised....................... (14,257) (105,996)
Options outstanding, end of period...... 832,084 841,341
Outstanding options exercisable at end
of period................ 825,584 779,841
Options reserved for future grants at
end of period............. 39,747 44,747
Option prices per share:
Exercised, during the period..... $5.31 $4.84-$10.63
Outstanding, end of period.. $4.84-$12.66 $4.84-$12.66
On March 17, 1989, the Board of Directors also adopted the 1989 Stock
Appreciation Rights Plan (the SAR Plan) and the 1989 Restricted Stock Plan
(the Restricted Stock Plan). The SAR Plan authorized the Board of Directors
to grant stock appreciation rights to employees, officers and directors in
such amounts and with such exercise prices as it shall determine. No stock
appreciation rights granted under the SAR Plan may be exercised more than
five years from its date of grant. The SAR Plan authorized a maximum of
125,000 shares to be issued pursuant to stock appreciation rights granted
thereunder.
For the Period Ended
March 31, December 31,
1996 1995
Rights outstanding, beginning of period... - -
Rights granted.................... - -
Rights exercised...................... - -
Rights expired..................... - -
Rights cancelled........................... - -
Rights outstanding, end of period... -0- -0-
Rights reserved for future grants
at end of period........................ 5,000 5,000
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
7. Stockholders' Equity (continued):
____________________________________
The company recorded no compensation expense relating to stock
appreciation rights for the three months ended March 31, 1996, and 1995,
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. Other Revenue:
__________________
Effective December 1, 1989, the company entered into a coinsurance
agreement with Employers Reassurance Corporation (ERC) which reinsured 90% of
the risk on the company's block of SPWL policies written prior to 1989. The
agreement provides that ERC assumes 90% of all risks associated with each
policy in the block. These policies continue to be administered by American.
In return, American receives an administrative allowance of $31.50 per policy
per year. The total allowance received during the three months ended March
31, 1996 and 1995 was $29,187 and $31,301, respectively.
9. Income Taxes:
_________________
The provision for income taxes charged to operations was as follows:
(000's Omitted)
For the three Months
Ended March 31,
1996 1995
Current income tax expense (benefit)..... $3,172 (518)
Deferred income tax expense (benefit).... 738 2,411
Total income tax expense............. $3,910 1,893
10. 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, Inc., (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
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
10. Acquisition (continued):
____________________________
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 received the approval of the shareholders of both FBG and
the company, and became effective on April 8, 1996.
In connection with the acquisition, the company borrowed $35,000,000
under a credit agreement with The First National Bank of Chicago, Fleet
National Bank and Boatmen's First National Bank of Kansas City, the proceeds
of which were 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.
11. Contingencies:
__________________
The company's insurance subsidiary is subject to state guaranty
association assessments in all states in which it is admitted. Generally,
these associations guarantee specified amounts payable to residents of the
state under policies issued by insolvent insurers. Most state laws permit
assessments or some portion thereof to be credited against future premium
taxes. Charges (credits) relating to the guaranty fund assessments impacted
1995 and 1994 income before taxes by approximately $1,001,000 and $504,000,
respectively. The company expects that further charges to income may be
required in the future and will record such amounts when they become known.
Item 2. 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 Single Premium Immediate
Annuities (SPIAs) and Flexible Premium Universal Life policies (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 Generally Accepted Accounting
Principals (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 (losses) and policy charges are realized as
revenue, and DAC is amortized as an expense. The timing of DAC amortization
is based on the projected realization of profits including realized gains
(losses) for each type of annuity contract and is periodically adjusted for
23
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%. For the first
three months of 1996, the company's weighted average expected surrender level
was 12.3%, compared to weighted average actual surrenders of 15.1% for such
period. 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 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 March 31, 1996, approximately $226.8
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 $224.7 million of this amount is 6% or less. If the
company reduces credited rates below the "bailout" rates on policies
containing "bailout" provisions in the future, it intends to pay any
resulting surrenders from cash provided by operations and premiums received.
In the event such sources are not sufficient to pay surrenders, the company
would have to sell securities at the then current market prices. American
expects that withdrawals on its annuity contracts will increase as such
contracts approach maturity. There is no certainty as to the company's
ability to realize investment gains in the future to offset the adverse
impact on earnings, should future "bailout" surrenders occur.
