SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Three Months Ended March 31, 1994
Commission File Number 0-15330
AMVESTORS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Kansas 48-1021516
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
415 Southwest 8th Avenue, Topeka, Kansas 66603
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (913) 232-6945
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the close of the period covered by this
report.
Class Outstanding March 31, 1994
Common Stock, no par value 10,142,842 shares
<PAGE>
AMVESTORS FINANCIAL CORPORATION
INDEX
PART I. Financial Information: Page Number
Consolidated Balance Sheets
March 31, 1994 and December 31, 1993 2-3
Consolidated Statements of Earnings
Three months ended March 31, 1994 and 1993 4
Consolidated Statements of Stockholders' Equity
Twelve months ended December 31, 1993 and
Three months ended March 31, 1994 5
Consolidated Statements of Cash Flows
Three months ended March 31, 1994 and 1993 6
Notes to Consolidated Financial Statements 7-21
Management's Discussion and Analysis of Financial
Condition and Results of Operations 22-27
PART II. Other Information 28-29
<PAGE>
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1994 and December 31, 1993
(000's Omitted)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS 1994 1993
Investments:
Debt securities:
Bonds:
Held-to-maturity (market $1,075,645
and $1,104,914) $ 1,096,410 1,066,583
Available-for-sale (cost $658,861 and
market $705,738) 679,754 662,696
Preferred stock with mandatory
redemption requirements, available-
for-sale (cost $184 and market $177) 175 184
1,776,339 1,729,463
Equity securities, available-for-sale:
Common stock (cost $2,423 and $2,968) 2,188 3,036
Preferred stock (cost $44 and $662) 39 876
2,227 3,912
Other long-term investments 50,251 39,880
Short-term investments 2,114 1,911
1,830,931 1,775,166
Less allowance for credit losses (2,500) (2,500)
Total investments 1,828,431 1,772,666
Cash and cash equivalents 16,275 21,782
Accounts receivable (net of allowance for
uncollectible accounts of $354 and $348) 114 819
Amounts receivable under reinsurance
agreements 150,975 151,392
Amounts receivable on securities
settlements in process 5,869 1,203
Accrued investment income 26,326 26,544
Deferred policy acquisition costs 126,542 128,671
Deferred income taxes 3,764 8,622
Other assets 3,257 2,997
Total assets $ 2,161,553 2,114,696
</TABLE>
See notes to consolidated financial statements.
<PAGE>
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1994 and December 31, 1993
(000's Omitted, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
LIABILITIES AND STOCKHOLDERSO EQUITY 1994 1993
Liabilities:
Policy liabilities:
Future policy benefits $ 2,039,135 2,005,339
Other policy liabilities 5,294 4,948
2,044,429 2,010,287
Accrued expenses and other liabilities 4,837 4,064
Total liabilities 2,049,266 2,014,351
Commitments and contingencies - -
Stockholders' equity:
Common stock, no par value, authorized
25,000,000 shares; issued - 10,142,842
shares in 1994 and 1993 12,907 12,907
Paid in capital 64,612 64,612
Unrealized investment gains (net of
deferred policy acquisition cost
effects of $6,131 and $-0- and deferred
income tax expense of $5,079 and $548) 9,434 1,064
Retained earnings 28,755 25,183
115,708 103,766
Less leveraged employee stock ownership
trust (LESOP) (3,421) (3,421)
Total stockholders' equity 112,287 100,345
Total liabilities and stockholders'
equity $ 2,161,553 2,114,696
</TABLE>
See notes to consolidated financial statements.
<PAGE>
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three months ended March 31, 1994 and 1993
(000Os Omitted, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
1994 1993
Revenue:
Insurance premiums and policy charges $ 1,292 1,622
Net investment income 34,889 35,097
Net investment gains 1,178 9,137
Other revenue 132 71
Total revenue 37,491 45,927
Benefits and expenses:
Benefits, claims and interest credited
to policyholders 27,003 29,666
Amortization of deferred policy
acquisition costs 2,424 5,651
General insurance expenses 2,207 2,247
Premium and other taxes, licenses
and fees 375 220
Other expenses 70 79
Total benefits and expenses 32,079 37,863
Operating earnings 5,412 8,064
Interest expense - 221
Earnings before income tax expense 5,412 7,843
Income tax expense 1,840 2,353
Net earnings $ 3,572 5,490
Earnings per share of common stock:
Primary:
Net earnings $ .34 .84
Fully diluted:
Net earnings $ .34 .78
Average share outstanding:
Primary 10,401 6,453
Fully diluted 10,401 7,020
</TABLE>
See notes to consolidated financial statements.
<PAGE>
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERSO EQUITY
(000Os Omitted, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Unrealized Retained
investment earnings
Preferred Common Paid-in gains (accum. Treasury
stock stock capital (losses) deficit stock LESOP Total
Balance as of
January 1, 1993 $ 172 8,186 45,016 (809) 7,441 (6,855) (3,688) 49,463
Net earnings - - - - 17,978 - - 17,978
Decrease in unrealized
investment losses - - - 1,873 - - - 1,873
Cash dividends to stock-
holders ($1.50 per share
on preferred stock) - - - - (236) - - (236)
Cash paid on reverse stock
split - - (25) - - - - (25)
Issuance of common stock:
upon completion of
stock offering - 4,392 25,014 - - - - 29,406
upon exercise of options - 290 1,704<F2> - - - - 1,994
upon conversion of
preferred stock (172) 729 (557) - - - - -
Cancellation of treasury
stock (690) (6,165) - - 6,855 - -
Repurchase of warrants
upon payment of debt - (375) - - - - (375)
Allocation of LESOP
shares - - - - - - 267 267
Balance as of
December 31, 1993 - 12,907 64,612 1,064<F1> 25,183 - (3,421) 100,345
Net earnings - - - - 3,572 - - 3,572
Cummulative effect of
adoption of SFAS 115 on
January 1, 1994 - - - 19,573 - - - 19,573
Decrease in unrealized
investment gains - - - (11,203) - - - (11,203)
Balance as of
March 31, 1994 $ - 12,907 64,612 9,434<F3><F4> 28,755 - (3,421) 112,287
<FN>
<F1> Net of deferred income taxes of $548.
<F2> Net of income tax benefit of $441.
<F3> Net of deferred income taxes of $5,079.
<F4> Net of amortization of deferred policy acquisition cost of $6,131.
</TABLE>
See notes to consolidated financial statements.
