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EXHIBIT 99.5
FINANCIAL BENEFIT LIFE INSURANCE COMPANY
REPORT AND OPINION
ON CASH FLOW TESTING ANALYSIS
AS OF OCTOBER 31, 1995
December 22, 1995
Edward P. Mohoric, F.S.A., M.A.A.A.
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TABLE OF CONTENTS
SECTION I
INTRODUCTION................................. 1
SECTION II
OPINION AND RESULTS.......................... 6
SECTION III
ASSUMPTIONS.................................. 14
SECTION IV
INVESTMENT ASSUMPTIONS....................... 21
APPENDIX A: PROFITS BY SCENARIO
APPENDIX B: LEVEL SCENARIO INCOME STATEMENT
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SECTION I
INTRODUCTION
Scope and Limitations
I, Edward P. Mohoric, have been retained by Financial Benefit Life
Insurance Company (FBLIC) to provide FBLIC with an Actuarial Opinion on reserve
adequacy based on cash flow testing in connection with its proposed acquisition
by American Investors Corporation (AIC). In doing this work I have prepared a
reserve adequacy analysis for FBLIC in the form of that contained in Section 8
of the NAIC Model Actuarial Opinion and Memorandum Regulation.
The opinion is included in Section II of this report along with a
summary of the results. I have not, as part of this analysis, reviewed the
actual reserve calculations which were prepared for the company by Fafian and
Associates. I am not expressing an opinion with regard to whether reserves are
computed appropriately or comply with applicable laws of the state of Florida.
Rather, this opinion is limited to the adequacy of reserves under cash flow
testing.
I have utilized the applicable Standards of Practice promulgated by the
Actuarial Standards Board, as the basis for this review of the October 31, 1994
statutory reserves and supporting assets of FBLIC for cash flow analysis.
Actuarial methods, considerations, and analyses used in the preparation of this
report conform to the appropriate Standards of Practice.
This report has been prepared for the use of FBLIC. I understand that this
report may be provided to (1) FBLIC's advisors in connection with the
acquisition, (2) the management and advisors of AIC, (3) management of banks
which are proposing financing of the sale, and (4) regulators reviewing the
acquisition. I require that I be informed in advance of any distribution of
this report. This report may not be shown or distributed to any other party
without my prior written consent. Further, any distribution of this report must
be in its entirety, including the Appendices.
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Any reader of this report must possess a substantial level of expertise
in areas relevant to this analysis to appreciate the significance of the
assumptions used in the analysis, and the impact of the assumptions on the
illustrated results. Readers without this level of expertise are advised to
retain an actuary to aid them in understanding these results.
Qualification
As stated in the opinion statement in Section II, I satisfy the
American Academy of Actuaries standards for qualification to provide the
opinion.
Reliances
I have relied on data supplied by FBLIC. I have not audited or
independently verified any of the information provided to me. In the event that
information supplied to me by FBLIC was incorrect or inadequate, the results
provided by me and presented in this report would be affected. The items I have
relied on include, but are not limited to the following:
1. Information in FBLIC's statutory financial statements.
2. Inventories of FBLIC's inforce policies at October 31, 1995,
including account values, cash surrender values, statutory reserves,
and current and guaranteed credited rates provided on computer
diskette.
3. Inventories of SPIAs and payout terms and modes as provided
on computer diskette.
4. Listings of FBLIC's November 15, 1995 bond and CMO portfolios
including book values, par values, market values, coupons, book
yields, NAIC ratings, maturity dates, and call provisions.
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5. Lists and descriptions of assets sold and purchased between
November 15, 1995 and December 12, 1995.
6. Information on policies inforce including surrender charge
schedules, policy guarantees, and other policy provisions.
7. Information on policy experience including lapses, deaths,
partial surrenders, renewal premium, commissions and other
information.
I have also relied on information provided by AIC with regard to AIC's
planned investment strategy (including anticipated spreads to Treasury) and
interest crediting strategy after acquisition of this business.
Reserve Adequacy Analysis
The analysis considered reserve adequacy under alternative scenarios of
assumptions for future experience, including the impact of that experience on
asset values and asset cash flows. The specific scenarios tested are not meant
to be a prediction of future events. Rather, the scenarios represent an
illustrative range of potential investment market conditions and operating
experience which could arise in the future. Although I believe that the choice
of these scenarios is appropriate for the purpose of this report, there is no
guarantee that actual experience will conform to the specific assumptions
tested or fall within the illustrated range.
The reserve adequacy analysis considered only those assets which were held in
support of the reserves and other liabilities subject to analysis. Other assets
of FBLIC were not reviewed or considered in the analysis.
Analysis Methods and Criteria for Adequacy
Cash flow testing was the method used for testing adequacy of reserves in view
of the assets supporting them. The method involves projecting and comparing, as
of the valuation date, the
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timing and amount of asset and obligation cash flows after the valuation date.
The projection methodology can be called a "profit released" model. In this
model, statutory profits are paid out of the line (if positive) or borrowed by
the line (if negative). The line is then evaluated based on the present value
of cash flows (profits) from and to the line.
According to current standards of practice, assets supporting the reserves and
related items are deemed to be adequate when projected asset cash flows plus
future revenues, are sufficient to cover projected future obligations under
moderately adverse conditions. Under more adverse conditions, the supporting
assets may not be adequate to cover future obligations. I am basing my opinion
on my review of the present value of profits (including capital gains and
losses and net of taxes) under the scenarios tested. For FBLIC, the present
value of profits was positive in all scenarios tested.
Projection Method
Insurance Cash Flows
Insurance cash flows include premiums less benefits, expenses,
commissions, changes in statutory reserves, and federal income taxes.
The cash flows vary by the interest scenario tested.
Asset Cash Flows
Components of asset cash flow include investment income, calls,
repayment of principal, and prepayments of Collateralized Mortgage
Obligations (CMOs). The investment income is calculated for each existing
bond, and CMOs and for new assets purchased during the course of the
projection based on the asset' s par value, coupon, and maturity date.
Calls are calculated based on each bond's characteristics and call
provisions. Prepayments are based on each CMOs' characteristics and
prepayments provisions. Calls and prepayments vary by scenario depending
on how and when interest rates change. Interest rates on new bonds
purchased vary depending on the rates assumed to be prevailing at the
time of purchase in each scenario.
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All but three CMOs were projected using the GAT precision model. The
prepayments for the CMOs vary by scenario depending on how and when
interest rates change. Two of the remaining CMOs were treated as short
term pass through securities as the tranches are currently paying down.
The remaining CMO was modelled into one of the GAT CMOs with similar
characteristics regarding coupon and maturity date.
When liquidations are necessitated by negative cash flows, assets are
sold at their assumed market value which varies by scenario and
projection year. If the cash shortfall is so large that all assets
modelled as being available for liquidation are in fact liquidated,
borrowing of funds takes place as a proxy for liquidations. The borrowing
is assumed to be at a rate equal to the short term Treasury rate plus 300
basis points in the seven scenarios.
For each projection year the asset and liability cash flows are added
together and adjusted for any capital gains or losses incurred, as well
as for federal income taxes paid and for profits released. If the cash
flow is positive, the net amount is invested according to the assumed
investment strategy. If the cash flow is negative, assets are liquidated
to the extent necessary to make the net cash flow equal zero. The
investment/disinvestment strategy is described in Section IV.
Length of Projection Period
Profits were projected for a 20 year time period. After 20 years, the bulk of
FBLIC's current assets and liabilities are projected to have matured or
surrendered.
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SECTION II
OPINION AND RESULTS
Opinion
I, Edward P. Mohoric, a member of the American Academy of Actuaries, am
associated with the firm of Milliman & Robertson, Inc. I have been retained by
Financial Benefit Life Insurance Company to render this opinion with regard to
cash flow testing as of October 31, 1995. I meet the Academy qualification
standards for rendering the opinion.
This opinion is limited to testing reserve adequacy using cash flow testing
techniques. The opinion does not include a review of FBLIC's reserves for
appropriate computation or for compliance with the applicable laws of the state
of Florida. As such, I did not review the actuarial assumptions or actuarial
methods in the actual reserve calculation.
