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FORM 10-Q/A
AMENDMENT NO. 1
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, 1999
[ ] 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 42-1447959
---- ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
5000 Westown Parkway, Suite 440
West Des Moines, Iowa 50266
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(Address of principal executive offices)
(515) 221-0002
--------------
(Telephone)
(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 [ ]
APPLICABLE TO CORPORATE ISSUERS:
Shares of common stock outstanding at October 31, 1999: 4,712,310
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EXPLANATORY PARAGRAPH
This amendment to Form 10-Q is being filed for the purpose of expanding
the disclosure of related party transactions. For the specific changes, see the
Consolidated Balance Sheet, the Consolidated Statement of Cash Flows and Note H
to the unaudited Consolidated Financial Statements.
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements.
American Equity Investment Life Holding Company
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- --------------
(unaudited) (audited)
<S> <C> <C>
Assets
Cash and investments:
Fixed maturity securities:
Available-for-sale, at market (amortized cost:
1999 - $811,759,359;1998 - $600,300,562) $ 780,444,165 $ 601,897,562
Held for investment, at amortized cost (market:
$319,523,860) 358,524,093 --
Equity securities, at market (cost: $16,190,339) 14,977,759 --
Derivative instruments 20,143,551 16,171,621
Policy loans 228,681 192,184
Cash and cash equivalents 12,532,226 15,891,779
-------------- --------------
Total cash and investments 1,186,850,475 634,153,146
Receivable from other insurance companies 514,320 616,737
Premiums due and uncollected 1,171,409 1,684,698
Accrued investment income 9,166,162 2,946,796
Receivables from related parties 10,077,682 89,427
Property, furniture and equipment, less accumulated
depreciation: 1999 -- $1,403,014; 1998 -- $859,085 1,147,350 1,242,228
Value of insurance in force acquired 831,677 1,068,906
Deferred policy acquisition costs 100,540,177 32,005,772
Intangibles, less accumulated amortization:
1999 - $620,363; 1998 -- $472,306 2,077,213 646,142
Deferred income tax asset 25,155,292 8,289,499
Other assets 854,617 117,035
Assets held in separate account 153,369 151,450
-------------- --------------
Total assets $1,338,539,743 $ 683,011,836
============== ==============
</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 (continued)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- ---------------
(unaudited) (audited)
<S> <C> <C>
Liabilities and stockholders' equity
Liabilities:
Policy benefit reserves:
Traditional life and accident and health $ 14,961,266 $ 11,317,156
insurance products
Annuity products 1,097,331,176 529,765,023
Other policy funds and contract claims 9,839,078 6,315,598
Provision for experience rating refunds 266,198 833,679
Amounts due to related parties 7,432,250 2,438,600
Notes payable 15,000,000 10,000,000
Amounts due under repurchase agreements 33,662,500 49,000,000
Amounts due on securities purchased but not settled at
period end 65,620,026 --
Federal income taxes payable 1,199,607 1,648,822
Other liabilities 7,369,918 5,410,987
Liabilities related to separate accounts 153,369 151,450
--------------- ---------------
Total liabilities 1,252,835,388 616,881,315
Minority interest in subsidiary:
Company-obligated convertible mandatorily redeemable
preferred securities of subsidiary trust 25,970,140
Other 173,135
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 625,000 625,000
Common Stock, par value $1 per share - 25,000,000
shares authorized; issued and outstanding:
1999 -- 4,711,685 shares; 1998 - 4,581,962 shares 4,711,685 4,581,962
Additional paid-in capital 66,158,235 64,783,117
Accumulated other comprehensive income (loss) (8,567,171) 420,035
Retained earnings deficit (3,366,669) (4,279,593)
--------------- ---------------
Total stockholders' equity 59,561,080 66,130,521
--------------- ---------------
Total liabilities and stockholders' equity $ 1,338,539,743 $ 683,011,836
=============== ===============
</TABLE>
See accompanying notes.
