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, 1995:
*Per share data for 1991 and 1992 has been restated to give effect to a one-for-two and one half reverse stock split effective June 11, 1993.
The company specializes in the sale of deferred annuity products as a retirement savings vehicle for individuals. 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 SPIAs and 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 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 American's annuity policies in force have surrender charges which are designed to discourage and mitigate the effect of premature withdrawals.As a result, the impact on earnings from surrenders will depend upon the extent to which available surrender charges offset the associated amortization of DAC. For the years ended 1995, 1994 and 1993, the company's weighted average expected surrender levels were 8.9%, 9.0% and 13.0%, compared to the weighted average actual surrenders of 14.2%, 9.8% and 14.7%. Historically the negative impact on earnings of any difference between the actual surrender levels and expected surrender levels has been more than offset by the realization of gains on the sale of securities and the change in future expected gross profits as the result of the company's reduction in credited rates. Recent periods of low interest rates have reduced the company's investment yields. As a result of the lower investment yields, the company elected to reduce credited interest rates on certain of its annuity products. Certain annuities issued by the company include a "bailout" feature. This feature generally allows policyowners to withdraw their entire account balance without surrender charge for a period of 45 to 60 days following the initial determination of a renewal crediting rate below a predetermined level. If a policyowner elects not to withdraw funds during this period, surrender charges are reinstated. On policies including a "bailout" feature, the company announces its renewal crediting rates on January 14 of each year. In January 1994 and 1993, the company deemed it advisable, due to the
INTEREST EXPENSE increased $.1 million in 1995 as a result of $7.0 million of borrowing under the company's credit agreement. The proceeds of this borrowing were contributed to the surplus of American. Interest expense decreased $1.0 million in 1994 following the repayment of all debt in November, 1993, with proceeds from the company's 1993 common stock offering. INCOME TAX EXPENSE increased $2.9 million to $8.5 million in 1995 from $5.6 million in 1994. This follows a $3.0 million decrease in 1994 from $8.6 million in 1993. Taxes were provided at an effective rate of 34%, 29% and 32% in 1995, 1994 and 1993, respectively. 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 approved by the Kansas Insurance Commissioner. The liquidity 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 deferred annuities, 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, 1995, 1994 and 1993, was ($7.6) million, $26.6 million and ($91.5) million, respectively. The decrease in net cash provided by annuity contracts without life contingencies in 1995 resulted primarily from a $125.6 million increase in surrender and death benefits paid from $246.6 million (approximately 11.5% of beginning reserves for future policy benefits) to $372.2 million (approximately 17.3% of beginning reserves for future policy benefits) along with a $89.9 million increase in premiums received from $267.8 million to $357.7 million. 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. Net cash provided by the company's operating activities was $157.9 million, $130.5 million and $129.7 million in 1995, 1994 and 1993, respectively. Cash provided by financing and operating activities and by the sale and maturity of portfolio investments is used primarily to purchase portfolio investments and
for the payment of acquisition costs (commissions and expenses associated with the sale and issuance 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 (4%, 2% and 3% as of December 31, 1995, 1994 and 1993, respectively). The weighted average duration of the company's bond portfolio was 4.4 years as of December 31, 1995. The company continually assesses its capital requirements in light of business developments and various capital and surplus adequacy ratios which affect insurance companies. 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 6 of Notes to Consolidated Financial Statements. In 1993, the company raised $29.4 million through the sale of 3,451,668 shares of Common Stock. In December, 1994, the company entered into a credit agreement with The First National Bank of Chicago and Boatmen's First National Bank of Kansas City, as Lenders. Under the terms of this agreement, the Lenders have committed to lend up to $15,000,000 in the form of a 5-year reducing credit facility, of which $7,000,000 had been borrowed at December 31, 1995. For additional information regarding this credit agreement, see Note 5 of Notes to Consolidated Financial Statements. As of December 31, 1995, the company owned bonds of 3 issuers in amounts exceeding 10% of stockholders' equity. The carrying value of such bonds was $58.0 million which represented 3% 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. Recent regulatory actions against certain large life insurers encountering financial difficulty have prompted the various state guaranty associations to begin assessing life insurance companies for the resulting losses. For further information regarding the effects of guaranty fund assessments, see Note 12 of Notes to Consolidated Financial Statements. REINSURANCE. The company had amounts receivable under reinsurance agreements of $146.6 million and $149.7 million as of December 31, 1995 and 1994, respectively. Of the amounts, $145.0 million and $147.9 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
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 investment 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, 1995, the carrying value of the company's five largest investments in securities rated non-investment grade by both Standard & Poor's Corporation ("S&P") and Moody's Investors Service, Inc. ("Moody's") aggregated $39.6 million, with an approximate market value of $38.0 million, none of which individually exceed $11.0 million. For a list of all investments exceeding 10% of stockholders' equity see Note 2 of Notes to Consolidated Financial Statements.
