SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Nine Months Ended September 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 September 30, 1996
------- -------------------------------
Common Stock, no par value 12,870,203 shares
AMVESTORS FINANCIAL CORPORATION
INDEX
PART I Financial Information: Page Number
Consolidated Balance Sheets-
September 30, 1996 and December 31, 1995 2-3
Consolidated Statements of Earnings-
Nine months ended September 30, 1996 and 1995 4
Consolidated Statements of Earnings-
Three months ended September 30, 1996 and 1995 5
Consolidated Statements of Stockholders' Equity-
Twelve months ended December 31, 1995 and
Nine months ended September 30, 1996 6
Consolidated Statements of Cash Flows-
Nine months ended September 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 35-39
1
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and December 31, 1995
(000's Omitted)
(Unaudited)
ASSETS 1996 1995
- --------------------------------------- ------------- ------------
Investments:
Debt securities:
Bonds:
Available-for-sale (cost: $2,550,902 and
$1,947,777) ....................... $ 2,568,138 2,044,606
Trading (cost: $45,919 and $1,489) 46,070 1,485
2,614,208 2,046,091
Equity securities:
Common stock:
Available-for-sale (cost: $2,596 and $1,047) 2,503 1,181
Preferred stock:
Available-for-sale (cost: $28,670 and $7,566) 28,640 7,733
Trading (cost: $2,051 and $619) 2,068 629
33,211 9,543
Other long-term investments 41,358 39,491
Short-term investments 372 436
Total investments 2,689,149 2,095,561
Cash and cash equivalents 43,436 48,281
Accounts receivable (net of allowance for uncollectible
accounts of $791 and $739) 708 454
Amounts receivable under reinsurance agreements 247,269 146,618
Amounts receivable on securities settlements in process 7,120 10,873
Accrued investment income 39,126 29,357
Deferred cost of policies produced 182,183 140,476
Deferred cost of policies purchased 41,676 --
Other assets 30,890 4,584
Total assets ................................... $3,281,557 2,476,204
See notes to consolidated financial statements.
2
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 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 $ 3,002,153 2,259,028
Other policy liabilities 7,362 7,312
3,009,515 2,266,340
Subordinated debentures payable 65,000 -
Notes payable - 7,000
Amounts due on securities settlements in process 5,804 1,438
Deferred income taxes 537 22,901
Accrued expenses and other liabilities 12,611 4,080
Total liabilities 3,093,467 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 98,496 64,284
Unrealized investment gains (losses)(net of deferred
cost of policies produced amortization expense (benefit) of $4,563 and
$27,327 and net of deferred cost of policies purchased amortization
expense (benefit) of $508 and $0 and deferred income
tax expense (benefit) of $4,223 and $24,431) 7,819 45,372
Retained earnings 68,400 54,714
191,153 177,274
Less treasury stock (234) -
Less leveraged employee stock ownership trust
(LESOP) (2,829) (2,829)
Total stockholders' equity 188,090 174,445
Total liabilities and stockholders' equity $3,281,557 2,476,204
See notes to consolidated financial statements.
3
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Nine months ended September 30, 1996 and 1995
(000's Omitted, except per share data)
(Unaudited)
1996 1995
Revenue:
Insurance premiums and policy charges ............. $ 10,451 6,554
Net investment income ............................. 139,704 114,724
Net investment gains (losses) ..................... 4,792 (993)
Other revenue ..................................... 1,473 683
Total revenue ..................................... 156,420 120,968
Benefits and expenses:
Benefits, claims and interest credited
to policyholders .................................. 104,500 88,588
Amortization of deferred cost of policies produced 11,467 8,085
Amortization of deferred cost of policies purchased 3,516 --
General insurance expenses ........................ 9,084 6,315
Premium and other taxes, licenses and fees ........ 1,879 1,256
Other expenses .................................... 165 157
Total benefits and expenses ....................... 130,611 104,401
Operating earnings .................................... 25,809 16,567
Interest expense ...................................... 2,107 57
--------- ------
Earnings before income tax expense and
extraordinary item .................................. 23,702 16,510
Income tax expense .................................... 8,414 5,617
Earnings before extraordinary item..................... 15,288 10,893
Extraordinary item: Loss on early extinguishment of
debt (net of income tax benefit of $148) ............ (269) --
Net earnings .......................................... $ 15,019 $ 10,893
Earnings per share of common stock:
Primary:
Net earnings ...................................... $ 1.19 1.05
Fully diluted:
Net earnings ...................................... $ 1.15 1.05
Average share outstanding:
Primary............................................ 12,584 10,330
Fully diluted..................................... 13,755 10,378
See notes to consolidated financial statements.
