Annual Report (Form 10-K), fiscal year 1994

Item 1. Description of Business ____________________________________ Item 1. (a) General Development of Business __________________________________________________ AmVestors Financial Corporation (AmVestors or the company) is an insurance holding company whose subsidiaries are 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). AmVestors was incorporated in 1986 to serve as a holding company for all of the common stock of American. American specializes in the sale of annuity products throughout the United States. Single premium deferred annuities ("SPDA") accounted for approximately 78% of all premiums received by the company in 1994. Other products offered include single premium immediate annuities ("SPIA") and flexible premium deferred annuities ("FPDA"). As of December 31, 1994, the company had total annuity contracts in force of $2.0 billion. The company designs its products and directs its marketing efforts towards the savings and retirement market. U.S. Census Bureau statistics indicate that the pre-retirement segment of this market, ages 45 to 64, ("preretirement market") is the fastest growing age group in the country and also project a 30% increase in the number of individuals in this age group during the 1990s. Historically, the 50 and older age group has accounted for over 80% of all annuity premiums received by the company and, to date, the average premium received by it per annuity contract has been approximately $22,000. The company continues to target this age group because management believes that as this group ages, it will have an increasing interest in saving for retirement, nursing home care and unanticipated medical costs. The company seeks to make sales in the market for retirement savings products by offering annuity products that meet the demands of agents and the pre-retirement population. The company markets its annuity products through independent agents licensed in 47 states and the District of Columbia. Agents are recruited through the company's wholly-owned subsidiary, American Sales, as well as through various other marketing organizations. As of December 31, 1994, the company had approximately 6,700 independent agents licensed to sell the company's products. The company does not market its annuity products through stockbrokers. The company endeavors to attract agents to sell its products by offering a broad selection of fixed annuity products, by providing timely, comprehensive services to agents and customers and by continuing to specialize in annuity products. Since 1990, over 34% of annuity premiums received by American have been produced by agents recruited by American Sales, resulting in commission savings for the company as compared with business produced by agents recruited through other marketing organizations. Beginning in 1988, management restructured the company's investment portfolio, reducing the holdings of non-investment grade securities from approximately 59% of its total bond portfolio as of the end of 1987 to approximately 7% as of December 31, 1994. During the same period, the company has expanded internal investment management capabilities through the addition of new personnel, and has augmented its capabilities for agent recruitment through American Sales and the establishment of relationships with additional marketing organizations. The company repaid its outstanding indebtedness in 1993, with proceeds from the sale to the public of 3,451,668 shares of its common stock. As a result of these actions, management believes that the company is now better positioned to take advantage of the opportunities for the sale of its products in the savings and retirement market. The company's strategy is to expand sales in a growing market, attract quality agents, sell products with profit potential and maintain a high quality investment portfolio.
The company incorporates certain features in its annuity contracts that are designed to reduce the occurrence and effect of premature contract terminations and significant withdrawals. Such features include surrender charges which decline over time and which apply, subject to certain exceptions, to premature terminations during the first five to fourteen years of an annuity contract. In addition, annual withdrawals free of surrender charges are generally limited to 10% of an annuity's cash value. Certain of American's annuities also provide for deferred payments of the surrender value of the annuity over a five year period or market value adjustments of surrender value which reflect changes in interest rates. Certain annuity policies incorporate a "bailout" feature which generally allows policyowners to withdraw their account balances for a limited period of time, free of surrender charges, if credited rates fall below a specified level. The company experienced significant surrenders following the reduction of credited rates below specified "bailout" levels during 1992 and 1993. Founded in 1965, American has focused on the sale of single premium annuity products since 1984. On May 9, 1994, A.M. Best which rates insurance companies based on factors of concern to policyowners, reaffirmed American's "A-" (Excellent) rating. On October 24, 1994, Duff & Phelps reaffirmed American's claims paying ability rating of "A+" (Single-A-Plus). There were no material proceedings involving the company or any of its subsidiaries, or mergers or acquisitions. Item 1. (b) Financial Information About Industry Segments ______________________________________________________________ The company does not have any material reportable segments. Item 1. (c) Narrative Description of Business _________________________________________________ See Item 1. (c) (l) (i) Item 1. (c) (1) Business Done and Intended to be Done __________________________________________________________ See Item 1. (c) (l) (i) Item 1. (c) (1) (i) Principal Products __________________________________________ INDUSTRY OVERVIEW Annuities have traditionally been used by individuals as a tax-deferred savings vehicle for retirement planning. U.S. Census Bureau statistics indicate that the 45 to 64 age group is the fastest growing age group in the country and project a 30% increase in the number of individuals in this age group during the 1990s. The company believes that this demographic trend, longer life expectancy, and rising per capita income, as well as the tax deferred savings advantage of annuity products relative to other savings products, will increase demand for single premium annuities for retirement planning. COMPANY OVERVIEW Founded in 1965, American has focused on the sale of single premium annuities since 1984. During various periods prior to 1984, American offered participating and nonparticipating ordinary life insurance, flexible premium annuities and certain disability income and cancer expense policies. However, in the middle 1980s, American perceived greater opportunities in the savings and retirement market and began to concentrate its marketing efforts on the sale of single premium annuities.
In 1988, management reviewed the company's investment strategy and determined to reverse the non-investment grade strategy which the company had employed since entering the single premium annuity market in 1984. Management reduced the percentage of the company's bond portfolio rated below investment grade from approximately 59% at the end of 1987 to approximately 41% by the end of 1988. In 1989 and 1990 the company suffered substantial losses related to its investments in non-investment grade bonds as the credit quality of issuers of, and the market for, non-investment grade bonds deteriorated. Through the restructuring of its investment portfolio in 1991 and 1992, the company ultimately was able to increase, consistent with the company's investment policy, the portion of its bond portfolio rated investment grade to approximately 93%. The level of sales and surrenders of SPDAs was adversely affected in 1991 and 1992 by the company's substantial investment losses, the highly publicized financial difficulties of other life insurance companies, and A.M. Best's lowering in July 1991, of American's rating from "A" (Excellent) to "A-" (Excellent). In response, management took additional steps to improve the company's financial condition and competitive position in the annuity business. The company expanded internal investment management capabilities and augmented its agent recruitment capabilities through its internal marketing organization, American Sales, and the establishment of relationships with additional marketing organizations. During 1993, the company repaid its bank debt and contributed $14.6 million to the statutory capital of American with proceeds from the sale of 3,451,668 shares of common stock. Management believes the actions taken resulted in the increased sales experienced in 1994 and 1993. STRATEGY The company has developed its business strategy to better enable it to capitalize on what it perceives as significant opportunities in the growing annuity market. The elements of this strategy are to (i) expand sales in a growing market while maintaining its focus on single premium annuities, (ii) attract quality agents, (iii) design and sell products with profit potential, and (iv) maintain a high quality investment portfolio. EXPAND SALES IN A GROWING MARKET. The company believes that its focus on deferred annuity products in the expanding savings and retirement market provides opportunity for growth. The company seeks to meet the needs of the savings and retirement market by offering a portfolio of annuity products nationwide. Over 80% of American's premiums received have been from individuals ages 50 and over. ATTRACT QUALITY AGENTS. The company intends to pursue the growth of its business through increased production from existing agents and through the creation of new agent relationships. American believes that it is able to attract agents to sell its products by providing a broad selection of fixed annuity products and timely, comprehensive services to agents and customers. The company recruits agents through its wholly-owned subsidiary, American Sales, and through other marketing organizations, and regularly evaluates its distribution system for growth opportunities. American has approximately 6,700 independent insurance agents licensed to sell its products in 47 states and the District of Columbia. DESIGN AND SELL PRODUCTS WITH PROFIT POTENTIAL. The company seeks to design its products to enhance the potential for profit and reduce the risk of loss. Management's philosophy is to limit sales of annuities when it believes that market conditions would prevent the company from achieving targeted spreads. The company adjusts credited rates based on prevailing market conditions and available investment yields, subject to certain interest rate guarantees. Annuities currently issued by the company include features such as surrender charges, limited free withdrawal privileges, market value adjustments and deferred payout provisions. These features are designed to encourage persistency and provide protection from losses due to premature termination. Management continuously monitors and adjusts its produc t features and terms in response to market conditions.