Page 3 of 18
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American Equity Investment Life Holding Company
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended September 30 Nine months ended September 30
------------------------------- ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Traditional life and accident and health
insurance premiums $ 3,306,239 $ 1,940,985 $ 9,318,731 $ 7,574,589
Annuity product charges 712,516 249,378 1,758,596 365,013
Net investment income 19,835,304 7,493,655 42,802,001 18,142,946
Realized gains (losses) on investments (57,267) -- (86,933) 300,526
------------ ------------ ------------ ------------
Total revenues 23,796,792 9,684,018 53,792,395 26,383,074
Benefits and expenses:
Insurance policy benefits and change in future
policy benefits 2,549,110 1,636,079 6,478,530 5,295,494
Interest credited to account balances 11,992,874 4,546,337 24,371,971 9,819,251
Interest expenses on notes payable 239,184 185,364 608,220 592,071
Interest expense on amounts due under
repurchase agreements 759,303 460,711 2,442,856 1,281,018
Amortization of deferred policy acquisition
costs and value of insurance in force
acquired 3,819,682 693,681 7,693,896 2,014,460
Amortization of goodwill 17,500 17,500 52,500 52,500
Other operating costs and expenses 3,589,276 2,402,147 10,243,598 7,828,220
------------ ------------ ------------ ------------
Total benefits and expenses 22,966,929 9,941,819 51,891,571 26,883,014
------------ ------------ ------------ ------------
Income (loss) before income taxes 829,863 (257,801) 1,900,824 (499,940)
------------ ------------ ------------ ------------
Income tax benefit (expense):
Current (4,939,697) (610,791) (13,050,785) (2,708,080)
Deferred 4,672,828 592,150 12,236,020 2,715,413
------------ ------------ ------------ ------------
(266,869) (18,641) (814,765) 7,333
Minority interest in earnings in subsidiary:
Dividends on company-obligated convertible
mandatorily redeemable preferred securities
of subsidiary trust (173,135) -- (173,135) --
------------ ------------ ------------ ------------
Net income (loss) $ 389,859 $ (276,442) $ 912,924 $ (492,607)
============ ============ ============ ============
Basic earnings (loss) per common share $ 0.08 $ (0.06) $ 0.20 $ (0.11)
============ ============ ============ ============
Diluted earnings (loss) per common share $ 0.08 $ (0.06) $ 0.16 $ (0.11)
============ ============ ============ ============
</TABLE>
See accompanying notes.
Page 4 of 18
<PAGE>
American Equity Investment Life Holding Company
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Operating activities
Net income (loss) $ 912,922 $ (492,608)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Adjustments related to interest sensitive products:
Interest credited to account balances 24,371,971 9,819,251
Annuity product charges (1,758,596) (365,013)
Increase in traditional life and accident and health
insurance reserves 3,644,110 720,983
Policy acquisition costs deferred (49,899,722) (18,231,589)
Amortization of deferred policy acquisition costs 7,456,667 1,728,444
Provision for depreciation and other amortization 929,216 710,229
Amortization of discount and premiums on fixed
maturity securities and derivative instruments (11,272,860) (9,808,888)
Deferred income taxes (12,236,020) (2,715,413)
Change in federal income taxes (449,215) (2,840,662)
Realized (gain) loss on sale of investments 86,933 (300,526)
Amounts due to related parties 4,993,650 --
Receivables from related parties (9,988,255) --
Other (1,443,336) 10,677,376
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Net cash used in operating activities (44,652,535) (11,098,416)
Investing activities Maturities or repayments of investments:
Fixed maturity securities - available-for-sale 289,059,607 132,008,620
------------- -------------
289,059,607 132,008,620
Acquisition of investments:
Fixed maturity securities - available-for-sale (425,133,995) (407,020,163)
Fixed maturity securities - held for investment (341,707,425) --
Equity securities (16,190,339)
Derivative instruments (26,004,989) (6,801,785)
Policy loans (36,497) (16,522)
------------- -------------
(809,073,245) (413,838,470)
Proceeds from sale of property -- 2,094,619
Purchase of property, furniture and equipment (449,049) (327,370)
------------- -------------
Net cash used in investing activities (520,462,687) (280,062,601)
</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 (continued)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Financing activities
Receipts credited to annuity policyholder account balances $ 585,367,760 $ 265,116,787
Return of annuity policyholder account balances (39,253,179) (13,975,791)