The following reserves as of October 31, 1995 were tested:
Asset Adequacy
Tested Amounts Reserves and Liabilities
---------------------------------------------------------------
Additional
Formula Actuarial Analysis Other Total
Statement Item Reserves Reserves Method* Amount Amount
- --------------------------------------------------------------------------------------------------------------------
Exhibit 8
- - Life Insurance $3,844,863 -- C -- $3,844,863
- - Annuities
Deferred 455,035,137 -- C -- 455,035,137
Payout 26,869,414 -- C -- 26,869,414
- - Other Reserves 0 I 5,767
TOTAL RESERVES $485,749,414 $0 $0 $485,755,181
IMR** $8,496,089 C $8,496,089
AVR*** $9,551,133 C $9,551,133
* "C" indicates cash flow testing. "I" indicates that cash flow testing was
not performed because the block is immaterial.
** as of December 19, 1995
*** Used only to extent of the present value of projected defaults; as of
September 30, 1995.
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I have relied on Jerry R. Hoeft, Senior Vice President of FBLIC for listings
and summaries of book and market values of securities for listings and
summaries of recent assets sold and bought, for listings and summaries of
policies and contracts inforce, and for descriptions of policy features and
historical experience as described in the statement attached to this section.
I have relied on use of interest crediting strategy in the development of cash
flow testing as provided by Larry Bruning, Chief Actuary of AIC described in
the statement attached to this section.
I have relied on use of the reinvestment strategy as to new investments from
positive cash flow as provided by Timothy S. Reimer, Chief Investment Officer
of AIC and described in the statement attached to this section.
In my opinion the reserves concerning the statement items identified above when
considered in light of the assets held by the company with respect to such
reserves including, but not limited to, the investment earnings on such assets,
and the considerations anticipated to be received and retained under such
policies and contracts, make adequate provision, according to presently
accepted actuarial standards of practice, for the anticipated cash flows
required by the contractual obligations and related expenses of the company.
The actuarial methods, considerations and analyses used in forming my opinion
conform to the appropriate Standards of Practice as promulgated by the
Actuarial Standards Board, which standards form the basis of this statement of
opinion.
To the best of my knowledge and relying on information provided by Jerry R.
Hoeft, Senior Vice President and Chief Financial Officer of FBLIC, there have
been no material changes between October 31, 1995 and December 19, 1995 which
should be considered in reviewing this opinion.
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The impact of unanticipated events subsequent to the date of this opinion is
beyond the scope of this opinion. The analysis of asset adequacy should be
viewed recognizing that the company's future experience may not follow all the
assumptions used in the analysis.
Results
Table 1 summarizes the results of our analysis. The values in Table 1 include
$8,496,089 for FBLIC's IMR. In addition, as described in Section IV, projected
default costs are offset by the AVR. The interest scenarios tested are
described in more detail in Section IV.
Projected statutory profits each year by scenario are included in Appendix A.
Appendix B includes detailed projected statutory income statements for the
level interest scenario.
Table 1
FINANCIAL BENEFIT LIFE INSURANCE COMPANY
October 31, 1995 Valuation Actuary Results
Present Value of After-Tax Profits at After-Tax Earned Rate
Including Release of IMR and DAC Tax
(values shown in thousands of dollars)
Scenario Description
- -------- -----------
1 Level $20,841
2 Rates rise .5% each year for ten years,
and then remain at that level. 12,610
3 Rates rise 1% each year for five years,
then fall 1% each year back to the original level,
and then remain at that level. 6,141
4 Rates rise 3% in the first year,
and then remain at that level. 3,929
5* Rates fall .5% each year for ten years,
and then remain at that level. 29,703
6* Rates fall 1% each year for five years, then rise
1% each year back to the original level,
and then remain at that level. 30,617
7* Rates fall 3% in the first year,
and then remain at that level. 27,685
*Interest rates in falling interest scenarios are not allowed to decrease by
more than 50% of the average 5 year Treasury rate for the
week ending December 6, 1995.
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Taxes
We assumed a 35% tax rate in our projections. Taxable income is assumed to be
equal to statutory income adjusted for differences between tax and statutory
reserves. For the projections we assumed tax reserves were equal to the cash
value. We have assumed that FBLIC would be able to achieve an immediate tax
benefit for any operating or capital losses.
FBLIC has an outstanding unamortized DAC balance of approximately $2,094,867.
We have reflected the amortization of this balance using the 35% tax rate
described above and present valuing at the after-tax earnings rate. This
produces an increment of $637,871 in the level interest scenario and slight
variations in the other scenarios. We have reflected DAC Tax on new premiums
from existing inforce at a rate of 1.75% amortized over ten years. We did not
consider any tax loss carryforwards.
Reinsurance
As of July 1993, FBLIC had 100% coinsured approximately $140 million of
liabilities to Philadelphia Life Insurance Company. While there is some right
of recapture, these reinsured policies (currently $117 million of account
value) are not expected to have any impact to FBLIC. Based on these facts, we
have performed no testing or review on the reserves underlying these contracts.
Cash Value Treatment
FBLIC has a provision in many of their policies to allow payout of the cash
value as a five year certain annuity. FBLIC's practice has been not to utilize
this provision but to pay the full cash value on surrender. FBLIC, however,
could utilize this provision in certain situations in the future where the
lapses are high in combination with low market values on their assets. As
described in Section III, we assumed this provision would be invoked in
increasing interest scenarios if there is high lapsation. If this provision is
not implemented, FBLIC would fail Scenarios 3 and 4, two of the increasing
interest scenarios. In our projection this provision is invoked in Scenarios 2,
3, and 4 in the years 2002, 2000, and 2001, respectively.
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Stockholder Dividends
We have assumed in this analysis that the Board of Directors will pay
shareholders dividends only if sufficient statutory surplus exists after
allocating assets to support the reserves determined by the Appointed Actuary.
Thus, this analysis has not contemplated the payment of dividends to
shareholders in determining the level of reserves.
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[FINANCIAL BENEFIT LIFE INSURANCE COMPANY LETTERHEAD]
I, Jerald R. Hoeft, Senior Vice President and Chief Financial Officer of
Financial Benefit Life Insurance Company hereby affirm that the listings and
summaries of policies and contracts inforce for Financial Benefit Life Insurance
Company as of October 31, 1995, descriptions of policy features and historical
experience, listings and summaries of book and market values of securities
owned by Financial Benefit Life Insurance Company as of November 15, 1995,
assets sold and bought since that date, which were prepared for and submitted
to Edward P. Mohoric were prepared under my direction and to the best of my
knowledge and belief are substantially accurate and complete.
I also hereby affirm that to the best of my knowledge and belief there
have been no material events between October 31, 1995 and December 19, 1995
which would impact Edward P. Mohoric's cash flow testing analysis for Financial
Benefit Life Insurance Company.
/s/ Jerald R. Hoeft
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Jerald R. Hoeft
Senior Vice President and CFO
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[AMERICAN INVESTORS LIFE INSURANCE COMPANY, INC. LETTERHEAD]
I, Larry Bruning, Chief Actuary of American Investors Life Insurance Company
Inc., a wholly owned subsidiary of AmVestors Financial Corp., hereby affirm
that I submitted the following crediting strategy to Edward P. Mohoric in
connection with his cash flow testing of Financial Benefit Life Insurance
Company. This crediting strategy represents American Investors' anticipated
strategy to manage this block of business.
- - Crediting strategy - manage the block of business at a 350 basis
point spread through the surrender charge period and 200 basis points
thereafter to the company's net earnings rate. The exception is that if
interest rates stay at current (November 30, 1995) levels, we would not
drop the credited rate below 5%. We did not put this floor in our models.
/s/ Larry J. Bruning
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Larry Bruning
Chief Actuary
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[AMERICAN INVESTORS LIFE INSURANCE COMPANY, INC. LETTERHEAD]
I, Timothy S. Reimer, Chief Investment Officer of American Investors Life
Insurance Company, a wholly owned subsidiary of AmVestors Financial Corp.,
hereby affirm that I submitted the following reinvestment strategy to Edward P.
Mohoric in connection with his cash flow testing of Financial Benefit Life
Insurance Company. This reinvestment strategy represents our anticipated
strategy to manage this existing block of business.
The reinvestment strategy is:
- - During 1996 buy $50 million of SBAs at a floating interest rate
equal to the Prime interest rate less 175 basis points, using a 30 year
amortization rate, and 7.5% constant prepayment rate.
