SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the six months ended
June 30, 1997 Commission File Number 0-15330
---------------------------
AMVESTORS FINANCIAL CORPORATION
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(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)
555 South Kansas Avenue, Topeka, Kansas 66603
----------------------------------------- ---------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (785) 232-6945
Securities registered pursuant to Section 12(g) of the Act:
Common Stock*
-------------
Title of class
*Report being filed pursuant to Section 13 of the act.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----------------------------------------------------------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Class Outstanding June 30, 1997
------ ---------------------------
Common Stock, no par value 13,294,119 shares
AMVESTORS FINANCIAL CORPORATION
INDEX
PARTI. Financial Information: Page Number
Consolidated Balance Sheets-
June 30, 1997 and December 31, 1996 2-3
Consolidated Statements of Earnings-
Six months ended June 30, 1997 and 1996 4
Consolidated Statements of Earnings-
Three months ended June 30, 1997 and 1996 5
Consolidated Statements of Stockholders' Equity-
Twelve months ended December 31, 1996 and
Six months ended June 30, 1997 6
Consolidated Statements of Cash Flows-
Six months ended June 30, 1997 and 1996 7-8
Notes to Consolidated Financial Statements 9-28
Management's Discussion and Analysis of Financial
Condition and Results of Operations 28-35
PART II. Other Information 36-40
1
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and December 31, 1996
(000's Omitted)
(Unaudited)
ASSETS 1997 1996
- ------------------------------------------------------- ---------- ---------
Investments:
Debt securities:
Bonds:
Available-for-sale (cost: $2,651,581 and
$ 2,547,658) $2,689,208 2,594,293
Trading (cost: $34,272 and $12,198) 34,729 12,291
2,723,937 2,606,584
Equity securities:
Common stock:
Available-for-sale (cost: $2,124 and $1,396) 2,973 2,440
Preferred stock:
Available-for-sale (cost: $34,217 and $27,742) 37,457 30,694
Trading (cost: $463 and $2,516) 470 2,539
40,900 35,673
Other long-term investments 38,266 41,152
Short-term investments 514 371
Total investments 2,803,617 2,683,780
Cash and cash equivalents
86,758 132,574
Amounts receivable under reinsurance agreements 230,430 241,458
Amounts receivable on securities settlements in process 2,536 2,395
Accrued investment income 38,384 36,676
Deferred cost of policies produced 199,383 175,837
Deferred cost of policies purchased 37,323 39,865
Goodwill 11,444 11,644
Other assets 28,438 21,246
Total assets $3,438,313 3,345,475
See notes to consolidated financial statements.
2
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and December 31, 1996
(000's Omitted)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
- ---------------------------------------------- ----------- ----------
Liabilities:
Policy liabilities:
Future policy benefits $3,118,221 3,037,005
Other policy liabilities 14,024 6,709
3,132,245 3,043,714
Subordinated debentures payable 65,000 65,000
Amounts due on securities settlements in process 1,357 11,301
Deferred income taxes 16,075 13,302
Accrued expenses and other liabilities 9,827 7,811
Total liabilities 3,224,504 3,141,128
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 - 13,342,295
shares in 1997 and 13,167,372 shares in 1996 16,978 16,755
Paid in capital 100,330 98,678
Unrealized investment gains (losses) (net of deferred cost of policies produced
amortization expense (benefit) of $14,988 and $18,175 and net of deferred
cost of policies purchased amortization expense (benefit) of $4,083 and
$5,112 and deferred income tax expense (benefit) of $7,859
and $9,643) 14,785 17,701
Retained earnings 84,452 73,949
216,545 207,083
Less treasury stock (234) (234)
Less leveraged employee stock ownership trust
(LESOP) (2,502) (2,502)
Total stockholders' equity 213,809 204,347
Total liabilities and stockholders' equity $ 3,438,313 3,345,475
See notes to consolidated financial statements.
3
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Six months ended June 30, 1997 and 1996 (000's Omitted,
except per share data)
(Unaudited)
1997 1996
Revenue:
Insurance premiums and policy charges $ 9,086 6,353
Net investment income 103,138 89,157
Net investment gains (losses) 3,915 2,534
Other revenue 1,561 713
Total revenue 117,700 98,757
Benefits and expenses:
Benefits, claims and interest credited to policyholders 76,471 66,765
Amortization of deferred cost of policies produced 8,286 7,413
Amortization of deferred cost of policies purchased 3,571 2,116
General insurance expenses 7,550 5,536
Premium and other taxes, licenses and fees 1,624 1,100
Other expenses 104 113
Total benefits and expenses 97,606 83,043
Operating earnings 20,094 15,714
Interest expense 2,863 734
Earnings before income tax expense and extraordinary item 17,231 14,980
Income tax expense 6,031 5,243
Earnings before extraordinary item 11,200 9,737
Extraordinary item: Loss on early extinguishment of
debt (net of income tax benefit of $25) -- (47)
Net Earnings $ 11,200 9,690
Earnings per share of common stock:
Primary:
Net earnings $ .81 .80
Fully diluted:
Net earnings $ .73 .79
Average shares outstanding:
Primary 13,824 12,086
Fully diluted 17,926 12,273
See notes to consolidated financial statements.
4
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three months ended June 30, 1997 and 1996 (000's Omitted,
except per share data)
(Unaudited)
1997 1996
Revenue:
Insurance premiums and policy charges ................. $ 4,677 3,896
Net investment income ................................. 52,706 49,988
Net investment gains (losses) ......................... 1,472 (5,093)
Other revenue ......................................... 896 688
Total revenue ........................................ 59,751 49,479
Benefits and expenses:
Benefits, claims and interest credited to policyholders 38,707 36,145
Amortization of deferred cost of policies produced .... 4,407 2,443
Amortization of deferred cost of policies purchased ... 1,785 2,116
General insurance expenses ............................ 3,602 3,615
Premium and other taxes, licenses and fees ............ 1,015 849
Other expenses ........................................ 45 53
Total benefits and expenses ........................... 49,561 45,221
Operating earnings ........................................ 10,190 4,258
Interest expense .......................................... 1,428 609
Earnings before income tax expense and extraordinary item . 8,762 3,649
Income tax expense ........................................ 3,067 1,333
Earnings before extraordinary item ........................ 5,695 2,316
Extraordinary item: Loss on early extinguishment of
debt (net of income tax benefit of $25) ............... -- (47)
Net earnings .............................................. $ 5,695 2,269
Earnings per share of common stock:
Primary:
Net earnings .......................................... $ .41 .17
Fully diluted:
Net earnings .......................................... $ .37 .17
Average shares outstanding:
Primary ............................................... 13,925 13,574
Fully diluted ......................................... 17,990 13,671
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)
[CAPTION]
Unrealized
Investment
Common Paid-in Gains Retained Treasury
Stock Capital (Losses)Earnings Stock LESOP Total
Balance as of January 1,
1996 ................................. $ 12,904 64,284 45,372 54,714 - (2,829) 174,445
Net earnings ........................... -- -- -- 20,862 -- 20,862
Change in unrealized invest-
ment gains (losses) .................. -- -- (27,671) -- -- -- (27,671)
Cash dividends to stockholders
($.1425 per share on common
stock) ............................... -- -- -- (1,627) -- -- (1,627)
Issuance of common stock:
upon acquisition of company ........... 3,464 28,865 -- -- - 32,329
upon exercise of options .............. 387 585<F1> -- -- -- - 972
Issuance of warrants:
upon acquisition of company .......... -- 5,201 -- -- -- -- 5,201
Purchase of warrants ................... -- (257) - -- -- -- (257)
Acquisition of treasury shares ......... -- -- -- -- (234) -- (234)
Allocation of LESOP shares ............. -- -- -- -- -- 327 327
- ---------------------------------------- ----------------- ------- ------ -------- -------- --------
Balance as of December 31,
1996 ................................. 16,755 98,678 17,701 73,949 (2,502) 204,347
Net earnings ........................... -- -- -- 11,200 -- -- 11,200
Change in unrealized invest-
ment gains (losses) .................. -- -- (2,916) -- -- -- (2,916)
Cash dividends to stockholders
($.0525 per share on common
stock) ............................... -- -- - (697 -- -- (697)
Issuance of common stock:
upon exercise of options .............. 223 1,652<F1>) -- -- -- 1,875
- ---------------------------------------- ----------------- ------- ------ -------- -------- --------
Balance as of June 30,
1997 ................................. $ 16,978 100,330 14,785 84,452 (234) (2,502) 213,809
======================================== ================= ======= ====== ======== ======== ========
<FN>
<F1> Net of income tax benefit of $525 and $242 for the period ended June 30,
1997 and December 31, 1996, respectively.
