SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
Amendment No. 1 to
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Six Months Ended June 30, 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 June 30, 1996
Common Stock, no par value 12,870,203 shares
AMVESTORS FINANCIAL CORPORATION
INDEX
PART I. Financial Information: Page Number
Consolidated Balance Sheets-
June 30, 1996 and December 31, 1995 2-3
Consolidated Statement of Earnings-
Six months ended June 30, 1996 and 1995 4
Consolidated Statements of Earnings-
Three months ended June 30, 1996 and 1995 5
Consolidated Statements of Stockholders' Equity-
Twelve months ended December 31, 1995 and
Six months ended June 30, 1996 6
Consolidated Statements of Cash Flows-
Six months ended June 30, 1996 and 1995 7-8
Notes to Consolidated Financial Statements 9-27
Management's Discussion and Analysis of Financial
Condition and Results of Operations 27-34
PART II. Other Information 34-39
1
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and December 31, 1995
(000's Omitted)
(Unaudited)
ASSETS 1996 1995
______________________________________ _______________ _____________
Investments:
Debt securities:
Bonds:
Available-for-sale (cost: $2,563,280 and
$1,947,777)............................. $ 2,573,421 2,044,606
Trading (cost: $6,834 and $1,489)..... 6,787 1,485
2,580,208 2,046,091
Equity securities:
Common stock:
Available-for-sale (cost: $2,220
and $1,047). 2,106 1,181
Preferred stock:
Available-for-sale (cost: $25,462
and $7,566)....................... 25,824 7,733
Trading (cost: $2,573 and $619)...... 2,731 629
30,661 9,543
Other long-term investments........... 41,327 39,491
Short-term investments................... 580 436
Total investments................... 2,652,776 2,095,561
Cash and cash equivalents............... 9,407 48,281
Accounts receivable (net of allowance for
uncollectible
accounts of $876 and $739).................. 823 454
Amounts receivable under reinsurance agreements... 252,410 146,618
Amounts receivable on securities settlements in
process..................... 10,313 10,873
Accrued investment income....................... 37,371 29,357
Deferred cost of policies produced........... 177,901 140,476
Deferred cost of policies purchased.............. 43,584 -
Deferred income taxes............................ 1,711 -
Other assets.................................... 24,125 4,584
Total assets......................... $ 3,210,421 2,476,204
See notes to consolidated financial statements.
2
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 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........... $ 2,976,738 2,259,028
Other policy liabilities............... 5,392 7,312
2,982,130 2,266,340
Notes payable....................... 35,000 7,000
Amounts due on securities settlements
in process........................ 2,960 1,438
Deferred income taxes................. - 22,901
Accrued expenses and other liabilities.. 9,866 4,080
Total liabilities................... 3,029,956 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 - 12,918,379
shares in 1996 and 10,140,738 shares
in 1995......................... 16,438 12,904
Paid in capital.................. 98,753 64,284
Unrealized investment gains (losses)(net of
deferred
cost of policies produced amortization
expense
(benefit) of $2,740 and $27,327
and deferred income
tax expense (benefit) of $2,673 and
$24,431).......................... 4,976 45,372
Retained earnings........................ 63,361 54,714
183,528 177,274
Less treasury stock.................. (234) -
Less leveraged employee stock ownership trust
(LESOP) .............................. (2,829) (2,829)
Total stockholders' equity............. 180,465 174,445
Total liabilities and stockholders' equity.. $3,210,421 2,476,204
See notes to consolidated financial statements.
3
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Six months ended June 30, 1996 and 1995
(000's Omitted, except per share data)
(Unaudited)
1996 1995
Revenue:
Insurance premiums and policy
charges..................... $ 6,353 4,516
Net investment income......... 89,157 76,190
Net investment gains (losses)...... 2,534 (306)
Other revenue................. 713 190
Total revenue.............. 98,757 80,590
Benefits and expenses:
Benefits, claims and interest
credited
to policyholders................. 66,765 58,697
Amortization of deferred cost of
policies produced................. 7,413 5,569
Amortization of deferred cost of
policies purchased............... 2,116 -
General insurance expenses......... 5,536 4,401
Premium and other taxes, licenses
and fees........................ 1,100 873
Other expenses.............. 113 106
Total benefits and expenses...... 83,043 69,646
Operating earnings................... 15,714 10,944
Interest expense.................. 734 41
Earnings before income tax
expense and
extraordinary item.................... 14,980 10,903
Income tax expense................... 5,243 3,816
Earnings before extraordinary item... 9,737 7,087
Extraordinary item: Loss on early
extinguishment of
debt (net of income tax benefit of $25).. (47) -
Net earnings............................. $ 9,690 $ 7,087
Earnings per share of common stock:
Primary:
Net earnings......................... $ .80 .69
Fully diluted:
Net earnings....................... $ .79 .68
Average share outstanding:
Primary 12,086 10,284
Fully diluted................ 12,273 10,369
See notes to consolidated financial statements.
4
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three months ended June 30, 1996 and 1995
(000's Omitted, except per share data)
(Unaudited)
1996 1995
Revenue:
Insurance premiums and policy charges.. $ 3,896 2,612
Net investment income.................... 49,988 37,970
Net investment gains (losses)......... (5,093) (296)
Other revenue.................. 688 92
Total revenue........................... 49,479 40,378
Benefits and expenses:
Benefits, claims and interest credited
to policyholders...................... 36,145 29,697
Amortization of deferred cost of policies
produced................. 2,443 2,581
Amortization of deferred cost of policies
purchased............... 2,116 -
General insurance expenses............. 3,615 2,186
Premium and other taxes, licenses and fee 849 348
Other expenses............................ 53 52
Total benefits and expenses............. 45,221 34,864
Operating earnings.......................... 4,258 5,514
Interest expense.......................... 609 20
Earnings before income tax expense and
extraordinary item.................... 3,649 5,494
Income tax expense...................... 1,333 1,923
Earnings before extraordinary item............ 2,316 3,571
Extraordinary item: Loss on early
extinguishment of
debt (net of income tax benefit of $25)..... (47) -
Net earnings............................ $ 2,269 3,571
Earnings per share of common stock:
Primary:
Net earnings................... $ .17 .35
Fully diluted:
Net earnings.......................... $ .17 .34
Average share outstanding:
Primary 13,574 10,321
Fully diluted........................ 13,671 10,381
See notes to consolidated financial statements.
