The company occupied its new home office complex in Topeka, Kansas during 1996. Total floor space in the building is approximately 105,000 square feet. Of that amount, the company occupies 61,000 square feet and leases the remainder. These facilities are believed adequate to meet the company's projected needs for the foreseeable future.
Following is a summary of selected financial data for each of the five years in the period ended December 31, 1996: (000's Omitted, except per share data)
*Per share data for 1992 has been restated to give effect to a one-for-two and one half reverse stock split effective June 11, 1993.
GENERAL The company specializes in the sale of deferred annuity products. During each of the past three years, sales of deferred annuities have accounted for at least 96% of the company's premiums received, while sales of single premium immediate annuities (SPIAs) and flexible premium universal life insurance (FPULs) have accounted for virtually all remaining premiums received. The company's operating earnings are derived primarily from its investment results, including realized gains (losses), less interest credited to annuity contracts and expenses. Under GAAP, premiums received on deferred annuities, SPIAs without life contingencies and FPULs are not recognized as revenue at the time of sale. Similarly, policy acquisition costs (principally commissions) related to such sales are not recognized as expenses but are capitalized as deferred acquisition costs, or "DAC". As a result of this deferral of costs and the lack of revenue recognition for premiums received, no profit or loss is realized on these contracts at the time of sale. Premiums received on deferred annuities, SPIAs without life contingencies and FPULs are reflected on the company's balance sheet by an increase in assets equal to the premiums received and by a corresponding increase in future policy liabilities. The company's earnings depend, in significant part, upon the persistency of its annuities. Over the life of the annuity, net investment income, net investment gains (losses) and policy charges are realized as revenue, and DAC is amortized as an expense. The timing of DACamortization is based on the projected realization of profits including realized gains (losses) for each type of annuity contract and is periodically adjusted for actual experience. If a policy is terminated prior to its expected maturity, any remaining related DAC is expensed in the current period. Most of company's annuity policies in force have surrender charges which are designed to discourage and mitigate the effect of premature terminations.As a result, the impact on earnings from surrenders will depend upon the extent to which available surrender charges offset the associated amortization of DAC. Recent periods of low interest rates have reduced the company's investment yields. As a result of the lower investment yields, the company reduced credited interest rates on its annuity products. Certain annuities issued by the company include a "bailout" feature which allows policyowners to withdraw their entire account balance without surrender charge for a period of 45 to 60 days following the initial determination of a renewal credited rate below a predetermined level. If a policyowner elects not to withdraw funds during this period, surrender charges are reinstated. As of December 31, 1996, approximately $256.7 million, or 11.8% of American's annuity account values contained a "bailout" provision, the current credited interest rates on these policies are above the "bailout" rate. The "bailout" rate on $254.6 million of this amount is 6% or less. As of that same date, approximately $18.7 million, or 3.8% of FBL's annuity account values contained a "bailout" provision, the current credited interest rates on these policies are above the "bailout" rate. The "bailout" rate on the entire $18.7 million is 5.5% or less, with $15.4 million at 5% or less. If the company reduces credited interest rates below the "bailout" rates on policies containing "bailout" provisions in the future, it intends to pay any resulting surrenders from cash provided by operations and premiums received. In the event such sources are not sufficient to pay surrenders, the company would have to sell securities at the then current market prices. Management expects that withdrawals on the company's annuity contracts will increase as such contracts approach maturity. The company may not be able to realize investment gains in the future to offset the adverse impact on earnings, should future "bailout" surrenders occur. MARGIN ANALYSIS The company's earnings are impacted by realized investment gains (losses) and by the associated amortization of the deferred costs of policies produced and purchased. The actual timing and pattern of such amortization is determined by the actual profitability to date (which includes realized investment gains (losses)) and the expected future profitability on a particular annuity contract. To the extent investment income is accelerated through realization of investment gains, the corresponding amortization of deferred costs is also accelerated as the stream of profitability on the underlying annuities is effectively accelerated. When investment losses are realized, the reverse is true. The following margin analysis depicts the effects of realized gains, amortization of DAC and other components of profit on the company's operating earnings:
See notes to consolidated financial statements. AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (000's Omitted, except per share data)
The above represents transactions involving the exchange of one security for another. For additional information see Note 2 of Notes to Consolidated Financial Statements.
