-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, NyOHOFZTSmu1dlZArbKZz63ewUDPqx5qeHrvcTTbQTJqwU6K9tRjfb8Ylu4sQJuC uTWL4aXaQR6EfCcv0cdzMA== 0000005320-94-000012.txt : 19940520 0000005320-94-000012.hdr.sgml : 19940520 ACCESSION NUMBER: 0000005320-94-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940331 FILED AS OF DATE: 19940516 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMVESTORS FINANCIAL CORP CENTRAL INDEX KEY: 0000005320 STANDARD INDUSTRIAL CLASSIFICATION: 6311 IRS NUMBER: 481021516 STATE OF INCORPORATION: KS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15330 FILM NUMBER: 94528814 BUSINESS ADDRESS: STREET 1: 415 SOUTHWEST 8TH AVE STREET 2: P O BOX 2039 CITY: TOPEKA STATE: KS ZIP: 66601 BUSINESS PHONE: 9132326945 MAIL ADDRESS: STREET 1: 415 SOUTHWEST 8TH AVE STREET 2: P O BOX 2039 CITY: TOPEKA STATE: KS ZIP: 66601 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN INVESTORS LIFE INSURANCE CO INC DATE OF NAME CHANGE: 19860921 10-Q 1 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 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 AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, 1994 and December 31, 1993 (000's Omitted) (Unaudited)
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
See notes to consolidated financial statements. AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, 1994 and December 31, 1993 (000's Omitted, except per share data) (Unaudited)
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
See notes to consolidated financial statements. AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Three months ended March 31, 1994 and 1993 (000Os Omitted, except per share data) (Unaudited)
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
See notes to consolidated financial statements. AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERSO EQUITY (000Os Omitted, except share and per share data) (Unaudited)
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 - - - - 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 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 28,755 - (3,421) 112,287 Net of deferred income taxes of $548. Net of income tax benefit of $441. Net of deferred income taxes of $5,079. Net of amortization of deferred policy acquisition cost of $6,131.
See notes to consolidated financial statements. 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)
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 -
See notes to consolidated financial statements. 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. 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:
(000's Omitted) (000's Omitted) 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
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. 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. 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. Investments: A summary of investment income is as follows:
(000's Omitted) For the Period Ended March 31, 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
The maturity of the company's debt and equity securities portfolio as of March 31, 1994 was as follows:
(000's Omitted) As of March 31, 1994 Held-to-maturity Available-for-sale Estimated Estimated Book Market Book Market Value Value Value Value 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
These tables include mortgage-backed securities based on the estimated cash flows of the underlying mortgages. 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:
(000's Omitted) Estimated Book Unrealized Unrealized Market Value Gains Losses Value March 31, 1994 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 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:
Accumulated Estimated Original Write Book Market Cost downs Value Value March 31, 1994 $ 7,545 7,545 _ _ December 31, 1993 $ 7,611 7,582 29 76
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:
(000's Omitted) Estimated Book Unrealized Unrealized Market March 31, 1994 Value Gains Losses Value 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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. Investments (continued):
(000's Omitted) Estimated Book Unrealized Unrealized Market December 31, 1993 Value Gains Losses Value 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
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. 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:
(000's Omitted) For the Period Ended March 31, 1994 1993 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
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:
(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 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 -
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:
(000's Omitted) March 31, December 31, 1994 1993 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
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):
For the Ceded to Assumed Period Gross other from other Net Ended Descriptions amount companies companies amount 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
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:
(000's Omitted) March 31, December 31, 1994 1993 Reserve for future policy benefits $ 148,253 148,712 Reimbursement for benefit payments and administrative allowance 853 757 $149,106 149,469
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. 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:
For the Period Ended March 31, December 31, 1994 1993 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
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.
For the Period Ended March 31, December 31, 1994 1993 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
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:
Warrant Issue Number Exercise Expiration Holder Date of Shares Price Date Morgan Guaranty 12/8/88 75,000 $ 3.9688 12/9/98 4/30/92 95,002 6.3855 5/1/02 170,002
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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 11. Income Taxes: The provision for income taxes charged to operations was as follows:
(000's Omitted) For the Period Ended March 31, 1994 1993 Current income tax expense $ 2,061 1,513 Deferred income tax expense (benefit) (221) 840 Total income tax expense $ 1,840 2,353
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. 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" 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. 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):
For the Period Ended March 31, 1994 1993 (dollars in millions) (percent of average invested assets annualized) Average invested assets $ 1,823.1 100.0% $ 1,714.3 100.0% Insurance premiums and policy charges $ 1.3 .3% $ 1.6 .4% Net investment income 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% 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. Net investment income is presented net of investment expense. Note: Numbers may not add due to rounding.
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. 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. 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. 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.
Exhibit Page Number or Number Description Number (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
Exhibit Page Number or Incorporation Number Description by Reference (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 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 AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES EXHIBIT 11 CALCULATION OF EARNINGS (LOSS) PER SHARE (000's Omitted, except per share data)
For the Quarter Ended March 31 1994 1993 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
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