</FN>
See notes to consolidated financial statements.
6
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Six Months ended June 30, 1997 and 1996
(000's Omitted)
(Unaudited)
1997 1996
Operating Activities:
Net earnings ....................................... $ 11,200 9,689
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Interest credited to policyholders ............... 79,694 67,620
Amortization of (discounts) premiums
on debt securities, net ......................... (2,424) (626)
Amortization of deferred cost of policies
produced ........................................ 8,286 7,412
Amortization of deferred cost of policies
purchased ...................................... 3,571 2,116
Net investment (gains) losses .................... (3,915) (2,534)
Investment trading activity ...................... (19,297) (6,852)
Accrued investment income ........................ (1,708) (641)
Deferred income taxes ............................ (4,610) 998
Other, net ....................................... 7,199 1,513
Net cash provided by operating activities .......... 77,996 78,695
Investing Activities:
Purchases of securities:
Available-for-sale ................................ (393,279) (537,208)
Proceeds from sale of securities:
Available-for-sale ................................ 234,576 340,582
Proceeds from maturity or redemption:
Available-for-sale ................................ 52,850 82,463
Other long-term investments, net ................... 2,889 4,392
Short-term investments, net ........................ (144) 12
Capitalization of deferred cost of policies
produced ......................................... (28,645) (20,251)
Capitalization of goodwill ......................... _ (330)
Acquisition, net of cash received .................. _ (2,314)
Other, net ......................................... (3,003) (3,494)
Net cash used in investing activities .............. (134,756) (136,148)
Financing Activities:
Premiums received .................................. 280,950 211,789
Surrender and death benefits paid .................. (278,470) (215,318)
Surrender and risk charges collected ............... 7,789 5,307
Securities settlements in process .................. (10,084) 2,082
Acquisition of treasury stock ...................... _ (234)
Cash dividends to stockholders ..................... (697) (1,043)
Issuance of common stock ........................... 1,874 472
Notes payable ...................................... _ 12,500
Other, net ......................................... 9,582 3,024
Net cash provided by (used in)
financing activities .............................. 10,944 18,579
Increase (Decrease) in Cash and Cash Equivalents ....... (45,816) (38,874)
Cash and Cash Equivalents:
Beginning of year .................................. 132,574 48,281
End of year ........................................ $ 86,758 9,407
See notes to consolidated financial statements.
7
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Increase (Decrease) in Cash and Cash Equivalents Six months
ended June 30, 1997 and 1996
(000's Omitted)
(Unaudited)
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION: ..... 1997 1996
Income tax payments (refunds) ................... $ 3,350 2,215
Interest payments .............................. $ 975 600
(000's Omitted)
For the Period Ended June 30,
NON-CASH ACTIVITIES: ................................ 1997 1996
Change in net unrealized investment gains
(losses) ....................................... $ (8,916) (86,739)
Less: Associated (increase) reduction in
amortization of deferred cost of policies
Produced ................................. 3,187 24,989
Purchased ................................. 1,029 (403)
Deferred income tax (expense) benefit ..... 1,784 21,757
Net change in net unrealized gains (losses) ... $ (2,916) (40,396)
--------
Investing activities:
Purchase of securities:
Available-for-sale ........................... $ 20,884 --
Sales of securities:
Available-for-sale ........................... $ 20,884 --
--------
Details of acquisition:
Fair value of assets acquired .................. $ -- 722,388
Liabilities assumed ............................ -- (673,611)
Common stock and warrants issued ............... -- (37,531)
Cash paid ...................................... -- 11,246
Less: Cash acquired ............................ -- (8,932)
Net cash paid for acquisition .................. $ -- 2,314
The above represents transactions involving the exchange of one security
for another. For additional information see Note 2 of Notes to Consolidated
Financial Statements.
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 CBO II Inc. (CBO II), AmVestors
Investment Group, Inc. (AIG), Annuity International Marketing Corporation
(AIMCOR), Financial Benefit Life Insurance Company (FBL), Annuity Warehouse,
Inc. (AW), formerly The Insurance Mart, Inc., and Rainbow Card Pack
Publication, Inc. (RBCP), (collectively the company). All significant
intercompany accounts and transactions have been eliminated.
B. ACCOUNTING PRINCIPLES AND PRACTICES:
The accompanying unaudited consolidated financial statements have been
prepared on the basis of generally accepted accounting principles as promulgated
by the American Institute of Certified Public Accountants. In the opinion of the
company, the consolidated financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to present fairly the
financial position as of June 30, 1997 and the results of earnings and the
statements of cash flows for the six month periods ended June 30, 1997 and 1996.
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 (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 fair 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 fair value are based on information obtained from
published financial information provided by issuers, independent sources such as
broker dealers or the company's independent investment advisor. Such amounts
represent an estimate of the consideration to be received in the future when the
defaulted company's debt is settled through the sale of their assets or the
restructuring of their debt. These estimates do not represent the discounted
present value of these future considerations.
Investments in common 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 a specific identification
basis.
Other long-term investments include policy loans and mortgage loans
on real estate which
are carried at cost less principal payments since date of acquisition,
and certain partnership investments which are carried at an amount equal to the
company's share of the partner's estimated market value with any unrealized
gains or (losses) recorded in net investment income.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. Summary of Significant Accounting Policies (continued):
- -----------------------------------------------------------
D. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Estimated fair value amounts have been determined by the company using
available market information and appropriate valuation methodologies. Due to the
fact that considerable
judgment is required to interpret market data to develop the estimates
of fair value, the estimates presented are not necessarily indicative of the
amounts that could be realized in a current market exchange.
The carrying values and estimated fair values of the company's financial
instruments as of June 30, 1997, and December 31, 1996, were as follows:
(000's Omitted)
1997 1996
--------- ----------
Fair Carrying Carrying Fair
Value Value Value Value
---------- --------- --------- ----------
Assets:
Debt securities .............. $2,723,937 2,723,937 2,606,584 2,606,584
Equity securities ............ 40,900 40,900 35,673 35,673
Other long-term investments .. 38,266 38,485 41,152 41,176
Short-term investments ....... 514 514 371 371
Cash and cash equivalents .... 86,758 86,758 132,574 132,574
Accounts receivable on
securities settlements in
process .................... 2,536 2,536 2,395 2,395
Accrued investment income .... 38,384 38,384 36,676 36,676
Liabilities:
Future policy benefits -
investment contracts ........ 2,879,970 2,663,753 2,767,32 62,583,902
Other policy liabilities ..... 14,024 14,024 6,709 6,709
Subordinated debentures
payable ..................... 65,000 71,825 65,000 65,325
Amounts due on securities
settlements in process ...... 1,357 1,357 11,301 11,301
Accrued expenses and other
liabilities ................. 9,827 9,827 7,811 7,811
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.
ACCRUED INVESTMENT INCOME - The carrying amounts reported in the balance
sheet for these assets approximate fair value.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. Summary of Significant Accounting Policies (continued):
- -----------------------------------------------------------
FUTURE POLICY BENEFITS FOR INVESTMENT CONTRACTS - The fair values for
deferred annuities were estimated to be the amount payable on demand at the
reporting date as those investment contracts have no defined maturity and are
similar to a deposit liability. The amount payable at the reporting date was c
alculated 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 is based on a dealer quote.
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 licensed in 47 states, the District of Columbia and the U.S.
Virgin Islands. 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 2%
of annuity sales in 1996, and the top twenty individual agents accounted for
approximately 18% of 1996 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 acquiring new business (primarily commissions and policy
expenses), which vary with and are directly related to the production of new
business, have been deferred. The deferred costs related to investment-type
deferred annuity contracts are amortized in relation to the incidence of
expected gross profits over the expected life of the policies. For single
premium life insurance, deferred policy acquisition costs are amortized over the
life of the policies, but not more than 20 years for policies issued before
January l, 1987, and not more than 30 years for policies issued after December
31, 1986, 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. Summary of Significant Accounting Policies (continued):
- -----------------------------------------------------------
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.