4
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three months ended September 30, 1996 and 1995
(000's Omitted, except per share data)
(Unaudited)
1996 1995
Revenue:
Insurance premiums and policy charges ............. $ 4,098 2,038
Net investment income ............................. 50,547 38,534
Net investment gains (losses) ..................... 2,258 (687)
Other revenue ..................................... 760 493
Total revenue ..................................... 57,663 40,378
Benefits and expenses:
Benefits, claims and interest credited
to policyholders .................................. 37,735 29,891
Amortization of deferred cost of policies produced 4,054 2,516
Amortization of deferred cost of policies purchased 1,400 -
General insurance expenses ........................ 3,548 1,914
Premium and other taxes, licenses and fees ........ 779 383
Other expenses .................................... 52 51
Total benefits and expenses ....................... 47,568 34,755
Operating earnings .................................... 10,095 5,623
Interest expense ...................................... 1,373 16
-------- -------
Earnings before income tax expense and
extraordinary item .................................. 8,722 5,607
Income tax expense .................................... 3,171 1,801
Earnings before extraordinary item .................... 5,551 3,806
Extraordinary item: Loss on early extinguishment of
debt (net of income tax benefit of $123) ............ (222) -
Net earnings .......................................... $ 5,329 3,806
Earnings per share of common stock:
Primary:
Net earnings ...................................... $ .39 .37
Fully diluted:
Net earnings ...................................... $ .36 .37
Average share outstanding:
Primary ........................................... 13,636 10,410
Fully diluted ..................................... 16,939 10,410
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
($.075 per share on common
stock) ...................................... - - - (761) - - (761)
Issuance of common stock:
upon exercise of options .................... 135 785<F1> - - - - 920
Allocation of LESOP shares ..................... - - - - - 306 306
------------ ---------- ------- ------- ------ -------- --------
Balance December 31, 1995 ...................... 12,904 64,284 45,372 54,714 - (2,829) 174,445
Net earnings ................................... - - - 15,019 - - 15,019
gains (losses) ............................... - - (37,553) - - - (37,553)
Cash dividends to stockholders
($.12 per share on common
stock) ...................................... - - - (1,333) - - (1,333)
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
Purchase of warrants .......................... - (257) - - - - (257)
Acquisition of treasury shares ................. - - - - (234) - (234)
------------ ---------- ------- ------- ------ -------- --------
Balance September 30, 1996 ................... $ 16,438 98,496 7,819 68,400 (234) (2,829) 188,090
============ ========== ======= ======= ====== ======== ========
<FN>
<F1> Net of income tax benefit of $155 and $440 for the periods ended September
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
Nine months ended September 30, 1996 and 1995
(Unaudited)
(000's Omitted)
1996 1995
Operating Activities:
Net earnings ........................................ $ 15,019 10,893
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Interest credited to policyholders ................ 106,722 90,145
Amortization of (discounts) premiums on debt
securities, net .................................. (798) (755)
Amortization of deferred cost of policies produced 11,466 8,085
Amortization of deferred cost of policies purchased 3,518 -
Net investment (gains) losses ..................... (4,797) 993
Accrued investment income ......................... (2,396) 664
Deferred income taxes ................................... 1,386 5,111
Other, net ........................................ 2,828 2,233
Net cash provided by operating activities ........... 132,948 117,369
Investing Activities:
Purchases of securities:
Held-to-maturity ................................... - (5,118)
Available-for-sale ................................. (631,813) (232,752)
Trading ............................................ (73,687) -
Proceeds from sale of securities:
Held-to-maturity ................................... - -
Available-for-sale ................................. 407,285 72,830
Trading ............................................ 27,821 -
Proceeds from maturity or redemption of securities:
Held-to-maturity ................................... - 26,303
Available-for-sale ................................. 120,727 56,193
Trading ............................................ 1,294 -
Other long-term investments, net .................... 4,324 17,067
Short-term investments, net ......................... 219 60
Capitalization of deferred cost of policies produced (30,408) (25,085)
Capitalization of goodwill .......................... (341) -
Acquisition, net of cash received ................... (2,314) -
Construction of home office ......................... (7,691) (997)
Other, net .......................................... (271) (221)
Net cash used in investing activities ............... (184,855) (91,720)
Financing Activities:
Premiums received ................................... 317,986 256,815
Surrender and death benefits paid ................... (328,811) (290,210)
Surrender and risk charges collected ................ 8,801 5,274
Securities settlements in process ................... 8,118 4,407
Acquisition of treasury stock ....................... (234) -
Cash dividends to stockholders ...................... (1,333) (760)
Issuance of common stock ............................ 483 762
Purchase of warrants ................................ (257) -
Notes payable ....................................... (22,500) -
Debentures payable .................................. 65,000 -
Other, net .......................................... (191) 4,150
Net cash provided by (used in) financing
activities ......................................... 47,062 (19,562)
Increase (Decrease) in Cash and Cash Equivalents ........ (4,845) 6,087
Cash and Cash Equivalents:
Beginning of year ................................... 48,281 10,621
End of year ........................................ $ 43,436 16,708
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
Nine months ended September 30, 1996 and 1995
(Unaudited)
(000's Omitted)
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION: 1996 1995
Income tax payments (refunds) ................... $ 2,590 (1,332)
Interest payments ............................... $ 805 --
-------
Change in net unrealized investment gains (losses) $ (80,016) 43,294
Less: Associated (increase) reduction in amortization
of deferred policy acquisition costs ... 22,256 (10,823)
Deferred income tax (expense) benefit ...... 20,207 (10,331)
Net change in net unrealized gains (losses) ..... $ (37,553) 22,140
-------
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), 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 September 30, 1996 and the results of earnings and the
statements of cash flows for the nine month periods ended September 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 September 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 ........ $2,614,208 2,614,208 2,046,091 2,046,091
Equity securities ...... 33,211 33,211 9,543 9,543
Other long-term investments 41,358 41,376 39,491 39,546
Short-term investments ... 372 372 436 436
Cash and cash equivalents . 43,436 43,436 48,281 48,281
Accounts receivable on
securities settlements in
process ................ 7,120 7,120 10,873 10,873
Accounts receivable and
accrued investment income . 39,834 39,834 29,811 29,811
Liabilities:
Future policy benefits -
investment contracts .. 2,733,926 2,557,642 2,022,653 1,900,895
Other policy liabilities . 7,362 7,362 7,312 7,312
Subordinated debentures
payable ........ 65,000 65,000 - -
Notes payable .......... - - 7,000 7,000
Amounts due on securities
settlements in process ..... 5,804 5,804 1,438 1,438
Accrued expenses and other
liabilities ......... 12,611 12,611 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.