<PAGE>AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Increase (Decrease) in Cash and Cash Equivalents
Three months ended March 31, 1994 and 1993 (000's Omitted) (Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
1994 1993
Operating Activities:
Net earnings $ 3,572 5,490
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Interest credited to policyholders 27,683 30,206
Depreciation 92 132
Amortization of (discounts) premiums on
debt securities, net (1,290) (401)
Amortization of deferred policy
acquisition costs 2,424 5,651
Net investment (gains) losses (1,178) (9,137)
Accrued investment income 218 1,531
Deferred income taxes (221) 840
Amortization of discount on notes payable (43)
Accrued expenses and other liabilities 773 (546)
Other, net 1,405 1,528
Net cash provided by operating activities 33,478 35,251
Investing Activities:
Purchases of debt securities (76,369) (72,495)
Proceeds from sale of debt securities 16,635 162,862
Proceeds from maturation of debt securities 37,855 28,558
Purchases of long-term investments (12,842) (267)
Principal collected on mortgage loans 184 2,068
Policy loans originated (321) (492)
Principal collected on policy loans 256 477
Short-term investments, net (203) 194
Capitalization of deferred policy acquisition
costs (6,425) (3,661)
Other, net 965 (54)
Net cash provided by (used in) investing
activities (40,265) 117,190
Financing Activities:
Premiums received 69,849 46,954
Surrender and death benefits paid (65,083) (151,743)
Surrender and risk charges collected 1,334 1,123
Amount due on securities settlements
in process (4,666) (57,602)
Payments on notes payable - (3,000)
Cash dividends to stockholders - (84)
Issuance of common stock - 1,801
Other, net (154) (78)
Net cash provided by (used in)
financing activities 1,280 (162,629)
Increase (Decrease) in Cash and
Cash Equivalents (5,507) (10,188)
Cash and Cash Equivalents:
Beginning of year 21,782 93,050
End of period $ 16,275 82,862
Supplemental schedule of cash flow information:
Income tax payments $ - (1,329)
Interest payments $ - 298
Unrealized investment gains available for sale $ 20,644 -
Less: Associated amortization of deferred policy
acquisition costs 6,131 -
Deferred income tax expense 5,079 -
Net unrealized investment gains available
for sale $ 9,434 -
</TABLE>
See notes to consolidated financial statements.
<PAGE>
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 Investment Group, Inc. (AIG) and Omni-
Tech Medical, Inc. (Omni-Tech), (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 principals
as promulgated by the American Institute of Certified Public
Accountants. In the opinion of the company, the consolidated financial
statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position
as of March 31, 1994 and December 31, 1993 and the results of earnings
and the statements of cash flows for the three month periods ended
March 31, 1994 and 1993.
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 the estimated market
value, with any unrealized gains or losses recorded in stockholder's
equity.
Investments are reviewed on each balance sheet date to determine if
they are impaired. In determining whether an investment is impaired,
the company considers whether the decline in market value at the
balance sheet date is an other than temporary decline; if so, then the
investment's carrying value is reduced to a new cost basis which
represents estimated net realizable value. The decline in value is
reported as a realized loss, and a recovery from the new cost basis is
recognized as a realized gain only at sale.
The estimates of net realizable value are based on information
obtained from published financial information provided by issuers,
independent sources such as broker dealers or the company's
independent investment 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.
An allowance for credit losses has been recorded to reduce total
investments by charging investment losses. The recorded allowance
reflects management's estimate of losses existing in the investment
assets, which may occur in the future due to conditions unknown to
management at this time. Management periodically reviews the adequacy
of the allowance for credit losses. As credit losses are realized,
they are charged against the allowance.
Investments in common stock and non-redeemable preferred stock are
carried at market, with any unrealized gains or losses recorded in
stockholder's equity.
The cost of securities sold is determined on the identified
certificate basis.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (continued):
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 partner's equity.
d. Fair value of financial instruments:
Estimated fair value amounts have been determined by the company
using available market information and appropriate valuation
methodologies. Due to the fact that considerable judgment is required
to interpret market data to develop the estimates of fair value, the
estimates presented are not necessarily indicative of the amounts that
could be realized in a current market exchange.
The carrying values and estimated fair values of the company's
financial instruments as of March 31, 1994 were as follows:
<TABLE>
<CAPTION>
(000's Omitted) (000's Omitted)
<S> <C> <C>
Carrying Fair
Value Value
Assets
Debt securities $1,776,339 1,755,574
Equity securities 2,227 2,227
Other long-term investments 50,251 50,496
Short-term investments 2,114 2,114
Cash and cash equivalents 16,275 16,275
Accounts receivable and accrued
investment income 26,440 26,440
Liabilities:
Future policy benefits - investment
contracts 1,806,998 1,699,222
Other policy liabilities 5,294 5,294
Accrued expenses and other
liabilities 4,837 4,837
</TABLE>
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.
Accounts receivable and accrued investment income - The carrying
amounts reported in the balance sheet for these assets approximates
fair value.
<PAGE>
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 calculated as the account balance
less any applicable surrender charges.
Other policy liabilities - The carrying amount reported in the
balance sheet approximates the fair value of these liabilities.
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. Deferred policy acquisition costs:
The costs of acquiring new business (primarily commissions and
policy expenses), which vary with and are directly related to the
production of new business, have been deferred. The deferred costs
related to investment-type deferred annuity contracts are amortized in
relation to the incidence of expected gross profits over the expected
life of the policies, but not more than 15 years. For single premium
life insurance, deferred policy acquisition costs are amortized over
the life of the policies, but not more than 20 years for policies
issued before January l, 1987, and not more than 30 years for policies
issued after December 31, 1986, based on the expected gross profits
for the amortization periods. The deferred costs related to
traditional life contracts are amortized over the premium paying
period for the related policies using the same actuarial assumptions
as to interest, mortality and withdrawals as are used to calculate the
reserves for future benefits.
Determination of expected gross profits includes the best estimate
of certain elements over the life of the contracts, including
anticipated excess investment income, surrender charge revenues and
mortality charge revenues (single premium life insurance). Estimates
of expected gross profits used as a basis for amortization are
evaluated regularly by management, and the total amortization recorded
to date is adjusted by a charge or credit to the statement of
operations if actual experience indicates that the estimates should be
revised.
Net investment gains realized in the first quarter of 1994 and 1993
resulted in the company experiencing investment margins greater than
those estimated. As a result, $264,156 and $2,589,333 of the
unamortized balance of deferred policy acquisition costs were expensed
in the quarters ended March 31, 1994 and 1993, respectively. The
amount charged off is based on actual gross profits earned to date in
relation to total gross profits expected to be earned over the life of
the related contracts.
Estimates of the expected gross profits to be realized in future
years include the anticipated yield on investments. Deferred policy
acquisition costs will be adjusted in the future based on actual
investment income earned.
f. 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 4% to 9% depending on the year of
issue, with mortality and withdrawal assumptions based on company and
industry experience prevailing at the time of issue.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (continued):
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.
g. Participating policies:
The company issued participating policies in past years on which
dividends are paid to policyholders as determined annually by the
Board of Directors. The amount of dividends declared but undistributed
is included in other liabilities. Policy benefit reserves do not
include a provision for estimated future participating dividends.
h. Depreciation:
The home office buildings are depreciated on the straight-line basis
over estimated lives of 40 years. Other depreciation is provided on
the straight-line basis over useful lives ranging from 5 to 8 years.
i. Income taxes:
The company and its subsidiaries prepare and file their income tax
returns on a consolidated basis.