- - For non SBAs, invest 50% in A rated bonds at a spread of 65 basis
points over treasuries, 25% in mortgage backed securities at a spread of 90
basis points over treasuries, 20% in BBB rated bonds with a spread of 75
points over treasuries and 5% in high yield bonds with a spread of 250
basis points above treasuries.
- - For non SBAs, invest 25% in three year maturities, 50% in five year
maturities, and 25% in seven year maturities.
- - Invest the mortgage backed securities in CMOs with 15 year
collateral, and purchase last cash flow tranches. Use FHLMC 1414-J as a
model. However, as they become available, discount CMOs would be used.
- - Use investment expenses of 10 basis points.
/s/ Timothy S. Reimer
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Timothy S. Reimer
Chief Investment Officer
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SECTION III
LIABILITY ASSUMPTIONS
Inforce Model
Business in force as of October 31, 1995 was modelled into plan types as
follows. All dollar amounts are shown in thousands.
Policy Account Cash Statutory
Plan Count Value Value Reserve
Annuity - Accelerator 550 $14,087 $12,636 $12,732
Annuity - Accumulator 8,402 202,132 181,879 181,774
Annuity - Champion 9,077 205,332 177,667 180,171
Annuity - Benchmark 315 5,992 5,465 5,484
Annuity - FPDA 223 2,311 2,074 2,102
Annuity - SPDA 961 12,198 12,184 12,184
Life - SPWL 116 3,981 3,833 3,845
Annuity - Senior 2,584 65,008 60,834 60,589
TOTAL 22,228 $511,042 $456,571 $458,880
The company also has annuities in payout status. The annual benefit and
reserves were projected individually for each of these annuities. The total
reserve for annuities in payout status is $26,869,414 as of October 31, 1995.
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Surrender Charges
Benchmark
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Accelerator, Plans Plans Senior
Policy Accumulator, 6100, 6110, 6000, 6010, ---------------------------------
Year Champion 6120, 6130 6020, 6030 Pre-1993 Issues 1993+ Issues
- --------------------------------------------------------------------------------------------------------
1 15% 15% 12% 8% 8%
2 15 14 11 7 7
3 15 13 10 6 6
4 13 12 9 5 5
5 11 11 8 4 4
6 9 10 7 0 3
7 7 9 6 0 2
8 5 8 4 0 0
9 3 7 0 0 0
10 0 6 0 0 0
11 0 5 0 0 0
12 0 4 0 0 0
13 0 3 0 0 0
14 0 2 0 0 0
15 0 1 0 0 0
16+ 0 0 0 0 0
The FPDA, SPDA, and SPWL products have no remaining surrender charges.
Expenses Loads
There are no expense loads in any of the products.
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Guaranteed Interest Rates
Plan Guaranteed Interest Rate
Accelerator 3.5%
Accumulator 3.0/4.0*
Benchmark 4.0
Champion 3.0/4.0*
FPDA 4.0
SPDA 4.0
SPWL 4.0
Senior 3.0
*depending on plan code
Death Benefits
All of the annuities except Senior have death benefits equal to account
value. The Senior plan has a death benefit equal to the premium deposit in
year 1, the premium deposit with one year's guaranteed interest in year 2, and
the account value in years three and later.
For SPWL, the death benefit is equal to the account value multiplied by the
corridor percentages defined by DEFRA.
Payment of Cash Values
Some of FBLIC's policies have a provision which allows the payout of the cash
value over a five year period. FBLIC does not currently employ this provision.
FBLIC would employ this provision in certain situations wherein the business
was experiencing high lapses, necessitating large levels of asset liquidation
at a time when most asset book values are significantly below market values.
We assumed this provision would be implemented in the three scenarios in which
the interest rates increased over time. We employed this provision for a five
year period starting in years 2002,
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2000, and 2001 for scenarios 2, 3, and 4, respectively. At this time we assumed
the cash values would be used to purchase a five year certain annuity at
guaranteed interest rates. After employing this provision, we assumed FBLIC
would continue to use this provision for surrenders in the subsequent five
years before reverting back to paying full cash value.
Renewal Premiums
FBLIC currently is receiving renewal premiums on its deferred annuities equal
to about $11 million per year. We projected this premium to decrease uniformly
over the first ten projection years. The premium was allocated across all
deferred annuity plans and durations in proportion to initial reserves.
Renewal Credited Rates
Initial projection credited rates were set equal to the actual credited rates
as of October 31, 1995. Credited rates were modified to reflect market
conditions annually for all plans. An approximation of the company's crediting
strategy is outlined below based on discussions with Larry Bruning of AIC. The
approach is to generally manage at a spread to earnings.
Each policy without current surrender charges will be managed at a 200 basis
point spread to the company's net earnings rate. Policies with current
surrender charges will be managed at a 350 basis point spread to the company's
net earnings rate. The exception is that if interest rates stay at current
(December 6, 1995) levels, AIC would not drop the credited rate below 5%.
Market Credited Rates
Future market rates of interest were assumed to be driven by the Treasury yield
curve. Market rates were assumed to equal the seven year Treasury rate minus a
spread of 50 basis points. The spreads were developed based on the following
assumed market rate at December 6, 1995:
Market
Plan Rate
All Plans 5.06%
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Lapses
We have assumed base lapses of 3% in the first policy year, and 6% in the
second policy year. We then graded lapses to 12% by the end of the surrender
charge period according to the following formula:
Lapse Rate = 6% + [( l - Current SC) * 6%]
----------
Year 2 SC
Where SC = surrender charge adjusted for free partials
We have increased the formula lapse rates to 30% in the year the surrender
charge becomes zero. After the end of the surrender charge period, we used 25%
for the next year, 20% for the second year and a flat base lapse rate of 15%
thereafter.
Interest Sensitive Lapses
We have used the following increments to the base lapse rates to reflect the
sensitivity of lapses to changing interest rate environments.
2
Increment to Base Lapse = 2 * (MR - CR - SC/4)
Where:
MR = market rate
CR = credited rate
SC = surrender charge
If CR is greater than MR:
2
Decrement to Base Lapse = (MR-CR)
If CR is greater than (MR-SC/4), the "2" multiple is changed to 0, making no
increment.
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The minimum lapse rate (after year 1) is always 6%. The maximum lapse rate is
always 50%.
Partial Surrenders
The annuity products have a 10% free partial withdrawal provision after the
first policy year. We have modelled the free withdrawal provision by reducing
the surrender charge and assuming a 20% annual usage rate (which has a 2%
impact) after the first year.
For partial surrender we applied the following increment to base partial usage
to reflect the sensitivity of partial surrenders to changing interest rate
environments:
.5 x (MR - CR - 1), but with the overall partial usage never less than 2%.
Commissions
Commissions in renewal premiums are equal to the full first year commission.
These are:
Accumulator 7%
Accelerator 7%
Benchmark 7%
Champion 10%
Senior 7%
Nursing Home Benefit
Certain annuity policies have a nursing home benefit which allows an additional
20% free partial withdrawal if the insured has been confined to a nursing home
facility for at least 30 days. This rider was issued on all policies between
October 1990 and March 1992. Subsequent to March 1992 this benefit is included
only on the Senior policies.
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Due to the limited expected usage and small benefit level, we did not include
this benefit in our analysis.
Maintenance Expenses
We have assumed a $90.00 per policy maintenance expense. We used inflation of
3% plus the change in the short term Treasury rate from December 6, 1995
levels. For the SPIAs we assumed expenses are .4% of reserves which
approximates $90 per SPIA contract.
Deaths
Deaths on the deferred annuities and SPIAs are based on the 1983 Individual
Annuity Mortality table for males. The average issue age for the October 31,
1995 inforce is 64.
Deaths on the SPWL are based on 100% of 1975-80 Male Select & Ultimate table.
The average issue age for the October 31, 1995 inforce is 52.
Reserves
At October 31, 1995 the statutory reserve on the deferred annuities and SPWL is
100.51% of the cash surrender value adjusted for the free partial withdrawal.
We have assumed for future projection years while there is a surrender charge
that the statutory reserve remains 100.51% of the cash value adjusted for the
free partial withdrawals. We assumed the statutory reserve would equal the
account value after there is no surrender charge. We assumed future tax
reserves equal to the cash values, adjusted for free partials.