MAINTAIN A HIGH QUALITY INVESTMENT PORTFOLIO. The company seeks to maintain a high quality investment portfolio and to purchase investments taking into account the anticipated cash flows of its assets and liabilities. The weighted average duration of the company's investments was 4.7 years as of December 31, 1994. As of that date, approximately 97% of the company's investment portfolio consisted of bonds approximately 93% of which were investment grade. MARKETING AND DISTRIBUTION To access the market of potential annuity buyers, the company maintains a network of independent agents licensed in 47 states and the District of Columbia. As of December 31, 1994, American had approximately 6,700 agents contracted to sell its annuity products. The company also maintains contact with approximately 26,000 agents that are not currently licensed, but have either sold American's annuities in the past or have expressed an interest in doing so. These agents continue to receive periodic mailings related to interest rate and commission changes, and new product introductions, and are reappointed as required in order to represent the company in selling its products. However, in order to save costs associated with reappointing agents, the company does not automatically relicense an agent that has not written business for twelve months. Such costs include the annual licensing fee of $20 to $40 per agent. The company recruits new agents through American Sales and through other marketing organizations. Because both American Sales and other marketing organizations rely on independent agents, the company does not maintain an exclusive or captive sales force thereby avoiding the related costs. Since 1990, over 34% of annuity premiums received by American have been produced by agents recruited through American Sales. Marketing organizations are responsible for, and bear the cost of, recruiting agents. In accordance with industry custom, American Sales and the marketing organizations receive a gross commission from American for originating an annuity contract, a portion of which is paid to the originating agent (the "street commission"). The marketing organization or American Sales retains the difference between the gross commission and the street commission (the "override commission"). The availability of override commissions provides an economic incentive to the marketing organizations to recruit agents who produce business. The company, through American Sales, recruits new agents principally through direct mail solicitations. The company analyzes the market for its products and reviews the number and geographical distribution of licensed agents regularly. Data reviewed include premiums received and agents licensed per capita by state. This allows the company to identify specific regions of the country where it believes it can most effectively recruit agents for the sales of its annuity products. The company develops a targeted list of potential agents from sources such as databases of licensed agents maintained by state insurance commissioners as well as industry associations such as the Million Dollar Round Table and the American Society of Chartered Life Underwriters. The company also regularly advertises its products, rates and commission levels in various industry trade publications. To be contracted by the company, agents must be licensed by state insurance regulatory authorities and have their applications approved by the company. Crediting rates, commissions, the perceived quality of the issuer, product features and services are generally the principal factors influencing an agent's willingness and ability to sell particular annuity products. The company believes that both agents and policyowners value the service provided by the company. For example, American generally issues an SPDA policy, together with the agent's commission check, within 72 hours of receiving the application and premium. The company also seeks to provide ongoing service to the agent. Towards that end, the company provides agents with access to the company's senior executives. The company has developed an interactive system accessible by all agents to obtain policy information. In addition, agents and annuitants can access information about their policies via a toll-free telephone number.
The company collects premiums from policyowners throughout the United States. During 1994, 57.4% of its SPDA sales were in the following states: Florida (7.8%), Illinois (7.5%), California (6.5%), Michigan (6.5%), Texas (5.7%), Ohio (5.2%), Kansas (4.9%), Colorado (4.6%), Wisconsin (4.6%), and New Jersey (4.1%). The company is not dependent on any one agent or agency for any substantial amount of its business. No single agent accounted for more than 1.0% of American's annual sales in 1994, and the top twenty individual agents accounted for approximately 13.8% of American's volume in 1994. The company does not have exclusive agency agreements with its agents and management believes most of these agents sell products, similar to those sold by American, for other insurance companies. This can result in sales declines if for any reason American is relatively less competitive or there are concerns such as existed in 1991, about asset quality, the downgrade in American's A.M.Best rating, and the insolvencies of other insurance companies. The four major independent marketing organizations through which the company recruits agents to sell its annuity products were responsible for the recruitment of agents that accounted for 46.1% of premiums received during 1994. While the termination of the company's relationships with any of its marketing organizations could result in the loss of agents and could adversely affect the level of sales and surrenders, the company does not believe that the loss of any one marketing organization would have a material adverse effect on the financial condition of the company. In 1991, the company became aware of five instances of agent fraud involving two agents in Ohio, one agent in Tennessee, one agent in Texas and one agent in Kansas. While there was no connection between any of the five agents, all cases of agent fraud involved either (i) the wrongful taking of funds from certain individuals who thought they were submitting funds to the company, or (ii) forged endorsements of surrender checks payable to policyholders of the company. The agents were prosecuted and settlements were reached with the victims. Certain amounts paid by the company were recovered from two banks that cashed checks with forged endorsements. The company (i) engaged a firm to review and recommend procedures, (ii) adopted changes in certain procedures relating to agent licensing, policy issuance and delivery, and processing of withdrawals and surrenders, to help reduce future occurrences of fraud, and (iii) purchased insurance coverage for up to $10 million of future losses from fraud. By implementing these changes the company believes that it has substantially reduced the likelihood of future material loss resulting from agent fraud. PRODUCTS The company specializes in the sale of SPDA products to individuals. During each of the past three years, sales of SPDAs have accounted for approximately 86% of the company's premiums received, while sales of SPIAs and FPDAs have accounted for virtually all remaining premiums received. SPDAs involve a one-time premium deposit by the policyowner at the time of issuance. Following an accumulation period, the policyowner is entitled to receive the principal value plus accumulated interest credited to such annuity, payable either in a lump-sum or through annuity payments over a certain period or for life. Interest credited during the accumulation period generally is not subject to federal or state income tax. Payments are typically made to the annuitant after age 65 and are taxable at the tax rate then applicable to the annuitant. American currently sells annuity products with different benefits, interest rates and commission structures. These products offer tax-deferred accumulation of interest, various interest guarantees, guaranteed cash values, and a choice of guaranteed income options on the selected maturity date. The portfolio of products is continuously reviewed with new plans added and others discontinued in an effort to remain competitive.
The company's operating earnings are derived primarily from its investment results, including realized gains (losses), less interest credited to annuity contracts and expenses. In determining credited rates, American takes into account the profitability of its annuity business and the relative competitive positions of its products. Credited rates during the initial and any renewal period are based on assumptions and estimates relating principally to persistency, investment yield and expenses as well as managemen t's judgment as to certain market and competitive conditions. American's SPDAs have an initial credited interest rate (currently 5.75% to 8.75%, depending on the features of the contract) guaranteed for a period of one to five years. Following the initial guarantee period, American may adjust the credited interest rate annually, subject to the guaranteed minimum interest rates specified in the contracts. Such minimum guaranteed rates range from 4% to 6%. The credited rates on SPDAs with accumulated values of approximately $537.5 million are currently set at the minimum guaranteed rate. The accumulated values of SPDAs by credited interest rates are as follows as of December 31, 1994: $834.7 million-less than or equal to 5.5%; $619.4 million-greater than 5.5% but less than or equal to 6.5%; $215.4 million-greater than 6.5% but less than or equal to 7.5%; and $150.5 million-greater than 7.5%. The credited rates on SPDAs representing a majority of total accumulated value may be reset by the company within a period of one year subject to the guaranteed minimum rate. The company incorporates a number of features in its annuity products designed to reduce the occurrence and adverse effect of premature termination of the policy. Premature termination of an annuity contract results in the loss of future investment earnings related to the annuity deposit and in the accelerated recognition of deferred expenses related to policy acquisition, principally commissions, which are otherwise recoverable over the life of the policy. The primary feature incorporated by the company to minimize premature terminations is a surrender charge. While the policyowner is permitted at any time to withdraw all or part of the accumulated value of his policy, such withdrawals are generally subject to a surrender charge for the period of years specified in the contract. The surrender charge, which is a percentage of the total accumulated value including accrued interest, is designed to discourage premature termination. Surrender charges, subject to certain exceptions, apply for the number of years specified in the contract and decline to zero over a period of five to fourteen years. All annuities currently issued by the company include surrender charges and approximately 90% of the company's contracts in force currently have surrender charges. The company generally limits free annual withdrawal to 10% of accumulated value. When the company receives a request for surrender of an annuity policy, a conservation letter is mailed to the policyowner. This letter is designed to inform the policyowner of the possible tax implications and the surrender charge payable under the annuity policy. No surrender benefits are paid until the company receives a written response to the conservation letter. Typically policyowners who have requested a surrender of $10,000 or more are personally contacted by telephone. The company's conservation procedures are designed to (i) attempt to conserve the business, (ii) ascertain the causes of the surrenders, and (iii) identify and terminate agents who write low persistency business. In certain contracts, the surrender charge is waived for a period of 45 to 60 days following the crediting of a renewal interest rate below a specified rate ( the "bailout" rate). Of the company's $2.0 billion annuity contracts in force as of December 31, 1994, $180.9 million have a "bailout" feature remaining. The "bai lout" rate on $180.5 million of this amount is 6% or less. Surrender charges also generally do not apply to one-time annual withdrawals by policyowners of up to 10% of the accumulated value of the annuity. Approximately 39% of the SPDA business in force as of December 31, 1994, provides that the company may pay any surrender value in level installments over 60 months in lieu of a lump sum payment. Additionally, at that date approximately 14% of the SPDA business in