The company provides for the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that
have been reported in the financial statements on the liability
method.
j. Earnings per share:
Primary earnings per share of common stock are computed by dividing
net earnings reduced by preferred dividend requirements 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 preferred
stock outstanding during 1993.
k. Consolidated statements of cash flows:
For purposes of reporting cash flows, cash and cash equivalents
includes cash and money market accounts.
l. New accounting standards:
Effective January 1, 1994, the company adopted the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." This Statement addresses the accounting and reporting for
certain investments in debt and equity securities by requiring such
investments to be classified in held-to-maturity, available-for-sale,
or trading categories. The cummulative effect of the adoption of this
Statement was an increase in stockholder's equity of $9,433,607,
representing the aggregate excess fair value over cost for those
securities included in the available-for-sale category, net of
associated amortization of deferred policy acquisition costs and
deferred income tax expense. Net earnings for the period ended March
31, 1994 were not affected by the adoption of this Statement.
m. Reclassifications:
Certain reclassifications have been made to conform the March 31,
1993 and December 31, 1993 financial statements to the March 31, 1994
presentation.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Investments:
A summary of investment income is as follows:
<TABLE>
<CAPTION>
(000's Omitted)
For the Period
Ended March 31,
<S> <C> <C>
1993 1993
Debt securities $ 35,659 34,711
Equity securities 5 25
Other long-term investments (488) 271
Short-term investments 134 544
Other 76 29
35,386 35,580
Less investment expenses 497 483
Net investment income $ 34,889 35,097
Net investment gains:
Debt securities $ 595 9,129
Equity securities 583 8
Net investment gains $ 1,178 9,137
</TABLE>
The maturity of the company's debt and equity securities portfolio
as of March 31, 1994 was as follows:
<TABLE>
<CAPTION>
(000's Omitted)
As of March 31, 1994
Held-to-maturity Available-for-sale
Estimated Estimated
Book Market Book Market
Value Value Value Value
<S> <C> <C> <C> <C>
Debt securities:
One year or less $ 4,677 4,709 42,898 43,733
Two years through
five years 107,130 109,077 334,974 343,070
Six years through
ten years 846,665 830,366 238,421 248,166
Eleven years and
after 137,938 131,493 42,568 44,785
1,096,410 1,075,645 658,861 679,754
Preferred stock
with mandatory
redemption requirements - - 184 175
Equity securities - - 2,467 2,227
$1,096,410 1,075,645 661,512 682,156
</TABLE>
These tables include mortgage-backed securities based on the estimated
cash flows of the underlying mortgages.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Investments (continued):
The book value, estimated market value and unrealized market gains
and losses of debt and equity securities as of March 31, 1994, and
December 31, 1993 were as follows:
<TABLE>
<CAPTION>
(000's Omitted)
Estimated
Book Unrealized Unrealized Market
Value Gains Losses Value
March 31, 1994
<S> <C> <C> <C> <C>
Bonds held-to-maturity:
Corporate debt obligations
Investment grade $811,935 12,057 27,732 796,260
High-yield 84,349 669 2,776 82,242
896,284 12,726 30,508 878,502
U.S. Treasury obligations 3,629 7 149 3,487
Mortgage-backed securities 196,497 1,158 3,999 193,656
Bonds held-to-maturity 1,096,410 13,891 34,656 1,075,645
Bonds available-for-sale:
Corporate debt obligation
Investment grade 197,880 10,865 - 208,745
High-yield 5,576 47 285 5,338
203,456 10,912 285 214,083
U.S. Treasury obligations 19,749 - 1,123 18,626
Mortgage-backed securities 435,656 11,501 112 447,045
Bonds available-for-sale 658,861 22,413 1,520 679,134
Total bonds 1,755,271 36,304 36,176 1,755,399
Preferred stock with
mandatory redemption
requirements available-
for-sale 184 - 9 175
Equity securities available-
for-sale 2,467 234 474 2,227
$ 1,757,922 36,538 36,659 1,757,801
December 31, 1993
Bonds held-to-maturity:
Corporate debt obligations
Investment grade $776,905 32,703 3,480 806,128
High-yield 84,063 2,799 559 86,303
860,968 35,502 4,039 892,431
U.S. Treasury obligations 3,631 14 5 3,640
Mortgage-backed securities 201,984 6,905 46 208,843
Bonds held-to-maturity 1,066,583 42,421 4,090 1,104,914
Bonds available-for-sale:
Corporate debt obligations
Investment grade 198,636 19,943 - 218,579
High-yield - - - -
198,636 19,943 - 218,579
U.S. Treasury obligations 9,954 12 - 9,966
Mortgage-backed securities 454,106 23,087 - 477,193
Bonds available-for-sale 662,696 43,042 - 705,738
Total bonds 1,729,279 85,463 4,090 1,810,652
Preferred stock with mandatory
redemption requirements 184 - 7 177
$ 1,729,463 85,463 4,097 1,810,829
/TABLE
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Investments (continued):
The preceding table includes the book value and estimated market
value of debt securities which the company has determined to be
impaired (other than temporary decline in value) as follows:
<TABLE>
<CAPTION>
Accumulated Estimated
Original Write Book Market
Cost downs Value Value
<S> <C> <C> <C> <C>
March 31, 1994 $ 7,545 7,545 _ _
December 31, 1993 $ 7,611 7,582 29 76
</TABLE>
The company defines high-yield securities as those corporate debt
obligations rated below investment grade by Standard & Poor's and
Moody's or, if unrated, those that meet the objective criteria
developed by the company's independent investment advisory firm.
Management believes that the return on high-yield securities
adequately compensates the company for additional credit and liquidity
risks that characterize such investments. In some cases, the ultimate
collection of principal and timely receipt of interest is dependent
upon the issuer attaining improved operating results, selling assets
or obtaining financing.
The book value, estimated market value and unrealized market gains
and losses by type of mortgage-backed security as of March 31, 1994,
and December 31, 1993 were as follows:
<TABLE>
<CAPTION>
(000's Omitted)
Estimated
Book Unrealized Unrealized Market
March 31, 1994 Value Gains Losses Value
<S> <C> <C> <C> <C>
Government agency mortgage-backed securities:
Planned amortization classes $104,921 801 1,606 104,116
Targeted amortization classes and
accretion directed classes 7,666 118 - 7,784
Sequential classes 31,045 619 - 31,664
Pass-throughs 55 5 - 60
Total government agency
mortgage-backed securities 143,687 1,543 1,606 143,624
Government sponsored enterprise
mortgage-backed securities:
Planned amortization classes 339,663 7,705 1,378 345,990
Sequential classes 954 15 - 969
Pass-throughs 362 15 - 377
Total government sponsored enterprise
mortgage-backed securities 340,979 7,735 1,378 347,336
Other mortgage-backed securities:
Planned amortization classes 32,107 509 - 32,616
Sequential classes 104,855 2,741 1,127 106,469
Pass-throughs 16 1 - 17
Subordinated classes 10,509 130 - 10,639
Total other mortgage-backed securities 147,487 3,381 1,127 149,741
Total mortgage-backed securities $632,153 12,659 4,111 640,701
/TABLE
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Investments (continued):
<TABLE>
<CAPTION> (000's Omitted)
Estimated
Book Unrealized Unrealized Market
December 31, 1993 Value Gains Losses Value
<S> <C> <C> <C> <C>
Government agency mortgage-backed securities:
Planned amortization classes $104,528 5,064 - 109,592
Targeted amortization classes and
accretion directed classes 7,646 436 - 8,082
Sequential classes 37,220 1,171 - 38,391
Pass-throughs 60 6 - 66
Total government agency
mortgage-backed securities 149,454 6,677 - 156,131
Government sponsored enterprise
mortgage-backed securities:
Planned amortization classes 340,328 17,588 - 357,916
Sequential classes 5,612 58 - 5,670
Pass-throughs 428 30 - 458
Total government sponsored enterprise
mortgage-backed securities 346,368 17,676 - 364,044
Other mortgage-backed securities:
Planned amortization classes 47,887 983 31 48,839
Sequential classes 101,852 4,306 15 106,143
Pass-throughs 19 1 - 20
Subordinated classes 10,510 349 - 10,859
Total other mortgage-backed securities 160,268 5,639 46 165,861
Total mortgage-backed securities $656,090 29,992 46 686,036
</TABLE>
Certain mortgage-backed securities are subject to significant
prepayment risk. This is due to the fact that in periods of declining
interest rates, mortgages may be repaid more rapidly than scheduled,
as individuals refinance higher rate mortgages to take advantage of
the lower current rates. As a result, holders of mortgage-backed
securities may receive large prepayments on their investments which
they are unable to reinvest at an interest rate comparable to the rate
on the prepaying mortgages. Mortgage-backed pass-through securities
and sequential classes, which comprised 21.7% and 22.1% of the book
value of the company's mortgage-backed securities as of March 31, 1994
and December 31, 1993, respectively, are sensitive to this prepayment
risk.