Financing fees deferred (1,579,128) --
Proceeds from notes payable 5,000,000 --
Accrued distributions on company-obligated convertible
mandatorily redeemable preferred securities of subsidiary trust 173,135 --
Change in amounts due under repurchase agreements (15,337,500) 40,997,500
Net proceeds from issuance of common stock 1,414,441 1,020,990
Proceeds from company-obligated convertible mandatorily
redeemable preferred securities of subsidiary trust 25,970,140 --
------------- -------------
Net cash provided by financing activities 561,755,669 293,159,486
------------- -------------
Increase(decrease) in cash and cash equivalents (3,359,553) 1,998,469
Cash and cash equivalents at beginning of period 15,891,779 7,719,829
------------- -------------
Cash and cash equivalents at end of period $ 12,532,226 $ 9,718,298
============= =============
Supplemental disclosures of cash flow information
Cash paid during period for:
Interest $ 3,051,076 $ 1,873,129
Income taxes 13,500,000 5,650,000
Non-cash financing and investing activities:
Bonus interest deferred as policy acquisition costs 5,583,554 3,873,786
</TABLE>
See accompanying notes.
Page 6 of 18
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American Equity Investment Life Holding Company
Notes to Consolidated Financial Statements
(unaudited)
September 30, 1999
NOTE A - BASIS OF PRESENTATION
The unaudited consolidated financial statements as of September 30, 1999 and for
the periods ended September 30, 1999 and 1998, as well as the audited
consolidated balance sheet as of December 31, 1998, include the accounts of the
Company and its wholly-owned subsidiaries, American Equity Investment Life
Insurance Company, American Equity Capital Trust I, American Equity Investment
Properties, L.C. and American Equity Capital, Inc. 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
the Company's financial position and results of operations on a basis consistent
with the prior audited financial statements.
NOTE B - FIXED MATURITY SECURITIES
Fixed maturity securities that the Company has the positive intent and ability
to hold to maturity are designated as "held for investment". Held for investment
securities are reported at cost adjusted for amortization of premiums and
discounts. Changes in the market value of these securities, except for declines
that are other than temporary, are not reflected in the Company's financial
statements. The Company records income from these securities based upon the
accrual of the original issue discount ("OID") attributable to the difference
between the face amount and the offering price when first issued from the date
of purchase to the respective maturity dates. Income attributable to any
additional discounts from the OID is accrued from the date of purchase to the
nearest date on which the securities may be called for redemption.
Fixed maturity securities which may be sold are designated as
"available-for-sale". Available-for-sale securities are reported at market value
and unrealized gains and losses, if any, on these securities are included
directly in a separate component of stockholders' equity, net of certain
adjustments. Premiums and discounts are amortized/accrued using methods which
result in a constant yield over the securities' expected lives.
Amortization/accrual of premiums and discounts on mortgage and asset-backed
securities incorporate prepayment assumptions to estimate the securities'
expected lives.
NOTE C - 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
$63,412,000 and $28,871,000 for the nine months ended September 30, 1999 and
1998, 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 5.11% and 5.88% for
the nine months ended September 30, 1999 and 1998, respectively.
Page 7 of 18
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American Equity Investment Life Holding Company
Notes to Consolidated Financial Statements
(unaudited)
NOTE D - EARNINGS PER SHARE
The weighted-average shares used to determine basic earnings per share and the
adjusted weighted-average shares used to determine diluted earnings per share
for the periods ended September 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
Three months ended September 30 Nine months ended September 30
------------------------------- -------------------------------
1999 1998 1999 1998
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Weighted-average shares 4,701,258 4,422,646 4,647,079 4,421,458
Adjusted weighted-average
shares 6,477,779 4,422,646(1) 6,231,229 4,421,458(1)
</TABLE>
(1) A net loss was incurred in these periods and thus no adjustment for
dilution is permitted.