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SECTION IV
INVESTMENT ASSUMPTIONS
We were provided with FBLIC's asset portfolio as of October 31, 1995.
During early December, 1995, $71,982,407 (book value) of longer term
periods were sold for a gain of $3,010,160 (1,956,604 after tax). Of
this, $59,518,656 was reinvested into bonds of between 7 and 11 years
maturity and the remaining $14,420,355 is being held in short term
investments. We modeled this restructured portfolio into amounts backing
reserves and IMR or surplus as follows. All amounts are shown in
thousands of dollars.
Average Average Market
Type of Security Par Value Annualized Coupon Book Value Bond Yield Value
Governments $2,525 7.85% $2,522 7.96% $2,576
Corporate Bonds 281,508 8.35 279,139 8.54 292,582
Adjustable Rate Bonds 548 7.46 548 7.46 548
Foreign Bonds 250 8.26 250 8.26 250
Mortgage Pass Throughs 13,762 7.96 13,794 7.94 13,466
CMOs 150,178 6.57 142,770 7.28 147,157
Cash & Short Term 55,222 * 55,222 -- 55,222
Total Assets Allocated to
Reserves and IMR $503,992 7.74%** $494,245 8.11%** $511,801
Assets Allocated to Surplus
CMOs 11,869
Preferred Stock 8,200
Common Stock 1,300
Mortgages 5,904
Real Estate 2,632
Total $525,206
*immediate reinvestment according to formula underlying projection
**excludes cash reinvestment yield
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For all but three CMOs, cash flows were obtained from the GAT CMO system for
each of the seven interest scenarios in this analysis. Two of these CMOs (Home
Mac Mortgage Services 87-3-D and Citicorp 89-A-3) were treated as short term
mortgages as they are currently paying off. The last CMO (SASI 95-B A3) was
modeled into FNMA 92-17-H. The market values for each CMO are as of September
30, 1995.
Portfolio Quality
For the corporate bonds, adjustable rate bonds, and foreign bonds, the
following table shows the percentage of book value by AVR category. (The
following is as of October 31, 1995). The post restructuring levels were not
available.
NAIC AVR Class
1 55.1%
2 30.6
3 12.0
4 2.3
5 0.0
6 0.0
100.0%
All of the CMOs and pass throughs are rated NAIC Class 1.
Market Values
For corporate bonds, U.S. Treasury and pass through securities, we calculated a
spread to the September 30, 1995 Treasury Curve to reproduce market values as
provided by FBLIC. For all CMOs, an initial spread to the September 30, 1995
Treasury curve was calculated to reproduce the market value provided by FBLIC.
Market values in any future year were calculated by
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discounting future cash flows at the current market rate. The current market
rate was assumed to maintain the initial spread over the current Treasury
curve.
Reinvestment Assumptions
The assumed distribution of future cash flows are outlined below. We developed
these assumptions based on discussions with Tim Reimer at AIC concerning the
planned investment strategy for this block after acquisition by AIC. The actual
investments chosen by AIC will depend on opportunities in the market on a
day-to-day basis.
The first $50 million of positive cash flow will be invested in SBAs (Small
Business Association Loans). These securities are treated as adjustable rate 30
year mortgages with a constant 7.5% prepayment rate and whose interest rate
varies based on the prime rate and is equal to the prime rate minus 175 basis
points. The prime rate is the rate at which banks offer loans to large
corporate concerns. For purposes of this analysis, the prime rate is set to the
one year treasury rate plus 235 basis points.
Following this first $50 million of investment, future positive cash flows will
be invested in the following:
Type Maturity Distribution Spread to Treasury
Corporate A 3 12.50% 65 BP
5 25.00 65 BP
7 12.50 65 BP
Corporate BBB 3 5.00% 75 BP
5 10.00 75 BP
7 5.00 75 BP
High Yield B 3 1.25% 250 BP
5 2.50 250 BP
7 1.25 250 BP
CMO AAA 12* 25.00% 90 BP
*weighted average life of the tranches
-23 -
26
For future CMO investments, we assumed a CMO structure comparable to an
existing CMO, FHLMC 1414. We assumed investment in the J tranche of this CMO.
Disinvestment Assumption
To the extent disinvestment is required to fund net cash outflows, securities
are sold in order to maximize capital gains (minimize capital losses) except
that we assumed that the SBAs purchased were the last asset to be liquidated.
Market values are based on spreads to treasuries derived from the September 30,
1995 market values provided by FBL and the September 30, 1995 yield curve.
Initial Treasury Yield Curve
For purposes of this analysis, we have assumed the December 6, 1995 yield curve
as the beginning yield curve. For comparison, the yield curve used to derive
spreads to treasuries as of September 30, 1995 is also shown.
Treasury Yield Curve
(nominal rates shown)
Maturity September 30, 1995 December 6, 1995
3 months 5.406% 5.472%
1 year 5.674 5.327
2 years 5.851 5.324
3 years 5.914 5.372
5 years 6.015 5.490
10 years 6.178 5.671
30 years 6.504 6.028
Investment Expenses
We have assumed investment expenses of 10 basis points. This assumption was
provided to us by AIC.
-24-
27
Bid/Asked Spread
The cost of buying or selling an asset was assumed to be .50%.
Default Costs
The assumed default costs are based on a recent study by Edward Altman and
Merrill Lynch. The rates were based on a study of historical defaults for the
period of 1971 to 1994. The rates assumed are shown below by S&P rating
category.
S&P Class Default Rate (basis points)
AAA .8
AA 3.0
A 5.0
BBB 21.0
BB 95.0
B 307.0
CCC 690.0
The present value of defaults in all cases was less than FBLIC's September 30,
1995 Asset Valuation Reserve of $9,551,133. Therefore, the present value of
defaults were added back into the resulting present values. Actual default
costs will be dictated by an array of complex economic forces and by other
factors which we cannot accurately predict. Such forces may generate defaults
higher or lower than those assumed here.
Prepayments Provision
- - Corporate Bonds -- FBC has less than 2% of its current portfolio in
callable bonds. Company practice has been to invest in noncallable bonds.
We therefore ignored call provisions in our projection.
-25-
28
- - Mortgage Pass Throughs -- Prepayment rates are derived from a study of
historical prepayment rates and utilize the following formula, subject to
a maximum of 600% of PSA and a minimum of 100% of PSA.
Prepayment Rate = [-2.06 + 6.98 x Arctan (SP)] x PSA
where
SP= spread between coupon on collateral and the
current market coupon for a comparable mortgage, as a
percentage. Current market coupon is set equal to the ten year
treasury rate plus 150 basis points.
PSA= Public Securities Association (PSA) standard
prepayment model. The model grades linearly from 0% to 6% over
the first two and one-half years of the mortgage lifetime, and
remains at 6% thereafter.
- - CMOs -- Prepayment rates are based on the standard GAT Precision model
which recognizes the spread to available interest rates in the given
environment and years since the security originated.
- - SBAs -- Prepayment rates for the Small Business Association loans are
assumed to be 7.5% per year. This assumptions was provided by AIC.
Interest Scenarios
The seven interest scenarios in the projections were based on the following
adjustments to the December 6, 1995 Treasury curve with the proviso that
interest rates in falling interest scenarios are not allowed to decrease by
more than 50% of the average 5 year Treasury rate for the week ending December
6, 1995.
-26-
29
Scenario
Number Name Description
1 Level Level.
2 Gradually Rates rise 1/2% each year for ten years, and
Rising then remain at that level.
3 Mountain Rates rise 1% each year for five years, then
fall 1% each year back to the original level,
and then remain at that level.
4 Pop-Up Rates rise 3% in the first year, and then
remain at that level.
5 Gradually Rates fall 1/2% each year for ten years, and
Falling then remain at that level.
6 Valley Rates fall 1% each year for five years, then
rise 1% each year back to the original level,
and then remain at that level.
7 Pop-Down Rates fall 3% in the first year, and then
remain at that level.
The resulting l year, 5 year, and 30 year Treasury rates are shown in the table
on the next page.
Liquidation/Borrowing Methodology
Bonds were liquidated so as to minimize capital losses or maximize capital
gains. The SBAs are liquidated only after all remaining assets have been
liquidated . If the cash shortfall is so large that all assets modelled as
being available for liquidation are in fact liquidated, borrowing of funds
takes place as a proxy for liquidation. The borrowing is assumed to be at a rate
equal to the short term Treasury rate plus 300 basis points in the seven
scenarios.