5
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(000's Omitted, except share and per share data)
(Unaudited)
Unrealized
Investment
Common Paid-in Gains Retained Treasury
Stock Capital (Losses) Earnings Stock 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........ - - - 9,690 - - 9,690
Change in unrealized
investment
gains (losses). - - (40,396) - - - (40,396)
Cash dividends to
stockholders
($.0975 per share
on common
stock).......... - - - (1,043) - - (1,043)
Issuance of common
stock:
upon acquisition
of company............ 3,464 28,866 - - - - 32,330
upon exercise of
options............... 70 402<F1> - - - - 472
Issuance of warrants:
upon acquisition of
company................ - 5,201 - - - - 5,201
Acquisition of treasury
shares.................. - - - - (234) - (234)
Balance June 30, 1996... $ 16,438 98,753 4,976 63,361 (234) (2,829) 180,465
<FN><F1> Net of income tax benefit of $155 and $440 for the periods ended
June 30,
1996 and December 31, 1995, respectively.
</FN>
See notes to consolidated financial statements.
6
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Six months ended June 30, 1996 and 1995
(Unaudited)
(000's Omitted)
1996 1995
Operating Activities:
Net earnings ...................................... $ 9,689 7,087
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Interest credited to policyholders .............. 67,620 59,375
Amortization of (discounts) premiums on debt
securities, net ................................ (626) (444)
Amortization of deferred cost of policies
produced ...................................... 7,412 5,569
Amortization of deferred cost of
policies purchased .................................... 2,116 --
Net investment (gains) losses ................... (2,534) 306
Accrued investment income ....................... (641) (221)
Deferred income taxes ........................... 998 3,709
Other, net ...................................... 1,513 1,427
Net cash provided by operating activities ......... 85,547 76,808
Investing Activities:
Purchases of securities:
Held-to-maturity ................................. -- (4,209)
Available-for-sale ............................... (537,208) (117,377)
Trading .......................................... (26,456) --
Proceeds from sale of securities:
Held-to-maturity ................................. -- --
Available-for-sale ............................... 340,582 25,021
Trading .......................................... 19,086 --
Proceeds from maturity or redemption of securities:
Held-to-maturity ................................. -- 14,133
Available-for-sale ............................... 82,463 36,630
Trading .......................................... 518 --
Other long-term investments, net .................. 4,392 20,275
Short-term investments, net ....................... 12 397
Capitalization of deferred cost of
policies produced .................................... (20,251) (16,133)
Capitalization of goodwill ........................ (330) --
Acquisition, net of cash received ................. (2,314) --
Other, net ........................................ (3,494) (369)
Net cash used in investing activities ............. (143,000) (41,632)
Financing Activities:
Premiums received ................................. 211,789 163,543
Surrender and death benefits paid ................. (215,318) (208,334)
Surrender and risk charges collected .............. 5,307 3,529
Securities settlements in process ................. 2,082 4,641
Acquisition of treasury stock ..................... (234) --
Cash dividends to stockholders .................... (1,043) (761)
Issuance of common stock .......................... 472 201
Notes payable ..................................... 12,500 --
Other, net ........................................ 3,024 3,293
Net cash provided by (used in) financing
activities ....................................... 18,579 (33,888)
Increase (Decrease) in Cash and Cash Equivalents ...... (38,874) 1,288
Cash and Cash Equivalents:
Beginning of year ................................. 48,281 10,621
End of year ....................................... $ 9,407 11,909
See notes to consolidated financial statements.
7
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Increase (Decrease) in Cash and Cash Equivalents
Six months ended June 30, 1996 and 1995
(Unaudited)
(000's Omitted)
1996 1995
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Income tax payments (refunds)....... $ 2,215 (1,332)
Interest payments....................... $ 600 -
____________________________________________________________________
Change in net unrealized investment gains
(losses)......................... $ (86,739) 42,600
Less: Associated (increase) reduction
in amortization
of deferred policy acquisition
costs.............................. 24,586 (10,650)
Deferred income tax (expense)
benefit................................. 21,757 (10,149)
Net change in net unrealized gains
(losses)................................ $ (40,396) 21,801
____________________________________________________________________
Details of acquisition:
Fair value of assets
acquired.................................... $ 720,362 -
Liabilities assumed................... (671,585) -
Common stock and warrants
issued...................................... (37,531) -
Cash paid.............................. 11,246 -
Less: Cash acquired..................... (8,932) -
Net cash paid for acquisition........... $ 2,314 -
See notes to consolidated financial statements.
8
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
_______________________________________________
A. PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of
AmVestors and its wholly-owned subsidiaries American Investors Life
Insurance
Company, Inc. (American), American Investors Sales Group, Inc. (American
Sales), AmVestors Acquisition Subsidiary, Inc. (AAS), successor through
merger with Financial Benefit Group, Inc. (FBG), AmVestors Investment Group,
Inc. (AIG), Annuity International Marketing Corporation (AIMCOR), Financial
Benefit Life Insurance Company (FBL), Financial Benefit Management
Corporation
(FBMC), The Insurancemart (TIM), and Rainbow Card Pack Publication, Inc.
(RBC), (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 June 30, 1996 and the results of
earnings and the statements of cash flows for the six month periods ended
June 30, 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.
9
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 June 30, 1996, and December 31, 1995, were as
follows:
(000's Omitted)
1996 1995
Carrying Fair Carrying Fair
Value Value Value Value
Assets
Debt securities............. $ 2,580,208 2,580,208 2,046,091 2,046,091
Equity securities.............. 30,661 30,661 9,543 9,543
Other long-term investments. 41,327 41,344 39,491 39,546
Short-term investments.. 580 580 436 436
Cash and cash equivalents.... 9,407 9,407 48,281 48,281
Accounts receivable on
securities settlements in
process................... 10,313 10,313 10,873 10,873
Accounts receivable and
accrued investment income.......... 38,194 38,194 29,811 29,811
Liabilities:
Future policy benefits -
investment contracts............ 2,708,764 2,522,609 2,022,653 1,900,895
Other policy liabilities......... 5,392 5,392 7,312 7,312
Notes payable................ 35,000 35,000 7,000 7,000
Amounts due on securities
settlements in process.......... 2,960 2,960 1,438 1,438
Accrued expenses and other
liabilities................... 9,866 9,866 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.