NOTE E - COMMON STOCK
In April, 1999, certain stockholders exercised warrants to purchase 114,083
shares of common stock at $12 per share resulting in proceeds of approximately
$1,369,000, before expenses of issuance of approximately $22,000.
In September 1999, an employee exercised options to acquire 6,600 shares of
common stock (of which 6,000 were exercisable at $10 per share and 600 were
exercisable at $12 per share) and other rights to receive deferred compensation
payable in the form of 9,040 shares of common stock.
NOTE F - MINORITY INTEREST
In September, 1999, American Equity Capital Trust I (the "Trust"), a wholly-
owned subsidiary of the Company, issued $25,970,000 of 8% Convertible Trust
Preferred Securities (the "Trust Preferred Securiites"). In connection with the
Trust's issuance of the Trust Preferred Securities and the related purchase by
the Company of all of the Trust's common securities, the Company issued to the
Trust $26,773,000 in principal amount of its 8% Convertible Junior Subordinated
Debentures, due September 30, 2029 (the "Debentures"). The sole assets of the
Trust are the Debentures and any interest accrued thereon. Each Trust Preferred
Security is convertible into one share of common stock of the Company at a
conversion price equal to the lesser of (i) $30 per share or (ii) 90% of the
initial price per share to the public of the Company's common stock sold in
connection with its initial public offering of such common stock (the "IPO"),
upon the earlier of the 91st day following the IPO or September 30, 2002. The
interest payment dates on the Debentures correspond to the distribution dates on
the Trust Preferred Securities. The Trust Preferred Securities, which have a
liquidation value of $30 per share plus accrued and unpaid distributions, mature
simultaneously with the Debentures. As of September 30, 1999, 865,671.33 shares
of Trust Preferred Securities were outstanding, all of which are unconditionally
guaranteed by the Company to the extent of the assets of the Trust.
Page 8 of 18
<PAGE>
NOTE G - SUBSEQUENT EVENT
In October, 1999, American Equity Capital Trust II (Trust II"), a wholly-owned
subsidiary of the Company, issued 97,000 shares of 5% Trust Preferred Securities
(liquidation value $97,000,000) (the "5% Trust Preferred Securities") to an
institutional investor (the "Purchaser"). The 5% Trust Preferred Securities have
been assigned a fair value of $72,490,000 (based upon an effective 7%
yield-to-maturity). The consideration received by Trust II in connection with
the issuance of the 5% Trust Preferred Securities consisted of fixed income
trust preferred securities of equal value which were owned by the Purchaser and
issued by an affiliate of the Purchaser in May, 1997. This affiliate of the
Purchaser is a significant beneficial holder of common stock of the Company.
In connection with Trust II's issuance of the 5% Preferred Securities and the
related purchase by the Company of all of Trust II's common securities, the
Company issued to Trust II $100,000,000 in principal amount of its 5%
Subordinated Debentures, due June 1, 2047 (the "5% Debentures"). The sole assets
of Trust II are the 5% Debentures and any interest accrued thereon. The interest
payment dates on the 5% Debentures correspond to the distribution dates on the
5% Trust Preferred Securities. The 5% Trust Preferred Securities mature
simultaneously with the Debentures. All of the 5% Trust Preferred Securities are
unconditionally guaranteed by the Company to the extent of the assets of Trust
II.
NOTE H - 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, 1999 and 1998, the Service Company
paid $30,948,000 and $12,084,000 respectively, to agents of the Company and the
Company paid renewal commissions to the Service Company of $9,986,000 and
$4,377,000. At September 30, 1999 and December 31, 1998, accounts payable to the
Service Company aggregated $7,296,000 and $2,439,000, 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, 1999, the net amount advanced to the Service Company totaled
$5,000,000.