-27-
30
Table IV-1
Financial Benefit Life Insurance Company
Summary of Treasury Yield Curve
(All rates are nominal.)
Scenario 1 Scenario 2
------------------------------- -------------------------------
Projection 1 Year 5 Year 30 Year 1 Year 5 Year 30 Year
Year Treasury Treasury Treasury Treasury Treasury Treasury
- ---------- -------- -------- -------- -------- -------- --------
1995 5.327% 5.490% 6.028% 5.327% 5.490% 6.028%
1996 5.327% 5.490% 6.028% 5.827% 5.990% 6.528%
1997 5.327% 5.490% 6.028% 6.327% 6.490% 7.028%
1998 5.327% 5.490% 6.028% 6.827% 6.990% 7.528%
1999 5.327% 5.490% 6.028% 7.327% 7.490% 8.028%
2000 5.327% 5.490% 6.028% 7.827% 7.990% 8.528%
2001 5.327% 5.490% 6.028% 8.327% 8.490% 9.028%
2002 5.327% 5.490% 6.028% 8.827% 8.990% 9.528%
2003 5.327% 5.490% 6.028% 9.327% 9.490% 10.028%
2004 5.327% 5.490% 6.028% 9.827% 9.990% 10.528%
2005 5.327% 5.490% 6.028% 10.327% 10.490% 11.028%
2006+ 5.327% 5.490% 6.028% 10.327% 10.490% 11.028%
Scenario 3 Scenario 4
------------------------------- -------------------------------
Projection 1 Year 5 Year 30 Year 1 Year 5 Year 30 Year
Year Treasury Treasury Treasury Treasury Treasury Treasury
- ---------- -------- -------- -------- -------- -------- --------
1995 5.327% 5.490% 6.028% 5.327% 5.490% 6.028%
1996 6.327% 6.490% 7.028% 8.327% 8.490% 9.028%
1997 7.327% 7.490% 8.028% 8.327% 8.490% 9.028%
1998 8.327% 8.490% 9.028% 8.327% 8.490% 9.028%
1999 9.327% 9.490% 10.028% 8.327% 8.490% 9.028%
2000 10.327% 10.490% 11.028% 8.327% 8.490% 9.028%
2001 9.327% 9.490% 10.028% 8.327% 8.490% 9.028%
2002 8.327% 8.490% 9.028% 8.327% 8.490% 9.028%
2003 7.327% 7.490% 8.028% 8.327% 8.490% 9.028%
2004 6.327% 6.490% 7.028% 8.327% 8.490% 9.028%
2005 5.327% 5.490% 6.028% 8.327% 8.490% 9.028%
2006+ 5.327% 5.490% 6.028% 8.327% 8.490% 9.028%
Scenario 5 Scenario 6 Scenario 7
------------------------------- ------------------------------- -------------------------------
Projection 1 Year 5 Year 30 Year 1 Year 5 Year 30 Year 1 Year 5 Year 30 Year
Year Treasury Treasury Treasury Treasury Treasury Treasury Treasury Treasury Treasury
- ---------- -------- -------- -------- -------- -------- -------- -------- -------- --------
1995 5.327% 5.490% 6.028% 5.327% 5.490% 6.028% 5.327% 5.490% 6.028%
1996 4.827% 4.990% 5.528% 4.327% 4.490% 5.028% 2.664% 2.745% 3.028%
1997 4.327% 4.490% 5.028% 3.327% 3.490% 4.028% 2.664% 2.745% 3.028%
1998 3.827% 3.990% 4.528% 2.664% 2.745% 3.028% 2.664% 2.745% 3.028%
1999 3.327% 3.490% 4.028% 2.664% 2.745% 3.014% 2.664% 2.745% 3.028%
2000 2.827% 2.990% 3.528% 2.664% 2.745% 3.014% 2.664% 2.745% 3.028%
2001 2.664% 2.745% 3.028% 2.664% 2.745% 3.014% 2.664% 2.745% 3.028%
2002 2.664% 2.745% 3.014% 2.664% 2.745% 3.028% 2.664% 2.745% 3.028%
2003 2.664% 2.745% 3.014% 3.327% 3.490% 4.028% 2.664% 2.745% 3.028%
2004 2.664% 2.745% 3.014% 4.327% 4.490% 5.028% 2.664% 2.745% 3.028%
2005 2.664% 2.745% 3.014% 5.327% 5.490% 6.028% 2.664% 2.745% 3.028%
2006+ 2.664% 2.745% 3.014% 5.327% 5.490% 6.028% 2.664% 2.745% 3.028%
31
APPENDIX A
32
Appendix A
Financial Benefit Life Insurance Company
Cash Flow Testing Analysis as of October 31, 1995
Summary of After Tax Profits by Scenario
Scenario 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
- -------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
1 1,759,187 729,469 410,773 1,225,991 1,949,589 1,893,226 2,067,215 2,134,967 1,800,662 1,614,753
2 2,505,885 3,129,735 2,613,204 2,706,240 2,354,881 1,283,726 (2,191,620) (1,373,220) (374,684) (536,338)
3 2,506,276 3,224,181 2,572,974 1,572,984 (4,030,479) (3,754,011) 37,539 (48,433) (30,150) (14,188)
4 2,585,091 3,146,094 1,733,257 935,372 (686,121) (6,534,655) 594,120 (700,226) (405,684) (354,612)
5 2,792,465 3,254,944 3,110,630 3,998,461 3,847,351 2,988,187 2,596,556 2,167,540 1,648,370 1,576,519
6 3,209,942 4,098,325 3,559,084 2,684,492 2,880,620 2,415,308 2,423,036 2,114,066 1,623,132 1,391,059
7 4,218,263 4,496,991 1,464,290 2,008,844 2,665,086 2,686,526 2,494,326 2,002,720 1,223,279 1,132,956
Scenario 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
- -------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
1 1,195,483 963,318 800,412 688,892 612,455 560,785 518,168 490,111 458,352 1,717,695
2 (388,925) (695,345) (87,160) 219,900 102,612 61,997 (567,591) (325,866) (59,941) 1,337,948
3 54,391 125,875 (44,077) (846,046) (511,740) (167,487) 83,964 216,456 288,101 1,699,893
4 (482,525) (266,997) (106,146) 52,667 67,258) (585,649) (333,521) (116,410) 68,817 1,451,800
5 371,992 189,658 95,072 100,748 91,637 118,831 140,256 173,835 203,196 1,623,441
6 1,139,810 897,044 622,588 572,482 119,363 352,853 293,165 275,612 275,277 1,364,128
7 389,442 267,594 217,806 173,653 152,975 157,157 165,684 189,933 209,238 1,586,976
Scenario Description:
1 Level
2 Gradually increasing
3 Mountain
4 Pop-up
5 Gradually decreasing
6 Valley
7 Pop-down
33
APPENDIX B
34
REPORT: 16
FINANCIAL BENEFIT LIFE INS CO PAGE: 13
TRIAL: 1 RISK ANALYSIS SYSTEM DATE: 12/19/95 TIME: 14:18:46
PRODUCT: (TOTAL COMPANY) TOTAL ALL BUSINESS UNIT FACTOR IS 1,000
STRATEGY:
Caption>
10/95 10/96 10/97 10/98 10/99 10/ 0 10/ 1