See notes to consolidated financial statements. AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1996, 1995 and 1994
1. Summary of Significant Accounting Policies (continued): ___________________________________________________________ SUBORDINATED DEBENTURES PAYABLE - The fair value of the company's debentures is based on a dealer quote. NOTES PAYABLE - The fair value of the company's note payable has been estimated to be an amount equal to the balance reported in the balance sheet. AMOUNTS DUE ON SECURITIES SETTLEMENTS IN PROCESS - The carrying amount reported in the balance sheet approximates the fair value of this liability. ACCRUED EXPENSES AND OTHER LIABILITIES - The carrying amount reported in the balance sheet approximates the fair value of these liabilities. The use of different market assumptions and/or estimation methodologies could have a material effect on the estimated fair value amounts. D. SIGNIFICANT RISKS AND UNCERTAINTIES: NATURE OF OPERATIONS - The company specializes in the sale of deferred annuity products, the earnings on which are not currently taxable to the annuity owner. Any changes in tax regulations which eliminate or significantly reduce this advantage of tax deferred income would adversely impact the operations of the company. The company's products are marketed nationwide through a network of independent agents licensed in 47 states, the District of Columbia and the U.S. Virgin Islands. The company is not dependent on any one agent or agency for a substantial amount of its business. No single agent accounted for more than 2% of annuity sales in 1996, and the top twenty individual agents accounted for approximately 18% of 1996 annuity sales. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. CERTAIN SIGNIFICANT ESTIMATES - Certain costs incurred to acquire new business are deferred and amortized in relation to the incidence of expected gross profits over the expected life of the policies. Determination of expected gross profits includes management's estimate of certain elements over the life of the policies, including investment income, interest to be credited to the contract, surrenders and resultant surrender charges, deaths and in the case of life insurance, mortality charges to be collected. These estimates of expected gross profits are used as a basis for amortizing deferred costs. These estimates are periodically reviewed by management and, if actual experience indicates that the estimates should be revised, the total amortization recorded to date is adjusted by a charge or credit to earnings. E. DEFERRED COST OF POLICIES PRODUCED: The costs of acquiring new business (primarily commissions and policy expenses), which vary with and are directly related to the production of new business, have been deferred. The deferred costs related to investment-type deferred annuity contracts are amortized in relation to the incidence of expected gross profits over the expected life of the policies. For single premium life insurance, deferred policy acquisition costs are amortized over the life of the policies, but not more than 20 years for policies issued before January l, 1987, and not more than 30 years for policies issued after December 31, 1986, 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 1. Summary of Significant Accounting Policies (continued): ___________________________________________________________ Net investment gains realized in 1996, 1995 and 1994 resulted in the company experiencing investment margins greater than those estimated. As a result, $3,691,731, $3,902 and $203,940 of the unamortized balance of deferred policy acquisition costs were expensed in 1996, 1995 and 1994, respectively. The amount charged off is based on actual gross profits earned to date in relation to total gross profits expected to be earned over the life of the related contracts. Estimates of the expected gross profits to be realized in future years include the anticipated yield on investments. Deferred policy acquisition costs will be adjusted in the future based on actual investment income earned. F. DEFERRED COST OF POLICIES PURCHASED: At the date of acquisition of a company, a portion of the purchase price is allocated to the right to receive future cash flows from the existing insurance contracts. The amount allocated represents the present value of the projected future cash flows from the acquired policies. These projections take into account mortality, surrenders, operating expenses, investment yields on the investments held to back the policy liabilities and other factors known or expected at the valuation date based on the judgment of management. The deferred cost of policies purchased is amortized in relation to the incidence of expected cash flows over the expected life of the policies. If it is determined that the present value of future cash flows is insufficient to recover the deferred cost of policies purchased, its carrying value will be reduced with a corresponding charge to earnings. G. GOODWILL: Goodwill represents the excess of the amount paid to acquire a company over the fair value of the net assets acquired. This balance is amortized on a straight-line basis over a 30-year period. If it is determined through an estimate of future cash flows that the goodwill has been impaired, its carrying value will be reduced with a corresponding charge to earnings. H. FUTURE