SUBORDINATED DEBENTURES PAYABLE - The fair value of the company's
debentures has been estimated to be an amount equal to the balance reported in
the balance sheet.
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
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. Summary of Significant Accounting Policies (continued):
- -------------------------------------------------------------
costs related to investment-type deferred annuity contracts are amortized in
relation to the incidence of expected gross profits over the expected life of
the policies. For single premium life insurance, deferred policy acquisition
costs are amortized over the life of the policies, but not more than 20 years
for policies issued before January l, 1987, and not more than 30 years for
policies issued after December 31, 1986, based on the expected gross profits for
the amortization periods. The deferred costs related to traditional life
contracts are amortized over the premium paying period for the related policies
using the same actuarial assumptions as to interest, mortality and withdrawals
as are used to calculate the reserves for future benefits.
Net investment gains (losses) realized in the first nine months of 1996
and 1995 resulted in the company experiencing investment margins greater than or
less than those estimated. As a result, $362,011 and $229,637 of the unamortized
balance of cost deferred on policies produced was expensed in the nine months
ended September 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:
Primary earnings per share of common stock are computed by dividing net
earnings by the sum of the weighted average number of shares outstanding during
the period plus dilutive common stock equivalents applicable to stock options
and warrants calculated using the treasury stock method. Fully diluted earnings
per share assumes the conversion of the convertible debentures outstanding with
applicable reduction in interest expenses related to the debentures.
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 Opinion No. 25 which requires
compensation cost be recognized based on the difference, if any, between the
quoted market price of the stock on the date of grant and the amount an employee
must pay to acquire the stock. The company will continue to apply APB Opinion
No. 25 in its consolidated financial statements and will disclose pro forma net
income and earnings per share in a footnote to its consolidated financial
statements, determined as if the new method were applied.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. Summary of Significant Accounting Policies (continued):
- -----------------------------------------------------------
P. RECLASSIFICATIONS:
Certain reclassifications have been made to conform the September 30,
1995 and December 31, 1995 financial statements to the September 30, 1996
presentation.
2. Investments:
- -----------------
A summary of investment income is as follows:
(000's Omitted)
For the Nine Month Period
Ended September 30,
1996 1995
Debt securities ....................................... $ 135,403 109,827
Equity securities ..................................... 1,057 70
Other long-term investments ........................... 3,590 5,258
Short-term investments ............. .................. 1,641 1,173
141,691 116,328
Less investment expenses .............................. 1,987 1,604
Net investment income ................................. $ 139,704 114,724
(000's Omitted)
For the Nine Month Period
Ended September 30,
1996 1995
Net investment gains (losses): Realized investment gains (losses):
Debt securities, available-for-sale .............. $ 3,404 (1,409)
Debt securities, held-to-maturity ................. -- 304
Debt securities, trading ............... .......... 360 --
Equity securities, available-for-sale ............. 707 461
Equity securities, trading ........................ 282 --
Other .......................................... (122) (349)
Net realized investment gains (losses) ................ 4,631 (993)
Unrealized investment gains (losses):
Debt securities, trading .......................... 154 --
Equity securities, trading ......................... 7 --
Net unrealized investment gains (losses) .............. 161 --
Net investment gains (losses) ......................... $ 4,792 (993)
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
September 30, 1996 was as follows:
(000's Omitted)
As of September 30, 1996
Available-for-Sale Trading
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------- ------ --------- ------
Debt securities:
One year or less ............... $ 62,830 63,220 - -
Two years through five years .......... 492,805 502,395 4,336 4,333
Six years through ten years ........... 1,387,807 1,395,011 41,151 41,307
Eleven years and after ......... 607,460 607,512 432 430
2,550,902 2,568,138 45,919 46,070
Equity securities .................. 31,266 31,143 2,051 2,068
$2,582,168 2,599,281 47,970 48,138
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 September 30, 1996, and December 31,
1995, were as follows:
(000's Omitted)
Estimated
Amortized Unrealize Unrealize Market
Cost Gains Losses Value
September 30, 1996 Bonds, available-for-sale:
Corporate debt obligations
Investment grade ................. $1,485,166 27,233 17,544 1,494,855
High-yield ....................... 198,655 3,646 2,896 199,405
1,683,821 30,879 20,440 1,694,260
U.S. Treasury obligations ........ 47,491 305 378 47,418
Mortgage-backed securities
Investment grade ................. 812,937 13,688 5,155 821,470
High-yield ....................... 6,653 -- 1,663 4,990
Bonds, available-for-sale ....... 2,550,902 44,872 27,636 2,568,138
Bonds, trading:
Corporate debt obligations
Investment grade ................. 7,344 40 45 7,339
High-yield ....................... 38,575 314 158 38,731
Bonds, trading ................. 45,919 354 203 46,070
Total bonds ..................... 2,596,821 45,226 27,839 2,614,208
Equity securities .................. 33,317 1,276 1,382 33,211
$2,630,138 46,502 29,221 2,647,419