STATUTORY GAINS (STATEMENT BASIS)
FISCAL PERIODS
PREMIUMS - 6,489 3,471 1,758 825 347 124
GROSS INVESTMENT INCOME - 35,991 33,888 30,875 27,597 23,804 19,669
ACCRUAL OF DISCOUNT - 827 878 912 979 870 849
AMORTIZATION OF IMR - 563 610 770 992 1,041 1,041
LESS INVESTMENT EXPENSE - 466 444 410 370 327 276
LESS INCOME LOST ON DEFAULTS - 914 885 868 774 598 405
TOAL INCOME - 42,490 37,518 33,037 29,249 25,136 21,002
NET SURRENDERS - 34,735 38,562 47,366 52,054 56,110 53,775
PARTIAL SURRENDERS - 11,699 10,472 9,096 7,420 6,361 4,725
DEATH BENEFITS - 11,084 11,192 10,944 10,398 9,579 8,536
DIVIDENDS - - - - - - -
ACQUISITION EXPENSES - - - - - - -
OTHER EXPENSES - 2,014 1,808 1,591 1,368 1,143 933
NET COMMISSIONS - - - - - - -
SURPLUS RELIEF CHARGE - - - - - - -
INCREASE IN LOADING - - - - - - -
INCREASE IN RESERVES - -19,060 -25,169 -36,067 -43,222 -50,422 -49,243
INCR IN DIVIDEND LIABILITY - - - - - - -
TOTAL DISBURSEMENTS - 40,474 36,866 32,931 28,018 22,772 18,726
STATUTORY GAIN - 2,016 652 106 1,231 2,365 2,276
CAPITAL GAINS - 1,625 - 2,148 1,160 157 722
GAIN ON CALLS AND ROLLOVER - -1 5 -2 -1 - -
LESS DEFAULT LOSSES - - - - - - -
LESS IMR CAPITALIZATION - 1,055 3 1,395 754 102 469
-
BOOK PROFIT - 2,585 654 857 1,636 2,419 2,529
INCREASE IN SURPLUS - - - - - - -
FEDERAL INCOME TAX - 825 -75 447 410 470 635
PROFITS RELEASED - 1,759 729 411 1,226 1,950 1,893
STATUTORY RESERVE 485,749 466,690 441,521 405,454 362,232 311,810 262,567
DIVIDEND LIABILITY - - - - - - -
TOTAL LIABILITY 485,749 466,690 441,521 405,454 362,232 311,810 262,567
SURPLUS - - - - - - -
TAX RESERVE 483,655 465,314 440,408 404,547 361,551 311,266 262,165
INTEREST MAINTENANCE RESERVE 8,496 8,989 8,382 9,008 8,769 7,830 7,258
POLICIES IN FORCE (UNSCALED) 22,228 20,163 18,065 15,771 13,414 11,062 8,925
INSURANCE IN FORCE 511,042 487,393 456,358 413,697 365,418 311,666 259,806
CASH VALUE IN FORCE 456,571 442,106 421,578 389,111 349,433 301,776 254,172
ACCOUNT VALUE IN FORCE 511,042 485,567 454,918 412,675 364,646 311,052 259,306
POLICY LOANS IN FORCE - - - - - - -
GROSS DEFERRED PREMIUMS - - - - - - -
NET DEFERRED PREMIMUMS - - - - - - -
PRESENT VALUE OF PROFITS RELEASED TO DATE
PV AT 10.00(O UMLAUT) PROFITS RELEASED - 1,599 2,202 2,511 3,348 4,559 5,627
PV AT 12.50(O UMLAUT) PROFITS RELEASED - 1,564 2,140 2,429 3,194 4,276 5,210
PV AT 15.00(O UMLAUT) PROFITS RELEASED - 1,530 2,081 2,351 3,052 4,022 4,840
PV AT AFTER TAX EARNED RATE - 1,676 2,339 2,695 3,709 5,251 6,683
35
RERPORT: 16
FINANCIAL BENEFIT LIFE INS CO PAGE: 14
TRIAL: 1 RISK ANALYSIS SYSTEM DATE: 12/19/95 TIME: 14:18:46
PRODUCT: (TOTAL COMPANY) TOTAL ALL BUSINESS UNIT FACTOR IS 1,000.
STRATEGY:
10/2 10/3 10/4 10/5 10/6 10/7
STATUTORY GAINS (STATEMENT BASIS)
FISCAL PERIODS
PREMIUMS 36 8 1 - - -
GROSS INVESTMENT INCOME 15,879 13,038 10,712 8,926 7,266 6,047
ACCRUAL OF DISCOUNT 906 1,002 719 264 157 147
AMORTIZATION OF IMR 993 828 662 534 426 341
LESS INVESTMENT EXPENSE 211 168 144 128 108 89
LESS INCOME LOST ON DEFAULTS 288 213 239 181 161 127
TOTAL INCOME 17,316 14,495 11,712 9,414 7,580 6,318
NET SURRENDERS 45,904 37,795 34,134 26,907 19,520 14,986
PARTIAL SURRENDERS 4,172 3,211 2,897 2,273 2,034 1,679
DEATH BENEFITS 7,425 6,434 5,591 4,899 4,340 3,888
DIVIDENDS - - - - - -
ACQUISITION EXPENSES - - - - - -
OTHER EXPENSES 752 605 481 379 304 248
NET COMMISSIONS - - - - - -
SURPLUS RELIEF CHARGE - - - - - -
INCREASE IN LOADING - - - - - -
INCREASE IN RESERVES -43,506 -36,311 -33,779 -27,222 -20,219 -15,777
INCR IN DIVIDEND LIABILITY - - - - - -
TOTAL DISBURSEMENTS 14,748 11,734 9,323 7,236 5,980 5,024
STATUTORY GAIN 2,568 2,761 2,389 2,178 1,601 1,294
CAPITAL GAINS - - 19 - 24 -
GAIN ON CALLS AND ROLLOVER - - - - - -
LESS DEFAULT LOSSES - - - - - -
LESS IMR CAPITALIZATION - - 12 - 15 -
BOOK PROFIT 2,568 2,761 2,395 2,178 1,609 1,294
INCREASE IN SURPLUS - - - - - -
FEDERAL INCOME TAX 501 626 594 563 413 331
PROFITS RELEASED 2,067 2,135 1,801 1,615 1,195 963
STATUTORY RESERVE 219,061 182,750 148,971 121,749 101,530 85,753
DIVIDEND LIABILITY - - - - - -
TOTAL LIABILITY 219,061 182,750 148,971 121,749 101,530 85,753
SURPLUS - - - - - -
TAX RESERVE 218,803 182,636 148,904 121,717 101,515 85,746
INTEREST MAINTENANCE RESERVE 6,265 5,438 4,788 4,254 3,843 3,503
POLICIES IN FORCE (UNSCALED) 7,152 5,718 4,468 3,515 2,827 2,302
INSURANCE IN FORCE 214,979 178,142 144,374 117,587 97,750 82,337
CASH VALUE IN FORCE 212,021 176,961 144,102 117,366 97,569 82,190
ACCOUNT VALUE IN FORCE 214,570 177,810 144,102 117,366 97,569 82,190
POLICY LOANS IN FORCE - - - - - -
GROSS DEFERRED PREMIUMS - - - - - -
NET DEFERRED PREMIUMS - - - - - -
PRESENT VALUE OF PROFITS RELEASED TO DATE
PV AT 10.00 (o umlaut) PROFITS RELEASED 6,688 7,684 8,448 9,070 9,489 9,796
PV AT 12.50 (o umlaut) PROFITS RELEASED 6,116 6,948 7,572 8,069 8,397 8,631
PV AT 15.00 (o umlaut) PROFITS RELEASED 5,617 6,315 6,827 7,226 7,483 7,663
PV AT AFTER TAX EARNED RATE 8,180 9,659 10,856 11,884 12,615 13,181
36
REPORT: 16
PAGE: 15
FINANCIAL BENEFIT LIFE INS CO
DATE: 12/19/95 TIME: 14:18:46
TRIAL: 1 RISK ANALYSIS SYSTEM
UNIT FACTOR IS 1,000.
PRODUCT: (TOTAL COMPANY) TOTAL ALL BUSINESS
STRATEGY:
10/8 10/9 10/10
STATUTORY GAINS (STATEMENT BASIS)
FISCAL PERIODS
PREMIUMS - - -
GROSS INVESTMENT INCOME 5,085 4,320 3,635
ACCRUAL OF DISCOUNT 134 77 55
AMORTIZATION OF IMR 283 257 251
LESS INVESTMENT EXPENSE 75 65 56
LESS INCOME LOST ON DEFAULTS 108 84 63
TOTAL INCOME 5,320 4,505 3,823
NET SURRENDERS 12,285 10,344 8,682
PARTIAL SURRENDERS 1,558 1,286 1,175
DEATH BENEFITS 3,493 3,140 2,814
DIVIDENDS - - -
ACQUISITION EXPENSES - - -
OTHER EXPENSES 204 167 137
NET COMMISSIONS - - -
SURPLUS RELIEF CHARGE - - -
INCREASE IN LOADING - - -
INCREASE IN RESERVES -13,296 -11,352 -9,791
INCR IN DIVIDEND LIABILITY - - -
TOTAL DISBURSEMENTS 4,243 3,585 3,016
STATUTORY GAINS 1,077 920 807
CAPITAL GAINS - -2 -
GAIN ON CALLS AND ROLLOVER - - -
LESS DEFAULT LOSSES - - -
LESS IMR CAPITALIZATION - -1 -
BOOK PROFIT 1,077 920 807
INCREASE IN SURPLUS - - -
FEDERAL INCOME TAX 276 231 194
PROFITS RELEASED 800 689 612
STATUTORY RESERVE 72,456 61,104 51,313
DIVIDEND LIABILITY - - -
TOTAL LIABILITY 72,456 61,104 51,313
SURPLUS - - -
TAX RESERVE 72,454 61,103 51,313
INTEREST MAINTENANCE RESERVE 3,219 2,961 2,710
POLICIES IN FORCE (UNSCALED) 1,878 1,528 1,239
INSURANCE IN FORCE 69,389 58,363 48,866
CASH VALUE IN FORCE 69,271 58,266 48,788
ACCOUNT VALUE IN FORCE 69,271 58,266 48,788
POLICY LOANS IN FORCE - - -
GROSS DEFERRED PREMIUMS - - -
NET DEFERRED PREMIUMS - - -
PRESENT VALUE OF PROFITS RELEASED TO DATE
PV AT 10.00(o umlat) PROFITS RELEASED 10,028 10,210 10,356
PV AT 12.50(o umlat) PROFITS RELEASED 8,804 8,937 9,041
PV AT 15.00(o umlat) PROFITS RELEASED 7,793 7,891 7,966
PV AT AFTER TAX EARNED RATE 13,633 14,006 14,325
STRATEGY:
10/11 10/12 10/13
STATUTORY GAINS (STATEMENT BASIS)
FISCAL PERIODS
PREMIUMS - - -
GROSS INVESTMENT INCOME 3,081 2,591 2,165
ACCRUAL OF DISCOUNT 18 14 10
AMORTIZATION OF IMR 248 244 250
LESS INVESTMENT EXPENSE 48 40 34
LESS INCOME LOST ON DEFAULTS 37 25 5
TOTAL INCOME 3,262 2,784 2,386
NET SURRENDERS 7,261 6,050 5,020
PARTIAL SURRENDERS 964 880 722
DEATH BENEFITS 2,517 2,242 1,990
DIVIDENDS - - -
ACQUISITION EXPENSES - - -
OTHER EXPENSES 112 91 74
NET COMMISSIONS - - -
SURPLUS RELIEF CHARGE - - -
INCREASE IN LOADING - - -
INCREASE IN RESERVES -8,321 -7,145 -6,039
INCR IN DIVIDEND LIABILITY - - -
TOTAL DISBURSEMENTS 2,533 2,118 1,767
STATUTORY GAINS 729 666 619
CAPITAL GAINS -6 -14 -14
GAIN ON CALLS AND ROLLOVER - - -
LESS DEFAULT LOSSES - - -
LESS IMR CAPITALIZATION -4 -9 -9
BOOK PROFIT 727 661 615
INCREASE IN SURPLUS - - -
FEDERAL INCOME TAX 166 143 124
PROFITS RELEASED 561 518 490
STATUTORY RESERVE 42,991 35,847 29,807
DIVIDEND LIABILITY - - -
TOTAL LIABILITY 42,991 35,847 29,807
SURPLUS - - -
TAX RESERVE 42,991 35,847 29,807
INTEREST MAINTENANCE RESERVE 2,458 2,205 1,966
POLICIES IN FORCE (UNSCALED) 1,002 808 648
INSURANCE IN FORCE 40,812 33,911 28,093
CASH VALUE IN FORCE 40,749 33,860 28,052
ACCOUNT VALUE IN FORCE 40,749 33,860 28,052
POLICY LOANS IN FORCE - - -
GROSS DEFERRED PREMIUMS - - -
NET DEFERRED PREMIUMS - - -
PRESENT VALUE OF PROFITS RELEASED TO DATE
PV AT 10.00(o umlat) PROFITS RELEASED 10,478 10,581 10,669
PV AT 12.50(o umlat) PROFITS RELEASED 9,126 9,196 9,255
PV AT 15.00(o umlat) PROFITS RELEASED 8,026 8,074 8,114
PV AT AFTER TAX EARNED RATE 14,606 14,855 15,082
37
FINANCIAL BENEFIT LIFE INS CO REPORT: 16
TRIAL: 1 RISK ANALYSIS SYSTEM PAGE: 16
DATE: 12/19/95 TIME: 14:18:46
PRODUCT: (TOTAL COMPANY) TOTAL ALL BUSINESS UNIT FACTOR IS 1,000.
STRATEGY:
10/14 10/15
STATUTORY GAINS (STATEMENT BASIS)
FISCAL PERIODS
PREMIUMS - -
GROSS INVESTMENT INCOME 1,807 1,497
ACCRUAL OF DISCOUNT 1 -
AMORTIZATION OF IMR 256 1,628
LESS INVESTMENT EXPENSE 28 23
LESS INCOME LOST ON DEFAULTS 2 1
TOTAL INCOME 2,034 3,101
NET SURRENDERS 4,148 22,383
PARTIAL SURRENDERS 651 528
DEATH BENEFITS 1,756 1,542
DIVIDENDS - -
ACQUISITION EXPENSES - -
OTHER EXPENSES 60 47
NET COMMISSIONS - -
SURPLUS RELIEF CHARGE - -
INCREASE IN LOADING - -
INCREASE IN RESERVES -5,148 -23,164
INCR IN DIVIDEND LIABILITY - -
TOTAL DISBURSEMENTS 1,467 1,335
STATUTORY GAIN 567 1,766
CAPITAL GAINS -17 -78
GAIN ON CALLS AND ROLLOVER - -
LESS DEFAULT LOSSES - -
LESS IMR CAPITALIZATION -11 -50
BOOK PROFIT 561 1,739
INCREASE IN SURPLUS - -
FEDERAL INCOME TAX 103 21
PROFITS RELEASED 458 1,718
STATUTORY RESERVE 24,659 1,495
DIVIDEND LIABILITY - -
TOTAL LIABILITY 24,659 1,495
SURPLUS - -
TAX RESERVE 24,659 1,495
INTEREST MAINTENANCE RESERVE 1,679 -
POLICIES IN FORCE (UNSCALED) 519 -
INSURANCE IN FORCE 23,141 -
CASH VALUE IN FORCE 23,109 -
ACCOUNT VALUE IN FORCE 23,109 -
POLICY LOANS IN FORCE - -
GROSS DEFERRED PREMIUMS - -
NET DEFERRED PREMIUMS - -
PRESENT VALUE OF PROFITS RELEASED TO DATE
PV AT 10.00(o umlat) PROFITS RELEASED 10,744 10,999
PV AT 12.50(o umlat) PROFITS RELEASED 9,304 9,467
PV AT 15.00(o umlat) PROFITS RELEASED 8,146 8,251
PV AT AFTER TAX EARNED RATE 15,285 16,018
38
FEBRUARY 7, 1996
OPINION
39
I, Edward P. Mohoric, a member of the American Academy of Actuaries,
am associated with the firm of Milliman & Robertson, Inc. I
have been retained by Financial Benefit Life Insurance Company to
render this opinion for use in the proposed acquisition of Financial
Benefit Group by AmVestors Financial. I meet the Academy
qualification standards for rendering the opinion and am familiar with
the valuation requirements applicable to life and health insurance
companies.
I have examined the actuarial assumptions and actuarial methods used
in determining reserves and related actuarial items listed below as
posted by the company, in their reporting, as of October 31, 1995.
Tabulated below are the posted reserves and related actuarial items
and changes which we have made based on our calculations with
identification as to which reserves have been subjected to asset
adequacy analysis.
Asset Adequacy
Tested Amounts Reserves and Liabilities
M&R Additional
Statement Item Posted Calculated Analysis Actuarial
Reserves Reserves Method* Reserves Total Amount
Exhibit 8
- - Life Insurance $3,844,863 $3,833,133 C -- $3,833,133
- - Annuities
Deferred 455,035,137 459,533,599 C -- 459,533,599
Payout 26,869,414 27,417,369 C -- 27,417,369
Other Reserves 0 I 5,767
TOTAL RESERVES $485,749,414 $490,784,101 $0 $490,789,868
IMR** $8,496,089 C $8,496,089
AVR*** $9,551,133 C $9,551,133
* "C"indicates cash flow testing. "I" indicates that cash flow testing
was not performed because the block is immaterial.