24
MARGIN ANALYSIS
The company's earnings are impacted by realized investment gains and
losses and by the associated amortization of DAC. The actual timing and
pattern of such amortization is determined by the actual profitability to
date (which includes realized investment gains and losses) and the expected
future profitability on a particular annuity contract. To the extent
investment income is accelerated through realization of investment gains, the
corresponding amortization of DAC is also accelerated as the stream of
profitability on the underlying annuities is effectively accelerated. When
investment losses are realized, the reverse is true. The following margin
analysis depicts the effects of realized gains (losses) on the company's
operating earnings:
For the Three Months Ended March 31,
1996 1995
(dollars in millions)
(percent of average
invested assets annualized)
Average invested assets <F1>.. $ 2,078.4 100.0% $ 1,936.2 100.0%
Insurance premiums and policy
charges....... $ 2.5 .47% 1.9 .39%
Net investment income <F2> 39.2 7.54 38.2 7.90
Net investment gains (losses),
core....................... .4 .08 - -
Policyholder benefits......... (30.6) (5.89) (29.0) (5.99)
Gross interest margin........ 11.4 2.20 11.1 2.30
Associated amortization of deferred
acquisition costs................ (2.9) (.57) (3.0) (.62)
Net interest margin............. 8.5 1.63 8.1 1.68
Net investment gains (losses), other. 7.2 1.39 - -
Associated amortization of deferred
acquisition costs................... (2.0) (.39) - -
Net margin from investment gains
(losses), other................. 5.2 1.00 - -
Total net margin................. 13.7 2.63 8.1 1.68
Expenses, net.................. (2.2) (.42) (2.7) (.56)
Operating earnings........... 11.5 2.20 5.4 1.12
Interest expense............... (.1) (.02) - -
Earnings before income taxes.... 11.3 2.18 5.4 1.12
Income tax expense................ 3.9 .75 1.9 .39
Net earnings.................... $ 7.4 1.42% 3.5 .73%
Operating earnings............ $11.5 2.20% 5.4 1.12%
Less: Net margin from investment gains
(losses), other................... 5.2 1.00 - -
Operating earnings excluding net
margin
from investment gains (losses),
other $ 6.3 1.20% 5.4 1.12%
<FN><F1>Average of cash, invested assets (before SFAS 115 adjustment) and net
amounts due to
or from brokers on unsettled security trades at the beginningand end of
period.
<F2>Net investment income is presented net of investment expense.
Note: Numbers may not add due to rounding.
25
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996, and 1995
INSURANCE PREMIUMS AND POLICY CHARGES increased $.6 million or 32%,
to $2.5 million in 1996 from $1.9 million in 1995, due to a $.4 million
increase in surrender charges received as a result of increased surrenders of
annuity policies and a $.2 million increase in SPIA sales. The increased surre
nder activity realized in 1996 and 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 have declined.
NET INVESTMENT INCOME increased $1.0 million, or 3%, to $39.2 million
from $38.2
million in 1995. This increase reflects an increase in average
invested assets from $1,936.2 million in 1995 to $2,078.4 million in 1996,
offset in part by decrease in the average yield on invested assets from 7.9%
for the three months ended March 31, 1995, to 7.5% for the same period in
1996.
NET INVESTMENT GAINS WERE $7.6 million in 1996, compared with a $10.0
thousand loss in 1995. Gains and losses may be realized upon securities which
are disposed of for various reasons. The gains realized during both 1995 and
1996 are the result of general portfolio management. Unrealized gains
(losses) in the company's bond portfolio were $28.1 million and $96.8 million
as of March 31, 1996 and December 31, 1995, respectively.
BENEFITS, CLAIMS AND INTEREST CREDITED TO POLICYHOLDERS increased
$1.6 million, or 6%, to $30.6 million in 1996 from $29.0 million in 1995.
This increase results primarily from an increase in the average interest rate
credited on the company's annuity liabilities, from 5.9% as of March 31,
1995, to 6.0% as of March 31, 1996, along with an increase in annuity
liabilities to $2,120.7 million on March 31, 1996, from $1,979.8 million on
March 31, 1995.
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS increased $2.0
million, or 67%, to $5.0 million in 1996 from $3.0 million in 1995.