Page 9 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 the consolidated financial
position of the Company at September 30, 1999, and the consolidated results of
operations for the periods ended September 30, 1999 and 1998, 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 other financial
information, including management's discussion and analysis, included in the
Company's Form 10.
All statements, trend analyses and other information contained in this
report and elsewhere (such as in filings by the Company with the Securities and
Exchange Commission, press releases, presentations by the Company or its
management or oral statements) relative to markets for the Company's products
and trends in the Company's 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:
* general economic conditions and other factors, including
prevailing interest rate levels and stock and credit market
performance which may affect (among other things) the
Company's ability to sell its products, its ability to access
capital resources and the costs associated therewith, the
market value of the Company's investments and the lapse rate
and profitability of policies
* customer response to new products and marketing initiatives
* mortality and other factors which may affect the profitability
of the Company's products
* changes in Federal income tax laws and regulations which may
affect the relative income tax advantages of the Company's
products
* increasing competition in the sale of annuities
* 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
* the ability to achieve Year 2000 readiness for significant
systems and operations on a timely basis
* the risk factors or uncertainties listed from time to time in
the Company's private placement memorandums or filings with
the Securities and Exchange Commission
Page 10 of 18
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American Equity Investment Life Holding Company
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Results of Operations
Three and nine months ended September 30, 1999 and 1998
The Company had net income of $390,000 for the third quarter of 1999
and $913,000 for the nine months ended September 30,1999, compared to net losses
of $276,000 and $493,000, respectively, for the same periods in 1998. Net income
in 1999 is a direct result of the growth in the Company's annuity business which
began to accelerate in the third quarter of 1997. Annuity reserves grew from
$73,689,000 at September 30, 1997 to $410,201,000 at September 30,1998 and
$1,097,331,000 at September 30, 1999. New annuity deposits during the nine
months ended September 30, 1999 increased 121% to $585,368,000, compared to
$265,117,000 for the same period in 1998. The increased annuity production is a
direct result of the growth in the Company's agency force which increased from
4,450 agents at December 31, 1997 to 10,525 agents at December 31, 1998 and
16,325 agents at September 30, 1999.
The growth in the Company's annuity business resulted in a sizeable
increase in the Company's investment spread for the three months and nine months
ended September 30, 1999. While certain expenses also increased as a result of
the growth in the Company's annuity business, the incremental profits from a
larger deposit base allowed the Company to offset a greater portion of its fixed
operating costs and expenses.
Traditional life and accident and health insurance premiums increased
70% to $3,306,000 for the third quarter of 1999, and 23% to $9,319,000 for the
nine months ended September 30, 1999 compared to $1,941,000 and $7,575,000,
respectively, for the same periods in 1998. These increases are principally
attributable to increases in direct life insurance premiums.
Annuity product charges (surrender charges assessed against annuity
withdrawals) increased 186% to $713,000 for the third quarter of 1999, and 382%
to $1,759,000 for the nine months ended September 30, 1999 compared to $249,000
and $365,000, respectively, for the same periods in 1998. These increases are
principally attributable to the growth in the Company's annuity business and
correspondingly, increases in annuity policy withdrawals subject to surrender
charges. Annuity policy withdrawals were $39,253,000 for the nine months ended
September 30,1999 compared to $13,976,000 for the same period in 1998.
Net investment income increased 165% to $19,835,000 in the third
quarter of 1999, and 136% to $42,802,000 for the nine months ended September 30,
1999 compared to $7,494,000 and $18,143,000, respectively, for the same periods
in 1998. The invested assets (amortized cost basis) increased 144% to
$1,205,633,000 at September 30, 1999 compared to $494,933,000 at September 30,
1998, while the annualized effective yield earned on average invested assets
remained unchanged at 7.50% for the nine months ended September 30,1999 and
1998.