force had a market value adjustment provision that will provide American with additional protection during a period of rising interest rates through a reduction in the surrender value payable upon surrender of the policy. INVESTMENTS The company's earnings are largely determined by its ability to maintain a spread between its investment results and the interest credited on its annuity products. The average duration of the company's investments was 4.7 years as of December 31, 1994. As of that date, the company had $1,914.3 million of cash and invested assets of which $1,844.2 million or approximately 96% represented investments in bonds. At that date, approximately 93% of the company's bond portfolio was rated investment grade. As of December 31, 1994, the carrying value of the company's bond portfolio exceeded its market value by $91.5 million. The following table summarizes the company's investment results for the period indicated: INVESTMENT RESULTS
The following table sets forth the company's investment portfolio as of December 31, 1994:
Included in other Long Term Investments on December 31, 1994, were $23.1 million, at market, of limited partnership investments. These funds are managed by outside investment advisors. The investment guidelines of these partnerships allow for a very broad range of investment alternatives to include, but not limited to, derivatives, currencies, foreign and U.S. stocks, foreign and U.S. bonds, futures, options and commodities. Such partnerships are generically referred to as hedge funds. These investments were made with a goal of obtaining yield over time which exceeds the yield of the S&P 500 Index and are carried at market value with any unrealized gains and losses recorded in Net Investment Income in the company's statement of earnings. Net Investment Income (Loss) on these partnerships were $1.2 million and ($1.9) million for 1993 and 1994, respectively. The company first invested in such partnerships in July 1993; therefore, 1993 income represents partial year results. Subsequent to December 31, 1994, the company withdrew $5.5 million from certain of these partnerships. Management believes that the earnings on this class of investments could experience greater volatility than that which might be achieved by the S&P 500 Index and could, therefore, m aterially affect the company's earnings for any given period. Bonds and mortgage-backed securities often contain options which permit an issuer to call, prepay or repurchase a security at a specified price in the future. When a security is called, it is probable that American will have to reinvest the proceeds at a lower interest rate. Mortgage-backed securities are accounted for using expected prepayment assumptions. Accordingly, as prepayment rates on mortgage-backed securities change, the company adjusts its income realization on mortgage-backed securities to reflec t its best estimate of future cash flows and the corresponding income resulting from the accretion of discounts and the amortization of premiums. Mortgage-backed securities are subject to prepayment risk. This is due to the fact that in periods of declining interest rates, the mortgages which collateralize the security may be repaid more rapidly than scheduled, as individuals refinance higher rate mortgages to take advantage of lower prevailing rates. As a result, holders of mortgage-backed securities could receive prepayments on their investments which the holder may not be able to reinvest at interest rates comparable to the rate on the prepaying security. The company has reduced this risk of prepayment by investing a majority (approximately 76%) of its mortgage-backed investment portfolio in planned amortization class ("PAC"), targeted amortization class ("TAC") and accretion directed class ("AD") instruments. These investments are designed to amortize in a more predictable manner by shifting the primary risk of prepayment of the underlying collateral to investors in other tranches ("support classes") of the CMO. Sequential and pass-through classes r epresent approximately 22% of the book value of the company's mortgage-backed securities as of December 31, 1994. In some instances, American invests in non-agency, non-government sponsored enterprise mortgage-backed securities. Such investments comprised 24% of the book value of American's mortgage-backed securities at December 31, 1994. The credit risk associated with non-agency, non-government sponsored enterprise mortgage-backed securities generally is greater than that of an agency or government sponsored enterprise mortgage-backed securities which benefit from either explicit or implicit guarantees of the U.S. government or an agency or instrumentality thereof; however, all of American's non-agency, non-government sponsored enterprise mortgage-backed securities are rated either Aaa or Aa by Moody's. As of December 31, 1994, the company did not own any "interest only," "principal only," or "residual" classes of CMOs. For additional information on the company's investment in mortgage-backed securities see Note 2 of Notes to Consolidated Financial Statements.
The company carries all investments which it believes have experienced other than temporary declines in value at estimated net realizable value. In addition, as of December 31, 1994, the company maintained a GAAP credit loss reserve of $2.2 million. The following table indicates by quality rating the composition of the company's debt securities portfolio (at book and market value) excluding short-term investments as of December 31, 1994: COMPOSITION OF DEBT SECURITIES BY QUALITY RATING (1)
As used in the above table and elsewhere in this report, book value is defined as amortized cost, including adjustments for any other than temporary dimunitions in value, prior to any market value adjustments. 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. Rising interest rates could encourage increased policy surrenders. This could create the need to sell bonds at a time when their market values are below their book values. The weighted average life and duration of the company's bond portfolio as of December 31, 1994, and for the past three years were as follows: WEIGHTED AVERAGE LIFE AND DURATION
See Note 2 of Notes to Consolidated Financial Statements for information regarding the maturity of the company's bond portfolio as of December 31, 1994. The company attempts to manage its assets and liabilities so that income and principal payments received from investments are adequate to meet the cash flow requirements of its policyholder liabilities. The relatively short-term nature of the investment portfolio reflects the characteristics of the company's liabilities. Approximately 93% of the policy and deposit liabilities of the company represents reserves for SPDAs that may be partially or totally surrendered at the policyholders' option, subject to surrender charges, market value adjustments or other limitations, when applicable. The cash flows of the company's liabilities are affected by actual maturities, surrender experience and credited interest rates. The company periodically performs cash flow studies under various interest rate scenarios to evaluate the adequacy of expected cash flows from its assets to meet the expected cash requirements of its liabilities. The company utilizes these studies to determine if it is necessary to lengthen or shorten the average life and duration of its investment portfolio. Because of the significant uncertainties involved in the estimation of asset and liability cash flows, there can be no assurance that the company will be able to effectively manage the relationship between its asset and liability cash flows. The components of net investment gains (losses) for the past three years were as follows: COMPONENTS OF NET INVESTMENT GAINS (LOSSES)
See "Management Discussion and Analysis of Financial Condition and Results of Operations" with respect to amounts of securities sold. See Notes 1 and 2 of Notes to Consolidated Financial Statements for additional information with respect to investments. OTHER INSURANCE PRODUCTS Prior to 1987, American sold, among other products, cancer expense plans and nonparticipating and participating life insurance. In 1982, American reinsured all of its cancer expense plans and in 1986, American reinsured approximately 65% of its nonparticipating life insurance in force through assumption reinsurance treaties. The total reserves on reinsurance ceded under assumption reinsurance treaties were approximately $11 million at the time of transfer. A recent federal district court decision held that in certain circumstances an insurer may remain contingently or primarily liable for policy liabilities transferred in assumption reinsurance transactions. Based on management's belief that the reinsurers are solvent and capable of
meeting all obligations on the policies reinsured, management considers the likelihood that any liability would inure to the company remote. However, in the event of the insolvency of the reinsurers, it is possible that the company would be liable for the reinsured policies. American has $17.3 million face amount of participating life insurance policies in force, net of reinsurance, and $53.6 million of nonparticipating life insurance, net of reinsurance, in force. American has followed a plan of paying dividends on its outstanding participating life insurance policies in amounts determined annually by its Board of Directors and expects to continue doing so in the future. For the year ended December 31, 1994, dividends paid under these policies totalled $.2 million. Actual mor tality experience in a particular period may be different than actuarially expected mortality experience and, consequently, may adversely affect the company's operating results for such period. REINSURANCE American reinsures portions of life insurance risks with unaffiliated insurance companies under traditional indemnity reinsurance agreements. Generally, American enters into traditional reinsurance arrangements to assist in diversifying its risk and to limit its maximum loss exposure on risks that exceed American's policy retention limits, currently $150,000 per life. Reinsurance does not fully discharge American's obligation to pay policy claims on the reinsured business. American remains responsible for policy claims to the extent the reinsurer fails to pay claims. No reinsurer of business ceded by American has failed to pay any policy claims (either individually or in the aggregate) with respect to such ceded business. As of December 31, 1994, American had ceded to reinsurers $259.2 million of its $330.1 million of life insurance in force and had taken $148.6 million of related reserve credits against future policy benefits. Of the insurance ceded and reserve credits taken, $228.9 million and $146.9 million, respectively, relate to one reinsurance contract with Employers Reassurance Corporation (ERC). This reinsurance agreement pertains to the coinsurance of 90% of all risks associated with all of the SPWL policies written by the company prior to 1989. Based on a review of the 1993 statutory Annual Statements filed by ERC with the Kansas Insurance Department and ERC's A.M. Best rating of "A+" (Superior), the company believes that ERCis solvent and capable of meeting its obligations on the policies reinsured. RATINGS American has been rated "A-" (Excellent) by A.M. Best since 1991. A.M. Best's ratings for insurance companies currently range from "A++" to "F," and some companies are not rated. Publications of A.M. Best indicate that "A" (Excellent) and "A-" (Excellent) ratings are assigned to those companies which, in A.M. Best's opinion, have achieved excellent overall performance when compared to the norms of the life insurance industry, and generally, have demonstrated a strong ability to meet their policyholder and other contractual obligations. In evaluating a company's financial and operating performance, A.M. Best reviews the company's profitability, leverage and liquidity as well as the company's book of business, the adequacy of its policy reserves and the experience and competency of its management. American has a claims paying ability rating from Duff & Phelps of "A+" (High). Duff & Phelps' claims paying ability ratings represent its opinion as to the financial ability of an operating insurance company to meet obligations under its insurance policies and are based on current information provided by the insurance company and other sources. Higher ratings generally indicate financial stability and a strong ability to pay claims. A.M. Best's and Duff & Phelps' ratings are based upon factors of concern to policyowners, agents and intermediaries and are not directed toward the protection of investors.