POLICY BENEFITS: Liabilities for future policy benefits under life insurance policies, other than single premium life insurance, have been computed by the net level premium method based upon estimated future policy benefits (excluding participating dividends), investment yield, mortality and withdrawals giving recognition to risk of adverse deviation. Interest rates range from 41\2% to 101\4% depending on the year of issue, with mortality and withdrawal assumptions based on company and industry experience prevailing at the time of issue. For single premium life insurance and single premium annuities, the future policy benefits are equal to the accumulation of the single premiums at the credited rate of interest and for single premium whole life, less any mortality charges. I. PARTICIPATING POLICIES: The company issued participating policies on which dividends are paid to policyholders as determined annually by the Board of Directors. The amount of dividends declared but undistributed is included in other liabilities. Policy benefit reserves do not include a provision for estimated future participating dividends. J. 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 1. Summary of Significant Accounting Policies (continued): ___________________________________________________________ K. 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. L. EARNINGS PER SHARE: Primary earnings per share of common stock are computed by dividing net earnings by the sum of the weighted average number of shares outstanding during the period plus dilutive common stock equivalents applicable to stock options and warrants calculated using the treasury stock method. Fully diluted earnings per share assumes the conversion of the convertible debentures outstanding with applicable reduction in interest expense related to the debentures. M. CONSOLIDATED STATEMENTS OF CASH FLOWS: For purposes of reporting cash flows, cash and cash equivalents includes cash and money market accounts and other securities with original maturities of three months or less. N. NEW ACCOUNTING STANDARDS: Effective January 1, 1996, the company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long Lived Assets." This statement establishes accounting standards for the impairment of long-lived assets, certain intangibles, and goodwill related to those assets. The adoption did not have a material affect on its consolidated financial statements. Effective January 1, 1996, the company adopted the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." This statement requires increased disclosure of compensation expense arising from stock compensation plans. The Statement encourages rather than requires companies to adopt a new method of accounting that accounts for stock compensation awards based on their estimated fair value at the date they are granted. Companies are permitted to continue accounting under APB Opinion No. 25 which requires compensation cost be recognized based on the difference, if any, between the quoted market price of the stock on the date of grant and the amount an employee must pay to acquire the stock. The company has elected to continue to apply APB Opinion No. 25 in its consolidated financial statements and has disclosed pro forma net income and earnings per share in Note 8 of Notes to Consolidated Financial Statements, determined as if the new method were applied. Effective for transfer and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996, SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" establishes accounting and reporting standards based on the consistent application of the financial-components approach. This approach requires the recognition of financial assets and servicing assets that are controlled by the reporting entity, the derecognition of financial assets when control is surrendered, and the derecognition of liabilities when they are extinguished. Specific criteria are established for determining when control has been surrendered in the transfer of financial assets. The company does not expect the implementation of this Statement to have a material effect on its consolidated financial statements. O. RECLASSIFICATIONS: Certain reclassifications have been made to conform prior years' financial statements to the December 31, 1996 presentation. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2. Investments: _________________ A summary of net investment income and net investment gains (losses) 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 to achieve a yield in excess of the S&P 500 Index. The partnerships are carried at an amount equal to the company's share of the partnerships' estimated market value with related unrealized gains and losses recorded in net investment income. In accordance with the permitted guidelines, the investments purchased by these partnerships may experience greater than normal volatility which could materially affect the company's earnings for any given period. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2. Investments (continued): ______________________________ The maturity of the company's debt and equity securities portfolio as of December 31, 1996 was as follows: (000's Omitted) As of December 31, 1996 ______________________________________
2. Investments (continued): _____________________________ (000's Omitted) Estimated Amortized Unrealized Unrealized Market Costs Gains Losses Value December 31, 1995 __________________ Bonds available-for-sale: Corporate debt obligations Investment grade ......... $1,076,873 63,321 724 1,139,470 High-yield ............... 147,878 5,468 1,810 151,536 1,224,751 68,789 2,534 1,291,006 U.S. Treasury obligations 51,743 942 21 52,664 Mortgage-backed securities Investment grade ......... 661,652 32,062 1 693,713 High-Yield ............... 9,631 - 2,408 7,223 Bonds available-for-sale . 1,947,777 101,793 4,964 2,044,606 Bonds trading: Corporate debt obligations Investment grade ......... 458 - 7 451 High-yield ............... 1,031 5 2 1,034 Bonds trading ........... 1,489 5 9 1,485 Total bonds ............. 1,949,266 101,798 4,973 2,046,091 Equity securities ........ 9,232 614 303 9,543 $1,958,498 102,412 5,276 2,055,634 The preceding table includes the carrying value and estimated market value of debt securities which the company has determined to be impaired (othe r than temporary decline in value) as follows: (000's Omitted) Accumulated Estimated Original Write Carrying Market Cost Downs Value Value December 31, 1996 $ 7,545 7,545 - - December 31, 1995 $ 7,545 7,545 - -
The company defines high-yield securities as those corporate debt obligations rated below investment grade by Standard & Poor's and Moody's or, if unrated, those that meet the objective criteria developed by the company's independent investment advisory firm. Management believes that the return on high-yield securities adequately compensates the company for additional credit and liquidity risks that characterize such investments. In some cases, the ultimate collection of principal and timely receipt of interest is dependent upon the issuer attaining improved operating results, selling assets or obtaining financing. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The amortized cost, estimated market value and unrealized market gains (losses) by type of mortgage-backed security as of December 31, 1996 and 1995 were as follows:
Certain mortgage-backed securities are subject to significant prepayment risk. In periods of declining interest rates, mortgages may be repaid more rapidly than scheduled as individuals refinance higher rate mortgages to take advantage of the lower current rates. As a result, holders of mortgage-backed securities may receive large prepayments on their investments which they are unable to reinvest at an interest rate comparable to the rate on the prepaying mortgages. Mortgage-backed pass-through securitie s and sequential classes, which comprised 27.5% and 23.4% of the carrying value of the company's mortgage-backed securities as of December 31, 1996 and 1995, respectively, are sensitive to this prepayment risk. A portion of the company's mortgage-backed securities portfolio consists of planned amortization class ("PAC"), targeted amortization class ("TAC") and accretion directed class ("AD") instruments. These securities are designed to amortize in a more predictable manner by shifting the primary risk of prepayment to investors in other tranches (support classes) of the mortgage-backed security. PAC, TAC and ADsecurities comprised 67.5% and 74.6% of the carrying value of the company's mortgage-backed securities as of December 31, 1996 and 1995, respectively. As of December 31, 1996, 67.3% of the company's mortgage-backed securities were issued by either government agencies or government-sponsored enterprises, compared to 75.3% as of December 31, 1995. The credit risk associated with these securities is generally less than other mortgage-backed securities. With the exception of seven issues, with a carrying value of $26,799,287 as of December 31, 1996, all of the company's investments in other mortgage-backed securities are rated A or better by Standard& Poor's or Moody's. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2. Investments (continued): ___________________________
10% of Stockholders' Equity ......... $20,435 17,444 Bonds: Columbia/HCA Healthcare Corp, various interest rates and due dates through 2005 ... $24,164 24,993 FNMA94 83 B, 7.5%, due 7-2003 ....... 19,197 20,598 Goldman Sachs Group, various interest rates and due dates through 2003 ......... 21,093 21,098 LA County Pension Oblig, various interest rates and due dates through 2005 ... 18,633 20,675 Quebec Province CDA, various interest rates and due dates through 2007 ......... 24,821 25,737 20,199 21,923 Racers 1996 C12-7, 0%, due 01-2009 ........................ 48,142 47,911
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 recogni zed in the period they occur based upon specific review of the securities portfolio and other factors. On December 5, 1996, the company through its subsidiaries American, FBL and CBO II completed the formation of a Collateralized Bond Obligation (CBO). The transaction involved the formation of a CBO Trust which borrowed $159,500,800 from foreign investors at a rate equal to the London Inter Bank Offering Rate (LIBOR) plus .5%. The proceeds of this offering were used to purchase $171,044,460 of below investment grade bonds, $158,640,651 from American, $5,963,809 from FBLand $6,440,000 from a brokerage firm. At the same time, American, FBL and CBO II purchased $42,522,242 of trust certificates from the CBOTrust for cash totaling $12,345,266 and below investment grade bonds totaling $30,176,976. Certain of the trust certificates received by American and FBL were not rated investment grade. These certificates, which had a book value of $25,789,580 were transferred along with cash totaling $22,352,117 into a Trust on December 31, 1996. The Trust used the cash to purchase Zero Coupon U.S. Treasury securities. The CBO certificates along with the U.S. Treasury securities were then used as collateral for the issuance of the $48,141,697 of the Racers 1996 C12-7 reflected in the above table. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2. Investments (continued): ___________________________ The consideration received on sales of investments, carrying value and realized gains and losses on those sales were as follows:
During 1995, the company transferred bonds of four issuers from held-to-maturity to available-for-sale based upon a significant deterioration in the issuers' creditworthiness. The book value of these bonds at the time of transfer was $16,128,888. Included in the above table are 1995 losses of $2,151,154 on the sale of bonds of four issuers which the company had transferred from held-to-maturity to available-for-sale. The 1994 amounts include bonds of one issuer which the company had classified as held-to-maturity, the sale of which resulted in a loss of $205,526. The decision to sell these bonds was based upon a significant deterioration in the issuers' creditworthiness. The book value of these bonds at the time of sale was $8,507,732. Net unrealized gains (losses) on debt securities held-to-maturity, debt securities available-for-sale, debt securities trading, equity securities available-for-sale, equity securities trading and other long-term investments changed as follows:
1996 Life insuran$e in force 295,552 221,147 74,405 Insurance premiums and policy charges ........ 15,107 795 14,312 Future policy benefits 3,037,005 238,774 2,798,231
FBL and Philadelphia Life Insurance Company are parties to a reinsurance agreement under which FBL ceded 100% of the risk on certain deferred annuity policies on a coinsurance basis. As of December 31, 1996, the company had amounts receivable of $99,335,043 resulting from this agreement. 5. Convertible Subordinated Debentures: _______________________________________
7. Retirement Plans: ____________________ The company sponsors an Employee Stock Ownership Plan (ESOP) for all full-time employees with one year of service. Qualifying participants may contribute an amount not to exceed 10% of covered compensation. The company made no contributions to this plan during the three years ended December 31, 1996, 1995 and 1994. The company sponsors a Leveraged Employee Stock Ownership Plan (LESOP) for all full-time employees with one year of service. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 7. Retirement Plans (continued): ________________________________ The LESOP has acquired 370,244 shares of the company's stock through the proceeds of a note payable to American. The note bears interest at 7.0% and is payable in annual installments through December 30, 2002. The note had an unpaid principal balance of $2,662,965 and $3,010,882 as of December 31, 1996, and December 31, 1995. Each year the company will make contributions to the LESOP which are to be used to make loan interest and principal payments. On December 31 of each year, a portion of the common stock will be allocated to participating employees. Of the 416,862 shares of the company's common stock now owned by the LESOP, 202,634 shares have been allocated to the participating employees with the remaining 214,228 shares being held by American as collateral for the loan. On October 24, 1996, the ESOP was merged into the LESOP. The unallocated portion of the company's common stock owned by the LESOP has been recorded as a separate reduction of stockholders' equity. Accrued contributions to the LESOP during December 31, 1996, 1995 and 1994 were $326,952, $305,564 and $285,565. During 1992, the company's Board of Directors approved retirement plans for its members and members of the Board of Directors of certain of its subsidiaries. The plans provide that retired Directors shall serve as Advisory Members to the Board at a fee of $750 per meeting attended and a monthly lifetime benefit in the amount of $750 be paid to each qualified Director upon retirement. In addition, the company has agreed to continue any life insurance policies being provided as of the date of retirement. To qualify for this benefit, a Director must reach the age of 60 and meet years of service requirements thereafter. The plan also calls for a mandatory retirement on the date the Director's term expires following age 70. A liability in the amount of $431,359, representing the present value of future benefits, has been established. Charges (credits) to earnings related to the plans were $4,278, ($85,543) and $(40,244) for the years ended December 31, 1996, 1995 and 1994, 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 years ended December 31, 1996, 1995 and 1994 were $353,953, $210,907 and $215,664, respectively. Prior to the merger with AmVestors, FBG had approved a non-contributory Employee Stock Ownership Plan (FBGESOP) and a contributory 401-k Plan for all of its employees. As of December 31, 1996, the FBG ESOP owned 311,593 shares of AmVestors common stock and 75,982 warrants to purchase AmVestors common stock. At that same date, the 401-k Plan held 18,284 shares of AmVestors common stock and 4,458 warrants to purchase AmVestors common stock. The company anticipates maintaining these as separate plans for the benefit of the former FBG employees and is working with the Internal Revenue Service to correct any qualification problems which may exist. There were no contributions to the FBG ESOP in 1996. 