Traditional life and accident and health insurance benefits increased
56% to $2,549,000 in the third quarter of 1999, and 22% to $6,479,000 for the
nine months ended September 30, 1999 compared
Page 11 of 18
<PAGE>
American Equity Investment Life Holding Company
-----------------------------------------------
to $1,636,000 and $5,295,000, respectively, for the same periods in 1998. These
increases are principally attributable to an increases in reserves related to
the increases in direct life insurance premiums.
Interest credited to annuity policyholder account balances increased
164% to $11,993,000 in the third quarter of 1999 and 148% to $24,372,000 for the
nine months ended September 30, 1999 compared to $4,546,000 and $9,819,000,
respectively, for the same periods in 1998. These increases are principally
attributable to increases in annuity liabilities. At September 30, 1999, the
weighted average crediting rate for the Company's annuity liabilities, excluding
interest rate bonuses guaranteed for the first year of the annuity contract, was
5.12%, compared to 5.20% at September 30, 1998.
Interest expense on notes payable increased 18% to $239,000 for the
third quarter of 1999, and 9% to $608,000 for the nine months ended September
30, 1999 compared to $185,000 and $592,000, respectively, for the same periods
in 1998. Outstanding borrowings increased from $10,000,000 to $15,000,000 in
August, 1999. The applicable interest rate decreased from 8.04% for the three
and nine months ended September 30, 1998, to 7.62% for the three months ended
September, 30, 1999 and an average rate of 7.43% for the nine months ended
September 30,1999.
Interest expense on amounts due under repurchase agreements increased
65% to $759,000 in the third quarter of 1999, and 91% to $2,443,000 for the nine
months ended September 30,1999 compared to $461,000 and $1,281,000, respectively
for the same periods in 1998. These increases were principally attributable to
the larger average balance of funds borrowed, offset in part by a lower cost of
funds in 1999. See Note C of the Notes to Consolidated Financial Statements.
Amortization of deferred policy acquisition costs and value of
insurance in force acquired increased 444% to $3,777,000 in the third quarter of
1999, and 280% to $7,652,000 for the nine months ended September 30, 1999
compared to $694,000 and $2,014,000, respectively, for the same periods in 1998.
These increases are primarily due to the growth in the Company's annuity
business as discussed above.
Other operating costs and expenses increased 51% to $3,632,000 in the
third quarter of 1999, and 31% to $10,286,000 for the nine months ended
September 30, 1999, compared to $2,402,000 and $7,828,000, respectively, for the
same periods in 1998. These increases are principally attributable to increases
in home office staff and related salaries and costs of employment.
Income tax expense increased 1305% from $19,000 in the third quarter of
1998 to $267,000 in the third quarter of 1999, and from a benefit of $7,000 to
an expense of $815,000 for the nine months ended September 30, 1999. The
Company's effective income tax rate of 41% for the third quarter of 1999, and
47% for the nine months ended September 30,1999 exceed the federal statutory
rate of 34% primarily because the Company has established a valuation allowance
against deferred income tax assets of the non-life insurance entities due to the
uncertainty of the Company's ability to utilize such income tax benefits in the
future.
Page 12 of 18
<PAGE>
American Equity Investment Life Holding Company
-----------------------------------------------
Financial Condition
Cash and investments increased 87% during the nine months ended
September 30, 1999 as a result of (i) the growth in the Company's annuity
business discussed above and (ii) the issuance of the 8% Convertible Trust
Preferred Securities described in Note F to Consolidated Financial Statements.
At September 30, 1999, the fair value of the Company's available-for-sale fixed
maturity securities and equity securities was $32,527,774 less than the
amortized cost of those investments as a result of the increase of (i) the
increase in the level of long term interest rates, (ii) a widening of the
interest rate spread between Treasury securities and non-treasury bonds, and
(iii) higher volatility in the level of interest rates which impacts the value
of rights to call bonds before maturity. At September 30, 1999, the amortized
cost of the Company's fixed maturity securities held for investment exceeded the
market value by $39,000,000 for the same reason.