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
September 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 September 30, 1996, and
December 31, 1995 were as follows:
(000's Omitted)
Estimated
Amortized Unrealized Unrealized Market
September 30, 1996 Cost Gains Losses Value
- --------------------------------- -------- ------ ---------- ----------
Government agency mortgage-backed securities:
Planned amortization classes ........... $ - - - -
Targeted amortization classes and
accretion directed classes ............ - - - -
Sequential classes ...................... - - - -
Pass-throughs .......................... 25 2 - 27
Total government agency
mortgage-backed securities ..... 25 2 - 27
Government-sponsored enterprise mortgage-backed securities:
Planned amortization classes ........ 527,198 10,204 2,904 534,498
Targeted amortization classes and
accretion directed classes ....... 44,703 464 - 45,167
Sequential classes .................. 8,942 96 - 9,038
Pass-throughs ................... ... 3,348 31 - 3,379
Total government-sponsored enterprise
mortgage-backed securities ......584,191 10,795 2,904 592,082
Other mortgage-backed securities:
Planned amortization classes ...... . 15,248 117 30 15,335
Sequential classes ......... ....... 191,960 2,501 2,217 192,244
Pass-throughs .................. 8 1 - 9
Subordinated classes ............... 28,158 272 1,667 26,763
Total other mortgage-backed securities 235,374 2,891 3,914 234,351
Total mortgage-backed securities ........ $819,590 13,688 6,818 826,460
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 24.9% and 23.4% of the carrying value of the
company's mortgage-backed securities as of September 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 71.6% and 74.6% of the carrying
value of the company's mortgage-backed securities as of September 30, 1996 and
December 31, 1995.
As of September 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 seven issues, with a carrying value of
$28,989,648 as of September 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 Nine Month Period
Ended September 30,
-------------------------------
1996 1995
Consideration received ............... $ 557,219 175,505
Carrying value ....................... 552,467 176,149
Change in unrealized gains (losses) on
trading securities ................... 161 -
Net investment gains (losses) ........ $ 4,913 (644)
Investment gains ..................... $ 13,262 1,533
Investment losses .................... (8,510) (2,177)
Change in unrealized gains (losses) on
trading securities ................... 161 -
Net investment gains (losses) ........ $ 4,913 (644)
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 - (79,593) 155 (424) 7
Balance as of September 30, 1996.. $ - 17,236 151 (123) 17
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
3. Other Assets:
- ----------------
Other assets consist of the following:
(000's Omitted)
September 30, December 31,
1996 1995
Property and equipment at cost:
Home office properties
(including land of $1,067)....... $ 14,780 3,643
Furniture and equipment........... 4,887 3,711
Automobiles....................... 174 99
19,841 7,453
Less accumulated depreciation.... 5,854 3,650
13,987 3,803
Goodwill............................ 12,654 68
Other............................... 4,249 713
$ 30,890 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
September 30, Life insurance in force $303,309 228,696 74,613
1996 Insurance premiums and
policy charges....... 11,012 561 10,451
September 30, Life insurance in force 318,346 243,301 75,015
1995 Insurance premiums and
policy charges....... 7,267 713 6,554
September 30, Future policy benefits... 3,002,153 246,515 2,755,638
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 unlikely.
The company had amounts receivable under reinsurance agreements of
$247,268,922 and $146,617,611 as of September 30, 1996, and December 31, 1995,
respectively.
Of the total amounts receivable, $142,716,659 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 $8,222,668 and $6,787,793 for periods ended September 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)
September 30, December 31,
1996 1995
Reserve for future policy benefits........ $140,322 143,558
Reimbursement for benefit payments and
administrative allowance................. 693 1,407
$141,015 144,965
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
September 30, 1996, the company had amounts receivable of $104,522,263 resulting
from this agreement.
5. Convertible Subordinated Debentures:
- ---------------------------------------
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 Regulation 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 September 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.
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.
6. 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.
On July 12, 1996 the company paid off the existing bank debt from the
proceeds of the Convertible Subordinated Debentures.
7. Retirement Plans:
- --------------------
The company sponsors an Employee Stock Ownership Plan (ESOP) for all
full-time employees with one year of service. Qualifying participants may
contribute an amount not to exceed 10% of covered compensation. The company made
no contributions to this plan during either the nine months ended September 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)
7. 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 September 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 355,540 shares of the company's common stock now owned by the
LESOP, 113,323 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 $245,214, and $229,173, for the nine months
ended September 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 $432,748, representing the present value of
future benefits, has been established. Charges (credits) to earnings related to
the plans were $(2,889) and $(87,761) for the nine months ended September 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
nine months ended September 30, 1996, and 1995 were $273,099 and $166,292
respectively.