8. STOCKHOLDERS' EQUITY: Dividends by American and FBLto AmVestors are limited by laws applicable to insurance companies. Under Kansas law, American may pay a dividend from its surplus profits, without prior consent of the Kansas Commissioner of Insurance, if the dividend does not exceed the greater of 10% of statutory capital and surplus at the end of the preceding year or all of the statutory net gain from operations of the preceding year. As of December 31, 1996, surplus profits of American were $19,936,727 and 10% of statutory capital and surplus was $10,146,126. American is also required to maintain, on a statutory basis, paid-in capital stock and surplus (capital in excess of par value and unassigned surplus) of $400,000 each. As of December 31, 1996 and 1995, American's statutory capital and surplus was $101,461,258 and $98,288,590, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 8. Stockholders' Equity (continued): ____________________________________ respectively. Statutory net gain from operations for 1996, 1995 and 1994 was $7,203,263 $5,744,938 and $5,645,097, respectively. Under Florida insurance law and regulations, the aggregate dividends that FBL may pay without prior regulatory approval is limited to the greater of the sum of statutory net operating profits and net realized capital gains for the preceding calendar year (provided there is available surplus from net operating profits and net realized capital gains) or 10% of its available and accumulated statutory surplus derived from net operating profits and net realized capital gains. After payment of a dividend, FBLmust have 115% of required statutory surplus. On December 31, 1996, FBLhad accumulated statutory surplus derived from net operating profits and net realized capital gains of $25,384,976. The sum was statutory net profits and net realized capital gains for 1996 were $3,811,912. As of December 31, 1996, available surplus from net operating profits and net realized capital gains was $3,811,912. Required statutory surplus as of December 31, 1996 was $19,415,943 and actual surplus was $33,746,022. In connection with the original establishment of the Interest Maintenance Reserve (IMR), the Commissioner of Insurance of Kansas, the company's domiciliary state, ordered that American prepare its December 31, 1992, NAIC Annual Statement Form to equitably allocate 1992 capital gains and losses, not included in the calculation of the Asset Valuation Reserve (AVR), on other than government securities, fifty (50%) percent to surplus and fifty (50%) percent to IMR, after calculation of the AVR pursuant to the instructions provided by the NAIC. This differs from prescribed statutory accounting practices. This represented a permitted accounting practice for regulatory purposes, the effect of which was to increase statutory surplus by $8,168,000 as of December 31, 1992 ($5,533,000 as of December 31, 1996). In addition, American received permission from the Commissioner of Insurance of Kansas to amortize the effects of changing to Actuarial Guideline No. 32 concerning the Commissioners Annuity Reserve Valuation Method for individual annuity contracts over a three-year period beginning in 1995 rather than to record the full amount of the change of $2,176,000. The effect of this permitted accounting practice was to increase statutory surplus by $679,154 and $943,150 as of December 31, 1996 and 1995, respectivel y. On August 2, 1996, American was granted a variance from prescribed statutory accounting practices which allowed the company to contribute $20,000,000 to be used for the sole purpose of strengthening American's reserves without experiencing a decrease in Unassigned Funds (Surplus). The contribution was recorded as a contribution to a Special Surplus Fund and the resulting reserve strengthening was charged against this Special Surplus Fund. Total surplus was unaffected by this transaction. The company currently has two fixed stock option plans; the 1989 Nonqualified Stock Option Plan (1989 Plan), and the 1996 Incentive Stock Option Plan (1996 Plan). Options granted under the 1989 Plan have an exercise price equal to the closing price of the company's stock on the date of the original grant and none may be exercised beyond ten years from the grant date. A total of 878,556 options to acquire common stock were outstanding under the 1989 Plan as of December 31, 1996. The 1996 Plan was approved by the stockholders of the company at its Annual Meeting held on May 16, 1996 and is intended to qualify as an "incentive stock option plan" under Section 422 of the Internal Revenue Code of 1986. Options granted under the 1996 Plan have an exercise price equal to the closing price of the company's stock on the date of the original grant and none may be exercised beyond ten years from the grant date. A total of 673,000 options to acquire common stock were outstanding under the 1996 Plan as of December 31, 1996. Both the 1989 Plan and the 1996 Plan are administered by the Board of Directors and officers of the company and its subsidiaries. The terms of the options, including the number of shares granted, and the exercise price are subject to the sole discretion of the Board of Directors. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