REGULATION The company and American are subject to the insurance laws and regulations of Kansas, the domiciliary state of American, and the laws and regulations of the other states in which American is licensed to do business. At present, American is licensed to conduct business in 47 states and the District of Columbia. The insurance laws and regulations, as well as the level of supervisory authority that may be exercised by the various state insurance departments, vary by jurisdiction, but generally grant broad powers to supervisory agencies or state regulators to examine and supervise insurance companies and insurance holding companies with respect to every significant aspect of the insurance business. These laws and regulations generally require insurance companies to meet certain solvency standards and asset tests, to maintain minimum standards of business conduct and to file certain reports with regulatory authorities, including information concerning their capital structure, ownership and financial condition. American is required to file annual statutory financial statements in each jurisdiction in which it is licensed. Additionally, American is subject to periodic examination by the insurance departments of the jurisdictions in which it is licensed, authorized and accredited. The Kansas Insurance Department completed its most recent examination of American for the years ended December 31, 1990 through December 31, 1993. The results of this examination contained no material adverse findings. The NAIC adopted an accreditation program in 1992 which requires Insurance Departments of the various states to become accredited by the end of 1994 or cede certain control over their domestic companies. The program requires certain model laws, model regulations and practices to be in effect. The Kansas Insurance Department has been accredited under the NAIC program. INSURANCE HOLDING COMPANY REGULATIONS; RESTRICTIONS ON DIVIDENDS AND DISTRIBUTIONS. The company and American are subject to regulation under the insurance and insurance holding company statutes of Kansas. The insurance holding company laws and regulations vary from jurisdiction to jurisdiction, but generally require insurance and reinsurance subsidiaries of insurance holding companies to register with the applicable state regulatory authorities and to file with those authorities certain reports describing, among other information, their capital structure, ownership, financial condition, certain intercompany transactions and general business operations. The insurance holding company statutes also require prior regulatory agency approval or, in certain circumstances, prior notice of certain material intercompany transfers of assets, as well as certain transactions between insurance companies, their parent companies and affiliates. The company is an insurance holding company and substantially all income reflected in its Consolidated Statements of Earnings is derived from the operations of American. The company's assets consist primarily of the stock of American and its other subsidiaries. Dividends, fees, rents and commissions received from American have been, and together with the company's retained funds and earnings thereon will be, the source of funds for the payment of operating and other expenses incurred by the company. Insurance laws and regulations of Kansas, the state of incorporation of American, restrict the flow of funds, including dividends, from American to the company. In addition, the payment of dividends, fees, rents and commissions by American reduces its capital and surplus, and therefore, can affect the amount of annuities it can write. Pursuant to the Kansas Insurance Holding Company Act, American may not, without prior approval of the Kansas Insurance Department, pay dividends if the amount of such dividends added to all other dividends or other distributions made by American within the preceding twelve months exceeds the greater of (i) its statutory net gain from operations for the prior calendar year or (ii) 10% of statutory surplus at the end of the preceding calendar year. During the year ended December 31, 1994, American had a statutory net gain from operations of $4.2 million. As of December 31, 1994, 10% of American's statutory
surplus was $8.8 million. In addition, another provision of Kansas insurance law limits dividends that American may pay to the company to earned surplus calculated on a statutory basis, which totalled $13.0 million as of December 31, 1994. Subject to the provisions of the Kansas insurance law, American also may advance funds to the company in the form of loans. Under the Kansas Insurance Statute, unless (i) certain filings are made with the Kansas Insurance Department, (ii) certain requirements are met, including a public hearing and (iii) approval or exemption is granted by the insurance commissioner, no person may acquire any voting security or security convertible into a voting security of an insurance holding company, such as the company, which controls a Kansas insurance company or merge with such a holding company, if as a result of such transaction such person would "control" the insurance holding company. "Control" is presumed to exist if a person directly or indirectly owns or controls 10% or more of the voting securities of another person. NAIC REGULATORY CHANGES. The NAIC and insurance regulators also have become involved in a process of re-examining existing laws and regulations and their application to insurance companies. In particular, this re-examination has focused on insurance company investment and solvency issues and, in some instances, has resulted in new interpretations of existing law, the development of new laws and the implementation of non-statutory guidelines. Regulations prescribed by the NAIC require the establishment of an Asset Valuation Reserve ("AVR") account designed to stabilize a company's statutory capital and surplus against fluctuations in the market value of stocks and bonds. The AVR consists of two main components: a "default component," which provides for potential credit related losses on debt-securities and an "equity component," which provides for potential losses on all types of equity investments, including real estate. The regulations also require the establishment of an Interest Maintenance Reserve ("IMR"), which is credited with the portion of realized investment gains and losses net of tax from the sale of fixed maturities attributable to changes in interest rates. The IMR is required to be amortized into earnings over the remaining period to maturity of the fixed maturities sold. RISK-BASED CAPITAL REQUIREMENTS. The NAIC has adopted risk-based capital ("RBC") requirements that require insurance companies to calculate and report information under a risk-based formula that attempts to measure statutory capital and surplus needs based on the risks in a company's mix of product and investment portfolio. Under the formula, a company first determines its Authorized Control Level risk-based capital ("ACL") by taking into account (i) the risk with respect to the insurer's assets; (ii) the risk of adverse insurance experience with respect to the insurer's liabilities and obligations; (iii) the interest rate risk with respect to the insurer's business; and (iv) all other business risks and such other relevant risks as are set forth in the RBC instructions. A company's "Total Adjusted Capital" is the sum of statutory capital and surplus and such other items as the RBC instructions may provide. The requirements provide for four different levels of regulatory attention. The "Company Action Level" is triggered if a company's Total Adjusted Capital is less than 2.0 times its ACL but greater than or equal to 1.5 times its ACL. At the Company Action Level, the company must submit a comprehensive plan to the regulatory authority which discusses proposed corrective actions to improve its capital position. The "Regulatory Action Level"is triggered if a company's Total Adjusted Capital is less than 1.5 times but greater than or equal to 1.0 times its ACL. At the Regulatory Action Level, the regulatory authority will perform a special examination of the company and issue an order specifying corrective actions that must be followed. The "Authorized Control Level" is triggered if a company's Total Adjusted Capital is less than 1.0 times but greater than or equal to 0.7 times its ACL,
and the regulatory authority may take action it deems necessary, including placing the company under regulatory control. The "Mandatory Control Level" is triggered if a company's Total Adjusted Capital is less than 0.7 times its ACL, and the regulatory authority is mandated to place the company under its control. As of December 31, 1994, American's Total Adjusted Capital was $111.3 million and its Authorized Control Level risk-based capital was $25.1 million. Should a future deficiency occur, American would be subject to an increased level of regulatory attention and, depending on the capital deficiency, possibly to actual control by the appropriate regulatory authorities. ASSESSMENTS AGAINST INSURERS. Under the guaranty fund laws of all states in which the company operates, insurers can be assessed for losses incurred by policyholders of insolvent insurance companies. At present, most guaranty fund laws provide for assessments based upon the amount of primary insurance underwritten in a given jurisdiction. See Note 13 of Notes to Consolidated Financial Statements. The company has set up a reserve for its current estimate of future non-recoverable guaranty fund assessments. FEDERAL REGULATION. Although the federal government generally does not directly regulate the insurance industry, federal initiatives often have an impact on the business. Congress and certain federal agencies are investigating the current condition of the insurance industry in the United States in order to decide whether some form of federal role in the regulation of insurance companies would be appropriate. It is not possible to predict the outcome of any such congressional activity or the potential effects thereof on the company. Item 1. (c) (1) (ii) New Products ________________________________________ The company introduced various versions of SPDA and FPDA during 1994. In addition, a flexible premium universal life policy was introduced, providing the company with a source of revenue diversification. The company has not marketed a life insurance policy since the first quarter of 1993. Item 1. (c) (1) (iii) Sources of Raw Materials _____________________________________________________ The company does not require any raw materials. Item 1. (c) (iv) Patents, Trademarks, Franchises, Etc. ____________________________________________________________ The company does not hold any patents, trademarks, licenses, franchises, or concessions which are materially important. Item 1. (c) (1) (v) Seasonal Nature of Business ____________________________________________________ The company is not engaged in a seasonal business. Item 1. (c) (1) (vi) Working Capital Items _____________________________________________ Not applicable. Item 1. (c) (1) (vii) Dependence on Customers _______________________________________________ The company is not dependent on a single customer or a few customers where the loss of any one or more of whom would have an adverse effect on the company. Item 1. (c) (1) (viii) Backlog of Orders _________________________________________ There is no backlog of orders with respect to the company. Item 1. (c) (1) (ix) Portion(s) of Business Subject to Governmental Negotiations ______________________________________________________________________________ There are no portions of the company's business which are subject to renegotiation or termination of governmental contracts.