As described in Note F to Consolidated Financial Statements, in
September 1999, American Equity Capital Trust I (the "Trust"), a wholly-owned
subsidiary of the Company, issued $25,970,000 of 8% Convertible Trust Preferred
Securities (the "Trust Preferred Securities"). In connection with the Trust's
issuance of the Preferred Securities and the related purchase by the Company of
all of the Trust common securities, the Company issued to the Trust $26,773,000
in principal amount of its 8% Convertible Junior Subordinated Debentures, due
September 30, 2029 (the "Debentures"). The sole assets of the Trust are the
Debentures and any interest accrued thereon. The interest payment dates on the
Debentures correspond to the distribution dates on the 8%Convertible Trust
Preferred Securities. The 8% Convertible Trust Preferred Securities, which have
a liquidation value of $30 per share plus accrued and unpaid distributions,
mature simultaneously with the Debentures. As of September 30, 1999, 865,671.33
shares of 8% Convertible Trust Preferred Securities were outstanding, all of
which are unconditionally guaranteed by the Company to the extent of the assets
of the Trust. The Company contributed $20,000,000 to the capital and surplus of
its life company subsidiary and intends to use the remainder for general
corporate purposes.
In April 1999, certain stockholders exercised warrants to purchase an
aggregate of 114,083 shares of common stock at $12 per share resulting in
proceeds of $1,369,000 (before costs of $22,000),which have been retained by the
Company for general corporate purposes.
In September 1999, an employee exercised options to acquire 6,600
shares of Common Stock (of which 6,000 were exercisable at $10 per share and 600
were exercisable at $12 per share) resulting in proceeds of $67,200.
The statutory capital and surplus of the Company's life insurance
subsidiary at September 30, 1999 was $112,003,000 and its statutory net income
for the nine months ended September 30, 1999 was $11,895,000. The life insurance
subsidiary made surplus note interest payments to the Company of $385,000 during
the nine months ended September 30,1999. For the remainder of 1999, up to
$7,460,000 can be distributed by the life insurance subsidiary as dividends or
surplus note payments without prior regulatory approval.
Page 13 of 18
<PAGE>
American Equity Investment Life Holding Company
-----------------------------------------------
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. The Company's life insurance subsidiary had $25,913,000
of earned surplus at September 30, 1999.
The transfer of funds by the Company's life insurance subsidiary is
also restricted by certain covenants in the Company's 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 the greater of (i) $73,000,000 or (ii) 85% of statutory
capital and surplus plus the asset valuation and interest maintenance reserves
as of the prior year end. Under the most restrictive of these limitations, all
of the life insurance subsidiary's earned surplus at September 30, 1999 would be
available for distribution by the life insurance subsidiary to the Company.
Year 2000 Readiness Disclosure
Many computer programs were originally written using two digits rather
than four digits to identify a particular year. Such programs may recognize a
date using "00" as the year 1900 rather than the year 2000. If not corrected,
these computer programs could cause system failures or miscalculations in the
year 2000, with possible adverse effects on the Company's operations.
During the first quarter of 1998, the Company developed a strategy to
identify and then test its internal computer programs which are date sensitive.
The Company's systems for administering its group life policies were identified
as having two-digit date codes. Conversion to four-digit codes and testing of
such converted systems commenced in the third quarter of 1998 and was completed
prior to December 31, 1998. These systems are now year 2000 compliant. The costs
of testing and conversion charged to expense during 1998 were approximately
$25,000.
The policy issue and administration system for the Company's individual
annuity and life insurance business is a system developed from the outset using
four digits for the year. This system was purchased from a third party vendor in
the fourth quarter of 1996. At that time, the vendor provided the Company with a
letter of year 2000 compliance for this system. However, the Company did not
rely solely on the compliance letter and began a comprehensive systems test in
the third quarter of 1998. Testing included processing daily, monthly, quarterly
and annual business cycles through February 29,2000. Internal testing was
completed during the fourth quarter of 1998. These systems were determined to be
year 2000 compliant. The costs of testing of this system charged to expense
during 1998 were approximately $10,000. The Company installed a vendor upgrade
to this system in October 1999. The vendor has provided the Company with a
letter of year 2000 compliance for this upgrade, and the Company will test the
system after installation to ensure year 2000 readiness. The costs of such
testing are not expected to exceed $10,000.