Estimates of the expected gross profits to be realized in future
years include the
anticipated yield on investments, including realized gains (losses).
Deferred policy acquisition costs 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, 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 manag ement.
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 cash flows 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\4% 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 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.
K. DEPRECIATION:
The home office buildings are depreciated on the straight-line basis
over estimated lives of 40 years. Other depreciation is provided on the
straight-line basis over useful lives ranging from 1 to 10 years.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. Summary of Significant Accounting Policies (continued):
- -----------------------------------------------------------
L. INCOME TAXES:
The company and its subsidiaries, except for FBL, prepare and file their
income tax returns on a consolidated basis. Under current tax law, FBLis not
eligible for inclusion in a consolidated tax return for a period of five years
following the acquisition.
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 expense 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 and other securities with original
maturities of three months or less.
O. NEW ACCOUNTING STANDARDS:
Effective for transfer and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996, SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" establishes accounting and reporting standards based on the
consistent application of the financial-components approach. This approach
requires the recognition of financial assets and servicing assets that are
controlled by the reporting entity, the derecognition of financial assets when
control is surrendered, and the derecognition of liabilities when they are
extinguished. Specific criteria are established for determining when control has
been surrendered in the transfer of financial assets. The company does not
expect the implementation of this Statement to have a material effect on its
consolidated financial statements.
P. RECLASSIFICATIONS:
Certain reclassifications have been made to conform the June 30, 1996
and December 31, 1996 financial statements to the June 30, 1997 presentation.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments:
- -----------------
A summary of net investment income and net investment gains (losses) follows:
(000's Omitted)
For the Period Ended June 30,
1997 1996
Net investment income:
Debt securities .................................. $ 98,307 86,203
Equity securities ................................ 790 586
Other long-term investments ...................... 3,158 2,701
Short-term investments ........................... 2,481 964
104,736 90,454
Less investment expenses ......................... 1,598 1,297
Net investment income ............................ $ 103,138 89,157
Net investment gains (losses): Realized investment gains (losses):
Debt securities, available-for-sale .......... $ 788 1,411
Debt securities, trading ..................... 822 267
Equity securities, available-for-sale ........ 1,699 577
Equity securities, trading ................... 264 179
Other ........................................ 1 (5)
Net realized investment gains (losses) ........... 3,574 2,429
Unrealized investment gains (losses):
Debt securities, trading ..................... 364 (43)
Equity securities, trading ................... (16) 148
Other long-term investments .................. (7) --
Net unrealized investment gains (losses) ......... 341 105
Net investment gains (losses) .................... $ 3,915 2,534
Certain limited partnership investments are included in income from
other long-term investments. These funds (commonly referred to as hedge
funds) are managed by outside investment advisors. The investment guidelines
of these partnerships provide for a broad range of investment alternatives,
including stocks, bonds, futures, options, commodities, and various other
financial instruments. These investments were purchased with the strategy to
achieve a yield in excess of the S&P 500 Index. The partnerships are carried
at an amount equal to the company's share of the partnerships' estimated
market value with related unrealized gains and losses recorded in net
investment income. In accordance with the permitted guidelines, the
investments purchased by these partnerships may experience greater than
normal volatility which could materially affect the company's earnings for any
given period.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (continued):
- ------------------------------
The maturity of the company's debt and equity securities portfolio as of
June 30, 1997 was as follows:
(000's Omitted)
As of June 30, 1997
Available-for-sale Trading
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
Debt securities:
One year or less $ 46,769 47,077 - -
Two years through five years 600,585 617,880 946 993
Six years through ten years 1,533,665 1,551,950 28,274 28,632
Eleven years and after 470,562 472,301 5,052 5,104
2,651,581 2,689,208 34,272 34,729
Equity securities 36,341 40,430 463 470
$2,687,922 2,729,638 34,735 35,199
These tables include the maturities of mortgage-backed securities based
on the estimated cash flows of the underlying mortgages.
The amortized cost, estimated market value and unrealized market gains
and losses of debt and equity securities as of June 30, 1997 and December 31,
1996, were as follows:
(000's Omitted)
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
June 30, 1997
---------------
Bonds available-for-sale:
Corporate debt obligations
Investment grade ......... $1,784,525 33,441 12,052 1,805,914
High-yield ............... 126,113 3,561 1,041 128,633
1,910,638 37,002 13,093 1,934,547
U.S. Treasury obligations 5,467 13 47 5,433
Mortgage-backed securities
Investment grade ......... 735,476 15,978 2,226 749,228
High-yield ............... -- -- -- --
Bonds available-for-sale . 2,651,581 52,993 15,366 2,689,208
Bonds trading:
Corporate debt obligations
Investment grade ......... 9,438 172 28 9,582
High-yield ............... 24,834 377 64 25,147
Bonds trading ............ 34,272 549 92 34,729
Total bonds .............. 2,685,853 53,542 15,458 2,723,937
Equity securities .......... 36,804 4,962 866 40,900
$2,722,657 58,504 16,324 2,764,837
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (continued):
- -----------------------------
(000's Omitted)
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
December 31, 1996
------------------
Bonds available-for-sale:
Corporate debt obligations
Investment grade ......... $1,589,336 38,980 8,831 1,619,485
High-yield ............... 129,510 3,546 821 132,235
1,718,846 42,526 9,652 1,751,720
U.S. Treasury obligations 44,520 246 437 44,329
Mortgage-backed securities
Investment grade ......... 778,615 18,216 2,561 794,270
High-yield ............... 5,677 -- 1,703 3,974
Bonds available-for-sale . 2,547,658 60,988 14,353 2,594,293
Bonds trading:
Corporate debt obligations
Investment grade ......... 8,824 90 57 8,857
High-yield ............... 3,374 84 24 3,434
Bonds trading ........... 12,198 174 81 12,291
Total bonds ............ 2,559,856 61,162 14,434 2,606,584
Equity securities .......... 31,654 4,430 411 35,673
$2,591,510 65,592 14,845 2,642,257
The preceding table includes the carrying value and estimated market
value of debt securities which the company has determined to be impaired (othe r
than temporary decline in value) as follows:
(000's Omitted)
Accumulated Estimated
Original Write Carrying Market
Cost Downs Value Value
June 30, 1997 $ 7,545 7,545 - -
December 31, 1996 $ 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
(losses) by type of mortgage-backed security as of June 30, 1997 and December
31, 1996 were as follows:
(000's Omitted)
Estimated
Amortized Unrealized Unrealized Market
June 30, 1997 Cost Gains Losses Value
---------------
Government agency mortgage-backed securities:
Pass-throughs ................................. $ 22 2 -- 24
Total government agency
mortgage-backed securities .......... 22 2 -- 24
Government sponsored enterprise mortgage-backed securities:
Planned amortization classes ............. 437,667 11,601 1,375 447,893
Targeted amortization classes and
accretion directed classes .............. 27,568 662 -- 28,230
Sequential classes ....................... 8,824 160 -- 8,984
Pass-throughs ............................ 2,170 23 -- 2,193
Total government-sponsored enterprise
mortgage-backed securities .......... 476,229 12,446 1,375 487,300
Other mortgage-backed securities:
Planned amortization classes ............. 9,783 99 -- 9,882
Sequential classes ....................... 203,712 2,696 851 205,557
Pass-throughs ............................ 8 -- -- 8
Subordinated classes ..................... 45,722 735 -- 46,457
Total other mortgage-backed securities 259,225 3,530 851 261,904
Total mortgage-backed securities ................. $735,476 15,978 2,226 749,228
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (continued):
- ---------------------------
(000's Omitted)
Estimated
Amortized Unrealized Unrealized Market
December 31, 1996 Cost Gains Losses Value
Government agency mortgage-backed securities:
Pass-throughs ................................. $ 23 2 - 25
Total government agency
mortgage-backed securities .......... 23 2 - 25
Government sponsored enterprise mortgage-backed securities:
Planned amortization classes ............. 488,496 13,569 1,400 500,665
Targeted amortization classes and
accretion directed classes .............. 27,596 673 - 28,269
Sequential classes ....................... 8,883 194 - 9,077
Pass-throughs ............................ 2,712 31 1 2,742
Total government-sponsored enterprise
mortgage-backed securities .......... 527,687 14,467 1,401 540,753
Other mortgage-backed securities:
Planned amortization classes ............. 13,025 163 - 13,188
Sequential classes ....................... 204,193 3,054 1,160 206,087
Pass-throughs ............................ 9 - - 9
Subordinated classes ..................... 39,355 530 1,703 38,182
Total other mortgage-backed securities 256,582 3,747 2,863 257,466
Total mortgage-backed securities ................. $784,292 18,216 4,264 798,244
Certain mortgage-backed securities are subject to significant prepayment
risk. 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 securitie s and sequential classes,
which comprised 29.2% and 27.5% of the carrying value of the company's
mortgage-backed securities as of June 30, 1997 and December 31, 1996,
respectively, are sensitive to this prepayment risk.
A portion of the company's mortgage-backed securities portfolio
consist 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 of the mortgage-backed security. PAC, TAC and
ADsecurities comprised 64.6% and 67.5% of the carrying value of the company's
mortgage-backed securities as of June 30, 1997 and December 31, 1996,
respectively.
As of June 30, 1997, 64.8% of the company's mortgage-backed
securities were issued by either government agencies or government-sponsored
enterprises, compared to 67.3% as of December 31, 1996. The credit risk
associated with these securities is generally less than other mortgage-backed
securities. With the exception of six issues, with a carrying value of
$22,058,882 as of June 30, 1997, 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 consideration received on sales of investments, carrying value and
realized gains and losses on those sales were as follows:
(000's Omitted)
For the Period Ended June 30,
1997 1996
Consideration received ................. $ 378,242 442,597
Carrying value ......................... 374,668 440,168
Net realized investment gains (losses) $ 3,574 2,429
Investment gains ....................... $ 7,137 10,225
Investment losses ...................... (3,563) (7,796)
Net realized investment gains (losses) $ 3,574 2,429
Net unrealized gains (losses) on debt securities available-for-sale,
debt securities trading, equity securities available-for-sale, equity securities
trading and other long-term investments changed as follows:
(000's Omitted)
Net Unrealized Gains (Losses)
-----------------------------------------------------------------
Debt Equity
Securities Debt Securities Equity Other
Available- Securities Available- Securities Long-term
for-Sale Trading for-Sale Trading Investments
Balance as of
January 1, 1996 ... $ 96,829 (4) 301 10 -
1996 Net Change ..... (50,194) 97 3,695 13 -
Balance as of
December 31, 1996 46,635 93 3,996 23 -
1997 Net Change ..... (9,008) 364 93 (16) (7)
Balance as of
June 30, 1997 ... $ 37,627 457 4,089 7 (7)
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
3. Other Assets:
- ----------------
Other assets consist of the following:
(000's Omitted)
---------------------------------
June 30, December 31,
1997 1996
Property and equipment at cost:
Home office properties
(including land of $525 and 1,067)...... $ 18,829 17,605
Furniture and equipment.................. 5,671 5,015
Automobiles.............................. 207 196
24,707 22,816
Less accumulated depreciation............ 4,752 5,987
19,955 16,829
Accounts receivable......................... 4,931 593
Other..................................... 3,552 3,824
$ 28,438 21,246
4. Reinsurance:
- ---------------
The company reinsures portions of insurance it writes. The maximum
amount of risk retained by American on any one life is $150,000, while the
maximum amount of risk retained by FBL on any one life is $25,000.
A summary of reinsurance data follows (000's Omitted):
Ceded to
For the Gross Other Net
Period Ended Descriptions Amount Companies Amount
June 30,
1997 Life insurance in force $283,367 207,556 75,811
Insurance premiums and
policy charges....... 9,532 446 9,086
June 30,
1996 Life insurance in force 308,443 233,065 75,378
Insurance premiums and
policy charges....... 6,948 595 6,353
June 30,
1997 Future policy benefits 3,118,221 227,779 2,890,442
December 31,
1996 Future policy benefits 3,037,005 238,774 2,798,231
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
$230,430,267 and $241,458,335 as of June 30, 1997 and December 31, 1996,
respectively. Of the total amounts receivable, $136,200,197 and $140,457,353
were associated with a coinsurance agreement entered into in 1989, which
ceded 90% of the risk on American'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
American on the reinsured risks totaled $6,773,543 and $5,608,655 for periods
ended June 30, 1997 and 1996, respectively.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
4. Reinsurance (continued):
- ---------------------------
The following table identifies the components of the amounts receivable
from ERC:
(000's Omitted)
June 30, December 31,
1997 1996
Reserve for future policy benefits $ 134,897 139,571
Reimbursement for benefit payments and
administrative allowance 1,303 886
$ 136,200 140,457
FBL and Philadelphia Life Insurance Company (PLI) are parties to a
reinsurance agreement under which FBL ceded 100% of the risk on certain deferred
annuity policies on a coinsurance basis. As of June 30, 1997 and December 31,
1996, the company had amounts receivable of $92,560,445 and $99,335,043
resulting from this agreement.
The following table identifies the components of the amounts receivable
from PLI:
(000's Omitted)
June 30, December 31,
1997 1996
Reserve for future policy benefits $ 91,263 97,602
Reimbursement for benefit payments and
administrative allowance 1,297 1,733
$ 92,560 99,335
5. Convertible Subordinated Debentures:
- ---------------------------------------
On July 12, 1996, the company closed an offering of $65,000,000 par
value 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 on July 12, 2003 unless previously
converted or redeemed. The debentures are redeemable, in whole or in part, at
the option of the holders, on September 30, 2001, at 124.25% of their principal
amount (which in essence reflects deferred interest at a compounded rate of
4.25%), plus accrued but unpaid cash interest at the coupon rate of 3%. The
debentures are redeemable, at the company's option, on or after June 30, 1999,
at certain specified declining redemption prices (starting at 103% of principal
value) plus accrued but unpaid cash interest (at the rate of 3%) and accrued
deferred interest (at a compounded rate of 4.25%). The debentures may be
redeemed any time after August 15, 1996, at the company's option at their
principal amount plus accrued cash interest (at the rate of 3%), but with no
payment for accrued deferred interest, if the average closing price of the
company's common stock equals or exceeds $23.12 for 20 consecutive trading days.
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 was 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.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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. As of June 30,
1997 and December 31, 1996, the ESOP held 62,003 shares of AmVestors common
stock. The company made no contributions to this plan during either the six
months ended June 30, 1997 or 1996.
The company sponsors a Leveraged Employee Stock Ownership Plan (LESOP)
for all full-time employees with one year of service.
The LESOP has acquired 370,244 shares of the company's stock through the
proceeds of a note payable to American. The note bears interest at 7.0% and is
payable in annual installments through December 30, 2002. The note had an unpaid
principal balance of $2,662,965 as of June 30, 1997, and December 31, 1996.
Each year the company makes contributions to the LESOP which are to be
used to make loan interest and principal payments. On December 31 of each year,
a portion of the common stock is allocated to participating employees. Of the
413,360 shares of the company's common stock now owned by the LESOP, 199,135
shares have been allocated to the participating employees with the remaining
214,228 shares being held by American as collateral for the loan.
On October 24, 1996, the ESOP was merged into the LESOP.
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 $174,918 and $163,476 for six months ended June
30, 1997 and 1996, 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 $432,130, representing the present value of future
benefits, has been established. Charges (credits) to earnings related to the
plans were $771 and ($1,558) for the six months ended June 30, 1997 and 1996,
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 six months
ended June 30, 1997 and 1996, were $189,032 and $164,040, respectively.
Prior to the merger with AmVestors, FBG had approved a non-contributory
Employee Stock Ownership Plan (FBGESOP) and a contributory 401-k Plan for all of
its employees. As of June 30, 1997 and December 31, 1996, the FBG ESOP owned
313,031 shares of AmVestors common stock and 76,579 warrants to purchase
AmVestors common stock. At that same date, the 401-k Plan held 15,846 shares of
AmVestors common stock and 3,861 warrants to purchase AmVestors common stock.