Item 1. (c) (1) (x) Competition in Registrant's Business ____________________________________________________________ The insurance industry is highly competitive and the company competes with individual companies and with groups of affiliated companies with substantially greater financial resources, larger sales forces and more widespread agency and brokerage relationships. In addition, in marketing annuity products, the company competes with other life insurance companies as well as financial institutions which market functionally competitive products. The company's marketing strategy is to provide products for the individual and business market through experienced, independent insurance agents and brokers licensed to sell life insurance. The company utilizes marketing agencies to recruit its agency force and also recruits agents directly, utilizing industry trade publications and direct mail. The agents and representatives contracted to sell for the company currently number approximately 6,700. The company's agents and brokers also represent other insurance companies and sell policies which may compete with those of the company. The company believes it has been successful in attracting and retaining brokers and agents because it has been able to offer a competitive package of innovative products, competitive commission structures, prompt policy issuance and responsive policyholder service. On January 18, 1995, the U.S. Supreme Court issued its decision in the case of NATIONSBANK OF NORTH CAROLINA, N.A., V. VARIABLE ANNUITY LIFE INSURANCE CO. In NATIONSBANK the Supreme Court upheld a decision by the Office of the Comptroller of the Currency that a national bank may broker annuities. However, the decision did not grant national banks the authority to issue or underwrite annuities. The decision may increase interest on the part of banks to begin selling annuities or to expand their existing efforts to sell annuities. The decision may result in a partial shift in the distribution of annuities from insurance agents to national banks, which could result in a decrease in sales for the company, or it may result in an increase in the number of annuities sold because of distribution through national banks, which could result in new distribution opportunities for the company. Item 1. (c) (1) (xi) Research and Development ________________________________________________ The company made no material expenditures with respect to research and development. Item 1. (c) (1) (xii) Environmental Issues ____________________________________________ Subsurface assessments and research conducted beneath the parking lot of the company's home office complex have indicated the possible existence of underground storage tanks and levels of contamination which may require remedial action. The company does not believe that any required remedial action will result in any material capital expenditures. Item 1. (c) (1) (xiii) Numbers of Persons Employed ___________________________________________________ On December 31, 1994, the company employed 100 persons in its Home Office and had approximately 6,700 full and part-time agents who are paid on a commission basis. Item 1. (d) Foreign Operations ______________________________ The company does not have any material operations in foreign countries nor does it derive any material portion of its revenue from customers in foreign countries.
Item 2.



Item 2. Properties __________________ The company owns its home office complex consisting of four buildings and the adjacent property in Topeka, Kansas. Total floor space in the four buildings is approximately 31,000 square feet. Recent and projected growth along with the efficiencies to be gained from having its operations under one roof have led the company to investigate the acquisition of different facilities. Item 3.

Item 3. Legal Proceedings _________________________ The company does not have any material legal proceedings pending against it. Item 4.

Item 4. Submission of Matters to a Vote of Security Holders __________________________________________________________ No matters were submitted to security holders during the fourth quarter of the fiscal year covered by this report. Item 5.

Item 5. Market Price of and Dividends on the Registrant's Common Equity and Related ______________________________________________________________________________ Stockholder Matters _____________________ The common stock of the company began trading on the New York Stock Exchange under the symbol AMV on November 30, 1994. Prior to that date the company's common stock traded in the over-the-counter market under the NASDAQ symbol AVFC. The following table shows the quarterly high and low sales price per share of common stock of the company as reported by the New York Stock Exchange and NASDAQ:
There were no dividends paid during 1993 or 1994. On February 23, 1995, the board of directors declared an annual cash dividend of 71\2 cents per common share, payable April 13, 1995, to stockholders of record on March 18, 1995. As of March 17, 1995, there were approximately 3,723 holders of record of the company's common stock. See Management's Discussion and Analysis of Liquidity and Capital Resources and Note 8 of the Notes to Consolidated Financial Statements for the statutory limitation on dividends payable from American under Kansas law.
Item 6.

Item 6. Selected Financial Data _______________________________________ AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES SELECTED FINANCIAL DATA (NOT COVERED BY INDEPENDENT AUDITORS' REPORT) Following is a summary of selected financial data for the five years ended December 31, 1994:
RESULTS OF OPERATIONS Years Ended December 31, 1994, 1993 and 1992 NET INVESTMENT INCOME increased $3.5 million, or 3%, to $142.0 million from $138.5 million in 1993. This increase resulted from an increase in average invested assets from $1,770.9 million in 1993 to $1,862.3 million in 1994, offset in part by a reduction in the average yield on invested assets from 7.8% for the year ended December 31, 1993, to 7.6% for the year ended December 31, 1994. Net investment income decreased $2.7 million, or 2%, to $138.5 million in 1993 from $141.2 million in 1992. This decrease resulted from the reduction in the average yield on invested assets from 8.4% for the year ended December 31, 1992, to 7.8% for the year ended December 31, 1993, offset in part by an increase in average invested assets from $1,689.6 million in 1992 to $1,770.9 million for 1993. Average yields have been impacted by declining interest rates throughout 1992 and 1993 and the reinvestment at lower yields of proceeds from securities disposed of to realize investment gains. The 1994 yields were down as a result of an investment in investment partnerships. These partnerships form a fund of funds totalling $23.1 million on December 31, 1994 which is structured in an attempt to consistently provide returns in excess of the Standard & Poor's (S&P) 500 over time without regard to the general direction of financial markets. This fund generated a loss of $1.9 million in 1994 compared with income of $1.2 million in 1993. Since the date of original investment this investment has experienced a loss of 2.2%, compared to a cash flow equivalent loss of 9.4% had the same amounts been invested at the same time in 10 year treasury bonds, or a .6% gain had the funds been invested in the Standard & Poor's 500. NET INVESTMENT GAINS decreased $16.2 million, or 95%, to $.8 million for the year ended December 31, 1994, from $17.0 million for the year ended December 31, 1993. This follows a $3.5 million decrease in 1993 from $20.5 million for the year ended December 31, 1992. Gains and losses may be realized upon securities which are disposed of for various reasons. The gains realized in 1994 are the result of general portfolio management while those taken in 1993 were to reduce the effects of the statutory losses resulting from surrenders following the reduction of interest crediting rates on certain annuity policies below the "bailout" rate. The gains realized during 1992 were primarily to utilize the tax benefit of capital loss carryforwards. The decision to realize gains or losses lies to a great degree in managements discretion. Unrealized gains (losses) in the company's bond portfolio were ($105.6) million, $81.4 million and $41.5 million as of December 31, 1994, 1993 and 1992, respectively. INCOME FROM DISPOSAL OF PRIVATE PLACEMENT SECURITIES was $5.8 million in 1992. During 1988, 1989, and 1990, American purchased private placement securities believed to have a quality rating equivalent to "BBB" by Standard & Poor's. In 1992 the company engaged an independent firm to review the private placement securities portfolio. That review determined those securities would have been rated "BB" - "B" if they had been rated by S&P when issued and that the total market value of the securities at the time of the report was approximately $5.8 million less than the par value of these securities. On September 21, 1992, an affiliate of the placement agent agreed to purchase the bonds at their par value, which approximated the company's cost. Several of these bonds had been written down in an amount totalling $2.1 million during 1990, 1991 and 1992 when declines in value were considered to be other than temporary. The effect on 1992 operations of this transaction was a net investment loss of $4.3 million representing the difference between the market value at the time of sale and the GAAP book carrying value of the securities, and $5.8 million of income from disposal of private placement securities representing the amount received in excess of market value. There were no similar transactions in 1994 or 1993. BENEFITS, CLAIMS AND INTEREST CREDITED TO POLICYHOLDERS decreased $1.5 million, to $112.3 million in 1994 from $113.8 million in 1993. This decrease results primarily from a reduction in the average interest rate credited on the company's annuity liabilities, from 6.2% as of December 31, 1993 to 5.8% as of December 31, 1994. This decrease was partially offset by an increase in annuity liabilities to $1,971.6 million on December 31, 1994. In 1993, this amount decreased $14.2 million, or 11%, to $113.8 million from $128.0 million in 1992. This decrease resulted primarily from a reduction in the average interest rate credited on annuity liabilities, from 7.1% as of December 31, 1992 to 6.2% as of December 31, 1993. This decrease was