Amortization of deferred policy acquisition costs (DAC) associated with gross
interest margin decreased $.1 million to $2.9 million in 1996 from $3.0
million in 1995. Amortization of DAC associated with investment gains
increased to $2.0 million on $7.6 million of gains in 1996 from a benefit of
$3.7 thousand on losses of $10.0 thousand. Acquisition costs incurred in 1996
and deferred into future policy periods were $9.1 million, compared with $7.4
million in 1995.
Income tax expense increased $2.0 million to $3.9 million in 1996
from $1.9 million in 1995. Taxes were provided at an effective rate of 35% on
both 1996 and 1995 income.
LIQUIDITY AND CAPITAL RESOURCES
The company is an insurance holding company whose principal asset is
the common stock of American. The company's primary cash requirements are to
pay operating expenses.
As a holding company, the company relies on funds received from
American to meet its cash requirements at the holding company level. The
company receives funds from American in the form of commissions paid to
American Sales, investment fees paid to AIG, rent, administrative, printing
and data processing charges and dividends. The insurance laws of Kansas
generally limit the ability of American to pay cash dividends in excess of
certain amounts without prior regulatory approval and also require that certai
n 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.
26
For purposes of the company's consolidated statements of cash flows,
financing activities include premiums received from sales of SPDAs,
surrenders and death benefits paid, and surrender and policy charges
collected on these contracts. The net cash provided by (used in) these
particular financing activities for the three months ended March 31, 1996,
and 1995, was $5.2 million and $(19.2) million, respectively.
The increase in net cash provided by annuity contracts without life
contingencies in the first three months of 1996 resulted primarily from a
$21.3 million increase in premiums received from $75.8 million to $97.1
million and a $2.7 million decrease in surrender and death benefits paid from
$93.8 million to $96.5 million.
Net cash provided by the company's operating activities was $38.7
million and $40.1
million in 1996 and 1995, respectively.
Cash provided by financing and operating activities and by the sale
and maturity of
portfolio investments is used primarily to purchase portfolio
investments and for the
payment of acquisition costs (commissions and expenses associated
with the sale and issue of policies). To meet its anticipated liquidity
requirements, the company purchases
investments taking into account the anticipated future cash flow
requirements of its
underlying liabilities. In addition, the company invests a portion of
its assets in short-term investments and maturities of less than one year (2%
and 4% as of March 31, 1996, and December 31, 1995, respectively). The
weighted average duration of the company's investment portfolio was 4.5 years
as of March 31, 1996.
The company continually assesses its capital requirements in light of
business developments and various capital and surplus adequacy ratios which
affect insurance companies. During the past five years, the company has met
its capital needs and those of American through several different sources
including bank borrowing and the sale of both preferred and common stock. On
December 31, 1991, the company issued 172,000 shares of its $2.00 Series B
Convertible Preferred Stock with a total stated value of $4.3 million. The
Preferred Stock was convertible at $7.50 per share into 573,332 shares of the
company's Common Stock. On December 30, 1992, the company issued and sold
235,294 shares of Common Stock at $10.625 per share to the company's
Leveraged Employee Stock Ownership Plan ("LESOP"). This purchase was financed
with the proceeds of a $2.5 million loan from American. For additional
information regarding the LESOP, see Note 6 of Notes to Consolidated
Financial Statements. In 1993, the company raised $29.4 million through the
sale of 3,451,668 shares of Common Stock. In December 31, 1994, the company
entered into a credit agreement with The First National Bank of Chicago and
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 has been been
borrowed at December 31, 1995. For additional information regarding this
credit agreement, see Note 5 of Notes to Consolidated Financial Statements.
Recent regulatory actions against certain large life insurers
encountering financial
difficulty have prompted the various state guaranty associations to
begin assessing life insurance companies for the resulting losses. For
further information regarding the effects of guaranty fund assessments, see
Note 11 of Notes to Consolidated Financial Statements.
REINSURANCE. The company had amounts receivable under reinsurance
agreements of $144.2 million and $146.6 million as of March 31, 1996, and
December 31, 1995, respectively. Of the amounts, $142.5 million and $145.0
million, respectively, were associated with a single insurer, ERC. In 1989,
the company entered into a coinsurance agreement which ceded 90% of the risk
on the company's block of Single Premium Whole Life (SPWL) policies written
prior to 1989 to ERC. The agreement provides that ERC assumes 90% of all risks
associated with each policy in the block. Under the terms of the contract,
the company continues to administer the policies and is reimbursed for all
payments made under the terms of those policies. The company also receives a
fee from the reinsurer for administering such
27
policies. Cash settlements
under the contract are made with ERC on a monthly basis. If ERC were to
become insolvent, American would remain responsible for the payment of all
policy liabilities.