The company anticipates maintaining these as separate plans for the benefit of
the former FBG employees and is working with the Internal Revenue Service to
correct any qualification problems which may exist. There were no contributions
to the FBG ESOP in 1997 or 1996.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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. As of December 31, 1996, surplus profits of
American were $19,936,727 and 10% of statutory capital and surplus was
$10,146,126. American is also required to maintain, on a statutory basis,
paid-in capital stock and surplus (capital in excess of par value and unassigned
surplus) of $400,000 each. As of June 30, 1997 and December 31, 1996, American's
statutory capital and surplus was $102,466,447 and $101,461,258,respectively.
The statutory net gain from operations for 1996 was $7,203,263.
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% 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, 1996, FBLhad accumulated statutory surplus derived from
net operating profits and net realized capital gains of $25,384,976. The sum of
statutory net profits and net realized capital gains for 1996 were $3,811,912.
As of June 30, 1997, available surplus from net operating profits and net
realized capital gains was $2,640,894. Required statutory surplus as of June 30,
1997 was $19,302,555 and actual surplus was $36,252,955.
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 ($5,074,424 as of June 30, 1997).
In addition, American received permission from the Commissioner of
Insurance of Kansas to amortize the effects of changing to Actuarial Guideline
No. 33 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 $2,176,497. The effect of this
permitted accounting practice was to increase statutory surplus by $210,736 and
$441,450 as of June 30, 1997 and December 31, 1996, respectively.
On August 2, 1996, American was granted a variance from prescribed
statutory accounting practices which allowed the company to contribute
$20,000,000 to be used for the sole purpose of strengthening American's reserves
without experiencing a decrease in Unassigned Funds (Surplus). The contribution
was recorded as a contribution to a Special Surplus Fund and the resulting
reserve strengthening was charged against this Special Surplus Fund. Total
surplus was unaffected by this transaction.
The company currently has two fixed stock option plans; the 1989
Nonqualified Stock Option Plan (1989 Plan), and the 1996 Incentive Stock Option
Plan (1996 Plan). Options granted under the 1989 Plan have an exercise price
equal to the closing price of the company's stock on the date of the original
grant and none may be exercised beyond ten years from the grant date. A total of
928,820 options to acquire common stock were outstanding under the 1989 Plan as
of June 30, 1997. The 1996 Plan was approved by the stockholders of the company
at its Annual Meeting held on May 16, 1996 and is intended to qualify as an
"incentive stock option plan" under Section 422 of the Internal Revenue Code of
1986. Options granted under the 1996 Plan have an exercise price equal to the
closing price of 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
8. Stockholders' Equity (continued):
- ------------------------------------
the company's stock on the date of the original grant and none may be exercised
beyond ten years from the grant date. A total of 931,064 options to acquire
common stock were outstanding under the 1996 Plan as of June 30, 1997.
Both the 1989 Plan and the 1996 Plan are administered by the Board of
Directors and officers of the company and its subsidiaries. The terms of the
options, including the number of shares granted, and the exercise price are
subject to the sole discretion of the Board of Directors.
A summary of the company's stock option plans as of and for the period
ended June 30, 1997 and December 31, 1996 follows:
1997 1996
---------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------- -------- -------- --------
Options outstanding,
beginning of period 1,551,556 $ 11.15 839,841 $8.97
Options granted 483,247 15.63 804,500 12.96
Options exercised (174,919) 7.71 (76,285) 6.52
Options terminated - - (16,500) 10.15
Options outstanding,
end of period 1,859,884 $ 12.63 1,551,556 $11.15
Options exercisable,
end of period 1,082,711 1,127,630
Options reserved for
future grants,
end of period - 483,247
The following table summarizes information about stock options
outstanding under the company's option plans as of June 30, 1997:
Weighted
Average Weighted
Range of Remaining Average
Exercise Options Contractual Exercise
Prices Outstanding Life in Years Price
-------- ------------ -------------- ----------
$7.03-$7.50 143,073 .34 $7.32
$8.75 20,000 7.40 8.75
$10.00-$11.25 348,500 6.66 10.13
$12.66-$13.50 865,064 8.46 12.94
$15.63 483,247 4.82 15.63
---------- ---------- ----------
1,859,884 6.54 $12.63
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
8. Stockholders' Equity (continued):
- ------------------------------------
The following table summarizes information about stock options
exercisable under the company's option plans as of June 30, 1997:
Weighted
Average
Options Exercise
Exercisable Price
------------ ----------
143,073 $ 7.32
20,000 8.75
348,500 10.13
571,138 12.98
---------- ----------
1,082,711 $11.24
========== ==========
The estimated fair value of options granted or modified in 1996 was
$6.03 per share. The estimated fair value of options granted in 1997 was $4.73
per share. The company applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its stock option plans. Accordingly,
no compensation expense has been recognized for its option plans. Had
compensation expense for the company's option plans been determined based on the
fair value at the grant dates for awards under those p lans consistent with the
method prescribed by SFAS123, the company's net earnings and fully diluted
earnings per share for the six month period ended June 30, 1997 and 1996 would
have been reduced to the pro forma amounts indicated below:
1997 1996
Net earnings (in thousands):
As reported....................................... $11,200 9,690
Pro forma......................................... 10,412 8,986
Fully diluted earnings per share:
As reported....................................... $ .73 .79
Pro forma......................................... .69 .73
As SFASNo. 123 has not been applied to options granted prior to January
1, 1995, the resulting pro forma compensation cost may not be representative of
that to be expected in future years.
The fair value of options granted in 1997 was estimated on the date of
grant using a binomial options-pricing model and the following weighted average
assumptions: (i) expected volatility of 23.9%, (ii) risk-free interest rate of
5.37%, (iii) dividend yield of .58%, and (iv) an expected life equal to the
contractual expiration.
The fair value of options granted in 1996 was estimated on the date of
grant using a binomial options-pricing model and the following weighted average
assumptions: (i) expected volatility of 29.4% (ii) risk-free interest rate of
5.14%, (iii) dividend yield of .69%, and (iv) an expected life equal to the
contractual expiration.
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. 25 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
8. Stockholders' Equity (continued):
- ------------------------------------
For the Period Ended
(000's Omitted)
-----------------------------
June 30, December 31,
1997 1996
Rights outstanding, beginning of year....... - -
Rights granted.............................. - -
Rights exercised............................ - -
Rights expired.............................. - -
Rights cancelled............................ - -
Rights outstanding, end of year............. - -
Reserved for future grants.................. 35,000 35,000
The company recorded no compensation expense relating to stock
appreciation rights for the six months ended June 30, 1997 and 1996,
respectively.
The Restricted Stock Plan authorizes the Board of Directors to make
restricted stock awards to employees, officers and directors in such amounts as
it shall determine. The stock issued pursuant to such awards is subject to
restrictions on transferability for a period of five years. Such stock is
subject to a five-year vesting schedule, and the company is required to
repurchase all vested stock from a grantee if such grantee's employment with the
company is terminated prior to the lapse of the transfer restrictions. The
Restricted Stock Plan authorizes a maximum of 125,000 shares to be issued
thereunder. No restricted stock awards have been granted pursuant to the
Restricted Stock Plan.
In conjunction with a previous bank borrowing, the company issued
ten-year warrants to purchase a total of 170,002 shares of its common stocks 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 663,706 shares of its common stock. On June 9, 1997 5 warrants were
exercised to purchase common stock. In addition, 52,660 warrants to purchase
common stock were issued upon the exercise of warrants previously issued by
FBGby conversion. 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 FBG to purchase a total of 270,689 shares of its common stock.
Prior to December 31, 1996, 260,305 warrants had been exercised. The
remaining 10,384 warrants have exercise prices ranging from $1.346 to $3.7198.
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 six months ended June 30, 1997 and 1996 were
$53,217 and $57,859, respectively. 26 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS-(Continued)
9. Other Revenue (continued):
- -----------------------------
Other revenue for the six months ended June 30, 1997 and 1996
includes override commissions of $855,513 and $418,669, respectively
attributable to the marketing efforts of AIMCORand AW. The 1997 period
includes $243,451 of administrative fees received by AIG from AmVestors CBO
Trust I.