8. 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 September
30, 1996, and December 31, 1995, American's statutory capital and surplus was
$95,762,493 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 10%
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
8. Stockholders' Equity (continued):
- -----------------------------------
of its available and accumulated statutory surplus derived from net operating
profits and net realized capital gains. After payment of a dividend, FBLmust
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 September 30, 1996, available surplus from net operating profits
and net realized capital gains was $2.4 million. Required statutory surplus as
of September 30, 1996 was $19.6 million and actual surplus was $34.6 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 ($5,743,000 as of September 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 ($867,675 as of September 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
September 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)
8. 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
September 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 nine months ended September 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
September 30, December 31,
1996 1995
Options outstanding, beginning of period............. - -
Options granted...................................... 673,000 -
Options outstanding, end of period................... 673,000 -
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)
8. 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 270,689 shares of its common stock as summarized in
the following table:
Warrant Issue Number Exercise Expiration
Holder Date of Shares Price Date
Wabash Life Insurance 2/18/92 63,176 $1.9786 2/19/97
Company 12/20/92 63,176 1.4839 12/20/2002
5/18/93 120,335 1.5582 3/18/2003
246,687
Other Various 24,002 1.3460-3.7188 Various
270,689
9. Other Revenue:
- ------------------
Effective December 1, 1989, the company entered into a coinsurance
agreement with Employers Reassurance Corporation (ERC) which reinsured 90% of
the risk on the company's block of SPWL policies written prior to 1989. The
agreement provides that ERC assumes 90% of all risks associated with each policy
in the block. These policies continue to be administered by American. In return,
American receives an administrative allowance of $31.50 per policy per year. The
total allowance received during the nine months ended September 30, 1996 and
1995 was $85,937 and $92,103, respectively.
Other revenue for the nine months ended September 30, 1996 includes
override commissions of $902,471 attributable to the marketing efforts of
AIMCORand TIM, $306,812 of rental income received by FBL and $105,537 of
advertising revenues received by RBC.
10. Income Taxes:
- -----------------
The provision for income taxes charged to operations was as follows:
(000's Omitted)
For the nine Months
Ended September 30,
1996 1995
Current income tax expense (benefit)....... $5,001 506
Deferred income tax expense (benefit)...... 3,413 5,111
Total income tax expense................. $8,414 5,617
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
11. 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 nine months ended September 30, 1996 include the results of
operations of FBG for the six month period ended September 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
The following table sets forth certain unaudited pro forma operating
data of the company for the nine months ended September 30, 1996 and 1995. This
pro forma data assumes the acquisition of FBG occurred on January 1, 1996 and
1995, respectively.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
11. Acquisition (continued):
- -----------------------------
Nine Months ended September 30,
1996 1995
(in thousands, except per share data)
Pro Forma Operating Data:
Total revenue.................................. $162,861 170,026
Earnings before extraordinary item............. 14,231 19,325
Net earnings................................... 13,814 19,325
Earnings per share of common stock:
Primary:
Earnings before extraordinary item........ $1.06 1.46
Net earnings.............................. $1.02 1.46
Fully diluted:
Earnings before extraordinary item........ $1.03 1.45
Net earnings.............................. $1.00 1.45
Average shares outstanding:
Primary.................................... 13,486 13,251
Fully diluted............................... 14,659 13,299
12. 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 insurers. Most state laws permit assessments or
some portion thereof to be credited against future premium taxes. Charges
(credits) relating to the guaranty fund assessments impacted 1995 by
approximately $1,001,000. The company expects that further charges to income may
be required in the future and will record such amounts when they become known.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The company specializes in the sale of deferred annuity products as a
retirement savings vehicle for individuals. During each of the past three years,
sales of deferred annuities have accounted for at least 96% of the company's
premiums received, while sales of Single Premium Immediate Annuities (SPIAs) and
Flexible Premium Universal Life policies (FPULs) have accounted for virtually
all remaining premiums received.
The company's operating earnings are derived primarily from its
investment results, including realized gains (losses), less interest credited to
annuity contracts and expenses. Under Generally Accepted Accounting Principals
(GAAP), premiums received on deferred annuities, SPIAs without life
contingencies and FPULs, are not recognized as revenue at the time of sale.
Similarly, policy acquisition costs (principally commissions) related to such
sales are not recognized as expenses but are capitalized as deferred 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 tim-
27
ing 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. In 1994 and 1993, the company deemed it advisable, due to the
general decline in interest rates and the yield on its investment portfolio, to
reduce credited interest rates on certain annuity contracts below the "bailout"
level. The aggregate account values of annuity contracts on which the crediting
rate was reduced below the "bailout" level totalled $109.8 million and $326.2
million during 1994 and 1993, respectively. As a result, $18.3 million, or 17%,
and $139.6 million, or 43%, of such policies were surrendered during 1994 and
1993, respectively. The company was able to offset the negative impact of
"bailout" surrenders on its earnings through the realization of gains on the
sale of its securities. Excluding surrenders from "bailout" products, American's
annuity withdrawal rates were 9% for 1994 and 7% for 1993. Although, as of
September 30, 1996, approximately $249.0 million, or 14% 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 $246.9
million of this amount is 6% or less. As of that same date, approximately $22.3
million, or 4.4% 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 $22.3 million is 5.5% or less, with $18.7
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. The company 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.
28
MARGIN ANALYSIS
The company's earnings are impacted by realized investment gains and
losses and by the associated amortization of deferred cost of policies produced
and purchased. 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 deferred costs 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 Nine Months Ended September 30,
1996 1995
(dollars in millions)
(percent of average
invested assets annualized)
Average invested assets <F1> ............. $ 2,471.8 100.0% $ 1,962.5 100.0%
Insurance premiums and policy charges .... $ 10.5 .56% $ 6.6 .45%
Net investment income <F2> ............... 139.7 7.54 114.7 7.79
Net investment gains (losses), core ...... 2.7 .15 - -
Policyholder benefits .................... (104.5) (5.64) (88.6) (6.02)
Gross interest margin .................... 48.4 2.61 32.7 2.22
Associated amortization of deferred
cost of policies produced ............... (10.7) (.57) (8.3) (.56)
Associated amortization of deferred
cost of policies purchased .............. (4.0) (.21) - -
Net interest margin ...................... 33.7 1.82 24.4 1.66
Net investment gains (losses), other ..... 2.1 .11 (1.0) (.07)
Associated amortization of deferred
cost of policies produced ............... (.8) (.04) .2 .02
Associated amortization of deferred
cost of policies purchased .............. .4 .02 - -
Net margin from investment gains (losses),
other ................................... 1.7 .09 (.8)
Total net margin ......................... 35.4 1.91 23.6 1.60
Expenses, net ............................ (9.6) (.52) (7.1) (.48)
Operating earnings ....................... 25.8 1.39 16.5 1.12
Interest expense ......................... 2.1 .11 - -
Earnings before income taxes and
extraordinary items ..................... 23.7 1.28 16.5 1.12
Income tax expense ....................... 8.3 .45 5.6 .38
Earnings before extraordinary item ....... 15.4 .83 10.9 .74
Extraordinary item ....................... (.4) (.02) - -
Net earnings ............................. $ 15.0 .81% $ 10.9 .74%
Operating earnings ....................... $ 25.8 1.39% $ 16.5 1.12%
Less: Net margin from investment gains
(losses), other ......................... 1.7 .09 (.8) (.05)
Operating earnings excluding net margin
from investment gains (losses), other ... $ 24.1 1.30% $ 17.3 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.
Note: Numbers may not add due to rounding.
</FN>
29
For the Quarter Ended September 30,
1996 1995
(dollars in millions)
(percent of average
invested assets annualized)
Average invested assets <F1> ............ $ 2,692.0 100.0% $ 1,973.6 100.0%
Insurance premiums and policy charges ... $ 4.1 .61% $ 2.0 .41%
Net investment income <F2> .............. 50.5 7.51 38.5 7.81
Net investment gains (losses), core ..... 1.1 .16 - -
Policyholder benefits ................... (37.7) (5.61) (29.9) (6.06)
Gross interest margin ................... 18.0 2.68 10.7 2.16
Associated amortization of deferred
cost of policies produced .............. (3.7) (.55) (2.7) (.55)
Associated amortization of deferred
cost of policies purchased ............. (1.4) (.21) - -
Net interest margin ..................... 12.9 1.91 8.0 1.62
Net investment gains (losses) ........... 1.2 .17 (.7) (.14)
Associated amortization of deferred
cost of policies produced .............. (.3) (.04) .2 .04
Associated amortization of deferred
cost of policies purchased ............. - - - -
Net margin from investment gains (losses) .9 .13 (.5) (.10)
Total net margin ........................ 13.7 2.04 7.5 1.52
Expenses, net ........................... (3.6) (.54) (1.9) (.38)
Operating earnings ...................... 10.1 1.50 5.6 1.14
Interest expense ........................ 1.4 .20 - -
Earnings before income taxes and
extraordinary item ..................... 8.7 1.30 5.6 1.14
Income tax expense (benefit) ............ 3.0 .45 1.8 .37
Earnings before extraordinary item ...... 5.7 .84 3.8 .77
Extraordinary item ...................... (.3) (.05) - -
Net earnings ............................ $ 5.3 .79% $ 3.8 .77%
Operating earnings ...................... $ 10.1 1.50% $ 5.6 1.14%
Less: Net margin from investment gains
(losses) ............................... .9 .13 (.5) (.10)
Operating earnings excluding net margin
from investment gains (losses), other .. $ 9.2 1.37% $ 6.1 1.24%
<FN>
<F1>Average of cash, invested assets (before SFAS 115 adjustment) and net
amounts due to
or from brokers on unsettled security trades at the 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
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1996, and 1995
INSURANCE PREMIUMS AND POLICY CHARGES increased $3.9 million or 59%, to
$10.5 million in 1996, due primarily to a $3.5 million increase in surrender
charges received on increased surrenders of annuity policies, resulting
primarily from the acquisition of FBG.
NET INVESTMENT INCOME increased $25.0 million or 22%, to $139.7 million
in 1996. This increase reflects an increase in average invested assets from
$1,962.5 million in 1995 to $2,471.8 million in 1996 offset in part by a
decrease in the average yield on invested assets from 7.8% for the nine months
ended September 30, 1995, to 7.5% for the same period in 1996. The increase in
average invested assets can be attributed to the acquisition of FBG. The yield
in both periods was impacted by an investment in investment partnerships. These
partnerships form a fund of funds totalling $18.8 million and $22.4 million on
September 30, 1996 and 1995, respectively. This fund of funds is structured in
an attempt to consistently provide returns in excess of the Standard & Poor's
(S&P) 500 over time without regard to the general direction of financial
markets. This fund generated income of $1.4 million in the 1996 nine months
compared with $3.0 million in 1995.
NET INVESTMENT GAINS (LOSSES) were $4.8 million in 1996, compared with a
$1.0 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 primarily 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 $17.4 million, $96.8 million and $50.8 million as of September
30, 1996, December 31, 1995 and September 30, 1995, respectively.
BENEFITS, CLAIMS AND INTEREST CREDITED TO POLICYHOLDERS increased $15.9
million, or 18%, to $104.5 million in 1996 from $88.6 million in 1995. This
increase results primarily from an increase in annuity liabilities to $2,823.7
million on September 30, 1996, from $2,033.2 million on September 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 September 30,
1995, to 5.8% as of September 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 $3.4
million, or 42%, to $11.5 million in 1996 from $8.1 million in 1995.
Amortization associated with gross interest margin increased $2.4 million to
$10.7 million in 1996 from $8.3 million in 1995, with the remaining change being
attributable to investment gains. Costs incurred during 1996 and deferred into
future policy periods were $30.4 million, compared with $25.1 million in 1995.
Amortization of deferred cost of policies purchased of $3.5 million
represents the amortization of the purchase price allocated to the policies
acquired in the acquisition of FBG.
General insurance expenses increased $2.8 million, or 44%, to $9.1
million for the 1996 nine months from $6.3 million for the same period in 1995.
This increase is due primarily to the acquisition of FBG.
Interest expense increased $2.1 million reflecting 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. The company
closed on an offering of $65.0 million of convertible subordinated debentures in
July, 1996 of which $35.2 of the proceeds were used to repay existing bank debt.
Income tax expense increased $2.8 million to $8.4 million in 1996 from
$5.6 million in
31
1995. Taxes were provided at an effective rate of 35%
on 1996 income and 34% on 1995 income.
Three Months Ended September 30, 1996, and 1995 INSURANCE PREMIUMS AND
POLICY CHARGES increased $2.1 million or
1.05%, to $4.1 million in 1996, due primarily to a $1.8 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 31%, to $50.5 million
in 1996. This increase reflects an increase in average invested assets from
$1,973.6 million in 1995 to $2,692.0 million in 1996 offset in part by a
decrease in the average yield on invested assets from 7.8% for the three months
ended September 30, 1995, to 7.5% for the same period in 1996. The increase in
average invested assets can be attributed to the acquisition of FBG. The yield
in both periods was impacted by an investment in investment partnerships. These
partnerships form a fund of funds totalling $18.8 million and $22.4 million on
September 30, 1996 and 1995, respectively. This fund of funds is structured in
an attempt to consistently provide returns in excess of the S&P 500 over time
without regard to the general direction of financial markets. This fund
generated a net loss of $.1 million in the 1996 quarter compared with income of
$1.0 million in 1995.
NET INVESTMENT GAINS (LOSSES) were $2.3 million in 1996, compared with a
$.7 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
resulted primarily 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 $17.4 million, $96.8 million and $50.8 million as of
September 30, 1996, December 31, 1995 and September 30, 1995, respectively.
BENEFITS, CLAIMS AND INTEREST CREDITED TO POLICYHOLDERS increased $7.8
million, or 26%, to $37.7 million in 1996 from $29.9 million in 1995. This
increase results primarily from an increase in annuity liabilities to $2,823.7
million on September 30, 1996, from $2,033.2 million on September 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 September 30,
1995, to 5.8% as of September 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 $1.6
million, or 64%, to $4.1 million in 1996 from $2.5 million in 1995. Amortization
associated with gross interest margin increased $1.0 million to $3.7 million in
1996 from $2.7 million in 1995, with the remaining change being attributable to
investment gains. Costs incurred during 1996 and deferred into future policy
periods were $10.1 million, compared with $9.0 million in 1995.
Amortization of deferred cost of policies purchased of $1.4 million
represents the amortization of the purchase price allocated to the policies
acquired in the acquisition of FBG.
General insurance expenses increased $1.6 million, or 84%, to $3.5
million for the 1996 three months from $1.9 million for the same period in 1995.
This increase is due primarily to the acquisition of FBG.
Interest expense increased $1.4 million reflecting 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. The company
closed on an offering of $65.0 million of convertible subordinated debentures in
July, 1996 of which $35.2 of the proceeds
32
were used to repay existing bank debt.
Income tax expense increased $1.4 million to $3.2 million in 1996
from $1.8 million in 1995. Taxes were provided at an effective rate of 36% on
1996 income and 32% 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, stockholder dividends and debt
service.
As a holding company, the company relies on funds received from American
and FBLto 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 it's
insurance subsidiaries be approved by the Insurance Commissioner of the state of
domicile.
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 nine months ended September 30, 1996, and 1995, was $47.1
million and $(19.6) million, respectively.
The increase in net cash provided by annuity contracts without life
contingencies in the first nine months of 1996 resulted primarily from a $61.2
million increase in premiums received from $256.8 million to $318.0 million
partially offset by an $38.6 million increase in surrender and death benefits
paid from $290.2 million to $328.8 million.
Net cash provided by the company's operating activities was $132.9
million and $117.4
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 (3%
and 4% as of September 30, 1996, and December 31, 1995, respectively). The
weighted average duration of the company's investment portfolio was 4.5 years as
of September 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, the sale of convertible debentures and both preferred and common
stock.
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
33
effects of guaranty fund assessments, see Note 12 of Notes to Consolidated
Financial Statements.
REINSURANCE. The company had amounts receivable under reinsurance
agreements of $247.3 million and $146.6 million as of September 30, 1996, and
December 31, 1995, respectively. Of the amounts, $141.0 million and $145.0
million, respectively, were associated with ERC. In 1989, the company entered
into a coinsurance agreement which ceded 90% of the risk on the company's block
of Single Premium Whole Life (SPWL) policies written prior to 1989 to ERC. The
agreement provides that ERC assumes 90% of all risks associated with each policy
in the block. Under the terms of the contract, the company continues to
administer the policies and is reimbursed for all payments made under the terms
of those policies. The company also receives a fee from the reinsurer for
administering such policies. Cash settlements under the contract are made with
ERC on a monthly basis. If ERC were to become insolvent, American would remain
responsible for the payment of all policy liabilities.
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 September 30, 1996, the
company had amounts receivable of $104.5 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, 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.
34
PART II. OTHER INFORMATION
AMVESTORS FINANCIAL CORPORATION
Item 1. Legal Proceedings
- --------------------------------
The company has no material legal proceedings pending against it.
Item 2. Changes in Securities
- -------------------------------------
None
Item 3. Defaults upon Senior Securities
- -------------------------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------------------
None
Item 5. Other Information
- --------------------------------
None
Item 6. Exhibits and Reports on Form 8-K
- ---------------------------------------------------
(a)Exhibits (numbered in accordance with Item 601 of Regulations
S-K).
Exhibit Page Number or Incorporation
Number Description by Reference
(2)(a) Plan and Agreement of Union dated Exhibit (2) to Registration
July 10, 1986, between AmVestors Statement on Form S-2,
Financial Corporation and American File No. 2-82811 dated
Investors Life Insurance Company, November 26, 1996.
Inc.
(2)(b) Resolutions of the Board of Exhibit (2)(a) to Form 10-Q
Directors dated January 7, 1988, dated May 11, 1988.
providing for succession to the
position of Chairman of the Board
of Directors
(2)(c) Agreement and Plan of Merger dated Exhibit (2.1)to Registration
September 8, 1995, between Financial Statement on Form S-4,
Benefit Group, Inc., AmVestors File No. 333-01309 dated
Financial Corporation and AmVestors March 1, 1996
Acquisition Subsidiary, Inc. as Amended
(3)(a) Articles of Incorporation as Amended Exhibit (3)(a) to Form 10-Q
and Restated dated October 26, 1993
(3)(b) Bylaws of the company Exhibit (4.2) to Registration
Statement on Form S-8, File
No. 33-31155 dated September
19, 1989
(4)(a) Specimen Common Stock Certificate Exhibit (4)(a) to Form 10-K
dated March 30, 1995.
35
Exhibit Page Number or Incorporation
Number Description by Reference
(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
(4)(d) 1995 Agents Stock Option Plan Exhibit (4.1) to Registration
Statement on Form S-3, File
No. 333-02211 dated April 2,
1996
(4)(e) AmVestors Financial Corporation 1996 Exhibit (4)(a) to Registration
Incentive Stock Option Plan Statement on Form S-8, File
No. 333-14571 dated October 21,
1996
(4)(f) Form of 3% Convertible Subordinated Exhibit (4.2) to Registration
Debentures due 2003 Statement on Form S-3, File No.
333-10101 dated August 29, 1996
(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.
(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 dated March 30, 1995 of
Bank Chicago and Boatmen's First National
Bank of Kansas City
36
Exhibit Page Number or Incorporation
Number Description by Reference
(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 Exhibit (10)(o) to Form 10-Q
between the company, First National dated August 14, 1996
Bank of Chicago, Boatmen's First
National Bank of Kansas City and Fleet
National Bank of Boston
(10)(p) Employment Agreement dated April 8, PP 40-42
1996, between the company and
Frank T. Crohn
(10)(q) Employment Agreement dated April 8, PP 43-45
1996, between the company and
Donna J. Rubertone
(11) Calculation of Earnings per Share P 46
(20)(a) Reports on Form 8-K
There were reports on Form 8-K for
the three months ended September 30, 1996
37
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
Annuity International Marketing 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
38
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: November 13, 1996
--------------------