A portion of the company's mortgage-backed securities portfolio
consists of planned amortization class ("PAC"), targeted amortization
class ("TAC") and accretion directed class ("AD") instruments. These
securities are designed to amortize in a more predictable manner by
shifting the primary risk of prepayment to investors in other tranches
(support classes) of the mortgage-backed security. PAC, TAC and
AD securities comprised 76.6% and 76.3% of the book value of the
company's mortgage-backed securities as of March 31, 1994 and December
31, 1993. The company does not invest in support class securities or
principal-only ("PO") and interest-only ("IO") strips.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Investments (continued):
As of March 31, 1994, 76.7% of the company's mortgage-backed
securities were issued by either government agencies or government
sponsored enterprises, compared to 75.6% as of December 31, 1993. The
credit risk associated with these securities is generally less than
other mortgage-backed securities. With the exception of one issue,
with a book value of $15,722 as of March 31, 1994, all of the
company's investments in other mortgage-backed securities are rated A
or better by Standard & Poor's or Moody's.
The amounts shown as (market) are primarily based on quotations
obtained from independent sources such as broker dealers who make
markets in similar securities. Unless representative trades of
securities actually occur at the balance sheet date, these quotes are
generally estimates of market value based on an evaluation of
appropriate factors such as institution-size trading in similar
securities, yield, credit quality, coupon rate, maturity, type of
issue and other market data. The estimated market value of high-yield
securities and the secondary market for high-yield securities have
been and are likely to continue to be volatile because these
securities are affected by various economic factors in addition to
interest rate levels. Losses are recognized in the period they occur
based upon specific review of the securities portfolio and other
factors.
The consideration received on sales of debt and equity securities,
book value and realized gains and losses on those sales were as
follows:
<TABLE>
<CAPTION> (000's Omitted)
For the Period Ended March 31,
1994 1993
<S> <C> <C>
Consideration received $ 56,850 232,437
Book value 55,672 223,300
Net investment gains (losses) $ 1,178 9,137
Investment gains $ 1,191 9,478
Investment losses (13) (341)
Net investment gains (losses) $ 1,178 9,137
</TABLE>
Net unrealized gains (losses) on debt securities held-to-maturity,
debt securities available-for-sale, equity securities available-for-
sale and other long-term investments changed
as follows:
<TABLE>
<CAPTION> (000's) Omitted
Net Unrealized Gains (Losses)
Debt Debt Equity
Securities Securities Securities Other
Held-to- Available- Available- Long Term
Maturity for-Sale for-Sale Investments
<S> <C> <C> <C> <C>
Balance as of January 1, 1992 37,420 4,115 (809) -
1993 Net Change 911 38,927 995 878
Balance as of December 31, 1993 38,331 43,042 186 878
1994 Net Change (59,096) (33,764) (30) (878)
Balance as of March 31, 1994 $(20,765) 9,278 156 -
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Investments (continued):
At March 31, 1994 and December 31, 1993, investments with statutory
carrying values of $1,748,114,918 and $1,736,404,701, respectively,
were on deposit with insurance departments to meet regulatory
requirements.
3. Related Party Transactions:
On January 22, 1991, the company made a $504,000, 30 year, first
mortgage loan on the personal residence of a Director. At the time the
loan was made, it represented a loan to value of 80%. This loan
originally provided for interest at the rate equal to the cost of
funds of the Eleventh District of the Federal Reserve, plus two
percent and had a final payment due February 1, 2021. On December 10,
1992 the terms of the loan were renegotiated to provide for interest
to be fixed at a rate of 7.5% and a final payment due January 10,
2008. The outstanding principal balance on this loan was $28,474 and
$205,059 as of March 31, 1994 and December 31, 1993, respectively.
4. Other Assets:
Other assets consist of the following:
<TABLE>
<CAPTION> (000's Omitted)
March 31, December 31,
1994 1993
<S> <C> <C>
Property and equipment at cost:
Home office building
(including land of $352) $ 2,113 2,113
Furniture and equipment 3,374 3,328
Automobiles 227 192
5,714 5,633
Less accumulated depreciation 3,267 3,174
2,447 2,459
Other 810 538
$ 3,257 2,997
</TABLE>
5. Reinsurance:
The company reinsures portions of insurance it writes. The maximum
amount of risk retained by the company on any one life is $60,000.
A summary of reinsurance data follows (000's Omitted):
<TABLE>
<CAPTION>
For the Ceded to Assumed
Period Gross other from other Net
Ended Descriptions amount companies companies amount
<S> <S> <C> <C> <C> <C>
March 31, Life insurance in force $ 347,597 274,915 - 72,682
1994 Insurance premiums and
policy charges 1,546 254 - 1,292
March 31, Life insurance in force 376,429 300,324 - 76,105
1993 Insurance premiums and
policy charges 1,899 277 - 1,622
March 31, Future policy benefits 2,039,135 150,034 - 1,889,121
1994
December Future policy benefits 2,005,339 150,500 - 1,854,839
31, 1993
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Reinsurance (continued):
The company had amounts receivable under reinsurance agreements of
$150,974,637 and $151,392,088 as of March 31, 1994, and December 31,
1993, respectively. Of the amounts, $149,105,662 and $149,468,739 were
associated with a single reinsurer. In 1989, the company entered into
a coinsurance agreement which ceded 90% of the risk on the company's
block of single premium whole life policies written prior to 1989 to
Employers Reassurance Corporation (ERC). The agreement provides that
ERC assumes 90% of all risks associated with each policy in the block.