10. Income Taxes:
- -----------------
The provision for income taxes charged to operations was as follows:
(000's Omitted)
For the six months Ended June 30,
1997 1996
Current income tax expense................ $ 1,421 2,499
Deferred income tax expense (benefit)..... 4,610 2,744
Total income tax expense (benefit).... $ 6,031 5,243
11. Acquisition:
- ----------------
On September 8, 1995, the company signed a merger agreement pursuant to
which it acquired all of the outstanding capital stock of FBG, a Delaware
corporation, for $5.31 per share, payable in 2,722,223 shares of the company's
common stock, warrants to purchase 663,706 shares of common stock and cash of
approximately $10,000,000.
FBG was an insurance holding company which owned all of the shares of
FBL, 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 AIMCOR and AW, both of which specialize in the distribution and
marketing of annuities.
The merger received the approval of the shareholders of both FBG and the
company, and became effective on April 8, 1996. The consolidated statements of
earnings for the six months ended June 30, 1997 and 1996 include the results of
operations of FBG. 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
11. Acquisition (continued):
- ----------------------------
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......................................... $ 523,145
Cash and cash equivalents........................... 8,932
Amounts receivable under reinsurance agreements..... 112,875
Accrued investment income........................... 7,373
Deferred cost of policies purchased................. 51,500
Goodwill............................................ 11,942
Other assets........................................ 6,621
Total assets...................................... $ 722,388
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities.................................. $ 650,865
Notes payable....................................... 15,500
Deferred income taxes............................... 1,316
Accrued expenses and other liabilities.............. 5,930
Total liabilities.................................. 673,611
Stockholders' Equity:
Common stock, no par value.......................... -
Paid in capital..................................... 48,777
Total stockholders' equity........................ 48,777
Total liabilities and stockholders' equity....... $ 722,388
12. Commitments and Contingencies:
- ----------------------------------
The company's insurance subsidiaries are subject to state guaranty
association assessments in all states in which they are 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
relating to the guaranty fund assessments impacted the years 1996 and 1995 by
approximately $1,913,000 and $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. 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 insurance
(FPULs) have accounted for virtually all remaining premiums received. 28
The company's operating earnings are derived primarily from its investment
results, including realized gains (losses), less interest credited to annuity
contracts and expenses. Under GAAP, premiums received on deferred annuities,
SPIAs without life contingencies and FPULs are not recognized as revenue at the
time of sale. Similarly, policy acquisition costs (principally commissions)
related to such sales are not recognized as expenses but are capitalized as
deferred acquisition costs, or "DAC". As a result of this deferral of costs and
the lack of revenue recognition for premiums received, no profit or loss is
realized on these contracts at the time of sale. Premiums received on deferred
annuities, SPIAs without life contingencies and FPULs are reflected on the
company's balance sheet by an increase in assets equal to the premiums received
and by a corresponding increase in future policy liabilities.
The company's earnings depend, in significant part, upon the persistency of
its annuities. Over the life of the annuity, net investment income, net
investment gains (losses) and policy charges are realized as revenue, and DAC is
amortized as an expense. The timing of DACamortization is based on the projected
realization of profits including realized gains (losses) for each type of
annuity contract and is periodically adjusted for actual experience. If a policy
is terminated prior to its expected maturity, any remaining related DAC is
expensed in the current period. Most of the company's annuity policies in force
have surrender charges which are designed to discourage and mitigate the effect
of premature terminations.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 reduced credited
interest rates on its annuity products. Certain annuities issued by the company
include a "bailout" feature which allows policyowners to withdraw their entire
account balance without surrender charges for a period of 45 to 60 days
following the initial determination of a renewal credited rate below a
predetermined level. If a policyowner elects not to withdraw funds during this
period, surrender charges are reinstated. As of June 30, 1997, approximately
$261.6 million, or 11.7% of American's annuity account values contained a
"bailout" provision, the current credited interest rates on these policies are
above the "bailout" rate. The "bailout" rate on $259.4 million of this amount is
6% or less. As of that same date, approximately $19.8 million, or 3.3% of FBL's
annuity account values contained a "bailout" provision, the current credited
interest rates on these policies are above the "bailout" rate. The "bailout"
rate on the entire $19.8 million is 5.5% or less, with $14.3 million at 5% or
less. If the company reduces credited interest 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. Management expects
that withdrawals on the company's annuity contracts will increase as such
contracts approach maturity. The company may not be able to realize investment
gains in the future to offset the adverse impact on earnings, should future
"bailout" surrenders occur. MARGIN ANALYSIS
The company's earnings are impacted by realized investment gains
(losses) and by the associated amortization of the deferred costs 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 (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, amortization of DACand other components of profit on the company's
operating earnings: 29
For the six months Ended June 30,
------------------------------------
1997 1996
(dollars in millions)
(percent of average invested assets)
Average invested assets <F1> ................. $ 2,807.1 100.0% $ 2,361.7 100.0%
Insurance premiums and
policy charges ............................. $ 9.1 .65% $ 6.4 .54%
Net investment income <F2> .................... 103.1 7.35% 89.2 7.55
Net investment gains
(losses, core <F3> ........................ 4.1 .29 1.6 .14
Policyholder benefits ........................ (76.5) (5.45) (66.8 (5.65)
Gross interest margin ........................ 39.8) 2.84) 30.4 2.57
Associated amortization of
deferred cost of:
Policies produced ....................... (8.6) (.61) (6.9 (.59)
Policies purchased ...................... (3.2) (.23) (2.5 (.21)
Net interest margin .......................... 28.0 2.00 20.9 1.77
Net investment gains (losses), other ......... (.2) (.01) .9 .08
Associated amortization of deferred cost of:
Policies produced ....................... .4 .03 (.5 (.04)
Policies purchased ...................... (.4) (.03) .5 .04
Net margin from investment
gains (losses), other .................... (.2) (.01) .9 .07
Total net margin ............................. 27.8 1.98) 21.8 1.84
Expenses, net ................................ (7.7) (.55) (6.0) (.51)
Operating earnings ........................... 20.1 1.43 15.8 1.33
Interest expense ............................. (2.9) (.20) (.7 (.06)
Earnings before income taxes and extraordinary
item ....................................... 17.2 1.23 15.0 1.27
Income tax expense ........................... (6.0) (.43) (5.3 (.44)
Earnings before extraordinary item ........... 11.2 .80 9.7 .83%
Extraordinary item ........................... - - - -
Net earnings ................................. $ 11.2 .80% $ 9.7 .83%
Operating earnings ........................... $ 20.1 1.43% $15.8 1.33%
Less: Net margin from
investment gains (losses), other ......... (.2) (.01) .9 .07
Operating earnings
excluding net margin from
investment gains (losses), other ......... $ 20.3 1.44% $14.9 1.26%
<FN>
<F1> Average of cash, invested assets (before SFAS115 adjustment) and net
amounts due
to or from brokers on unsettled security trades at the beginning and end
of
period for 1997 and time weighted for 1996 for acquisition of FBG
effective April 1,
1996.
<F2> Net investment income is presented net of investment expense.
<F3> Includes realized and unrealized gains (losses) on trading securities and
realized
gains (losses) on convertible securities where the company has accepted
lower current
yields in anticipation of the equity performance of the underlying common
stock.
Note: Numbers may not add due to rounding.
30
For the three months Ended June 30,
--------------------------------------------------
1997 1996
(dollars in millions)
(percent of average invested assets)
Average invested assets <F1> ................. $ 2,818.9 100.0% $ 2,647.9 100.0%
Insurance premiums and
policy charges ............................. $ 4.7 .66% $ 3.9 .59%
Net investment income <F2> .................... 52.7 7.48 50.0 7.55
Net investment gains
(losses), core <F3> ....................... 2.0 .28 1.2 .18
Policyholder benefits ........................ (38.7) (5.49) (36.1) (5.46)
Gross interest margin ........................ 20.7 2.93 18.9 2.86
Associated amortization of
deferred cost of:
Policies produced ....................... (4.7) (.67) (4.0) (.60)
Policies purchased ...................... (1.6) (.23) (2.5) (.38)
Net interest margin .......................... 14.3 2.03 12.4 1.87
Net investment gains (losses), other ......... (.5) (.07) (6.3) (.95)
Associated amortization of deferred cost of:
Policies produced ....................... .3 .05) 1.6 .23
Policies purchased ...................... (.1) (.02) .4 .06
Net margin from investment
gains (losses), other .................... (.3) (.05) (4.3) (.65)
Total net margin ............................. 14.0 1.98 8.1 1.22
Expenses, net ................................ (3.8) (.53) (3.8) (.58)
Operating earnings ........................... 10.2 1.45 4.3 .64
Interest expense ............................. (1.4) (.20) (.6) (.09)
Earnings before income taxes and extraordinary
item ....................................... 8.8 1.25 3.7 .55
Income tax expense ........................... (3.1) (.44) (1.3) (.20)
Earnings before extraordinary item ........... 5.7 .81 2.3 .35
Extraordinary item ........................... - - - -
Net earnings ................................. $ 5.7 .81% $ 2.3 .35%
Operating earnings ........................... $ 10.2 1.45% $ 4.3 .64%
Less: Net margin from
investment gains (losses), other ......... (.3) (.05) (4.3) (.65)
Operating earnings
excluding net margin from
investment gains (losses), other ......... $ 10.5 1.50% $ 8.6 1.29%
<FN>
<F1> Average of cash, invested assets (before SFAS115 adjustment) and net
amounts due
to or from brokers on unsettled security trades at the beginning and end
of
period for 1997 and time weighted for 1996 for acquisition of FBG
effective April 1,
1996.