partially offset by an increase in annuity liabilities to $1,826.9 million on December 31, 1993, from $1,806.2 million on December 31, 1992. AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS decreased $.4 million, to $9.0 million in 1994, from $9.4 million in 1993. Amortization of deferred policy acquisition costs (DAC) associated with gross interest margins increased $4.1 million, to $8.8 million in 1994, from $4.7 million in 1993. Amortization associated with investment gains decreased $4.6 million, to $.2 million in 1994, from $4.8 million in 1993. The 1993 amortization amounts reflect the lowering of interest crediting rates and the resulting increase in the estimates of future expected gross profits and the realization of $17.0 million of investments gains. This follows a decrease of $7.0 million, or 43%, in 1993 from $16.4 million in 1992, primarily due to decreased investment gains, the inclusion of income from disposal of private p lacement securities in the 1992 period and the increase in the estimates of future expected gross profits previously discussed. Acquisition costs incurred in 1994 and deferred into future policy periods were $25.8 million, compared with $18.2 million in 1993 and $14.1 million in 1992. GENERAL INSURANCE EXPENSES decreased $1.2 million, or 14%, to $7.6 million in 1994 from $8.8 million in 1993. This decrease is primarily attributable to the deferral of additional expenses related to the acquisition of annuity contracts in 1994. This follows an increase in general insurance expenses of $.1 million in 1993 from $8.7 million in 1992. PREMIUM AND OTHER TAXES, LICENSES AND FEES decreased $1.1 million, or 46%, to $1.3 million in 1994 from $2.4 million in 1993 following a decrease of $.1 million, or 4%, in 1993 from $2.5 million in 1992. The above amounts include charges (credits) of approximately ($.4) million, $1.6 million and $1. 8 million for the years 1994, 1993 and 1992, respectively, for nonrecoverable guaranty fund assessments resulting from a significant number of insolvencies that occurred in recent years. INTEREST EXPENSE decreased $1.0 million in 1994 following the repayment of all debt in November, 1993, with proceeds from the company's common stock offering. This follows a decrease of $1.4 million to $1.0 million in 1993 from $2.4 million in 1992. This decrease reflects the repayment of debt in 1993. INCOME TAX EXPENSE decreased $2.9 million to $5.6 million in 1994 from $8.5 million in 1993. During 1993, income tax expense increased $8.4 million to $8.5 million from $.1 million in 1992. A large portion of the tax on net investment gains realized in 1992 was offset by tax benefits from capital loss carryforwards from 1989 and 1990. These capital loss carryforwards were fully utilized during 1992 resulting in the taxation of the net investment gains realized in 1993 and 1994. 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, 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 filed with 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 years ended December 31, 1994, 1993 and 1992, was $26.6 million, ($91.5) million and ($27.7) million, respectively. The increase in net cash provided by annuity contracts without life contingencies in 1994 resulted primarily from a $72.3 million decrease in surrender and death benefits paid from $318.9 million (approximately 16.1% of beginning reserves for future policy benefits) to $246.6 million (approximately 12.3% of beginning reserves for future policy benefits) along with a $45.6 million increase in premiums received from $222.2 million to $267.8 million. The decline in net cash provided by annuity contracts without life contingencies in 1993 resulted primarily from a $115.8 million increase in surrender and death benefits paid from $203.1 million (approximately 11.1% of beginning reserves for future policy benefits) to $318.9 million (approximately 16.1% of beginning reserves for future policy benefits) offset by a $53.5 million increase in premiums received from $168.7 million to $222.2 million. The decline in net cash provided by annuity contracts without life contingencies in 1992 resulted primarily from a $50.5 million decline in premiums received from $219.2 million to $168.7 million, and a $5.8 million increase in surrender and death benefits paid from $197.3 million (approximately 12.6% of beginning reserves for future policy benefits) to $203.1 million (approximately 11.1% of beginning reserves for future policy benefits). Net cash provided by the company's operating activities was $130.5 million, $129.7 million and $142.9 million in 1994, 1993 and 1992, 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%, 3% and 7% as of December 31, 1994, 1993 and 1992, respectively). The weighted average duration of the company's investment portfolio was 4.7 years as of December 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 company's 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 7 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. In December, 1994, the company entered into a credit agreement with The First National Bank of Chicago and Boatman's First National Bank of Kansas City, as Lenders. Under the terms of this agreement, the Lenders have committed to lend up to $25,000,000 in the form of a 5-year reducing credit facility. For
additional information regarding this credit agreement, see Note 6 of Notes to Consolidated Financial Statements. As of December 31, 1994, the company owned bonds of 39 issuers in amounts exceeding 10% of stockholders' equity. The book value of such bonds was $546.4 million which represented 29% of the company's invested assets. See Note 2 of Notes to Consolidated Financial Statements. A default by any one of these issuers could materially adversely affect the results of operations and financial condition of the company. Twenty-six bonds with an aggregate book value of $364.7 million were REMIC Trusts established by government-sponsored enterprises. The remaining $181.7 million of such bonds represent 13 issuers, of which all but one in the amount of $10.1 million are rated investment grade. 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 13 of Notes to Consolidated Financial Statements. REINSURANCE. The company had amounts receivable under reinsurance agreements of $149.7 million and $151.4 million as of December 31, 1994 and 1993, respectively. Of the amounts, $147.9 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. See Item 1.(c)(l) Business Done and Intended to be Done-Other Insurance Products. 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. Conversely, if interest rates rise (as was the case in 1994), fixed income investments generally will decrease in market value, while net investment income will increase. In a rising interest rate environment (such as that experienced in 1994), the company's average cost of funds would increase over time as it prices its new and renewing annuities to maintain a generally competitive market rate. During such a rise in interest rates, new funds would be invested in bonds with higher yields than the liabilities assumed. In a declining interest rate environment, the company's cost of funds would decrease over time, reflecting lower interest crediting rates on its fixed annuities. In addition to the increase in the company's average cost of funds caused by a rising interest rate environment, surrenders of annuities that are no longer protected by surrender charges increase. While the company experienced a decrease in total surrenders during 1994, the decrease was primarily due to the large number of bailout surrenders in 1993. Throughout 1994, the company saw an increase in surrenders of policies which no longer were covered by surrender charges. Management believes the increased surrenders experienced in 1994 were due to the increasing interest rates throughout 1994. This trend
has continued into 1995. Management believes that surrenders are lower during periods of declining interest rates. BOND PORTFOLIO RESTRUCTURING. During 1990, the quoted market values of many non-investment grade bonds substantially decreased. In response to this decrease, the company substantially increased the allowance for credit losses during the third quarter of that year, and completed a significant restructuring of its bond portfolio during 1991. During 1994, 1993 and 1992, the company disposed of bonds with book values of $337.7, $374.6 and $673.8 million for net gains (losses) of $(.8) $18.6 and $19.7 million, respectively. In 1993, the company reduced credited interest rates below the "bailout" rates on certain annuity policies and the related surrenders experienced during the "bailout" period resulted in losses on a statutory basis. The company sold securities at gains to restore the statutory surplus lost. The following chart sets forth the reasons that bonds were disposed of, the book value of bonds disposed of and the gains (losses) on dispositions for the years ended December 31, 1994, 1993, and 1992:
In managing the relationship between its assets and liabilities, the company utilizes models which determine the cash flows necessary to meet the expected cash needs on the underlying liabilities under various interest rate scenarios. The company also utilizes these models to determine the dollar value of securities that would need to be sold under each interest rate scenario so as to determine what portion of its investment portfolio needs to be carried on its balance sheet as "available-for-sale." In addition, certain
conditions specific to an individual security (such as deterioration in credit quality) may result in a security being carried as "available-for-sale." For a discussion of the impact of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" see Note 1 of Notes to Consolidated Financial Statements. The carrying value, estimated market value, unrealized gains, and unrealized losses in non-investment grade bonds owned as of December 31, 1993, and December 31, 1992, were $84.1 million and $78.4 million, respectively, $86.3 million and $74.5 million, respectively, $2.8 million and $.6 million, respectively, and $.6 million and $4.5 million, respectively. The carrying value and estimated market value of securities which are not actively traded in a liquid market as of December 31, 1993 and December 31, 1992, were $.1 million and $.1 million, respectively. The market values of corporate debt securities rated below investment grade and comparable unrated securities tend to be more sensitive to issuer-specific developments and changes in economic conditions than higher rated securities. Issuers of these securities are often highly leveraged, so that their ability to service their debt obligations during an economic downturn or during sustained periods of rising interest rates may be impaired. In addition, such issuers may not have other methods of financing available to them, and may be unable to repay debt at maturity by refinancing. The risk of loss due to default in payment of interest or principal by such issuers is significantly greater than with inves tment grade issuers for the previously mentioned reasons and because such securities frequently are subordinated to the prior payment of senior indebtedness. As of December 31, 1993, the carrying value of the company's five largest investment in securities rated non-investment grade by both Standard & Poor's Corporation ("S&P") and Moody's Investors Service, Inc. ("Moody's") aggregated $24.3 million, with an approximate market value of $25.2 million, none of which individually exceed $6.0 million. For a list of all investments exceeding 10% of stockholders' equity including those classified as non-investment grade by the company, seeNote 2 of Notes to Consolidated Financial Statements. The company's allowance for credit losses was $2.2 million, $2.5 million and $2.5 million on December 31, 1994, 1993 and 1992, respectively. As of December 31, 1994, December 31, 1993 and December 31, 1992, the book value of non-investment grade bonds were $136.9 million, $84.1 million and $78.4 million, respectively. The amount of non-investment grade bonds held affects the amount of credit risk in the company's portfolio more significantly than do the amounts of investment grade bonds.
Item 8.



Item 8. Financial Statements and Supplemental Data ____________________________________________________________
INDEPENDENT AUDITORS' REPORT __________________________________ To the Board of Directors and Shareholders of AmVestors Financial Corporation Topeka, Kansas
We have audited the accompanying consolidated balance sheets of AmVestors Financial Corporation and subsidiaries (the company) as of December 31, 1994 and 1993, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of AmVestors Financial Corporation and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the company adopted the provisions of Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities in 1994 and Statement of Financial Accounting Standards No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts in 1993. /s/Deloitte & Touche LLP ____________________________
Kansas City, Missouri March 29, 1995
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (000's Omitted)
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (000's Omitted, except per share data)
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (000's Omitted, except per share data)
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (000's Omitted, except share and per share data)
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW Increase (Decrease) in Cash and Cash Equivalents
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (continued) Increase (Decrease) in Cash and Cash Equivalents
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1994, 1993 and 1992 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. 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. Beginning in 1994, debt securities available-for-sale are carried at estimated market value, with any unrealized gains or losses recorded in stockholders' equity. In 1993, debt securities classified as available-for-sale were carried at the lower of aggregate cost or estimated market value, with any unrealized loss recorded in stockholders' equity. Investments are reviewed on each balance sheet date to determine if they are impaired. In determining whether an investment is impaired, the company considers whether the decline in market value at the balance sheet date is an other than temporary decline; if so, then the investment's carrying value is reduced to a new cost basis which represents estimated net realizable value. The decline in value is reported as a realized loss, and a recovery from the new cost basis is recognized as a realized gain only at sale. The estimates of net realizable value are based on information obtained from published financial information provided by issuers, independent sources such as broker dealers or the company's independent investment advisors. Such amounts represent an estimate of the consideration to be received in the future when the defaulted company's debt is settled through the sale of their assets or the restructuring of their debt. These estimates do not represent the discounted present value of these future considerations. 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. The cost of securities sold is determined on the identified certificate basis. Other long-term investments include policy loans and mortgage loans on real estate which are carried at cost less principal payments since date of acquisition, and certain partnership investments which are carried at an amount equal to the company's share of the partnerships' estimated market value with any unrealized gains or losses recorded in net investment income. C. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 1. Summary of Significant Accounting Policies (continued): ______________________________________________________________ The carrying values and estimated fair values of the company's financial instruments as of December 31, 1994 and 1993 were as follows:
DEBT SECURITIES - Fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. EQUITY SECURITIES - Fair value equals the carrying value as these securities are carried at quoted market value. OTHER LONG-TERM INVESTMENTS - For certain homogeneous categories of mortgage loans, fair value is estimated using quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. Fair value of policy loans and other long-term investments is estimated to approximate the assets' carrying value. SHORT-TERM INVESTMENTS AND CASH AND CASH EQUIVALENTS - The carrying amounts reported in the balance sheet approximate the assets' fair value. AMOUNTS RECEIVABLE ON SECURITIES SETTLEMENTS IN PROCESS - The carrying amount reported in the balance sheet approximates the fair value of this asset. ACCOUNTS RECEIVABLE AND ACCRUED INVESTMENT INCOME - The carrying amounts reported in the balance sheet approximate fair value. FUTURE POLICY BENEFITS FOR INVESTMENT CONTRACTS - The fair values for deferred annuities were estimated to be the amount payable on demand at the reporting date as those investment contracts have no defined maturity and are similar to a deposit liability. The amount payable at the reporting date was c alculated as the account balance less any applicable surrender charges. OTHER POLICY LIABILITIES - The carrying amount reported in the balance sheet approximates the fair value of these liabilities. AMOUNTS DUE ON SECURITIES SETTLEMENTS IN PROCESS - The carrying amount reported in the balance sheet approximates the fair value of this liability.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 1. Summary of Significant Accounting Policies (continued): ______________________________________________________________ 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. D. 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. 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 1, 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 earnings if actual experience indicates that the estimates should be revised. Net investment gains realized in 1994, 1993 and 1992 resulted in the company experiencing investment margins greater than those estimated. As a result, $203,940, $4,790,523 and $8,691,521 of the unamortized balance of deferred policy acquisition costs were expensed in 1994, 1993 and 1992, 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. E. 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. 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. F. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 1. Summary of Significant Accounting Policies (continued): ______________________________________________________________ G. 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. H. 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. I. EARNINGS PER SHARE: Primary earnings per share of common stock are computed by dividing net earnings (reduced by preferred dividend requirements in 1993 and 1992) 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 1992. During 1993, 573,332 common shares were issued upon conversion of $4,300,000 of Series B Convertible Preferred Stock. Had this conversion occurred on January 1, 1993, primary earnings per share would have been $2.46 for 1993. During 1993, 1,646,883 shares of common stock were sold to retire debt in the amount of $14,030,289. Had this sale and the corresponding retirement of debt occurred on January 1, 1993, primary earnings per share would have been $2.25 for 1993. J. CONSOLIDATED STATEMENTS OF CASH FLOWS: For purposes of reporting cash flows, cash and cash equivalents includes cash and money market accounts. K. NEW ACCOUNTING STANDARDS: Effective January 1, 1994, the company adopted to 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 cumulative effect of the adoption of this Statement was an increase in stockholder's equity of $19,612,653 (net of related amortization of deferred policy acquisition costs of $12,745,031 and deferred income tax expense of $10,560,659), 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 December 31, 1994 were not affected by the adoption of this Statement. Effective May 1993, the company adopted the provisions of SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" and restated the financial statements of prior years to report amounts ceded to reinsurers separately as assets in the respective consolidated balance sheets. Adoption of this standard increased total assets and liabilities by $148,626,459 and $150,635,000 as of December 31, 1994 and 1993, respectively. L. RECLASSIFICATIONS: Certain reclassifications have been made to conform prior years' financial statements to the December 31, 1994, presentation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2. Investments: A summary of investment income is as follows:
Certain limited partnership investments are included in income from other long-term investments. These funds (commonly referred to as hedge funds) are managed by outside investment advisors. The investment guidelines of these partnerships provide for a broad range of investment alternatives, including stocks, bonds, futures, options, commodities, and various other financial instruments. These investments were purchased with the strategy that yield in excess of the S&P 500 Index may be obtained. The partnerships are carried at an amount equal to the company's share of the partnerships' estimated market value with related unrealized gains and losses recorded in net investment income. In accordance with the permitted guidelines, the investments purchased by these partnerships may experience greater than normal volatility which could materially effect the company's earnings for any given period. The maturity of the company's debt and equity securities portfolio as of December 31, 1994 was as follows:
These tables include mortgage-backed securities based on the estimated future cash flows of the underlying mortgages.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2. Investments (cont.): _________________________ The book value, estimated market value and unrealized market gains and losses of debt and equity securities as of December 31, 1994, and 1993 were as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2. Investments (cont.): _________________________ The preceding table includes the carrying value and estimated market value of debt securities which the company has determined to be impaired (other than temporary decline in value) as follows:
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 December 31, 1994, and December 31, 1993 were as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (cont.): ______________________
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-b acked pass-through securities and sequential classes, which comprised 21.6% and 22.1% of the carrying value of the company's mortgage-backed securities as of December 31, 1994 and December 31, 1993, respectively, are sensitive to this prepayment risk.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (cont.): _______________________ A portion of the company's mortgage-backed securities portfolio consists of planned amortization class ("PAC"), targeted amortization class ("TAC") and accretion directed class ("AD") instruments. These securities are designed to amortize in a more predictable manner by shifting the primary risk of prepayment to investors in other tranches (support classes) of the mortgage-backed security. PAC, TAC and ADsecurities comprised 76.8% and 76.3% of the carrying value of the company's mortgage-backed securities as of December 31, 1994 and December 31, 1993, respectively. The company does not invest in support class securities or principal-only ("PO") and interest-only ("IO") strips. As of December 31, 1994, 76.4% 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 four issues, with a carrying value of $15,186,000 as of December 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 following investments held as of December 31, 1994, exceeded ten percent of stockholders' equity:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2. Investments (cont.): _______________________
The amounts shown as "estimated market" are primarily based on quotations obtained from independent sources such as broker dealers who make markets in similar securities. Unless representative trades of securities actually occur at the balance sheet date, these quotes are generally estimates of market value based on an evaluation of appropriate factors such as institution-size trading in similar securities, yield, credit quality, coupon rate, maturity, type of issue and other market data. Losses are 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, carrying value and realized gains and losses on those sales were as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (cont.): _______________________ The above table includes bonds of one issuer which the company had classified as held-to-maturity. These bonds have a book value of $8,507,732 and the sale resulted in a realized loss of $205,526. The decision to sell these bonds was based upon a significant deterioration in the issuer's creditworthiness. In addition to the above sales, the company transferred bonds of two issuers from held-to-maturity to available-for-sale as a result of an increase in the risk weights used for regulatory risk-based capital purposes. The book value of these bonds was $16,960,874. Bonds of another issuer with a book value of $1,721,460 were also transferred from held-to-maturity to available-for-sale based upon a significant deterioration in the issuer's creditworthiness. 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:
At December 31, 1994 and 1993, investments with statutory carrying values of $1,866,074,033 and $1,736,404,701 respectively, were on deposit with various insurance departments. These amounts exceeded the minimum required deposits by $66,325,834 and $57,640,783 as of December 31, 1994 and 1993, respectively. 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 balances on this loan were $11,815 and $205,059 as of December 31, 1994 and 1993, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
4. Other Assets: ________________
5. Reinsurance: ________________ The company reinsures portions of insurance it writes. The maximum amount of risk retained by the company on any one life is $150,000. A summary of reinsurance data follows (000's Omitted):