** as of December 19, 1995
*** Used only to extent of the present value of projected defaults; as of
September 30, 1995.
Regarding the difference of $5,040,454 between the posted reserves
and the M&R calculated reserves, certain policies of Financial
Benefit Life Insurance Company contain contract language which
permits, at the company's option, a requested withdrawal or surrender
to be paid over a period of five annual installments, with interest
credited at the minimum guaranteed interest rate.
40
In determining the minimum reserve on these policies, I have taken a
conservative view and have used the full cash surrender value, unadjusted for
the five year payout, to calculate the CARVM reserve.
There are differences in interpretation of appropriate CARVM reserve
calculations for policies with these provisions. The posted reserves used this
same calculation with the exception of policies issued during 1992 wherein the
cash value is adjusted for the five year installment payout. The impact of
considering the five year installments on this block in testing for the minimum
reserve would be to reduce the reserves by $4,015,282. The impact of
considering the five year installments on all policies with this provision
would be to reduce the reserves for Financial Benefit Life Insurance Company by
$21,161,047.
My examination included such review of the actuarial assumptions and actuarial
methods and such tests of the actuarial calculations as I considered necessary.
I have relied on Jerry R. Hoeft, Senior Vice President of Financial Benefit
Life Insurance Company for listings and summaries of book and market values of
securities for listings and summaries of recent assets sold and brought, for
listings and summaries of policies and contracts inforce, and for descriptions
of policy features and historical experience as described in the statement
attached to this section. In other aspects, my examination included such
review of the actuarial assumptions and actuarial methods and such test of the
actuarial calculations as I considered necessary.
I have relied on use of interest crediting strategy in the development of cash
flow testing as provided by Larry Bruning, Chief Actuary of AmVestors Financial
described in the statement attached to this section. In other aspects, my
examination included such review of the actuarial assumptions and actuarial
methods and such test of the actuarial calculations as I considered necessary.
41
I have relied on use of the reinvestment strategy as to new investmens from
positive cash flow as provided by Timothy S. Reimer, Chief Investment Officer
of AmVestors Financial and described in the statement attached to this section.
In other aspects, my examination included such review of the actuarial
assumptions and actuarial assumptions and actuarial methods and such test of the
actuarial calculations as I considered necessary.
In my opinion the reserves and related actuarial values concerning the
statement items identified above:
(a) Are computed in accordance with presently accepted actuarial
standards consistently applied and are fairly stated, in
accordance with sound actuarial principles;
(b) Are based on actuarial assumptions which produce reserves at
least as great as those called for in any contract provision
as to reserve basis and method, and are in accordance with all
other contract provisions;
(c) Meet the requirements of the Insurance Law and regulation of
the state of Florida and are at least as great as required by
the state of Florida.
(d) Include provisions for all actuarial reserves and related
statement items which ought to be established.
The reserves and related items, when considered in light of the assets held by
the company with respect to such reserves and related actuarial items
including, but not limited to, the investment earnings on such assets, and the
considerations anticipated to be received and retained under such policies and
contracts, make adequate provision, according to presently accepted actuarial
standards of practice, for the anticipated cash flows required by the
contractual obligations and related expenses of the company.
42
The actuarial methods, considerations and analyses used in forming my opinion
conform to the appropriate Standards of Practice as promulgated by the Actuarial
Standards Board, which standards form the basis of this statement of opinion.
To the best of my knowledge and relying on information provided by Jerry R.
Hoeft, Senior Vice President and Chief Financial Officer of Financial Benefit
Life Insurance Company, there have been no material changes between October 31,
1995 and January 19, 1996 which should be considered in reviewing this opinion.
The impact of unanticipated events subsequent to the date of this opinion is
beyond the scope of this opinion. The analysis of asset adequacy portion of
this opinion should be viewed recognizing that the company's future experience
may not follow all the assumptions used in the analysis.
This opinion may be relied upon by the management and advisors of Financial
Benefit Life Insurance Company and the management, advisors, and creditors of
AmVestors Financial, but it may not be relied upon by any other party. This
Opinion is based on and rendered in the context of the analyses contained in
the related actuarial memorandum, which has been prepared in anticipation of
the planned merger of Financial Benefit Group and AmVestors Financial.
/s/ Edward P. Mohoric
- ---------------------------------------
Edward P. Mohoric
Milliman & Robertson, Inc.
259 Radnor Chester Road
Radnor, PA 19087
610-687-5644
February 7, 1996
WWLM812
43
[FINANCIAL BENEFIT LIFE INSURANCE COMPANY LETTERHEAD]
I, Jerald R. Hoeft, Senior Vice President and Chief Financial Officer
of Financial Benefit Life Insurance Company hereby affirm that the listings and
summaries of policies and contracts inforce for Financial Benefit Life
Insurance Company as of October 31, 1995, descriptions of policy features and
historical experience, listings and summaries of book and market values of
securities owned by Financial Benefit Life Insurance Company as of November 15,
1995, assets sold and bought since that date, which were prepared for and
submitted to Edward P. Mohoric were prepared under my direction and to the best
of my knowledge and belief are substantially accurate and complete.
I also hereby affirm that to the best of my knowledge and belief there
have been no material events between October 31, 1995 and January 19, 1996
which would impact Edward P. Mohoric's cash flow testing analysis for Financial
Benefit Life Insurance Company.
Jerald R. Hoeft
----------------------------
Jerald R. Hoeft
Senior Vice President and CFO
44
[AMERICAN INVESTORS LIFE INSURANCE COMPANY, INC. LOGO]
I, Timothy S. Reimer, Chief Investment Officer of American Investors Life
Insurance Company, a wholly owned subsidiary of AmVestors Financial Corp.,
hereby affirm that I submitted the following reinvestment strategy to Edward
P. Mohoric in connection with his cash flow testing of Financial Benefit Life
Insurance Company. This reinvestment strategy represents our anticipated
strategy to manage this existing block of business.
The reinvestment strategy is:
- - During 1996 buy $50 million of SBAs at a floating interest rate equal to the
Prime interest rate less 175 basis points, using a 30 year amortization rate,
and 7.5% constant prepayment rate.
- - For non SBAs, invest 50% in A rated bonds at a spread of 65 basis points
over treasuries, 25% in mortgage backed securities at a spread of 90 basis
points over treasuries, 20% in BBB rated bonds with a spread of 75 points
over treasuries and 5% in high yield bonds with a spread of 250 basis
points above treasuries.
- - For non SBAs, invest 25% in three year maturities, 50% in five year
maturities, and 25% in seven year maturities.
- - Invest the mortgage backed securities in CMOs with 15 year collateral, and
purchase last cash flow tranches. Use FHLMC 1414-J as a model. However, as
they become available, discount CMOs would be used.
- - Use investment expenses of 10 basis points.
/s/ Timothy S. Reimer
- -----------------------------------
Timothy S. Reimer
Chief Investment Officer
415 SW Eighth Avenue, P.O. Box 2039, Topeka, KS 66601-2039
Phone: (913) 232-6945
45
[AMERICAN INVESTORS LIFE INSURANCE COMPANY, INC. LOGO]
I, Larry Bruning, Chief Actuary of American Investors Life Insurance Company,
Inc., a wholly owned subsidiary of AmVestors Financial Corp., hereby affirm
that I submitted the following crediting strategy to Edward P. Mohoric in
connection with his cash flow testing of Financial Benefit Life Insurance
Company. This crediting strategy represents American Investors' anticipated
strategy to manage this block of business.
- - Crediting strategy - manage the block of business at a 350 basis point
spread through the surrender charge period and 200 basis points thereafter to
the company's net earnings rate. The exception is that if interest rates
stay at current (November 30, 1995) levels, we would not drop the credited
rate below 5%. We did not put this floor in our models.
/s/ Larry J. Bruning
- ------------------------------
Larry Bruning
Chief Actuary
415 SW Eighth Avenue, P.O. Box 2039, Topeka, KS 66601-2039
Phone: (913) 232-6945