<F2> Net investment income is presented net of investment expense.
<F2> Includes realized and unrealized gains (losses) on trading securities and
realized
gains (losses) on convertible securities where the company has accepted
lower current
yields in anticipation of the equity performance of the underlying common
stock.
Note: Numbers may not add due to rounding.
31
Six Months Ended June 30, 1997, and 1996
INSURANCE PREMIUMS AND POLICY CHARGES increased $2.7 million or 42%, to
$9.1 million in 1997, due primarily to a $2.2 million increase in surrender
charges received on increased surrenders of annuity policies. This increase
results in large part from the acquisition of FBG.
NET INVESTMENT INCOME increased $13.9 million or 16%, to $103.1 million
in 1997. This increase reflects an increase in average invested assets from
$2,361.7 million in 1996 to $2,807.1 million in 1997, offset in part by a
decrease in the average yield on invested assets from 7.6% for the six months
ended June 30, 1996, to 7.4% for the same period in 1997. The increase in
average invested assets can be attributed to the acquisition of FBG. The yield
in both periods was impacted by investments in investment partnerships. These
partnerships form a fund of funds totalling $20.5 million and $19.0 million on
June 30, 1997 and 1996, 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 net income of $1.8 million in the 1997 six months compared with income
of $1.5 million in 1996.
NET INVESTMENT GAINS (LOSSES) were $3.9 million in 1997, compared with
$2.5 million in 1996. Gains and losses may be realized upon securities which are
disposed of for various reasons. The net gains realized in both periods are the
result of general portfolio management. Unrealized gains (losses) in the
company's bond portfolio were $38.1 million, $46.7 million and $10.1 million as
of June 30, 1997, December 31, 1996 and June 30, 1996, respectively.
OTHER REVENUE increased $.8 million to $1.6 million in 1997. This
increase results from $.4 million increase in commissions received by AW and
AIMCOR and a $.2 million increase in administrative fees received by AIG.
BENEFITS, CLAIMS AND INTEREST CREDITED TO POLICYHOLDERS increased $9.7
million, or 15%, to $76.5 million in 1997 from $66.8 million in 1996. This
increase results primarily from an increase in annuity liabilities to $2,945.1
million on June 30, 1997, from $2,797.8 million on June 30, 1996. This increase
was partially offset by a decrease in the average interest rate credited on the
company's annuity liabilities, from 5.7% as of June 30, 1996, to 5.5% as of June
30, 1997. Both the increase in annuity liabilities and the decrease in the
average interest rate credited on those liabilities are largely due to the
acquisition of FBG.
Amortization of deferred cost of policies produced increased $.9
million, or 12%, to $8.3 million in 1997 from $7.4 million in 1996. Amortization
associated with gross interest margin increased $1.7 million to $8.6 million in
1997 from $6.9 million in 1996. Amortization associated with investment gains
(losses) decreased to $.4 million on $.2 million of (losses) in 1997 from $.5
million on $.9 million of gains in 1996. Costs incurred during 1997 and deferred
into future policy periods were $28.6 million, compared with $20.3 million in
1996.
Amortization of deferred cost of policies purchased increased $1.6
million to $3.6 million and represents the amortization of the purchase price
allocated to the policies acquired in the acquisition of FBG. The 1997 expense
represents amortization for six months while the 1996 expense represents
amortization for three months.
General insurance expenses increased $2.1 million, or 38%, to $7.6
million for the 1997 six months from $5.5 million for the same period in 1996.
This increase can be attributed to increases in business activity, assets under
management and the acquisition of FBG.
Interest expense increased $2.1 million reflecting the $65.0 million of
convertible subordinated debentures issued in July, 1996.
Income tax expense increased $.8 million to $6.0 million in 1997 from
$5.2 million in 1996. Taxes were provided at an effective rate of 35% on both
1997 and 1996 income. 32
Three Months Ended June 30, 1997, and 1996
INSURANCE PREMIUMS AND POLICY CHARGES increased $.8 million or 20%, to
$4.7 million in 1997, due primarily to a $.4 million increase in surrender
charges received on increased surrenders of annuity policies and a $.4 million
increase in premiums received on SPIA's with life contingencies.
NET INVESTMENT INCOME increased $2.7 million or 5%, to $52.7 million in
1997. This increase reflects an increase in average invested assets from
$2,647.9 million in 1996 to $2,818.9 million in 1997, offset in part by a
decrease in the average yield on invested assets from 7.6% for the three months
ended June 30, 1996, to 7.5% for the same period in 1997. The yield in both
periods was impacted by investments in investment partnerships. These
partnerships form a fund of funds totalling $20.5 million and $19.0 million on
June 30, 1997 and 1996, 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 net income of $1.3 million in the 1997 three months compared with
income of $.8 million in 1996.
NET INVESTMENT GAINS (LOSSES) were $1.5 million gain in 1997, compared
with $5.1 million loss in 1996. Gains and losses may be realized upon securities
which are disposed of for various reasons. The net gains realized in both
periods are the result of general portfolio management. Unrea lized gains
(losses) in the company's bond portfolio were $38.1 million, $46.7 million and
$10.1 million as of June 30, 1997, December 31, 1996 and June 30, 1996,
respectively.
BENEFITS, CLAIMS AND INTEREST CREDITED TO POLICYHOLDERS increased $2.6
million, or 7%, to $38.7 million in 1997 from $36.1 million in 1996. This
increase results primarily from an increase in annuity liabilities to $2,945.1
million on June 30, 1997, from $2,797.8 million on June 30, 1996. This increase
was partially offset by a decrease in the average interest rate credited on the
company's annuity liabilities, from 5.7% as of June 30, 1996, to 5.5% as of June
30, 1997.
Amortization of deferred cost of policies produced increased $2.0
million, or 80%, to $4.4 million in 1997 from $2.4 million in 1996. Amortization
associated with gross interest margin increased $.7 million to $4.7 million in
1997 from $4.0 million in 1996. Amortization associated with investment gains
(losses) decreased $1.3 million to a benefit of $.3 million on $.5 million of
(losses) in 1997 from a benefit of $1.6 million on $6.3 million of losses in
1996. Costs incurred during 1997 and deferred into future policy periods were
$16.7 million, compared with $11.2 million in 1996.
Amortization of deferred cost of policies purchased decreased $.4
million to $1.7 million and represents the amortization of the purchase price
allocated to the policies acquired in the acquisition of FBG.
Interest expense increased $.8 million reflecting the $65.0 million of
convertible subordinated debentures issued in July, 1996.
Income tax expense increased $1.8 million to $3.1 million in 1997 from
$1.3 million in 1996. Taxes were provided at an effective rate of 35% on both
1997 and 1996 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 FBL to meet its cash requirements at the holding company level. The company
receives funds from American in the form of commissions paid to American Sales,
fees paid to AIG, rent, administrative, printing and data processing charges and
dividends. The insurance laws of 33 Kansas and Florida generally limit the
ability of American and FBL to pay cash dividends in excess of certain amounts
without prior regulatory approval and also require that certain agreements
relating to the payment of fees and charges to the company by its insurance
subsidiaries be approved by the Insurance Commissioner of the state of domicile.
The liquidity requirements of American and FBL are met by premiums
received from annuity sales, net investment income received, and proceeds from
investments upon maturity, sale or redemption. The primary uses of funds are the
payment of surrenders, policy benefits, operating expenses and commissions, as
well as the purchase of assets for investment.
For purposes of reporting the company's consolidated statements of cash
flows, financing activities include premiums received from sales of deferred
annuities, surrenders and death benefits paid, and surrender and policy charges
collected on these contracts. The net cash provided by (used in) these
particular financing activities for the six months ended June 30, 1997 and 1996
was $10.3 million and $1.8 million, respectively.
The decrease in net cash provided by annuity contracts without life
contingencies in 1997 resulted primarily from a $63.2 million increase in
surrender and death benefits paid from $215.3 million (approximately 10% of
beginning reserves for future policy benefits) to $278.5 million (approximately
9% of beginning reserves for future policy benefits) offset by a $69.2 million
increase in premiums received from $211.8 million to $281.0 million.
Net cash provided by the company's operating activities was $78.0
million and $78.7 million in 1997 and 1996, 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
with maturities of less than one year (6% and 8% as of June 30, 1997 and
December 31, 1996, respectively). The weighted average duration of the company's
investment portfolio was 4.4 years as of June 30, 1997.
The company continually assesses its capital requirements in light of
business developments and various capital and surplus adequacy ratios which
affect insurance companies. The company has met its capital needs and those of
American through several different sources including bank borrowing, the
issuance of convertible debentures and the sale of 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 effects of guaranty fund
assessments, see Note 12 of Notes to Consolidated Financial Statements.
REINSURANCE. American and Employers Reassurance Corporation (ERC) are
parties to a reinsurance agreement under which American ceded 90%, on a
coinsurance basis, of the risk on its SPWLpolicies written prior to 1989. Under
the terms of the agreement, American continues to administer the policies and is
reimbursed for all payments made under the terms of the reinsured policies. For
its services, American receives a fee from the reinsurer for administering such
policies. If ERCwere to become insolvent, American would remain responsible for
the payment of all policy liabilities. As of June 30, 1997 and December 31,
1996, American had amounts receivable resulting from this agreement of $136.2
million and $140.5 million, respectively. 34
FBL and Philadelphia Life Insurance Company (PLI) are parties to a
reinsurance agreement under which FBLceded 100% of the risk on certain deferred
annuity policies on a coinsurance basis. Under the terms of the agreement, FBL
continues to administer the policies and is reimbursed for all payments made
under the terms of the reinsured policies. For its services, FBLreceives a fee
from the reinsurer for administering such policies. If PLI were to become
insolvent, FBL would remain responsible for the payment of all policy
liabilities. As of June 30, 1997 and December 31, 1996, FBL had amounts
receivable resulting from this agreement of $92.6 million and $99.3 million.
In addition, American 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 are no
longer protected by surrender charges increase. 35
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
- ----------------------------------------------------------------------
The annual meeting of the stockholders of the company was held May 15,
1997. The following Directors were elected at the annual meeting:
Janis L. Andersen
Mark V. Heitz
Robert T. McElroy, M.D.
The names of the other Directors where terms of office as Directors
continued after the meeting were as follows:
Robert G. Billings
Jack H. Brier
Robert R. Lee, II
John F.X. Mannion
Ralph W. Laster, Jr.
R. Rex Lee, M.D.
James V. O'Donnell
Frank T. Crohn
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, 1986.
Inc.
36
Exhibit Page Number or Incorporation
Number Description by Reference
(2)(b) Resolutions of the Board of Exhibit (2)(a) to Form 10-Q
Directors dated January 7, 1988, dated May 11, 1988.
providing for succession to the
position of Chairman of the Board
of Directors
(2)(c) Agreement and Plan of Merger dated Exhibit (2.1)to Registration
September 8, 1995, between Financial Statement on Form S-4,
Benefit Group, Inc., AmVestors File No. 333-01309 dated
Financial Corporation and AmVestors March 1, 1996
Acquisition Subsidiary, Inc. as Amended
(3)(a) Articles of Incorporation as Amended Exhibit (3)(a) to Form 10-Q
and Restated dated October 26, 1993
(3)(b) Bylaws of the company Exhibit (4.2) to Registration
Statement on Form S-4, File
No. 333-01309 dated February
28, 1996
(4)(a) Specimen Common Stock Certificate Exhibit (4)(a) to Form 10-K
dated March 30, 1995.
(4)(b) Common Stock Purchase Warrant Exhibit (10)(o) to Form 10-K
expiring December 9, 1998 dated April 12, 1989
(4)(c) Common Stock Purchase Warrant Exhibit (10)(v) to Form 10-Q
dated May 13, 1992
(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
(4)(g) Warrant agreement and form of warrant Appendix V to Registration
statement on Form S-4, File
No. 333-01309 dated March 1,
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
37
Exhibit Page Number or Incorporation
Number Description by Reference
(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, its 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) 1994 Stock Purchase Plan for Non-Employee Exhibit (10)(j) to Form 10-K
Directors effective February 24, 1994 dated March 30, 1995
(10)(j) 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)(k) Employment Agreement dated January 1, Exhibit (10)(k) to Form 10-Q
1997 between the company and Timothy S. dated May 14, 1997
Reimer
(10)(l) Employment Agreement dated January 1, Exhibit (10)(l) to Form 10-Q
1997 between the company and Thomas M. dated May 14, 1997
Fogt
(10)(m) Employment Agreement dated January 1, Exhibit (10)(m) to Form 10-Q
1997 between the company and Lynn F. dated May 14, 1997
Hammes
(10)(n) Employment Agreement dated January 1, Exhibit (10)(n) to Form 10-Q
1997 between the company and J. Ronald dated May 14, 1997
Stanley
(10)(o) Special Incentive Bonus Agreement dated Exhibit (10)(o) to Form 10-Q
March 27, 1997, between the company and dated May 14, 1997
Ralph W. Laster, Jr.
38
Exhibit Page Number or Incorporation
Number Description by Reference
(10)(p) Special Incentive Bonus Agreement dated Exhibit (10)(p) to Form 10-Q
March 27, 1997, between the company and dated May 14, 1997
Mark V. Heitz
(10)(q) Employment Agreement dated April 8, Exhibit (10)(p) to Form 10-Q
1996, between the company and dated November 13, 1996
Frank T. Crohn
(10)(r) Employment Agreement dated April 8, Exhibit (10)(p) to Form 10-Q
1996, between the company and dated November 13, 1996
Donna J. Rubertone
(10)(s) Employment Agreement dated April 1, PP 42-56
1997, between the company and
Ralph W. Laster, Jr.
(10)(t) Employment Agreement dated April 1, PP 57-70
1997, between the company and
Mark V. Heitz
(11) Calculation of Earnings per Share P 71
(20) Reports on Form 8-K
There were no reports on Form 8-K for
the three months ended June 30, 1997
(21) Wholly-owned subsidiaries of the
registrant:
American Investors Life Insurance
Company, Inc.
555 South Kansas Avenue
Topeka, Kansas 66603
American Investors Sales Group, Inc.
(formerly Gateway Corporation)
555 South Kansas Avenue
Topeka, Kansas 66603
AmVestors Investment Group, Inc.
(formerly American Investors Sales
Group, Inc.)
555 South Kansas Avenue
Topeka, Kansas 66603
AmVestors Acquisition Subsidiary, Inc.
555 South Kansas Avenue
Topeka, Kansas 66603
AmVestors CBO II Inc.
555 South Kansas Avenue
Topeka, Kansas 66603
39
Exhibit Page Number or Incorporation
Number Description by Reference
Annuity International Marketing
Corporation
7251 West Palmetto Park Road
Boca Raton, Florida 33433
Financial Benefit Life Insurance Company
555 South Kansas Avenue
Topeka, Kansas 66603
Annuity Warehouse, Inc.
(formerly The Insurance Mart, 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
40
SIGNATURES
- -----------------------------
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMVESTORS FINANCIAL CORPORATION
By: /c/ Ralph W. Laster, Jr.
-----------------------------
Ralph W. Laster, Jr.
Chairman of the Board
Chief Executive Officer
(Principal Executive Officer
and Chief Financial Officer)
(Principal Accounting Officer)
Date: August 14, 1997
--------------------
41