The company had amounts receivable under reinsurance agreements of $149,656,094 and $151,392,088 as of December 31, 1994, and December 31, 1993, respectively. Of the amounts, $147,949,099 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
5. Reinsurance (cont.): _______________________
The following table identifies the components of the amounts receivable from ERC:
6. Credit Agreement: ____________________ On December 29, 1994, the company entered into a credit agreement with The First National Bank of Chicago (First Chicago) and Boatmen's First National Bank of Kansas City (Boatmen's), as Lenders. Under the terms of this agreement, the Lenders have committed to lend up to $25,000,000 in the form of a 5-year reducing revolving credit facility. The company has agreed to pay a commitment fee of .25% per annum on the unused portion of the commitment. Borrowings under this agreement may be used for general corporate purposes. Interest on the borrowings under this agreement is determined at the option of the company to be: (i) a fluctuating rate of interest equal to the higher of the corporate base rate announced by First Chicago from time to time, and a fluctuating rate equal to the weighted average of rates on overnight Federal Funds transactions with members of the Federal Reserve System as published by the Federal Reserve Bank of New York plus .50% per annum, or (ii) a Eurodollar rate plus a margin ranging from 1.00% to 1.25%. In addition to general covenants which are customary for facilities such as this, the company has agreed to maintain minimum consolidated net worth, a minimum cash flow coverage ratio, minimum risk based capital for American, minimum capital, surplus and asset valuation reserve of American and to maintain a maximum debt to equity(including indebtedness) ratio. Additional covenants include: (i) limitations on acquisitions; (ii) maintenance of current lines of business; (iii) limitations on additional indebtedness; (iv) limitations on investments; (v) limitations on dividends and stock repurchases, and (vi) limitations on mergers, consolidations and sales of assets, typical of such facilities. At December 31, 1994, there had been no borrowings under this agreement. 7. Retirement Plans: ____________________ The company sponsors an Employee Stock Ownership Plan (ESOP) for all full-time employees with one year of service. Qualifying participants may contribute an amount not to exceed ten percent of covered compensation. The company made no contributions to the plan during the three years ended December 31, 1994. The company sponsors a Leveraged Employee Stock Ownership Plan (LESOP) for all full-time employees with one year of service. The LESOP has acquired 370,244 shares of the company's stock through the proceeds of a note payable to American. The note bears interest at 7.0% and is payable in annual installments through December 30, 2002. The note had unpaid principal balances of $3,336,038 and $3,639,922 as of December 31, 1994 and 1993, respectively. Each year, the company makes contributions to the LESOP which are to be used to make loan interest and principal payments. On December 31 of each year, a portion of the common stock is allocated to participating employees. Of the 368,079 shares of the company's common stock now owned by the LESOP, 99,704 shares have been allocated to the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 7. Retirement Plans (continued): ________________________________ participating employees with the remaining 268,375 shares 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. Contributions to the LESOP during December 31, 1994, 1993 and 1992 were $285,565, $266,886 and $200,226, 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 December 31, 1994, five of the company's directors qualified for benefits under the plan. A liability in the amount of $521,180, representing the present value of future benefits, has been established. Charges (credits) to earnings relating to the plans were ($40,244), $(3,282) and $564,706, for the years ended December 31, 1994, 1993 and 1992, respectively. Effective January 1, 1993, the company adopted an Age-Weighted Money Purchase Plan for all full-time employees with one year of service. The full cost of this plan will be paid by the company with qualifying participants receiving contributions based upon their age at plan implementation and current salary. Contributions to the Age-Weighted Money Purchase Plan for the year ended December 31, 1994 and 1993, were $215,664 and $213,059, respectively. 8. 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, 1994, surplus profits of American were $12,996,673 and 10% of statutory capital and surplus was $8,752,120. 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 December 31, 1994 and 1993 American's statutory capital and surplus was $87,521,204 and $87,146,052, respectively. Statutory net income (loss) for the years 1994, 1993 and 1992 was $4,167,120, ($1,469,786) and $1,853,297, respectively. In connection with the original establishment of the Interest Maintenance Reserve (IMR), the Commissioner of Insurance of Kansas, the company's domiciliary state, ordered that American prepare its December 31, 1992, NAIC Annual Statement Form to equitably allocate 1992 capital gains and losses, not included in the calculation of the Asset Valuation Reserve (AVR), on other than government securities, fifty (50%) percent to surplus and fifty (50%) percent to IMR, after calculation of the AVR pursuant to the instructions provided by the NAIC. This differs from prescribed statutory accounting practices. This permitted accounting practice increased statutory surplus as of December 31, 1992, by $8,167,587. Gains and losses for years subsequent to 1992 are recorded in accordance with prescribed statutory accounting practices.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 8. Stockholders' Equity (cont.): _________________________________ On March 17, 1989, the Board of Directors of the company adopted the 1989 Nonqualified Stock Option 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 859,837 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 years were as follows:
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 8. Stockholders' Equity (cont.): _________________________________ The company recorded compensation expense relating to stock appreciation rights of $-0-, $1,875 and $121,875, for the years ended December 31, 1994, 1993, and 1992, respectively. The Restricted Stock Plan authorizes the Board of Directors to make restricted stock awards to employees, officers and directors in such amounts as it shall determine. The stock issued pursuant to such awards is subject to restrictions on transferability for a period of five years. Such stock is subject to a five-year vesting schedule, and the company is required to repurchase all vested stock from a grantee if such grantee's employment with the company is terminated prior to the lapse of the transfer restrictions. The Restricted Stock Plan authorizes a maximum of 125,000 shares to be issued thereunder. No restricted stock awards have been granted pursuant to the Restricted Stock Plan. In conjunction with 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:
9. Stockholders' Rights Plan: ______________________________ On June 30, 1994, the company's Board of Directors voted to repeal the 1988 Stockholders' Rights Plan and set the close of business on July 22, 1994 as the record date for the payment of the one cent per share redemption price. Stockholders of record were paid on August 8, 1994, in full redemption of the rights under the plan. The total amount to redeem the Rights was $101,432. 10. Income From Disposal of Private Placement Securities _____________________________________________________ Income from disposal of private placement securities was $5.8 million in 1992. During 1988, 1989, and 1990, American purchase private placement securities believed to have a quality rating equivalent to "BBB" by S&P. In 1992, the company engaged an independent firm to review the private placement portfolio. That review determined those securities would have been rated "BB"-"B" if they had been rated by S&P when issued and that the total market value of the securities at the time of the report was approximately $5.8 million less than the par value of these securities. On September 21, 1992, an affiliate of the placement agent agreed to purchase the bonds at their par value, which approximated the company's cost. Several of these bonds had been written down in an amount totalling $2.1 million during 1990, 1991 and 1992 when declines in value were considered to be other than temporary. The effect on 1992 operations of this transaction was a net investment loss of $4.3 million representing the difference between the market value at the time of the sale and the GAAP book carrying value of the securities, and $5.8 million of income from the disposal of private placement securities, representing the amount received in excess of market value. There were no similar transactions in 1994 or 1993.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 11. 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 in 1994, 1993 and 1992 was $129,972, $136,912 and $143,370, respectively. During 1993 and 1992, the company received amounts of $51,000 and $472,000, respectively representing recoveries of amounts paid during 1991 as a result of the settlement of legal claims which resulted from agent fraud. 12. Income Taxes: ________________ The provision for income taxes charged to operations was as follows:
The net deferred tax asset was comprised of the following:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
12. Income Taxes (cont.): ________________________
The actual tax expense (benefit) for each year differs from the "expected" tax expense (computed by applying the Federal tax rate of 35% to earnings before income taxes) as follows:
Deferred income taxes are provided for the tax effects of transactions that are reported in different periods for financial reporting and tax return purposes. The primary components of the deferred income tax provision are as follows:
As of December 31, 1994, the company had no capital loss carryforwards available to offset future realized investment gains.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 13. Commitments and 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. Charges (credits) relating to guaranty fund assessments impacted 1994, 1993 and 1992 income before taxes by approximately $(368,000), $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. 14. Quarterly results (Unaudited): ________________________________ The company's quarterly results are set forth in the following table:
Item 9.

Item 9. Changes in and Disagreements with Accountants and Accounting and Financial Disclosure There have been no disagreements on accounting and financial disclosure within the twenty-four months prior to the date of the most recent financial statements. PART III
Item 10.



Item 10. Directors and Executive Officers of the Registrant ______________________________________________________________
The information set forth under the caption "Proposal A. Election of Directors" in the company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held May 18, 1995, is incorporated herein by reference. Item 11.

Item 11. Executive Compensation _________________________________
The information set forth under the caption "Executive Compensation" in the company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held May 18, 1995, is incorporated herein by reference. Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management __________________________________________________________________________
The information set forth under the caption "Principal Holders of Voting Securities" in the company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held May 18, 1995, is incorporated herein by reference.
Item 13.

Item 13. Certain Relationships and Related Transactions _________________________________________________________
The information set forth under the caption "Compensation Committee Interlocks and Insider Participation" in the company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held May 18, 1995, is incorporated herein by reference. PART IV Item 14.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ____________________________________________________________________________ (a) 1. Financial Statements See index to Financial Statements at Item 8. (b) 2. Financial Statement Schedules
All other schedules are omitted because they are not required or because the required information is included in the consolidated financial statements and the notes thereto.
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: /s/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: March 30, 1995 ________________
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
INDEPENDENT AUDITORS' REPORT _____________________________ We have audited the consolidated financial statements of AmVestors Financial Corporation and subsidiaries as of December 31, 1994 and 1993, and for each of the three years in the period ended December 31, 1994, and have issued our report thereon dated March 29, 1995; such report is included elsewhere in this Form 10-K. Our audits also included the financial statement schedules of AmVestors Financial Corporation and subsidiaries, listed in Item 14. These financial statement schedules are the responsibility of the company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/Deloitte & Touche LLP ____________________________
Kansas City, Missouri March 29, 1995
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES SUMMARY OF INVESTMENTS SCHEDULE I As of December 31, 1994 (000's Omitted)
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SCHEDULE II BALANCE SHEETS (000's Omitted)
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE II (cont.) STATEMENTS OF CASH FLOWS (000's Omitted) Increase (Decrease) in Cash and Cash Equivalents
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION SCHEDULE III (000's Omitted)
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES SCHEDULE V (000's Omitted)