The following table identifies the components of the amounts
receivable from ERC:
<TABLE>
<CAPTION> (000's Omitted)
March 31, December 31,
1994 1993
<S> <C> <C>
Reserve for future policy benefits $ 148,253 148,712
Reimbursement for benefit payments and
administrative allowance 853 757
$149,106 149,469
</TABLE>
6. Retirement Plans:
The company sponsors an Employee Stock Ownership Plan (ESOP) for all
full-time employees with one year of service. Qualifying participants
may contribute an amount not to exceed ten percent of covered
compensation. The company made no contributions to this plan during
either the three months ended March 31, 1994 or 1993.
The company sponsors a Leveraged Employee Stock Ownership Plan
(LESOP) for all full-time employees with one year of service.
The LESOP has acquired shares of the company aggregating 370,244
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 unpaid principal balance of $3,639,922
as of March 31, 1994.
Each year, the company will make contributions to the LESOP which
are to be used to make loan interest and principal payments. On
December 31 of each year, a portion of the common stock will be
allocated to participating employees. Of the 368,178 shares of the
companyOs common stock now owned by the LESOP, 75,357 shares have been
allocated to the participating employees with the remaining 292,821
shares being held by American as collateral for the loan.
The unallocated portion of the company's common stock owned by the
LESOP has been recorded as a separate reduction of stockholders'
equity. Accrued contributions to the LESOP were $71,391, and $140,264,
for the three months ended March 31, 1994, and 1993, 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 have reached 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.
As of March 31, 1994, five of the company's directors qualified for
benefits under the plan. A liability in the amount of $562,492,
representing the present value of future benefits, has been
established. Charges to earnings relating to the plans were $1,068,
and $7,919, for the three months ended March 31, 1994 and 1993,
respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Retirement Plans (continued):
Effective January 1, 1993, the company adopted an Age-Weighted Money
Purchase Plan for all full-time employees with one year of service.
The full cost of this plan will be paid by the company with qualifying
participants receiving contributions based upon their age at plan
implementation and current salary. Contributions to the Age-Weighted
Money Purchase Plan for the three months ended March 31, 1994 and 1993
were $44,400 and -0- respectively.
7. Stockholders' Equity:
Dividends by American to AmVestors are limited by laws applicable to
insurance companies. Under Kansas law, American may pay a dividend
from its surplus profits, without prior consent of the Kansas
Commissioner of Insurance, if the dividend does not exceed the greater
of 10% of statutory capital and surplus at the end of the preceding
year or all of the statutory net gain from operations of the preceding
year. As of December 31, 1993, surplus profits of American were
$12,621,521 and 10% of statutory capital and surplus was $8,714,605.
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 $100,000 each. As of March 31, 1994 and
December 31, 1993 American's statutory capital and surplus was
$89,422,233 and $87,146,052 respectively. Statutory net income (loss)
for the year 1993 was ($1,469,786).
On March 17, 1989, the Board of Directors of the company adopted the
1989 Nonqualified Stock Option Plan (the "1989 Nonqualified Plan") and
simultaneously approved the termination of the 1986 Incentive Stock
Option Plan and the 1986 Nonqualified Stock Option Plan. All of the
options outstanding under those Plans were cancelled and replaced with
options under the 1989 Nonqualified Plan. The options granted under
the 1989 Nonqualified Plan will cover the same number of shares and
have the same exercise price as the cancelled options, and none of
such options may be exercised beyond ten years from the original date
of grant of the cancelled option. A total of 797,237 options to
acquire common stock are outstanding under the 1989 Nonqualified Plan.
The 1989 Nonqualified Plan is administered by the Board of Directors
and officers of the company and its subsidiaries. The terms of the
options, including the number of shares, and the exercise price are
subject to the sole discretion of the Board of Directors.
Changes during the periods were as follows:
<TABLE>
<CAPTION> For the Period Ended
March 31, December 31,
1994 1993
<S> <C> <C>
Options outstanding, beginning of period 816,107 757,340
Options granted - 413,000
Options exercised - (227,561)
Options expired (18,870) (126,659)
Options cancelled - (13)
Options outstanding, end of period 797,237 816,107
Outstanding options exercisable at end of period 384,237 403,107
Shares reserved for future grants at end of period 217,047 145,677
Option prices per share:
Exercised, during the period - $4.84-$9.60
Outstanding, end of period $4.84-$13.75 $4.84-$13.75
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Stockholders' Equity (continued):
On March 17, 1989, the Board of Directors also adopted the 1989
Stock Appreciation Rights Plan (the SAR Plan) and the 1989 Restricted
Stock Plan (the Restricted Stock Plan). The SAR Plan authorized the
Board of Directors to grant stock appreciation rights to employees,
officers and directors in such amounts and with such exercise prices
as it shall determine. No stock appreciation rights granted under the
SAR Plan may be exercised more than five years from its date of grant.
The SAR Plan authorized a maximum of 125,000 shares to be issued
pursuant to stock appreciation rights granted thereunder. During 1991,
stock appreciation rights under the SAR Plan were granted as follows:
30,000 rights with a base price of $6.875, the closing stock price on
December 31, 1991, exercisable on December 31, 1992; 30,000 rights
with a base of $10.9375, the closing stock price on December 31, 1992,
exercisable on December 31, 1993; and 30,000 rights with a base price
of $11.00, the closing stock price on December 31, 1993, exercisable
on December 31, 1994.
<TABLE>
<CAPTION> For the Period Ended
March 31, December 31,
1994 1993
<S> <C> <C>
Rights outstanding, beginning of period 30,000 60,000
Rights granted - -
Rights exercised - (30,000)
Rights expired - -
Rights cancelled - -
Rights outstanding, end of period 30,000 30,000
Reserved for future grants 5,000 5,000
</TABLE>
The company recorded no compensation expense relating to stock
appreciation rights for the three months ended March 31, 1994 and
1993.
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 its bank borrowing, the company issued ten-year
warrants to purchase a total of 170,002 shares of its common stock as
summarized in the following table:
<TABLE>
<CAPTION>
Warrant Issue Number Exercise Expiration
Holder Date of Shares Price Date
<S> <C> <C> <C> <C>
Morgan Guaranty 12/8/88 75,000 $ 3.9688 12/9/98
4/30/92 95,002 6.3855 5/1/02
170,002
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Stockholders' Rights Plan:
At a meeting of the company's Board of Directors held August 4,
1988, a resolution was passed adopting a Stockholders' Rights Plan.
The Rights Plan provides that one junior preferred stock purchase
right will be distributed as a dividend on each outstanding share of
common stock of the company held on and after August 5, 1988.
Each right entitles holders of the company's common stock to
purchase one one-hundredth share of a new series of junior
participating preferred stock of the company at an exercise price of
$9.216. Each such fractional share of preferred stock is equivalent in
voting power to one share of the company's common stock and would be
paid dividends equal to the dividend paid on each share of common
stock. The rights will be exercisable only if a person or group
acquires beneficial ownership of 20% or more of the company's common
shares, or announces a tender or exchange offer upon consummation of
which, such person or group would beneficially own 20% or more of the
common shares, or if a person or group acquired beneficial ownership
of 10% or more of the common shares and such person or group is judged
to be an "Adverse Person" by the company.
If any person or group becomes the beneficial owner of 20% or more
of the company's common shares, effects certain business combinations,
or engages in certain "self-dealing" transactions, each right, not
owned by the person or group, entitles its holder to purchase the
previously described fractional shares of the company's junior
participating preferred stock, at the right's then-current exercise
price (or in certain circumstances as determined by the company, a
combination of cash, property, common shares or other securities),
having a value of twice the right's exercise price of $9.216. For
purposes of determining the value of the junior preferred stock, each
one one-hundredth of a share shall be considered to be equivalent in
value to one share of the company's common stock. In addition, if the
company is involved in a merger or business combination transaction
with another person in which the company is not the surviving company,
each right that has not previously been exercised will entitle its
holder to purchase, at the right's then-current exercise price, common
shares of such other person having a value of twice the right's
exercise price.
The company generally will be entitled to redeem the rights at 1
cent per right at any time until the 20th business day following the
announcement that a 20% ownership position has been acquired.
10. Other Revenue:
Effective December 1, 1989, the company entered into a coinsurance
agreement with Employers Reassurance Corporation (ERC) which reinsured
90% of the risk on the company's block of SPWL policies written prior
to 1989. The agreement provides that ERC assumes 90% of all risks
associated with each policy in the block. These policies continue to
be administered by American. In return, American receives an
administrative allowance of $31.50 per policy per year. The total
allowance received during the three months ended March 31, 1994 and
1993 was $33,170 and $34,842, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Income Taxes:
The provision for income taxes charged to operations was as follows:
<TABLE>
<CAPTION> (000's Omitted)
For the Period
Ended March 31,
1994 1993
<S> <C> <C>
Current income tax expense $ 2,061 1,513
Deferred income tax expense (benefit) (221) 840
Total income tax expense $ 1,840 2,353
</TABLE>
12. Contingencies:
The company's insurance subsidiary is subject to state guaranty
association assessments in all states in which it is admitted.
Generally these associations guarantee specified amounts payable to
residents of the state under policies issued by insolvent insurers.
Most state laws permit assessments or some portion thereof to be
credited against future premium taxes. Guaranty fund assessments
reduced 1993 and 1992 income before taxes by approximately $1,594,000,
and $1,834,000, respectively. The company expects that further charges
to income may be required in the future and will record such amounts
when they become known.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
The company specializes in the sale of SPDA products as a retirement
savings vehicle for individuals. During each of the past three years,
sales of SPDAs have accounted for at least 92% of the company's
premiums received, while sales of SPIAs and FPDAs have accounted for
virtually all remaining premiums received.
The company's operating earnings are derived primarily from its
investment results, including realized gains (losses), less interest
credited to annuity contracts and expenses. Under GAAP, premiums
received on SPDAs, SPIAs without life contingencies and FPDAs 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
SPDAs, SPIAs without life contingencies and FPDAs 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 and policy charges are
realized as revenue, and DAC is amortized as an expense. The timing of
DAC amortization is based on the projected realization of profits
including realized gains (losses) for each type of annuity contract
and is periodically adjusted for actual experience. If a policy is
terminated prior to its expected maturity, any remaining related DAC
is expensed in the current period. Most of American's annuity policies
in force have surrender charges which are designed to discourage and
mitigate the effect of premature withdrawals. As a result, the impact
on earnings from surrenders will depend upon the extent to which
available surrender charges offset the associated amortization of DAC.
For the years ended 1993, 1992 and 1991, the company's weighted
average expected surrender levels were 13.0%, 9.9% and 5.7%, compared
to the weighted average actual surrenders of 14.7%, 9.6% and 10.2%.
The negative impact on earnings of any difference between the actual
surrender levels and expected surrender levels has been more than
offset by the realization of gains on the sale of securities and the
change in future expected gross profits as the result of the company's
reduction in credited rates.
Recent periods of low interest rates have reduced the company's
investment yields. As a result of the lower investment yields, the
company elected to reduce credited interest rates on certain of its
annuity products. Certain annuities issued by the company include a
"bailout" feature. This feature generally allows policyowners to
withdraw their entire account balance without surrender charge for a
period of 45 to 60 days following the initial determination of a
renewal crediting rate below a predetermined level. If a policyowner
elects not to withdraw funds during this period, surrender charges are
reinstated. On policies including a "bailout" feature, the company
announces its renewal crediting rates on January 14 of each year. In
January 1994, 1993 and 1992, the company deemed it advisable, due to
the general decline in interest rates and the yield on its investment
portfolio, to reduce credited interest rates on certain annuity
contracts below the "bailout" level. The aggregate account values of
annuity contracts on which the crediting rate was reduced below the
"bailout" level totalled $109.8 million, $326.2 million, and $160.4
million during 1994, 1993 and 1992, respectively. As a result, $9.8
million, or 9%, $139.6 million, or 43%, and $34.6 million, or 22%, of
such policies were surrendered during 1994, 1993, and 1992,
respectively. The company was able to offset the negative impact of
"bailout" surrenders on its earnings through the realization of gains
on the sale of its securities. Excluding surrenders from "bailout"
products, American's annuity withdrawal rates were 7% in both 1993 and
1992. Although, as of March 31, 1994, approximately $162.8 million, or
9% of annuity account values contained a "bailout" provision, the
current credited rates on these policies are above the "bailout" rate.
The "bailout" rate on $82.0 million of this amount is 5% or less. If
the company reduces credited rate below the "bailout"
<PAGE>
rates on policies containing "bailout" provisions in the future, it
intends to pay any resulting surrenders from cash provided by
operations and premiums received. In the event such sources are not
sufficient to pay surrenders, the company would have to sell
securities at the then current market prices. American expects that
withdrawals on its annuity contracts will increase as such contracts
approach maturity. There is no certainty as to the company's ability
to realize investment gains in the future to offset the adverse impact
on earnings, should future "bailout" surrenders were to occur.
Premiums received by the company on the sale of its annuity products
have declined and surrenders have increased in recent years. In the
years ended December 31, 1993, 1992 and 1991, premiums received
amounted to $222.2 million, $168.7 million and $219.2 million,
respectively. Management believes the decline in premiums received
during 1992 was due primarily to the rating downgrade of American by
A.M. Best in July 1991, from "A" (Excellent) to "A-" (Excellent) and,
to a lesser extent, to reductions in credited rates, agent and
policyholder concerns about the company's non-investment grade bond
holdings and the highly publicized insolvencies of other life
insurance companies. Management also believes that a general decline
in interest rates and a corresponding reduction in credited rates
offered on annuity products may have reduced the relative
attractiveness of annuities as compared with alternative investment
vehicles. Management believes that A.M. Best ratings may have affected
the credited rates and commissions the company has had to credit or
pay to retain or attract business relative to the credited rates and
commissions credited or paid by carriers enjoying A+ (Superior) and
A++(Superior) ratings. The company has not materially altered the
levels of commissions paid or interest rates credited in response to
its A.M. Best ratings downgrade from A (Excellent) to A- (Excellent).