10
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
nationwide through a network of independent agents. 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 COST OF POLICIES PRODUCED:
The costs of producing 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
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. Summary of Significant Accounting Policies (continued):
___________________________________________________________
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 six months of
1996 and 1995 resulted in the company experiencing investment margins
greater
than or less than those estimated. As a result, $510,269 and ($70,330) of
the
unamortized balance of cost deferred on policies produced was expensed
(benefited) in the six months ended June 30, 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. Cost deferred on policies produced
will be adjusted in the future based on actual investment income earned.
G. DEFERRED COST OF POLICIES PURCHASED:
At the date of acquisition of a company, a portion of the purchase
price is allocated to the right to receive future cash flows from the
existing insurance contracts. The amount allocated represents the present
value of the projected future cash flows from the acquired policies. These
projections take into account mortality, surrenders, operating expenses,
investment yields on the investments held to back the policy liabilities and
other factors known or expected at the valuation date based on the judgment
of management.
The deferred cost of policies purchased is amortized in relation to
the incidence of expected cash flows over the expected life of the policies.
If it is determined that the present value of future cash flows is
insufficient to recover the deferred cost of policies purchased, its
carrying
value will be reduced with a corresponding charge to earnings.
H. GOODWILL:
Goodwill represents the excess of the amount paid to acquire a
company over the fair value of the net assets acquired. This balance is
amortized on a straight-line basis over a 30-year period. If it is
determined
through an estimate of future earnings that the goodwill has been impaired,
its carrying value will be reduced with a corresponding charge to earnings.
I. 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.
J. 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.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. Summary of Significant Accounting Policies (continued):
___________________________________________________________
K. DEPRECIATION:
The home office buildings are depreciated on the straight-line basis
over estimated lives of up to 40 years. Other depreciation is provided on
the
straight-line basis over useful lives ranging from 5 to 8 years.
L. 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.
M. 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.
N. CONSOLIDATED STATEMENTS OF CASH FLOWS:
For purposes of reporting cash flows, cash and cash equivalents
includes cash and money market accounts.
O. 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.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. Summary of Significant Accounting Policies (continued):
___________________________________________________________
P. RECLASSIFICATIONS:
Certain reclassifications have been made to conform the June 30, 1995
and December 31, 1995 financial statements to the June 30, 1996 presentation.
2. Investments:
_________________
A summary of investment income is as follows:
(000's Omitted)
For the Six Month Period
Ended June 30,
1996 1995
Debt securities................................ $ 86,203 72,681
Equity securities........................ 586 23
Other long-term investments....................... 2,701 3,784
Short-term investments...................... 964 758
90,454 77,246
Less investment expenses..................... 1,297 1,056
Net investment income..................... $ 89,157 76,190
(000's Omitted)
For the Six Month Period
Ended June 30,
1996 1995
Net investment gains (losses):
Realized investment gains (losses):
Debt securities, available-for-sale....... $ 1,411 (89)
Debt securities, held-to-maturity......... - 85
Debt securities, trading.................. 267 -
Equity securities, available-for-sale..... 577 47
Equity securities, trading................ 179 -
Other......................................... (5) (349)
Net realized investment gains (losses)........ 2,429 (306)
Unrealized investment gains (losses):
Debt securities, trading................... (43) -
Equity securities, trading................. 148 -
Net unrealized investment gains (losses)...... 105 -
Net investment gains (losses).............. $ 2,534 (306)
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.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (continued):
______________________________
The maturity of the company's debt and equity securities portfolio as
of June 30, 1996 was as follows:
(000's Omitted)
As of June 30, 1996
Available-for-Sale Trading
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
Debt securities:
One year or less $ 53,176 51,493 - -
Two years through five years 541,695 550,496 250 249
Six years through ten years 1,577,274 1,582,925 5,377 5,320
Eleven years and after 391,135 388,507 1,207 1,218
2,563,280 2,573,421 6,834 6,787
Equity securities 27,682 27,930 2,573 2,731
$ 2,590,962 2,601,351 9,407 9,518
These tables include mortgage-backed securities based on the
estimated cash flows of the
underlying mortgages.
The book value, estimated market value and unrealized market gains
and losses of debt and equity securities as of June 30, 1996, and December
31, 1995, were as follows:
(000's Omitted)
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
June 30, 1996
______________
Bonds, available-for-sale:
Corporate debt obligations
Investment grade........ $ 1,462,925 27,185 19,561 1,470,549
High-yield.............. 199,101 1,764 4,556 196,309
1,662,026 28,949 24,117 1,666,858
U.S. Treasury obligations... 49,298 541 501 49,338
Mortgage-backed securities
Investment grade.......... 844,620 13,111 6,008 851,723
High-yield................ 7,336 - 1,834 5,502
Bonds, available-for-sale 2,563,280 42,601 32,460 2,573,421
Bonds, trading:
Corporate debt obligations
Investment grade......... 6,081 20 51 6,050
High-yield............... 753 5 21 737
Bonds, trading........... 6,834 25 72 6,787
Total bonds.............. 2,570,114 42,626 32,532 2,580,208
Equity securities.......... 30,255 973 567 30,661
$2,600,369 43,599 33,099 2,610,869
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (continued):
_____________________________
(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 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
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
June 30, 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.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (continued):
____________________________
The amortized cost, estimated market value and unrealized market
gains and losses by type of mortgage-backed security as of June 30, 1996, and
December 31, 1995 were as follows:
(000's Omitted)
Amortized Unrealized Unrealized Market
June 30, 1996 Cost Gains Losses Value
Government agency mortgage-backed securities:
Planned amortization classes...... $ 65,609 200 1 65,808
Targeted amortization classes and
accretion directed classes........... 7,901 132 - 8,033
Sequential classes..................... 4,770 20 - 4,790
Pass-throughs....................... 28 2 - 30
Total government agency
mortgage-backed securities........ 78,308 354 1 78,661
Government-sponsored enterprise
mortgage-backed securities:
Planned amortization classes........ 480,110 9,350 3,626 485,834
Targeted amortization classes and
accretion directed classes.......... 41,684 301 - 41,985
Sequential classes.................. 4,246 45 - 4,291
Pass-throughs........................ 3,446 21 - 3,467
Total government-sponsored enterprise
mortgage-backed securities........ 529,486 9,717 3,626 535,577
Other mortgage-backed securities:
Planned amortization classes.............. 16,744 79 113 16,710
Sequential classes................. 213,313 2,957 2,259 214,011
Pass-throughs......................... 3,207 1 8 3,200
Subordinated classes.................. 10,898 3 1,835 9,066
Total other mortgage-backed securities... 244,162 3,040 4,215 242,987
Total mortgage-backed securities................ $ 851,956 13,111 7,842 857,225
17
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 26.9% and 23.4% of the carrying value of the
company's mortgage-backed securities as of June 30, 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 71.8% and 74.6%
of the carrying value of the company's mortgage-backed securities as of June
30, 1996 and December 31, 1995.
As of June 30, 1996, 71.3% 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 eight issues, with a carrying value of
$29,762,909 as of June 30, 1996, all of the company's investments in other
mortgage-backed securities are rated A or better by Standard & Poor's or
Moody's.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (continued):
___________________________
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 Six Month Period
Ended June 30,
1996 1995
Consideration received................. $ 442,602 95,360
Carrying value........................ 440,168 95,316
Change in unrealized gains (losses) on
trading securities.................... 105 -
Net investment gains (losses)......... $ 2,539 44
Investment gains...................... $ 10,225 430
Investment losses...................... (7,791) (386)
Change in unrealized gains (losses) on
trading securities................... 105 -
Net investment gains (losses)........... $ 2,539 44
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......................... - (86,688) (43) (53) 148
Balance as of June 30, 1996... $ - 10,141 (47) 248 158
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
3. Other Assets:
________________
Other assets consist of the following:
(000's Omitted)
June 30, December 31,
1996 1995
_____________ ____________
Property and equipment at cost:
Home office properties
(including land of $1,067)............. $ 10,406 3,643
Furniture and equipment................ 4,905 3,711
Automobiles............................ 141 99
15,452 7,453
Less accumulated depreciation............ 5,759 3,650
_____________ ____________
9,693 3,803
Goodwill.............................. 12,763 68
Other................................... 1,669 713
_____________ ____________
$ 24,125 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
June 30, Life insurance in force $ 308,443 233,065 75,378
1996 Insurance premiums and
policy charges....... 6,948 595 6,353
June 30, Life insurance in force 319,485 246,233 73,252
1995 Insurance premiums and
policy charges....... 5,009 493 4,516
June 30, Future policy benefits... 2,976,738 251,242 2,725,496
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
$252,410,333 and $146,617,611 as of June 30, 1996, and December 31, 1995,
respectively.
Of the total amounts receivable, $142,042,937 and $144,965,371 were
associated with a coinsurance agreement entered into in 1989, 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 $5,608,655 and $6,787,793 for periods
ended June 30, 1996 and 1995, respectively.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
4. Reinsurance (continued):
__________________________
The following table identifies the components of the amounts
receivable from ERC:
(000's Omitted)
June 30, December 31,
1996 1995
Reserve for future policy benefits......... $140,910 143,558
Reimbursement for benefit payments and
administrative allowance.............. 1,133 1,407
$142,043 144,965
FBL and Philadelphia Life Insurance Company are parties to a
reinsurance agreement under which FBL ceded 100% of the risk on certain
single premium deferred annuity policies on a coinsurance basis. As of June
30, 1996, the company had amounts receivable of $108,700,884 resulting from
this agreement.
5. Credit Agreement:
____________________
On April 8, 1996, the company entered into a $35,000,000 credit
agreement with The First National Bank of Chicago (First Chicago), Fleet
National Bank (Fleet) and Boatmen's First National Bank of Kansas City
(Boatmen's), as Lenders. On that same date, the company borrowed the entire
$35,000,000, using the proceeds to repay existing bank debt, fund the cash
portion of the acquisition of FBG and for general corporate purposes. The
effective annual interest rate on this borrowing was 7.46% as of June 30, 1996
. Principal repayments for this borrowing are as follows:
1996 $ -0-
1997 1,500,000
1998 7,500,000
1999 8,000,000
2000 8,000,000
2001 8,000,000
2002 2,000,000
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, plus a margin ranging from .00% to .50%, or (ii) a
Eurodollar rate plus a margin ranging from .75% to 1.75%.
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 and FBL, minimum unassigned surplus and cash flow test results for
American and FBL and 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 six months ended June
30, 1996 or 1995.
The company sponsors a Leveraged Employee Stock Ownership Plan
(LESOP) for all
full-time employees with one year of service.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
6. Retirement Plans (continued):
________________________________
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 June 30, 1996, and December
31, 1995.
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 356,509 shares of the company's common stock now owned by
the LESOP, 114,292 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 $197,076, and $152,782, for the six months
ended June 30, 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 $434,079, representing the present value
of future benefits, has been established. Charges (credits) to earnings
related to the plans were
$(1,558) and $(86,660) for the six months ended June 30, 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 June 30, 1996, and 1995 were $164,040 and $125,853
respectively.
7. Stockholders' Equity:
________________________
Dividends by American and FBLto 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 June 30, 1996, and December 31,
1995, American's statutory capital and surplus was $97,369,733 and
$98,288,590, respectively. Statutory net income (loss) for 1995 was $5,984,601
.
Under Florida insurance law and regulations, the aggregate dividends
that FBL may pay without prior regulatory approval is limited to the greater
of the sum of statutory net operating profits and net realized capital gains
for the preceding calendar year (provided there is available surplus from net
operating profits and net realized capital gains) or
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
7. Stockholders' Equity (continued):
____________________________________
10% of its available and accumulated statutory surplus derived from net
operating profits and net realized capital gains. After payment of a
dividend, FBL must have 115% of required statutory surplus.
On December 31, 1995, FBLhad accumulated statutory surplus derived
from net operating profits and net realized capital gains of $23.7 million.
The sum of statutory net profits and net realized capital gains for 1995 were
$3.4 million. As of June 30, 1996, available surplus from net operating
profits and net realized capital gains was $2.4 million. Required statutory
surplus as of June 30, 1996 was $19.7 million and actual surplus was $32.8
million.