Financial Statements and Supplemental Data _______________________________________________________ Page Number Independent Auditors' Report 33
We have audited the accompanying consolidated balance sheets of AmVestors Financial Corporation and subsidiaries (the company) as of December 31, 1995 and 1994, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. 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, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. The company adopted the provisions of Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities in 1994.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (000's Omitted, except share and per share data)
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 1. Summary of Significant Accounting Policies (continued): ___________________________________________________________________ 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. The carrying values and estimated fair values of the company's financial instruments as of December 31, 1995 and 1994 were as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2. Investments (continued): The amortized cost, estimated market value and unrealized market gains and losses of debt and equity securities as of December 31, 1995, and 1994 were as follows:
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 amortized cost, estimated market value and unrealized market gains and losses by type of mortgage-backed security as of December 31, 1995, and December 31, 1994 were as follows:
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. The consideration received on sales of debt and equity securities, carrying value and realized gains and losses on those sales were as follows:
At December 31, 1995 and 1994, investments with statutory carrying values of $1,956,343,973 and $1,866,074,033, respectively, were on deposit with various insurance departments. These amounts exceeded the minimum required deposits by $53,856,902 and $66,325,834 as of December 31, 1995 and 1994 respectively. 3. OTHER ASSETS: Other assets consist of the following:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 4. 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 is contingently liable for the portion of the policies reinsured under each of its existing reinsurance agreements in the event the reinsurance companies are unable to pay their portion of any reinsured claim. Management believes that any liability from this contingency is unlikely. The company had amounts receivable under reinsurance agreements of $146,617,611 and $149,656,094 as of December 31, 1995, and December 31, 1994, respectively. Of the amounts, $144,965,371 and $147,949,099 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. Reimbursements received from ERC for amounts paid by the company on the reinsured risks totalled $12,044,418, $9,740,717 and $7,991,680 for the years ended December 31, 1995, 1994 and 1993, respectively. The following table identifies the components of the amounts receivable from ERC:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 6. Retirement Plans (continued): ____________________________________ 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, 1995, 1994 and 1993 were $305,564, $285,565 and $266,886, 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. A liability in the amount of $435,637, representing the present value of future benefits, has been established. Charges (credits) to earnings relating to the plans were ($85,543), ($40,244) and ($3,282), for the years ended December 31, 1995, 1994 and 1993, 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, 1995, 1994 and 1993, were $210,907, $215,664 and $213,059, respectively. 7. STOCKHOLDERS' EQUITY: Dividends by American to AmVestors are limited by laws applicable to insurance companies. Under Kansas law, American may pay a dividend from its surplus profits, without prior consent of the Kansas Commissioner of Insurance, if the dividend does not exceed the greater of 10% of statutory capital and surplus at the end of the preceding year or all of the statutory net gain from operations of the preceding year. As of December 31, 1995, surplus profits of American were $16,764,059 and 10% of statutory capital and surplus was $9,828,859. 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, 1995 and 1994 American's statutory capital and surplus was $98,288,590 and $87,521,204 respectively. Statutory net income (loss) for the years 1995, 1994 and 1993 was $5,984,601, $4,167,120 and ($1,469,786), 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.
The company recorded compensation expense relating to stock appreciation rights of $-0-, $-0- and $1,875, for the years ended December 31, 1995, 1994, and 1993, 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 a previous 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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 10. Income Taxes: ___________________ The provision for income taxes charged to operations was 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 component of the deferred income tax provision are as follows:
12. 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 1995, 1994 and 1993 income before taxes by approximately $1,001,000, $504,000 and $1,594,000, respectively. The company expects that further changes to income may be required in the future and will record such amounts when they become known. 13. Quarterly results (Unaudited): ______________________________________ The company's quarterly results are set forth in the following table: