<PAGE>
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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number : 0-25985
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
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(Exact name of registrant as specified in its charter)
IOWA
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(State of Incorporation)
5000 WESTOWN PARKWAY, SUITE 440
WEST DES MOINES, IOWA 50266
-----------------------------
(Address of principal executive offices)
(515) 221-0002
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(Telephone)
42-1447959
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(I.R.S. Employer Identification No.)
(Former name, former address and former fiscal year,
if changed since last report)
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Indicate by check mark whether the registrant (1) has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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APPLICABLE TO CORPORATE ISSUERS:
Shares of common stock outstanding at October 31, 2000: 14,505,242
<PAGE>
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
American Equity Investment Life Holding Company
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Cash and investments:
Fixed maturity securities:
Available-for-sale, at market (amortized cost:
2000 - $1,439,614; 1999 - $1,070,465) $1,352,917 $ 997,020
Held for investment, at amortized cost (market:
2000 - $330,975; 1999 - $315,975) 423,118 398,467
Equity securities, at market (cost: 2000 -
$8,350; 1999 - $8,020) 6,516 7,613
Derivative instruments 34,208 44,210
Policy loans 259 231
Cash and cash equivalents 105,401 5,882
---------- ----------
Total cash and investments 1,922,419 1,453,423
Receivable from other insurance companies 369 598
Premiums due and uncollected 1,355 1,097
Accrued investment income 26,085 14,183
Receivables from related parties 47,037 18,896
Property, furniture and equipment, less accumulated
depreciation: 2000 - $2,192; 1999 - $1,632 1,109 1,346
Value of insurance in force acquired 514 752
Deferred policy acquisition costs 213,458 126,685
Intangibles, less accumulated amortization:
2000 - $865; 1999 - $681 2,270 2,238
Deferred income tax asset 44,490 43,037
Federal income taxes recoverable 1,496 1,663
Other assets 3,827 1,215
Assets held in separate account 823 371
---------- ----------
Total assets $2,265,252 $1,665,504
========== ==========
</TABLE>
(Continued on next page)
SEE ACCOMPANYING NOTES.
Page 2 of 18
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American Equity Investment Life Holding Company
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy benefit reserves:
Traditional life insurance and accident and health
products $ 18,964 $ 15,060
Annuity and single premium universal life products 1,923,915 1,343,816
Other policy funds and contract claims 15,805 11,553
Provision for experience rating refunds 331 545
Amounts due to related parties 19,796 10,003
Notes payable 32,100 20,600
Amounts due under repurchase agreements 104,956 86,969
Amounts due on securities purchased - 29,714
Other liabilities 11,746 13,567
Liabilities related to separate account 823 371
----------- -----------
Total liabilities 2,128,436 1,532,198
Commitments and contingencies
Minority interest in subsidiaries: company-obligated
mandatorily redeemable preferred securities of
subsidiary trusts 99,373 98,982
Stockholders' equity:
Series Preferred Stock, par value $1 per share, 2,000,000 shares authorized;
625,000 shares of 1998 Series A Participating Preferred Stock issued
and outstanding 625 625
Common Stock, par value $1 per share - shares authorized:
2000 - 75,000,000 and 1999 - 25,000,000; issued and
outstanding: 2000 - 14,497,992 shares and 1999 - 14,498 4,712
4,712,310 shares
Additional paid-in capital 57,400 66,058
Accumulated other comprehensive loss (35,973) (35,235)
Retained earnings (deficit) 893 (1,836)
----------- -----------
Total stockholders' equity 37,443 34,324
----------- ----------
Total liabilities and stockholders' equity $ 2,265,252 $ 1,665,504
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</TABLE>
SEE ACCOMPANYING NOTES.
Page 3 of 18
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American Equity Investment Life Holding Company
Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Traditional life and accident and
health insurance premiums $ 3,050 $ 3,306 $ 9,234 $ 9,319
Annuity and single premium
universal life product charges 2,657 713 5,945 1,758
Net investment income 28,052 19,835 61,801 42,802
Realized gains (losses) on sale of
investments 80 (57) 6,276 (87)
-------- -------- -------- --------
Total revenues 33,839 23,797 83,256 53,792
BENEFITS AND EXPENSES:
Insurance policy benefits and
change in future policy benefits 2,457 2,549 6,559 6,478
Interest credited to account balances 16,714 11,993 41,303 24,372
Interest expense on notes payable 676 239 1,523 608
Interest expense on amounts due
under repurchase agreements 958 760 2,676 2,443
Amortization of deferred policy
acquisition costs and value of
insurance in force acquired 4,469 3,837 10,083 7,746
Other operating costs and expenses 4,101 3,589 11,525 10,244
-------- -------- -------- --------
Total benefits and expenses 29,375 22,967 73,669 51,891
-------- -------- -------- --------
Income before income taxes 4,464 830 9,587 1,901
-------- -------- -------- --------
Income tax (expense) benefit:
Current (2,319) (4,940) (2,267) (13,051)
Deferred 1,492 4,673 996 12,236
-------- -------- -------- --------
(827) (267) (1,271) (815)
Minority interest in subsidiaries:
Earnings attributable to company-
obligated mandatorily redeemable
preferred securities of subsidiary
trusts (1,862) (173) (5,587) (173)
------- -------- -------- --------
Net income $ 1,775 $ 390 $ 2,729 $ 913
======== ======== ======== ========
Basic earnings per common share $ 0.12 $ 0.03 $ 0.19 $ 0.07
======== ======== ======== ========
Diluted earnings per common share $ 0.09 $ 0.03 $ 0.14 $ 0.06
======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES
Page 4 of 18
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American Equity Investment Life Holding Company
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,729 $ 913
Adjustments to reconcile net income to net cash used in
operating activities:
Adjustments related to interest sensitive products:
Interest credited to account balances 41,303 24,372
Annuity and single premium universal life product
charges (5,945) (1,758)
Increase in traditional life insurance and accident and
health reserves 3,904 3,644
Policy acquisition costs deferred:
Commissions paid to related party (73,761) (48,598)
Other (2,127) (1,302)
Amortization of deferred policy acquisition costs 9,845 7,456
Provision for depreciation and other amortization 982 929
Amortization of discount and premiums on fixed maturity
securities and derivative instruments 9,307 (11,273)
Change in federal income taxes recoverable 167 -
Change in deferred income taxes (996) (12,236)
Change in federal income taxes payable - (449)
Amounts due to related parties 9,793 4,994
Receivables from related parties (28,141) (9,988)
Other (10,469) (1,444)
Realized losses (gains) on sale of investments (6,276) 87
-------- --------
Net cash used in operating activities (49,685) (44,653)
</TABLE>
(Continued on next page)
SEE ACCOMPANYING NOTES.
Page 5 of 18
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American Equity Investment Life Holding Company
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
----------- ---------
<S> <C> <C>
INVESTING ACTIVITIES
Sales, maturities or repayments of investments:
Fixed maturity securities - available-for-sale $ 616,795 $ 289,060
Equity securities 1,070 -
Derivative instruments 7,177 -
---------- ---------
625,042 289,060
Acquisition of investments:
Fixed maturity securities - available-for-sale (1,004,902) (425,134)
Fixed maturity securities - held for investment (7,246) (341,708)
Equity securities (1,337) (16,190)
Derivative instruments (50,402) (26,005)
Policy loans (28) (37)
----------- ---------
(1,063,915) (809,074)
Purchases of property, furniture and equipment (323) (449)
----------- ---------
Net cash used in investing activities (439,196) (520,463)
FINANCING ACTIVITIES
Receipts credited to annuity and single premium universal
life policyholder account balances 654,818 585,368
Return of annuity and single premium universal life
policyholder account balances (96,817) (39,253)
Financing fees incurred and deferred (216) (1,579)
Proceeds from notes payable 11,500 5,000
Accrued distributions on company-obligated mandatorily
redeemable preferred securities of subsidiary trust - 173
Increase in amounts due under repurchase agreements 17,987 (15,337)
Acquisition of common stock (644) -
Net proceeds from issuance of common stock 1,772 1,414
Proceeds from company-obligated mandatorily
redeemable preferred securities of subsidiary trust - 25,970
----------- ---------
Net cash provided by financing activities 588,400 561,756
----------- ---------
Increase (decrease) in cash and cash equivalents 99,519 (3,360)
Cash and cash equivalents at beginning of period 5,882 15,892
----------- ---------
Cash and cash equivalents at end of period $ 105,401 $ 12,532
=========== =========
</TABLE>
SEE ACCOMPANYING NOTES.
Page 6 of 18
<PAGE>
American Equity Investment Life Holding Company
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
------ -------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during period for:
Interest $4,199 $ 3,051
Income taxes 2,100 13,500
Non-cash financing and investing activities:
Bonus interest deferred as policy acquisition costs 7,188 5,584
</TABLE>
SEE ACCOMPANYING NOTES.
Page 7 of 18
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American Equity Investment Life Holding Company
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER RETAINED TOTAL
PREFERRED COMMON PAID-IN COMPREHENSIVE EARNINGS STOCKHOLDERS'
STOCK STOCK CAPITAL LOSS (DEFICIT) EQUITY
--------- ------ ------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 $ 625 $ 4,712 $ 66,058 $(35,235) $(1,836) $ 34,324
3-for-1 stock split on shares
outstanding at
December 31, 1999 - 9,425 (9,425) - - 0
Comprehensive income:
Net income for period - - - - 2,729 2,729
Change in net unrealized
investment gains/losses - - - (738) - (738)
--------
Total comprehensive income 1,991
Issuance of 451,687 shares of
common stock - 452 1,320 - - 1,772
Acquisition of 90,625 shares
of common stock - (91) (553) - - (644)
------- -------- -------- -------- ------- --------
Balance at September 30, 2000 $ 625 $ 14,498 $ 57,400 $(35,973) $ 893 $ 37,443
======= ======== ======== ======== ======= ========
</TABLE>
Total comprehensive loss for the nine months ended September 30, 1999 was
$8,074, and was comprised of net income of $913 and an increase in net
unrealized depreciation of available-for-sale fixed maturity securities and
equity securities of $8,987.
Total comprehensive income for the third quarter of 2000 was $14,297, and
was comprised of net income of $1,775 and a decrease in net unrealized
depreciation of available-for-sale fixed maturity securities and equity
securities of $12,522.
Total comprehensive loss for the third quarter of 1999 was $327, and was
comprised of net income of $390 and an increase in net unrealized
depreciation of available-for-sale fixed maturity securities and equity
securities of $717.
All issuances and acquisitions of common stock during 2000 have been
adjusted for the 3-for-1 stock split.
Page 8 of 18
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American Equity Investment Life Holding Company
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2000
NOTE A- BASIS OF PRESENTATION
The unaudited consolidated financial statements as of September 30, 2000 and for
the periods ended September 30, 2000 and 1999, as well as the audited
consolidated balance sheet as of December 31, 1999, include the accounts of the
Company and its wholly-owned subsidiaries: American Equity Investment Life
Insurance Company, American Equity Investment Capital, Inc., American Equity
Capital Trust I (formed in 1999), American Equity Capital Trust II (formed in
1999), American Equity of Hawaii, Inc. (formed in 1999), and American Equity
Investment Properties, L.C. All significant intercompany accounts and
transactions have been eliminated.
The unaudited consolidated financial statements reflect all adjustments,
consisting only of normal recurring items, which are necessary to present fairly
our financial position and results of operations on a basis consistent with the
prior audited financial statements. Results for interim periods are not
necessarily indicative of the results that may be expected for a full year.
The Company operates solely in the life insurance business.
NOTE B - CHANGES IN AMOUNTS DUE UNDER REPURCHASE AGREEMENTS
As part of its investment strategy, the Company enters into securities lending
programs to increase its return on investments and improve its liquidity. These
transactions are accounted for as amounts due under repurchase agreements
(short-term collateralized borrowings). Such borrowings averaged approximately
$55,089,000 and $63,412,000 for the nine months ended September 30, 2000 and
1999, respectively, and were collateralized by investment securities with fair
market values approximately equal to the amount due. The weighted average
interest rate on amounts due under repurchase agreements was 6.48% and 5.11% for
the nine months ended September 30, 2000 and 1999, respectively.
NOTE C - INCREASE IN LINE OF CREDIT
In March, 2000, the maximum borrowing level under the Company's variable rate
revolving line of credit was increased from $25,000,000 to $40,000,000. The
Company borrowed an additional $11,500,000 under this line of credit during the
second quarter of 2000 and an additional $7,900,000 during October, 2000.
Page 9 of 18
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American Equity Investment Life Holding Company
Notes to Consolidated Financial Statements (Unaudited)
NOTE D - EARNINGS PER SHARE
The following table sets forth the computation of basic earnings per common
share and diluted earnings per common share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
NUMERATOR:
Net income - numerator for basic and
dilutive earnings per share $ 1,775 $ 390 $ 2,729 $ 913
=========== =========== =========== ===========
DENOMINATOR:
Weighted average shares outstanding -
denominator for basic earnings per
common share 14,481,214 14,103,774 14,361,087 13,941,237
Effect of dilutive securities:
1998 Series A Participating
Preferred Stock 1,875,000 1,875,000 1,875,000 1,875,000
Warrants 20,004 257,942 20,004 257,942
Stock options and subscription rights 2,082,755 1,875,361 2,082,755 1,875,361
Deferred compensation agreements 779,592 455,589 779,592 455,589
----------- ----------- ----------- -----------
Adjusted weighted average shares
outstanding - denominator for diluted
earnings per common share 19,238,565 18,567,666 19,118,438 18,405,129
=========== =========== =========== ===========
Basic earnings per common share $ 0.12 $ 0.03 $ 0.19 $ 0.07
=========== =========== =========== ===========
Diluted earnings per common share $ 0.09 $ 0.03 $ 0.14 $ 0.06
=========== =========== =========== ===========
</TABLE>
The effect of the convertible stock of the subsidiary trusts has not been
included in the computation of dilutive earnings per share as the effect is
antidilutive.
The Company effected a three-for-one split of common stock payable June 30, 2000
to stockholders of record as of June 1, 2000. Accordingly, all historical
weighted average share and per share amounts have been restated to reflect the
stock split. Share amounts presented in the unaudited Consolidated Balance
Sheets and unaudited Consolidated Statements of Stockholders' Equity reflect the
actual share amounts as of or for each period presented.
Page 10 of 18
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American Equity Investment Life Holding Company
Notes to Consolidated Financial Statements (Unaudited)
NOTE E - PENDING ACCOUNTING CHANGE
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 requires companies to record
derivative instruments on the balance sheet at fair value. Accounting for gains
or losses resulting from changes in the fair values of derivative instruments is
dependent on the use of the derivative and whether it qualifies for hedge
accounting. The Company issues equity-indexed annuity products, whose product
characteristics include embedded derivatives. The Company also purchases options
on the equity market indexes applicable to these products to fund the
liabilities classified as embedded derivatives. These items could be effected by
SFAS No. 133. The Statement is effective for the Company in the year 2001, with
earlier adoption encouraged. Because of various insurance-related issues
currently being examined by the FASB and the Derivative Implementations Group,
the Company has not yet determined the effect that this new Statement will have
on its operations or financial position.
NOTE F - COMMITMENTS AND CONTINGENCIES
The Company has a General Agency Commission and Servicing Agreement with
American Equity Investment Service Company (the Service Company), wholly-owned
by the Company's chairman, whereby, the Service Company acts as a national
supervisory agent with responsibility for paying commissions to agents of the
Company. This Agreement is more fully described in Note 11 to the Audited
Financial Statements included in the Company's Form 10-K.
During the nine months ended September 30, 2000 and 1999, the Service Company
paid $22,400,000 and $30,948,000 respectively, to agents of the Company and the
Company paid renewal commissions to the Service Company of $16,227,000 and
$9,986,000. At September 30, 2000 and December 31, 1999, accounts payable to the
Service Company aggregated $19,796,000 and $10,003,000, respectively, and is
included in amounts due to related parties.
During 1999, the Company agreed to loan to the Service Company up to $50,000,000
pursuant to a promissory note bearing interest at the "reference rate" of the
financial institution which is the Company's principal lender. Principal and
interest are payable quarterly over five years from the date of the advance. At
September 30, 2000 and December 31, 1999, the net amount advanced to the Service
Company was $35,582,000 and $18,175,000, respectively.
NOTE G - WARRANT EXERCISES
In April 2000, the Company's Chief Executive Officer, D.J. Noble, exercised
warrants to purchase 80,000 shares (240,000 shares after adjustment for the
3-for-1 stock split) of common stock at $10 per share. The Company loaned Mr.
Noble the aggregate exercise price of $800,000 pursuant to a forgivable loan
agreement to facilitate his exercise of these warrants. The forgivable loan
agreement is with full recourse, and is not collateralized by the shares issued
in connection with the exercise of these warrants. These warrants were not
issued in connection with the Company's employee stock option plan, but were
issued to Mr. Noble, the Company's founding shareholder, as part of his initial
capitalization of the Company. This loan is repayable in five equal annual
installments of principal and interest, each of which may be forgiven if Mr.
Noble remains continuously employed by the Company in his present capacity,
subject to specified exceptions. In addition, Sanders Morris Harris exercised
warrants to purchase 56,875 shares (170,625 shares after adjustment for the
3-for-1 stock split) of common stock at an exercise price of $12 per share,
resulting in proceeds of $682,500.
Page 11 of 18
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American Equity Investment Life Holding Company
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis reviews our consolidated financial
position at September 30, 2000, and the consolidated results of operations for
the periods ended September 30, 2000 and 1999, and where appropriate, factors
that may affect future financial performance. This analysis should be read in
conjunction with the unaudited consolidated financial statements and notes
thereto appearing elsewhere in this Form 10-Q, and the audited consolidated
financial statements, notes thereto and selected consolidated financial data
appearing in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
All statements, trend analyses and other information contained in this
report and elsewhere (such as in filings by us with the Securities and Exchange
Commission, press releases, presentations by us or our management or oral
statements) relative to markets for our products and trends in our operations or
financial results, as well as other statements including words such as
"anticipate," "believe," "plan," "estimate," "expect," "intend," and other
similar expressions, constitute forward-looking statements under the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
subject to known and unknown risks, uncertainties and other factors which may
cause actual results to be materially different from those contemplated by the
forward-looking statements. Such factors include, among other things:
o general economic conditions and other factors, including prevailing
interest rate levels and stock and credit market performance which may
affect (among other things) our ability to sell our products, our ability
to access capital resources and the costs associated therewith, the market
value of our investments and the lapse rate and profitability of policies
o customer response to new products and marketing initiatives
o mortality and other factors which may affect the profitability of our
products
o changes in Federal income tax laws and regulations which may affect the
relative income tax advantages of our products
o increasing competition in the sale of annuities
o regulatory changes or actions, including those relating to regulation of
financial services affecting (among other things) bank sales and
underwriting of insurance products and regulation of the sale, underwriting
and pricing of products
o the risk factors or uncertainties listed from time to time in our private
placement memorandums or filings with the Securities and Exchange
Commission
Page 12 of 18
<PAGE>
American Equity Investment Life Holding Company
-----------------------------------------------
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Our business has continued to grow steadily, with reserves for annuities
and single premium universal life policies increasing from $529,765,000 at
December 31, 1998 to $1,342,256,000 at December 31, 1999 and $1,923,915,000 at
September 30, 2000. Deposits from sales of annuities and single premium
universal life policies during the nine months ended September 30, 2000
increased 12% to $654,818,000 compared to $585,368,000 for the same period in
1999. The increased production is a direct result of the growth in our agency
force which increased from 10,500 agents at December 31, 1998 to 18,000 agents
at December 31, 1999 and 20,200 agents at September 30, 2000.
Our net income increased 355% to $1,775,000 for the third quarter of 2000,
and 199% to $2,729,000 for the nine months ended September 30, 2000 compared to
$390,000 and $913,000, respectively, for the same periods in 1999. The trend in
net income is the direct result of the continued growth in our annuity business.
Traditional life and accident and health insurance premiums decreased 8% to
$3,050,000 for the third quarter of 2000, and decreased 1% to $9,234,000 for the
nine months ended September 30, 2000 compared to $3,306,000 and $9,319,000,
respectively, for the same periods in 1999. The majority of our traditional life
and accident and health insurance premiums consist of group policies sold to a
limited market. Because our primary focus is the sale of annuities, we have made
no effort to expand sales of these products to other markets. As a result, sales
of such products have declined slightly.
Annuity and single premium universal life product charges (surrender
charges assessed against policy withdrawals and mortality and expense charges
assessed against single premium universal life policyholder account balances)
increased 273% to $2,657,000 for the third quarter of 2000, and 238% to
$5,945,000 for the nine months ended September 30, 2000 compared to $713,000 and
$1,758,000, respectively, for the same periods in 1999. These increases are
principally attributable to the growth in our annuity business and
correspondingly, an increase in annuity policy withdrawals subject to surrender
charges. Withdrawals from annuity and single premium universal life policies
were $96,817,000 for the nine months ended September 30, 2000 compared to
$39,253,000 for the same period in 1999.
Net investment income increased 41% to $28,052,000 in the third quarter of
2000, and 44% to $61,801,000 for the nine months ended September 30, 2000
compared to $19,835,000 and $42,802,000, respectively, for the same periods in
1999. Invested assets (amortized cost basis) increased 58% to $1,904,245,000 at
September 30, 2000 compared to $1,205,633,000 at September 30, 1999, while the
effective yield earned on invested assets was 7.6% at September 30, 2000
compared to 7.5% at September 30, 1999.
Realized gains (losses) on the sale of investments were $80,000 in the
third quarter of 2000 compared to realized losses of $57,000 for the same period
in 1999. For the nine months ended September 30, 2000, the Company had realized
gains of $6,276,000 compared to realized losses of $87,000 for the same period
in 1999. The increase in realized gains in the first nine months of 2000 is
principally attributable to an investment program involving the use of total
return exchange agreements. The Company experienced net losses of $3,406,000 on
these agreements consisting of realized gains on the early termination of seven
total return swap agreements of $7,177,000 and net investment expense of
$10,582,000 related to payments made on specified settlement dates. This program
was terminated in February, 2000. For the nine months ended September 30, 2000,
the net realized gains on the sale of investments also includes net losses of
$901,000 on the sale of certain corporate fixed maturity securities and equity
securities.
Page 13 of 18
<PAGE>
American Equity Investment Life Holding Company
-----------------------------------------------
Traditional life and accident and health insurance benefits decreased 4% to
$2,457,000 in the third quarter of 2000, and increased 1% to $6,559,000 for the
nine months ended September 30, 2000 compared to $2,549,000 and $6,478,000,
respectively, for the same periods in 1999. The decrease for the third quarter
of 2000 was attributable to an increase in death benefits and surrenders, and
the increase for the nine months ended September 30, 2000 was attributable to a
decrease in those items for that period.
Interest credited to annuity and single premium universal life policyholder
account balances increased 39% to $16,714,000 in the third quarter of 2000, and
69% to $41,303,000 for the nine months ended September 30, 2000 compared to
$11,993,000 and $24,372,000, respectively, for the same periods in 1999. These
increases are principally attributable to the increase in annuity liabilities.
At September 30, 2000, the weighted average crediting rate for our fixed rate
annuity liabilities, excluding interest rate and premium bonuses guaranteed for
the first year of the annuity contract, was 5.15%, compared to 5.12% at
September 30, 1999. The weighted average crediting rate, including interest rate
and premium bonuses guaranteed for the first year of the annuity contract, was
6.07% at September 30, 2000 compared to 6.59% at September 30, 1999.
With respect to our equity index products, the amount credited to
policyholders was $16,931,000 for the nine months ended September 30, 2000
compared to $10,507,000 for the same period in 1999. We purchase options on the
applicable equity market indexes to fund the amounts credited to these products.
The gain received on these options was $16,939,000 for the nine months ended
September 30, 2000 compared to $11,229,000 for the same period in 1999. The cost
of options are amortized over the life of the options and are included as a
deduction from investment income. For the nine months ended September 30, 2000,
investment income was reduced by $40,043,000 for this amortization compared to
$15,295,000 for the same period in 1999. The weighted average option cost was
4.99% at September 30, 2000 compared to 5.35% at September 30, 1999.
Interest expense on notes payable increased 183% to $676,000 for the third
quarter of 2000, and 150% to $1,523,000 for the nine months ended September 30,
2000 compared to $239,000 and $608,000, respectively, for the same periods in
1999. These increases are attributable to increases in the outstanding
borrowings in the third and fourth quarters of 1999, and the second quarter of
2000.
Interest expense on amounts due under repurchase agreements increased 26%
to $958,000 in the third quarter of 2000, and 10% to $2,676,000 for the nine
months ended September 30, 2000 compared to $760,000 and $2,443,000,
respectively, for the same periods in 1999. These increases are principally
attributable to increases in the average cost of funds borrowed, offset in part
by decreases in the average borrowings. See Note B of the Notes to Consolidated
Financial Statements.
Amortization of deferred policy acquisition costs and value of insurance in
force acquired increased 16% to $4,469,000 in the third quarter of 2000, and 30%
to $10,083,000 for the nine months ended September 30, 2000 compared to
$3,837,000 and $7,746,000, respectively, for the same periods in 1999. These
increases are primarily due to the growth in our annuity business as discussed
above.
Other operating costs and expenses increased 14% to $4,101,000 in the third
quarter of 2000, and 13% to $11,525,000 for the nine months ended September 30,
2000 compared to $3,589,000 and $10,244,000, respectively, for the same periods
in 1999. These increases are principally attributable to an increase in home
office staff and related salaries and costs of employment.
Income tax expense increased 210% to $827,000 in the third quarter of 2000
and increased 56% to $1,271,000 for the nine months ended September 30, 2000
compared to $267,000 and $815,000, respectively, for the same periods in 1999.
The increases are principally due to increases in pretax income. The effective
income tax rate for the 2000 periods is less than the applicable statutory
federal income tax rate of 35% because of (i) tax benefits for earnings
attributable to redeemable preferred securities of subsidiary trusts and (ii)
state income tax
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American Equity Investment Life Holding Company
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benefits on the parent company's non-life loss (life insurance subsidiary
taxable income is taxed at the 35% federal income tax rate and not generally
subject to state income taxes).
FINANCIAL CONDITION
Cash and investments increased 32% during the nine months ended September
30, 2000 as a result of the growth in our annuity business discussed above. At
September 30, 2000, the fair value of our available-for-sale fixed maturity
securities and equity securities was $88,531,000 less than the amortized cost of
those investments as a result of the increase of approximately 80 basis points
in mid-term and long-term interest rates that occurred during the second half of
1999, offset in part by a decrease of approximately 25 basis points that
occurred during the third quarter of 2000. At September 30, 2000, the amortized
cost of our fixed maturity securities held for investment exceeded the market
value by $92,143,000 for the same reason.
We did not issue any long-term debt securities during the first nine months
of 2000. In April 2000, stockholders exercised warrants to purchase an aggregate
of 80,000 shares (240,000 shares after adjustment for the 3-for-1 stock split)
of common stock at $10 per share, and 56,875 shares (170,625 shares after
adjustment for the 3-for-1 stock split) of common stock at $12 per share,
resulting in proceeds of $1,482,500, which have been retained by us for general
corporate purposes. For information related to borrowings under the Company's
variable rate revolving line of credit, see Note C of the Notes to Consolidated
Financial Statements.
During the first nine months of 2000, the Company purchased 90,625 shares
of common stock at an average cost of $7.10 per share and a total cost of
$643,750. During the second and third quarters of 2000, 35,862 of these shares
were sold at an average cost of $7.28 per share resulting in proceeds of
approximately $261,000. (These share and related per share amounts have been
adjusted for the 3-for-1 stock split.)
The statutory capital and surplus of our life insurance subsidiary at
September 30, 2000 was $143,672,000 and its statutory net income for the nine
months ended September 30, 2000 was $5,286,000. The life insurance subsidiary
made surplus note interest payments to us of $1,541,000 during the nine months
ended September 30, 2000. For the remainder of 2000, up to $14,786,000 can be
distributed by the life insurance subsidiary as dividends without prior
regulatory approval.
Dividends and surplus note payments may be made only out of earned surplus,
and all surplus note payments are subject to prior approval by regulatory
authorities. Our life insurance subsidiary had $30,315,000 of earned surplus at
September 30, 2000.
The transfer of funds by our life insurance subsidiary is also restricted
by certain covenants in our loan agreements, which, among other things, require
the life insurance subsidiary to maintain statutory capital and surplus
(including asset valuation and interest maintenance reserves) equal to a minimum
of $120,000,000 plus 25% of statutory net income for periods subsequent to
December 31, 1999 plus 75% of the actual sum of contributions to the capital and
surplus of our life insurance subsidiary. Under the most restrictive of these
limitations, $24,520,000 of the life insurance subsidiary's earned surplus at
September 30, 2000 would be available for distribution by the life insurance
subsidiary to us.
Our life subsidiary has entered into a general agency commission and
servicing agreement with American Equity Investment Service Company, an
affiliated company wholly-owned by the Company's chairman and president, whereby
the affiliate acts as a national supervisory agent with responsibility for
paying commissions to the Company's agents. During 1999, the parent company
agreed to loan the affiliate up to $50,000,000 as the source of funds for the
affiliate portion of first year commissions and had net advances of $35,582,000
through September 30, 2000 pursuant to the promissory note evidencing this
agreement, including $22,400,000 to the
Page 15 of 18
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American Equity Investment Life Holding Company
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affiliate for the affiliate portion of first year commissions paid during the
first nine months of 2000. Principal and interest are payable quarterly over
five years from the date of the advance. The principal source of funds for us to
advance funds to the affiliate is our bank line of credit, which was increased
by $15,000,000 to a maximum of $40,000,000 in March, 2000. (See Note C of the
Notes to Consolidated Financial Statements.)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest rate risk is our primary market risk exposure. Substantial and
sustained increases and decreases in market interest rates can affect the
profitability of our products and the market value of our investments.
The profitability of most of our products depends on the spreads between
interest yield on investments and rates credited on insurance liabilities. We
have the ability to adjust crediting rates (participation or asset fee rates for
equity-index annuities) on substantially all of our annuity policies at least
annually (subject to minimum guaranteed values). In addition, substantially all
of our annuity products have surrender and withdrawal penalty provisions
designed to encourage persistency and to help ensure targeted spreads are
earned. However, competitive factors, including the impact of the level of
surrenders and withdrawals, may limit our ability to adjust or maintain
crediting rates at levels necessary to avoid narrowing of spreads under certain
market conditions.
A major component of our interest rate risk management program is
structuring the investment portfolio with cash flow characteristics consistent
with the cash flow characteristics of our insurance liabilities. We use computer
models to simulate cash flows expected from our existing business under various
interest rate scenarios. These simulations enable us to measure the potential
gain or loss in fair value of our interest rate-sensitive financial instruments,
to evaluate the adequacy of expected cash flows from our assets to meet the
expected cash requirements of our liabilities and to determine if it is
necessary to lengthen or shorten the average life and duration of our investment
portfolio. (The "duration" of a security is the time weighted present value of
the security's expected cash flows and is used to measure a security's
sensitivity to changes in interest rates.) When the durations of assets and
liabilities are similar, exposure to interest rate risk is minimized because a
change in value of assets should be largely offset by a change in the value of
liabilities. At September 30, 2000, the effective duration of our fixed maturity
securities and short-term investments was approximately 9.8 years and the
estimated duration of our insurance liabilities was approximately 6.8 years.
If interest rates were to increase 10% from levels at September 30, 2000,
we estimate that the fair value of our fixed maturity securities, net of
corresponding changes in the values of deferred policy acquisition costs (the
effect of which would be $0 at September 30, 2000) and before income tax effect,
would decrease by approximately $100,086,000. The computer models used to
estimate the impact of a 10% change in market interest rates incorporate
numerous assumptions, require significant estimates and assume an immediate and
parallel change in interest rates without any management of the investment
portfolio in reaction to such change. Consequently, potential changes in value
of our financial instruments indicated by the simulations will likely be
different from the actual changes experienced under given interest rate
scenarios, and the differences may be material. Because we actively manage our
investments and liabilities, our net exposure to interest rates can vary over
time.
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American Equity Investment Life Holding Company
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PART II.
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) In July, 2000, one employee exercised options to purchase 100 shares of
common stock at $8.67 per share, resulting in proceeds of approximately
$867.
In July, 2000, a registered broker/dealer purchased 15,000 shares of common
stock at $7.33 per share, resulting in proceeds of approximately $110,000.
In September, 2000, an agent of the Company purchased 3,000 shares of
common stock at $7.33 per share, resulting in proceeds of approximately
$22,000.
In September, 2000, a consultant to the Company purchased 15,000 shares of
common stock at $7.33 per share, resulting in proceeds of approximately
$110,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended September
30, 2000.
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American Equity Investment Life Holding Company
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SIGNATURES
Pursuant to the requirements 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.
Date: November 10, 2000 AMERICAN EQUITY INVESTMENT LIFE
HOLDING COMPANY
By: /S/ DAVID J. NOBLE
--------------------------------------------
David J. Noble, Chief Executive Officer
(Principal Executive Officer)
By: /S/ WENDY L. CARLSON
--------------------------------------------
Wendy L. Carlson, Chief Financial Officer
(Principal Financial Officer)
By: /S/ TERRY A. REIMER
--------------------------------------------
Terry A. Reimer, Executive Vice President
(Principal Accounting Officer)
Page 18 of 18