In connection with the original establishment of the Interest
Maintenance Reserve (IMR), the Commissioner of Insurance of Kansas, the
company's domiciliary state, ordered that American prepare its December 31,
1992, NAIC Annual Statement Form to equitably allocate 1992 capital gains and
losses, not included in the calculation of the Asset Valuation Reserve (AVR),
on other than government securities, fifty (50%) percent to surplus and fifty
(50%) percent to IMR, after calculation of the AVR pursuant to the
instructions provided by the NAIC. This differs from prescribed statutory
accounting practices.
This 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 ($5,952,000 as of June 30, 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 ($687,709 as of June 30, 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 common stock on the date of grant
and none may be exercised beyond ten years from the grant date. A total of
899,423 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
June 30, December 31,
1996 1995
Options outstanding, beginning
of period........................ 841,341 859,837
Options granted.................... 130,000 87,500
Options exercised................... (55,418) (105,996)
Options cancelled.................. (16,500) -
Options outstanding, end of period.... 899,423 841,341
Outstanding options exercisable at
end of period................ 769,423 779,841
Options reserved for future grants at
end of period....... 206,247 44,747
Option prices per share:
Exercised, during the period... $4.84-$10.00 $4.84-$10.63
Outstanding, end of period..... $4,84-$13.50 $4.84-$12.66
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
7. Stockholders' Equity (continued):
____________________________________
On March 17, 1989, the Board of Directors also adopted the 1989 Stock
Appreciation Rights Plan (the SAR Plan) and the 1989 Restricted Stock Plan
(the Restricted Stock Plan). The SAR Plan authorized the Board of Directors
to grant stock appreciation rights to employees, officers and directors in
such amounts and with such exercise prices as it shall determine. No stock
appreciation rights granted under the SAR Plan may be exercised more than
five years from its date of grant. The SAR Plan authorized a maximum of
125,000 shares to be issued pursuant to stock appreciation rights granted
thereunder.
For the Period Ended
June 30, December 31,
1996 1995
Rights outstanding, beginning of period. - -
Rights granted................ - -
Rights exercised............... - -
Rights expired................ - -
Rights cancelled............... - -
Rights outstanding, end of period.. - -
Rights reserved for future grants
at end of period.............. 5,000 5,000
The company recorded no compensation expense relating to stock
appreciation rights for the six months ended June 30, 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.
On March 28, 1996, the Board of Directors of the company adopted the
1996 Incentive Stock Option Plan (the Plan). These options have an exercise
price equal to the closing price of the company's common stock on the date of
grant and none may be exercised beyond ten years from the date of grant. The
Plan authorized a maximum of 950,000 shares to be issued. A total of 673,000
options to acquire common stock are outstanding.
The 1996 Incentive Stock Option Plan is administered by the Board of
Directors of the
company. The term of the options, including the number of shares and
the exercise price are subject to the sole discretion of the Board of
Directors.
For the Period Ended
June 30, December 31,
1996 1995
Options outstanding, beginning of period.. - -
Options granted....... 653,000 -
Options outstanding, end of period....... 653,000 -
Outstanding options exercisable at end
of period............................ - -
Options reserved for future grants at
end of period......................... 297,000 -
Option prices per share:
Outstanding, end of period........... $12.875 -
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
7. Stockholders' Equity (continued):
____________________________________
In conjunction with a previous bank borrowing, the company issued
ten-year warrants to purchase a total of 170,002 shares of its common stock
as summarized in the following table:
Warrant Issue Number Exercise Expiration
Holder Date of Shares Price Date
Morgan Guaranty 12/8/88 75,000 $ 3.9688 12/9/98
4/30/92 95,002 6.3855 5/1/02
170,002
In conjunction with the acquisition of FBG, the company issued
warrants to purchase 663,708 shares of its common stock. These warrants are
exercisable at $16.42 per share of common stock and expire on April 2, 2002.
In addition to the above, the company assumed warrants previously
issued by FBGto purchase a total of 302,735 shares of its common stock as
summarized in the following table:
Warrant Issue Number Exercise Expiration
Holder Date of Shares Price Date
Wabash Life 2/18/92 63,176 $ 1.98 2/19/97
Insurance 12/20/92 63,176 1.48 12/20/2002
Company 5/18/93 120,334 1.56 3/18/2003
246,686
Fleet National Bank 6/27/94 34,381 7.09 6/30/2001
Other Various 21,668 1.34-3.72 Various
302,735
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 June 30,
1996 and 1995 was $57,859 and $61,980, respectively.
Other revenue for the quarter ended June 30, 1996 includes override
commissions of $418,669 attributable to the marketing efforts of AIMCORand
TIM, $142,790 of rental income received by FBL and $50,700 of advertising
revenues received by RBC.
9. Income Taxes:
_________________
The provision for income taxes charged to operations was as follows:
(000's Omitted)
For the six Months
Ended June 30,
1996 1995
Current income tax expense (benefit)........ $2,499 107
Deferred income tax expense (benefit)....... 2,744 3,709
Total income tax expense................ $5,243 3,816
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
10. Acquisition:
__________________
On September 8, 1995, the company signed a merger agreement pursuant
to which it acquired all of the outstanding capital stock of Financial
Benefit Group, Inc., (FBG) a Delaware corporation, for $5.31 per share,
payable in 2,722,223 shares of the company's common stock, warrants to purchase
663,708 shares of the company's common stock and cash.
FBG was an insurance holding company which owned 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 owned 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. The consolidated statements
of earnings for the six months ended June 30, 1996 includes the results of
operations of FBG for the three month period ended June 30, 1996.
The transaction has been accounted for using the purchase method with
any resulting goodwill being amortized on a straight line basis over a period
not to exceed 30 years. The opening consolidated balance sheet of the acquired
entities follows:
(000's Omitted)
ASSETS _________________
Investments..................... $ 524,165
Cash and cash equivalents....... 8,932
Accounts receivable............. 815
Amounts receivable under reinsurance
agreements........... 112,875
Accrued investment income....... 7,373
Deferred cost of policies purchased.. 45,700
Deferred income taxes............... 5,023
Goodwill........................... 12,485
Other assets....................... 2,994
Total assets..................... $ 720,362
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities................. $ 650,174
Notes payable...................... 15,500
Accrued expenses and other liabilities... 5,911
Total liabilities.................. 671,585
Stockholders' Equity:
Common stock, no par value
Paid in capital..................... 48,777
Total stockholders' equity............ 48,777
Total liabilities and stockholders' equity.. $ 720,362
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
10. Acquisition (continued):
_____________________________
The following table sets forth certain unaudited pro forma operating
data of the company for the six months ended June 30, 1996 and 1995. This pro
forma data assumes the acquisition of FBG occurred on January 1, 1996 and
1995, respectively.
Six Months ended June 30,
1996 1995
(in thousands, except per share data)
Pro Forma Operating Data:
Total revenue $105,663 116,076
Earnings before extraordinary item 8,411 13,256
Net earnings 8,364 13,256
Earnings per share of common stock:
Primary:
Earnings before extraordinary item $ .62 1.00
Net earnings $ .62 1.00
Fully diluted:
Earnings before extraordinary item $ .62 1.00
Net earnings $ .61 1.00
Average shares outsanding:
Primary 13,462 13,205
Fully diluted 13,649 13,290
11. Contingencies:
__________________
The company's insurance subsidiaries are 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 insur-
ers. 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.
12. Subsequent Event:
_____________________
On July 12, 1996, the company closed on an offering of $65,000,000 of
Convertible Subordinated Debentures. These securities were placed in Europe
pursuant to Regulations S under the Securities Act of 1933. The debentures
pay an annual cash yield of 3% payable semi-annually, are convertible into
the company's common stock at $17.125, and mature in seven years unless
previously converted or redeemed. The debentures are redeemable, in whole or
in part, at the option of the holders, on September 30, 2001, at 124.25% of
their principal amount (which in essence reflects deferred interest at a
compounded rate of 4.25%), plus accrued but unpaid cash interest at the
coupon rate of 3%. The debentures are redeemable, at the company's option, on
or after June 30, 1999, at certain specified declining redemption prices
(starting at 103% of principal value) plus accrued but unpaid cash interest
(at the rate of 3%) and accrued deferred interest (at a compounded rate of
4.25%). The debentures may be redeemed any time after August 15, 1996, at the
company's option at their principal amount plus accrued cash interest (at the
rate of 3%), but with no payment for accrued deferred interest, if the
average closing price of the company's common stock equals or exceeds $23.12
for 20 consecutive trading days.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
12. Subsequent Event (continued):
_________________________________
The debentures are unsecured obligations of the company, subordinated
to all existing and future senior indebtedness. Approximately $35,000,000 of
the net proceeds of the offering were used to repay existing bank debt,
$20,000,000 was contributed to American and the balance will be used for
other general corporate purposes.
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
cost of policies produced, 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
actual experience. If a policy is terminated prior to its expected maturity,
any remaining related DAC is expensed in the current period. Most of the
company'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.
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,
28
American's annuity withdrawal rates were 9% for 1994 and 7% for 1993. Although,
as of June 30, 1996, approximately $238.9 million, or 13% of American's annuity
account values contained a "bailout" provision, the current credited rates on
these policies are above the "bailout" rate. The "bailout" rate on $236.8
million of this amount is 6% or less. As of that same date, approximately $25.1
million, or 5% of FBL's annuity account values contained a "bailout" provision,
the current credited rates on these policies are above the "bailout" rate. The
"bailout" rate on the entire $25.1 million is 5.5% or less, with $19.5 million
at 4.5% 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.
29
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 Six Months Ended June 30,
1996 1995
(dollars in millions)
(percent of average
invested assets annualized)
Average invested assets <F1>............... $ 2,361.7 100.0% $ 1,940.1 100.0%
Insurance premiums and policy charges...... $ 6.4 .54% $ 4.5 .47%
Net investment income <F2>................. 89.2 7.55 76.2 7.85
Net investment gains (losses), core........ 1.6 .14 - -
Policyholder benefits..................... (66.8) (5.65) (58.7) (6.05)
Gross interest margin...................... 30.4 2.57 22.0 2.27
Associated amortization of deferred
cost of policies produced and purchased. (9.5) (.80) (5.6) (.58)
Net interest margin....................... 20.9 1.77 16.4 1.69
Net investment gains (losses), other...... .9 .07 (.3) (.03)
Associated amortization of deferred
cost of policies produced and purchased. - - (.1) .01
Net margin from investment gains (losses),
other.................................. .9 .07 (.2) (.02)
Total net margin......................... 21.8 1.84 16.1 1.66
Expenses, net........................... (6.0) (.51) (5.2) (.54)
Operating earnings...................... 15.8 1.33 10.9 1.12
Interest expense........................ .7 .06 - -
Earnings before income taxes and
extraordinary items.................... 15.0 1.27 10.9 1.12
Income tax expense...................... 5.3 .44 3.8 .39
Earnings before extraordinary item...... 9.7 .83 7.1 .73
Extraordinary item...................... - - - -
Net earnings........................... $ 9.7 .83% $ 7.1 .73%
Operating earnings..................... $ 15.8 1.33% $ 10.9 1.12%
Less: Net margin from investment gains
(losses), other...................... .9 .07 (.2) (.02)
Operating earnings excluding net margin
from investment gains (losses), other...... $ 14.9 1.26% $ 11.1 1.14%
<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 for
1995 and time weighted for 1996 for acquisition of FBG effective April 1,
1996.
<F2>Net investment income is presented net of investment expense.
Note: Numbers may not add due to rounding.
30
For the Quarter Ended June 30,
1996 1995
(dollars in millions)
(percent of average
invested assets annualized)
Average invested assets <F1>.... $2,647.9 100.0% $ 1,947.2 100.0%
Insurance premiums and policy charges. $ 3.9 .59% $ 2.6 .54%
Net investment income <F2>........... 50.0 7.55 38.0 7.80
Net investment gains (losses), core..... 1.2 .18 - -
Policyholder benefits............... (36.1) (5.46) (29.7) (6.10)
Gross interest margin................ 18.9 2.86 10.9 2.24
Associated amortization of deferred
cost of policies produced and purchased... (6.5) (.99) (2.7) (.55)
Net interest margin...................... 12.4 1.87 8.2 1.69
Net investment gains (losses).............. (6.3) (.95) (.3) (.06)
Associated amortization of deferred
cost of policies produced and purchased... 2.0 .30 .1 .02
Net margin from investment gains (losses).. (4.3) (.65) (.2) (.04)
Total net margin.......................... 8.1 1.22 8.0 1.65
Expenses, net............................ (3.8) (.58) (2.5) (.52)
Operating earnings....................... 4.3 .64 5.5 1.13
Interest expense.......................... .6 .09 - -
Earnings before income taxes and
extraordinary item...................... 3.7 .55 5.5 1.13
Income tax expense (benefit)............ 1.3 .20 1.9 .40
Earnings before extraordinary item....... 2.3 .35 3.6 .73
Extraordinary item..................... - - - -
Net earnings........................ $ 2.3 .35% $ 3.6 .73%
Operating earnings.................. $ 4.3 .64% $ 5.5 1.13%
Less: Net margin from investment gains
(losses)............................... (4.6) (.69) (.2) (.04)
Operating earnings excluding net margin
from investment gains (losses), other... $ 8.9 1.33% $ 5.7 1.17%
<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 for
1995 and time weighted for 1996 for acquisition of FBG effective April 1,
1996.
<F2>Net investment income is presented net of investment expense.
</FN>
Note: Numbers may not add due to rounding.
31
RESULTS OF OPERATIONS
Six Months Ended June 30, 1996, and 1995
INSURANCE PREMIUMS AND POLICY CHARGES increased $1.9 million or 42%,
to $6.4 million in 1996, due primarily to a $1.4 million increase in
surrender charges received on increased surrenders of annuity policies,
resulting primarily from the acquisition of FBG.
NET INVESTMENT INCOME increased $10.0 million or 13%, to $89.2
million in 1996. This increase reflects an increase in average invested
assets from $1,940.1 million in 1995 to $2,361.7 million in 1996 offset in
part by a decrease in the average yield on invested assets from 7.9% for the
six months ended June 30, 1995, to 7.6% for the same period in 1996. The
increase in average invested assets can be attributed to the acquisition of
FBG.
NET INVESTMENT GAINS (LOSSES) WERE $2.5 million in 1996, compared
with a $.3 million loss in 1995. Gains and losses may be realized upon
securities which are disposed of for various reasons. The net gains realized
in 1996 are the result of general portfolio management while the net losses
realized in 1995 result from writedowns of $1.0 million on securities deemed
to have an other than temporary dimunition in value. Unrealized gains in the
company's bond portfolio were $10.1 million, $96.8 million and $46.8 million
as of June 30, 1996, December 31, 1995 and June 30, 1995, respectively.
BENEFITS, CLAIMS AND INTEREST CREDITED TO POLICYHOLDERS increased
$8.1 million, or 14%, to $66.8 million in 1996 from $58.7 million in 1995.
This increase results primarily from an increase in the annuity liabilities
to $2,797.8 million on June 30, 1996, from $1,989.2 million on June 30, 1995.
This increase was partially offset by a decrease in the average interest rate
credited on the company's annuity liabilities, from 6.0% as of June 30, 1995,
to 5.7% as of June 30, 1996. Both the increase in annuity liabilities and the
decrease in the average interest rate credited on those liabilities is
largely due to the acquisition of FBG.
AMORTIZATION OF DEFERRED COST OF POLICIES PRODUCED increased $1.8
million, or 32%, to $7.4 million in 1996 from $5.6 million in 1995.
Amortization associated with gross interest margin increased $1.7 million to
$7.3 million in 1996 from $5.6 million in 1995, with the remaining change
being attributable to investment gains. Costs incurred during 1996 and
deferred into future policy periods were $20.3 million, compared with $16.1
million in 1995.
Amortization of deferred cost of policies purchased of $2.1 million
represents the amortization of the purchase price allocated to the policies
acquired in the acquisition of FBG.
General insurance expenses increased $1.1 million, or 25%, to $5.5
million for the 1996 six months from $4.4 million for the same period in
1995. This increase is due primarily to the acquisition of FBG.
Interest expense increased $.7 million as a result of the borrowing
of $7.0 million in December, 1995 and an additional $28.0 million in April,
1996. The funds borrowed in 1996 were used to fund the acquisition of FBG.
Income tax expense increased $1.4 million to $5.2 million in 1996
from $3.8 million in 1995. Taxes were provided at an effective rate of 35% on
both 1996 and 1995 income.
32
Three Months Ended June 30, 1996, and 1995
INSURANCE PREMIUMS AND POLICY CHARGES increased $1.3 million or 50%,
to $3.9 million in 1996, due primarily to a $1.4 million increase in
surrender charges received on increased surrenders of annuity policies,
resulting primarily from the acquisition of FBG.
NET INVESTMENT INCOME increased $12.0 million or 32%, to $50.0
million in 1996. This increase reflects an increase in average invested
assets from $1,947.2 million in 1995 to $2,647.9 million in 1996 offset in
part by a decrease in the average yield on invested assets from 7.8% for the
three months ended June 30, 1995, to 7.6% for the same period in 1996. The
increase in average invested assets can be attributed to the acquisition of
FBG.
NET INVESTMENT GAINS (LOSSES) WERE a net loss of $5.1 million in
1996, compared with a $.3 million loss in 1995. Gains and losses may be
realized upon securities which are disposed of for various reasons. The net
losses realized in 1996 are the result of general portfolio management while
the net losses realized in 1995 result from writedowns of $1.0 million on
securities deemed to have an other than temporary dimunition in value.
Unrealized gains in the company's bond portfolio were $10.1 million, $96.8
million and $46.8 million as of June 30, 1996, December 31, 1995 and June 30,
1995, respectively.
BENEFITS, CLAIMS AND INTEREST CREDITED TO POLICYHOLDERS increased
$6.4 million, or 22%, to $36.1 million in 1996 from $29.7 million in 1995.
This increase results primarily from an increase in the annuity liabilities
to $2,797.8 million on June 30, 1996, from $1,989.2 million on June 30, 1995.
This increase was partially offset by a decrease in the average interest rate
credited on the company's annuity liabilities, from 6.0% as of June 30, 1995,
to 5.7% as of June 30, 1996. Both the increase in annuity liabilities and the
decrease in the average interest rate credited on those liabilities is
largely due to the acquisition of FBG.
Amortization of deferred cost of policies purchased of $2.1 million
represents the amortization of the purchase price allocated to the policies
acquired in the acquisition of FBG.
General insurance expenses increased $1.4 million, or 64%, to $3.6
million for the 1996 three months from $2.2 million for the same period in
1995. This increase is due primarily to the acquisition of FBG.
Interest expense increased $.6 million as a result of the borrowing
of $7.0 million in December, 1995 and an additional $28.0 million in April,
1996. The funds borrowed in 1996 were used to fund the acquisition of FBG.
Income tax expense decreased $.6 million to $1.3 million in 1996 from
$1.9 million in 1995. Taxes were provided at an effective rate of 37% on 1996
income and 35% on 1995 income.
LIQUIDITY AND CAPITAL RESOURCES
The company is an insurance holding company whose principal asset is
the common stock of its insurance subsidiaries. The company's primary cash
requirements are to pay operating expenses.
As a holding company, the company relies on funds received from
American and FBL 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 and
Florida generally limit the ability of American and FBLto 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.
33
The liquidity requirements of American and FBLare 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
are the payment of surrenders, policy benefits, operating expenses and
commissions, as well as the purchase of assets for
investment.
For purposes of the company's consolidated statements of cash flows,
financing activities include premiums received from sales of SPDAs,
surrenders and death benefits paid, and surrender and policy charges
collected on these contracts. The net cash provided by (used in) these
particular financing activities for the six months ended June 30, 1996, and
1995, was $1.8 million and $(41.3) million, respectively.
The increase in net cash provided by annuity contracts without life
contingencies in the first six months of 1996 resulted primarily from a $48.3
million increase in premiums received from $163.5 million to $211.8 million
partially offset by an $7.0 million increase in surrender and death benefits
paid from $126.9 million to $215.3 million.
Net cash provided by the company's operating activities was $85.5
million and $76.8
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 (4%
and 4% as of June 30, 1996, and December 31, 1995, respectively). The
weighted average duration of the company's investment portfolio was 4.6 years
as of June 30, 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 $252.4 million and $146.6 million as of June 30, 1996, and
December 31, 1995, respectively. Of the amounts, $142.0 million and $145.0
million, respectively, were associated with ERC.
34
In 1989, the company entered
into a coinsurance agreement which ceded 90% of the risk on the company's
block of Single Premium Whole Life (SPWL) policies written prior to 1989 to
ERC. The agreement provides that ERC assumes 90% of all risks associated with
each policy in the block. Under the terms of the contract, the company
continues to administer the policies and is reimbursed for all payments made
under the terms of those policies. The company also receives a fee from the
reinsurer for administering such policies. Cash settlements under the
contract are made with ERC on a monthly basis. If ERC were to become
insolvent, American would remain responsible for the payment of all policy
liabilities.
FBL and Philadelphia Life Insurance Company are parties to a
reinsurance agreement under which FBLceded 100% of the risk on certain single
premium deferred annuity policies on a coinsurance basis. As of June 30,
1996, the company had amounts receivable of $108.7 million resulting from
this agreement.
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
35
Item 4. Submission of Matters to a Vote of Security Holders
________________________________________________________________________
A special meeting of the stockholders of the company was held April
8, 1996.
A proposal to approve an agreement and plan merger of Financial
Benefit Group, Inc. with the company passed with 6,189,247 shares voting in
favor, 63,992 shares voting against and 40,841 shares abstaining.
In addition, a proposal to vote upon an amendment to the 1989
Non-Qualified Stock Option Plan to increase the number of shares by 275,000
shares and to grant options in connection with the merger. This proposal
passed with 5,980,893 shares voting in favor, 401,482 shares voting against
and 47,685 shares abstaining.
The annual meeting of the stockholders of the company was held May
16, 1996. The following Directors were elected at the annual meeting:
Ralph W. Laster, Jr.
R. Rex Lee, M.D.
James V. O'Donnell
Frank T. Crohn
The names of the other Directors whose terms of office as Directors
continued after the meeting were as follows:
Janis L. Andersen
Mark V. Heitz
Robert T. McElroy, M.D.
Jack R. Manning
Robert G. Billings
Jack H. Brier
Robert R. Lee II
John F.X. Mannion
In addition, a proposal to approve the 1996 Incentive Stock Option
Plan for 950,000 shares passed with 6,874,736 shares voting in favor,
1,024,813 shares voting against and 74,305 shares abstaining.
Item 5. Other Information
________________________________
None
Item 6. Exhibits and Reports on Form 8-K
___________________________________________________
(a)Exhibits (numbered in accordance with Item 601 of Regulations
S-K).
Exhibit Page Number or Incorporation
Number Description by Reference
(2)(a) Plan and Agreement of Union dated Exhibit (2) to Registration
July 10, 1986, between AmVestors Statement on Form S-2,
Financial Corporation and American File No. 2-82811 dated
Investors Life Insurance Company, November 26, 1996.
Inc.
36
Exhibit Page Number or Incorporation
Number Description by Reference
(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
(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.
37
Exhibit Page Number or Incorporation
Number Description by Reference
(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
(10)(o) Credit Agreement dated April 8, 1996 PP 41-110
between the company, First National
Bank of Chicago, Boatmen's First
National Bank of Kansas City and Fleet
National Bank of Boston
(11) Calculation of Earnings per Share P 111
(20)(a) Reports on Form 8-K
There were no reports on Form 8-K for
the three months ended June 30, 1996
38
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
Financial Benefit Life Insurance Company
7251 West Palmetto Park Road
Boca Raton, Florida 33433
Annuity International Marketing Corporation
7251 West Palmetto Park Road
Boca Raton, Florida 33433
Financial Benefit Management Corporation
7251 West Palmetto Park Road
Boca Raton, Florida 33433
The Insurancemart, Inc.
7251 West Palmetto Park Road
Boca Raton, Florida 33433
Rainbow Card Pack Publication, Inc.
7251 West Palmetto Park Road
Boca Raton, Florida 33433
(27) Financial Data Schedule
39
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: August 14, 1996
____________________
40