In addition, the company is a party to two assumption reinsurance
agreements with other reinsurers.
EFFECT OF INFLATION AND CHANGES IN INTEREST RATES. The company does
not believe that inflation has had a material effect on its consolidated
results of operations during the past three years. The company seeks to
manage its investment portfolio, in part, to reduce its exposure to interest
rate fluctuations. In general, the market value of the company's fixed income
securities increases or decreases directly with interest rate changes. For
example, if interest rates decline (as was the case in 1995), 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 1996), 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 continued throughout 1995 and into 1996.
Management believes that surrenders are lower during periods of declining
interest rates.
PART II. OTHER INFORMATION
AMVESTORS FINANCIAL CORPORATION
Item 1. Legal Proceedings
________________________________
The company has no material legal proceedings pending against it.
Item 2. Changes in Securities
_____________________________________
None
Item 3. Defaults upon Senior Securities
_________________________________________________
None
Item 4. Submission of Matters to a Vote of Security Holders
__________________________________________________________________________
None
Item 5. Other Information
________________________________
None
28
Item 6. Exhibits and Reports on Form 8-K
___________________________________________________
(a)Exhibits (numbered in accordance with Item 601 of Regulations
S-K).
Exhibit Page Number or Incorporation
Number Description by Reference
(2)(a) Plan and Agreement of Union dated Exhibit (2) to Registration
July 10, 1986, between AmVestors Statement on Form S-2,
Financial Corporation and American File No. 2-82811 dated
Investors Life Insurance Company, November 26, 1996.
Inc.
(2)(b) Resolutions of the Board of Exhibit (2)(a) to Form 10-Q
Directors dated January 7, 1988, dated May 11, 1988.
providing for succession to the
position of Chairman of the Board
of Directors
(2)(c) Agreement and Plan of Merger dated Exhibit (2.1)to Registration
September 8, 1995, between Financial Statement on Form S-4,
Benefit Group, Inc., AmVestors File No. 333-01309 dated
Financial Corporation and AmVestors March 1, 1996
Acquisition Subsidiary, Inc. as amended
(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
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
dated May 13, 1992
(10)(a) Form of Indemnification Agreement
between Exhibit (10(a) to Form 10-K
company and its officers and directors dated March 29, 1988
(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, File
No. 33-31155 dated September 19,
1989
29
Exhibit Page Number or Incorporation
Number Description by Reference
(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 dated November 10, 1994
subsidiaries 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-Employee Exhibit (10)(j) to Form 10-K
Directors effective February 24, 1994 dated March 30, 1995
(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 Exhibit (10)(m) to Form 10-K
dated April 27, 1995, between the company dated March 14, 1996
and Ralph W. Laster, Jr.
(10)(n) 1995 Special Incentive Bonus Agreement Exhibit (10)(n) to Form 10-K
dated April 27, 1995, between the
company dated March 14, 1996
and Mark V. Heitz
(11) Calculation of Earnings per Share P 33
(20)(a) Reports on Form 8-K
There were no reports on Form 8-K for
the three months ended March 31, 1996
30
Exhibit Page Number or Incorporation
Number Description by Reference
(22) Wholly-owned subsidiaries of the
registrant:
American Investors Life Insurance
Company, Inc.
415 Southwest Eighth Avenue
Topeka, Kansas 66603
American Investors Sales Group, Inc.
(formerly Gateway Corporation)
415 Southwest Eighth Avenue
Topeka, Kansas 66603
AmVestors Investment Group, Inc.
(formerly American Investors Sales
Group, Inc.)
415 Southwest Eighth Avenue
Topeka, Kansas 66603
AmVestors Acquisition Subsidiary, Inc.
415 Southwest Eighth Avenue
Topeka, Kansas 66603
(27) Financial Data Schedule
31
SIGNATURES
_____________________________
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
AMVESTORS FINANCIAL CORPORATION
By: /c/Ralph W. Laster, Jr.
_____________________________
Ralph W. Laster, Jr.
Chairman of the Board
Chief Executive Officer
(Principal Executive Officer)
and Chief Financial Officer
(Principal Accounting Officer)
Date: May 14, 1996
____________________
32