In response to these events, the company continued to reduce its
holdings of non-investment grade securities to less than 5% as of
March 31, 1994. In addition, the company has expanded its internal
investment management capabilities through the addition of new
personnel. The company reduced its outstanding indebtedness from $31.2
million at the end of 1988 to $0 million as of December 31, 1993.
Recently, the company has augmented its capabilities for agent
recruitment through American Sales and the establishment of
relationships with additional National Marketing Organizations. As a
result of these actions, management believes that the company is now
better positioned to take advantage of any opportunities for the sale
of its products in the savings and retirement
market.
<PAGE>
Margin Analysis
The company's earnings are impacted by realized investment gains and
losses and by the associated amortization of DAC. The actual timing
and pattern of such amortization is determined by the actual
profitability to date (which includes realized investment gains and
losses) and the expected future profitability on a particular annuity
contract. To the extent investment income is accelerated through
realization of investment gains, the corresponding amortization of DAC
is also accelerated as the stream of profitability on the underlying
annuities is effectively accelerated. When investment losses are
realized, the reverse is true. The following margin analysis depicts
the effects of realized gains (losses) on the company's operating
earnings (loss):
<TABLE>
<CAPTION> For the Period Ended March 31,
1994 1993
(dollars in millions)
(percent of average
invested assets annualized)
<S> <C> <C> <C> <C>
Average invested assets <F1> $ 1,823.1 100.0% $ 1,714.3 100.0%
Insurance premiums and policy charges $ 1.3 .3% $ 1.6 .4%
Net investment income <F2> 34.9 7.7 35.1 8.2
Policyholder benefits (27.0) (5.9) (29.7) (6.9)
Gross interest margin 9.2 2.0 7.0 1.6
Associated amortization of deferred
acquisition costs (2.2) (.5) (3.0) (.7)
Net interest margin 7.0 1.5 4.0 .9
Net investment gains 1.2 .3 9.1 2.1
Associated amortization of deferred
acquisition costs (.3) (.1) (2.6) (.6)
Net margin from investment gains .9 .2 6.5 1.5
Total net margin 7.9 1.7 10.5 2.4
Expenses, net (2.5) (.5) (2.5) (.6)
Operating earnings 5.4 1.2 8.0 1.8
Interest expense - - .2 -
Earnings before income taxes 5.4 1.2 7.8 1.8
Income tax expense (benefit) 1.8 .4 2.4 .6
Net earnings $ 3.6 .8% $ 5.4 1.2%
Operating earnings $ 5.4 1.2% $ 8.0 1.9%
Less: Net margin from investment gains .9 .2 6.5 1.5
Operating earnings excluding net
investment gains and associated
amortization of deferred policy
acquisition costs $ 4.5 1.0% $ 1.5 .4%
<FN>
<F1> Average of cash, invested assets and net amounts due to or from
brokers on unsettled security trades at the beginning (1) and end of period.
<F2> Net investment income is presented net of investment expense.
Note: Numbers may not add due to rounding.
</TABLE>
<PAGE>
Results of Operations
Three Months Ended March 31, 1994 and 1993
Insurance premiums and policy charges decreased $.3 million, or 19%,
to $1.3 million in 1994 from $1.6 million in 1993, due primarily to a
$.3 million decrease in premiums received on SPIA contracts.
Net investment income decreased $.2 million, or 1% to $34.9 million
from $35.1 million in 1993. This decrease resulted from the reduction
in the average yield on invested assets from 8.2% for the three months
ended March 31, 1993, to 7.7% for the three months ended March 31,
1994, offset in part by an increase in average invested assets from
$1,714.3 million in 1993 to $1,823.1 million for 1994. The decline in
yield experienced during the 1994 quarter results primarily from a
$27.8 million investment in seven investment partnerships. Five of the
partnerships lost a total of $.9 million during the quarter ended
March 31, 1994. These partnerships form a fund of funds which is
structured in an attempt to consistently provide returns in excess of
the Standard and Poors 500 over time without regard to the general
direction of financial markets. The funds' annualized return since
inception in July 1993 was 3.0%, compared with a cash flow equivalent
loss of 5.5% had the same amounts been invested at the same time in
the Standard and Poors 500.
In addition to the losses experienced in the company's partnership
investments, average yields have been impacted by declining interest
rates throughout 1993 and the reinvestment at lower yields of proceeds
from securities disposed of to realize investment gains.
Net investment gains decreased $7.9 million, to $1.2 million in
1994, from $9.1 million in 1993. Gains and losses may be realized upon
securities which are disposed of for various reasons. The gains
realized during 1993 were to reduce the effects of the statutory
losses resulting from surrenders in the first quarter of 1993
following the reduction of crediting rates on certain annuity policies
below the "bailout" rate. Unrealized gains in the company's bond
portfolio were $.1 million, $81.4 million and $77.7 million as of
March 31, 1994, December 31, 1993 and March 31, 1993, respectively.
Benefits, claims and interest credited to policyholders decreased
$2.7 million, or 9%, to $27.0 million in 1994 from $29.7 million in
1993. This decrease results primarily from a reduction in the average
interest rate credited on the companyOs annuity liabilities, from 6.4%
as of March 31, 1993 to 5.8% as of March 31, 1994. This decrease was
partially offset by an increase in annuity liabilities to $1,861.6
million on March 31, 1994 from $1,731.3 million on March 31, 1993.
Amortization of deferred policy acquisition costs decreased $3.3
million, or 58%, to $2.4 million in 1994 from $5.7 million in 1993,
primarily due to decreased net investment gains and an increase in the
estimates of future expected gross profits resulting from the lowering
of interest crediting rates. Amortization of deferred policy
acquisition costs (DAC) associated with investment gains decreased
$2.3 million to $.3 million in 1994, from $2.6 million in 1993.
Amortization of DAC associated with gross interest margins decreased
$.9 million to $2.2 million in 1994, from $3.1 million in 1993.
Acquisition costs incurred during 1994 and deferred into future policy
periods were $6.4 million, compared with $3.7 million in 1993.
Interest expense decreased $.2 million, to $-0- million in 1994 from
$.2 million in 1993. The company's bank debt was paid on November 19,
1993, with proceeds from a common stock offering.
Income tax expense decreased $.6 million to $1.8 million in 1994
from $2.4 million in 1993. Taxes were provided at an effective rate of
34.0% on 1994 income and 30.0% on 1993 income.
<PAGE>
Liquidity and Capital Resources
The company is an insurance holding company whose principal asset is
the common stock of American. The company's primary cash requirements
are to pay operating expenses.
As a holding company, the company relies on funds received from
American to meet its cash requirements at the holding company level.
The company receives funds from American in the form of commissions
paid to American Sales, investment fees paid to AIG, rent,
administrative, printing and data processing charges and dividends.
The insurance laws of Kansas generally limit the ability of American
to pay cash dividends in excess of certain amounts without prior
regulatory approval and also require that certain agreements relating
to the payment of fees and charges to the company by American be
approved by the Kansas Insurance Commissioner.
The liquidity and requirements of American are met by premiums
received from annuity sales, net investment income received, and
proceeds from investments upon maturity, sale or redemption. The
primary uses of funds by American are the payment of surrenders,
policy benefits, operating expenses and commissions, as well as the
purchase of assets for investment.
For purposes of the company's consolidated statements of cash flows,
financing activities include premiums received from sales of SPDAs,
surrenders and death benefits paid, and surrender and policy charges
collected on these contracts. The net cash provided by (used in) these
particular financing activities for the three months ended March 31,
1994 and 1993, was $6.1 million and ($103.7) million, respectively.
The increase in net cash provided by annuity contracts without life
contingencies in the first three months of 1993 resulted primarily
from a $86.7 million decrease in surrender and death benefits paid
from $151.7 million to $65.1 million and by a $22.8 million increase
in premiums received from $47.0 million to $69.8 million.
Net cash provided by the company's operating activities was $33.5
million and $35.3 million in 1994 and 1993, respectively.
Cash provided by financing and operating activities and by the sale
and maturity of portfolio investments is used primarily to purchase
portfolio investments and for the payment of acquisition costs
(commissions and expenses associated with the sale and issue of
policies). To meet its anticipated liquidity requirements, the company
purchases investments taking into account the anticipated future cash
flow requirements of its underlying liabilities. In addition, the
company invests a portion of its assets in short-term investments and
maturities of less than one year (2% and 3% as of March 31, 1994 and
December 31, 1993, respectively). The weighted average duration of the
company's investment portfolio was 4.4 years as of March 31, 1994.
The company continually assesses its capital requirements in light
of business developments and various capital and surplus adequacy
ratios which affect insurance companies. During the past five years,
the company has met its capital needs and those of American through
several different sources including bank borrowing and the sale of
both preferred and common stock. On December 31, 1991, the company
issued 172,000 shares of its $2.00 Series B Convertible Preferred
Stock with a total stated value of $4.3 million. The Preferred Stock
was convertible at $7.50 per share into 573,332 shares of the
companyOs Common Stock. On December 30, 1992, the company issued and
sold 235,294 shares of Common Stock at $10.625 per share to the
company's Leveraged Employee Stock Ownership Plan ("LESOP"). This
purchase was financed with the proceeds of a $2.5 million loan from
American. For additional information regarding the LESOP, see Note 6
of Notes to Consolidated Financial Statements. In 1993, the company
raised $29.4 million through the sale of 3,451,668 shares of Common
Stock.
<PAGE>
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. The company had amounts receivable under reinsurance
agreements of $151.0 million and $151.4 million as of March 31, 1994
and December 31, 1993, respectively. Of the amounts, $149.1 million
and $149.5 million, respectively, were associated with a single
insurer, ERC. In 1989, the company entered into a coinsurance
agreement which ceded 90% of the risk on the company's block of SPWL
written prior to 1989 to ERC. The agreement provides that ERC assumes
90% of all risks associated with each policy in the block. Under the
terms of the contract the company continues to administer the policies
and is reimbursed for all payments made under the terms of those
policies. Additionally, the company receives a fee from the reinsurer
for administering such policies. Cash settlements under the contract
are made with ERC on a monthly basis. If ERC were to become insolvent,
American would remain responsible for the payment of all policy
liabilities.
In addition, the company is a party to two assumption reinsurance
agreements with other reinsurers.
Effect of Inflation and Changes in Interest Rates. The company does
not believe that inflation has had a material effect on its
consolidated results of operations during the past three years. The
company seeks to manage its investment portfolio in part to reduce its
exposure to interest rate fluctuations. In general, the market value
of the company's fixed income securities increases or decreases
directly with interest rate changes. For example, if interest rates
decline (as was the case in 1992 and 1993), the company's fixed income
investments generally will increase in market value, while net
investment income will decrease.
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.
<PAGE>
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
For a description of the Stockholders Rights Plan, see Note 8 of
Notes to consolidated Financial Statements which is incorporated
herein by reference.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits (numbered in accordance with Item 601 of Regulations S-K.
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Number
<C> <C> <C>
(2)(a) Plan and Agreement of Union dated Exhibit (2) to Registration
July 10, 1986, between AmVestors Form S-2, File #2-82811
Financial Corporation and American dated November 26 1986.
Investors Life Insurance Company,
Inc.
(2)(b) Resolutions of the Board of Exhibit (2)(a) to Form 10-Q
Directors dated January 7, 1988, dated May 11, 1988.
providing for succession to the
(4)(a) Rights Agreement dated as of Exhibit (1) to Form 8-K
August 4, 1988, between AmVestors dated August 10, 1988.
Financial Corporation and The
Merchants Bank, which includes the
form of Certificate of Designation
setting forth the terms of the
series A Junior Participating
Preferred Stock, $1.00 par value per
share, as Exhibit A, the form of
Right Certificate as Exhibit B and
the Summary of Rights to Purchase
Preferred Stock as Exhibit C
(4)(b) Specimen Common Stock Certificate Exhibit (4)(d) to Form 10-Q
dated August 13, 1993.
(11) Calculation of Earnings (Loss) per P 31
Share
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
Exhibit Page Number or Incorporation
Number Description by Reference
<C> <C> <C>
(20)(a) Reports on From 8-K
there were no reports on Form 8-K for
the three months ended March 31, 1994
(22) Wholly-owned subsidiaries of the registrant:
American Investors Life Insurance
Company, Inc.
415 Southwest Eighth Avenue
Topeka, Kansas 66603
American Investors Sales Group, Inc.
(formerly Gateway Corporation)
415 Southwest Eighth Avenue
Topeka, Kansas 66603
AmVestors Investment Group, Inc.
(formerly American Investors Sales
Group, Inc.)
415 Southwest Eighth Avenue
Topeka, Kansas 66603
Omni-Tech Medical, Inc.
6206 Southwest Ninth Terrace
Topeka, Kansas 66615
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AMVESTORS FINANCIAL CORPORATION
By: /c/Ralph W. Laster, Jr.
Ralph W. Laster, Jr.
Chairman of the Board
Chief Executive Officer
(Principal Executive Officer)
and Chief Financial Officer
(Principal Accounting Officer)
Date: May 13, 1994
<PAGE>
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES EXHIBIT 11
CALCULATION OF EARNINGS (LOSS) PER SHARE
(000's Omitted, except per share data)
</TABLE>
<TABLE>
<CAPTION> For the Quarter Ended March 31
1994 1993
<S> <C> <C>
CALCULATION OR PRIMARY EARNINGS
PER SHARE
Net earnings $ 3,572 5,490
Less dividends paid on preferred stock - (84)
Earnings for primary earnings per share 3,572 5,406
Average number of shares outstanding 10,143 6,075
Dilutive effect of stock options and warrants
after application of treasury stock method 258 378
Average number of common shares and
common equivalents outstanding 10,401 6,453
Primary earnings per share $ .34 .84
CALCULATION OF FULLY DILUTED EARNINGS
PER SHARE
Earnings for fully diluted earnings per share $ 3,572 5,490
Shares used in calculating primary
earnings per share 10,401 6,453
Shares resulting from assumed conversion
of preferred stock - 561
Additional dilutive effect of stock options
and warrants after application of treasury
stock method - 6
Average number of common shares outstanding
on a fully diluted basis 10,401 7,020
Fully diluted earnings per share $ .34 .78
</TABLE>