8. Stockholders' Equity (continued): ____________________________________ A summary of the company's stock option plans as of and for the years ended December 31, 1996, 1995, and 1994 follows:
77,483 $4.99 161,573 7.34 75,000 9.42 348,500 10.11 465,074 12.83 1,127,630 $10.44
1996 1995 1994 Rights outstanding, beginning of year....... - - 30,000 Rights granted.............................. - - - Rights exercised............................ - - - Rights expired.............................. - - (30,000) Rights cancelled............................ - - - Rights outstanding, end of year............. - - - Reserved for future grants.................. 35,000^ 35,000 35,000
Warrant Issue Number Exercise Expiration Holder Date of Shares Price Date Morgan Guaranty 12/8/88 75,000 $ 3.9688 12/9/98 4/30/92 95,002 6.3855 5/1/02 170,002
(000's Omitted) For the Year Ended December 31, 1996 1995 1994 Investments................................ $(76) 3,067 (692) Accounts receivable........................ (1,484) (1,232) 842 Accrued investment income.................. (18) (193) 204 Deferred policy acquisition costs.......... 8,660 7,094 6,629 Present value of future profits............ (2,447 - - Property and equipment..................... 215 27 (234) Other assets............................... 4 (133) (9) Future policy benefits..................... (44) (1,825) (5,632) Policy and contract claims................. (78) 56 178 Accrued expenses and other liabilities..... 27 120 114 Valuation allowance on future deductions and capital loss differences........... (1,071) 9 (750) Deferred income tax expense (benefit)...... 3,688 6,990 650 12. Acquisition: ________________ On September 8, 1995, the company signed a merger agreement pursuant to which it acquired all of the outstanding capital stock of FBG a Delaware corporation, for $5.31 per share, payable in 2,722,223 shares of the company's common stock, warrants to purchase 663,708 shares of common stock and cash of approximately $10,000,000. FBG was an insurance holding company which owned all of the shares of FBL a Florida domiciled insurer which specializes in the sale and underwriting of annuity products and is admitted in 41 jurisdictions, which includes 39 states, the District of Columbia and the U.S. Virgin Islands. FBG also owned all of the shares of AIMCOR and TIM both of which specialize in the distribution and marketing of annuities. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 12. Acquisition (continued): _____________________________ The merger received the approval of the shareholders of both FBG and the company, and became effective on April 8, 1996. The consolidated statements of earnings for the year ended December 31, 1996 include the results of operations of FBG for the nine month period ended December 31, 1996. The transaction has been accounted for using the purchase method with any resulting goodwill being amortized on a straight line basis over a period not to exceed 30 years. The opening consolidated balance sheet of the acquired entities follows: (000's Omitted) ASSETS Investments......................................... $ 523,145 Cash and cash equivalents........................... 8,932 Amounts receivable under reinsurance agreements..... 112,875 Accrued investment income........................... 7,373 Deferred cost of policies purchased................. 51,500 Goodwill............................................ 11,942 Other assets........................................ 6,621 Total assets...................................... $ 722,388 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Policy liabilities.................................. $ 650,865 Notes payable....................................... 15,500 Deferred income taxes............................... 1,316 Accrued expenses and other liabilities.............. 5,930 Total liabilities................................. 673,611 Stockholders' Equity: Common stock, no par value.......................... - Paid in capital..................................... 48,777 Total stockholders' equity........................ 48,777 Total liabilities and stockholders' equity........ $ 722,388 The following table sets forth certain unaudited pro forma operating data of the company for the year ended December 31, 1996 and 1995. This pro forma data assumes the acquisition of FBG occurred on January 1, 1996 and 1995, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
12. Acquisition (continued): _____________________________ (in thousands, except per share data) For the year ended December 31, 1996 1995
The company's insurance subsidiaries are subject to state guaranty association assessments in all states in which they are admitted. Generally, these associations guarantee specified amounts payable to residents of the state under policies issued by insolvent insurers. Most state laws permit assessments or some portion thereof to be credited against future premium taxes. Charges relating to the guaranty fund assessments impacted 1996, 1995 and 1994 by approximately $1,913,000, $1,001,000 and $504,000. 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):