External testing with third party providers of computer dependent
services was completed during the first quarter of 1999. The most critical of
these providers to the Company's ongoing business operations is the financial
institution with which the company electronically interfaces each business day
for the processing of premium collections and commission payments. Integrated
testing between the Company and this financial institution was successfully
completed in February 1999. Testing included all types of ACH (Automated
Clearing House) transactions. The cost of such testing charged to expense in
1999 was approximately $5,000.
Page 14 of 18
<PAGE>
American Equity Investment Life Holding Company
-----------------------------------------------
Additionally, the Company is in the process of instituting a corporate
wide disaster recovery plan for its data systems that will include both its Iowa
and Alabama locations. Both locations will be prepared to serve the other in the
event of a prolonged business outage. The plan will incorporate contingencies
for year 2000 interruptions caused by certain third party providers and other
outside elements for which adequate testing cannot be conducted. These would
include, for example, utility companies that supply electricity and water.
In a worst case scenario, if the Company's policy issue and
administration systems were inoperable, the Company could manually issue and
administer policies. Similarly, if ACH transactions were suspended, the Company
could manually issue commission checks and deposit premium receipts. Because
manual operations are more time consuming, these functions would not occur as
rapidly and delays of a few days to a few weeks could be experienced. In
addition, the Company may need to hire temporary staff to assist with such
manual operations. This would entail some additional expense although the
Company does not believe it would be material.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in the Company's market risks of
financial instruments since the date of the filing of the Company's registration
on Form 10 (May 5, 1999).
Page 15 of 18
<PAGE>
American Equity Investment Life Holding Company
-----------------------------------------------
PART II.
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(a) At the annual meeting of shareholders held June 7, 1999, the
shareholders approved an amendment to the Articles of Incorporation of
the Company to increase the number of authorized shares of common stock
from 10,000,000 to 25,000,000.
(c) In April, 1999, certain stockholders exercised warrants to purchase
114,083 shares of common stock at $12 per share resulting in proceeds
of approximately $1,369,000 before the costs of issuance.
In September, 1999, American Equity Capital Trust I (the "Trust"), a
wholly-owned subsidiary of the Company, issued $25,970,000 of 8%
Convertible Trust Preferred Securities (the "Trust Preferred
Securities") to 114 accredited investors in a private placement
transaction. In connection with the Trust's issuance of the Trust
Preferred Securities and the related purchase by the Company of all of
the Trust's common securities, the Company issued to the Trust
$26,773,000 in principal amount of its 8% Convertible Junior
Subordinated Debentures, due September 30, 2029 (the "Debentures"). The
sole assets of the Trust are the Debentures and any interest accrued
thereon. Each Trust Preferred Security is convertible into one share of
common stock of the Company at a conversion price equal to the lesser
of (i) $30 per share or (ii) 90% of the initial price per share to the
public of the Company's common stock sold in connection with its
initial public offering of such common stock (the "IPO"), upon the
earlier of the 91st day following the IPO or September 30, 2002. The
interest payment dates on the Debentures correspond to the distribution
dates on the Trust Preferred Securities. The Trust Preferred
Securities, which have a liquidation value of $30 per share plus
accrued and unpaid distributions, mature simultaneously with the
Debentures. As of September 30, 1999, 865,671.33 shares of Trust
Preferred Securities were outstanding, all of which are unconditionally
guaranteed by the Company to the extent of the assets of the Trust.
Also in September 1999, an employee exercised options to acquire 6,600
shares of common stock (of which 6,000 were exercisable at $10 per
share and 600 were exercisable at $12 per share) and other rights to
receive deferred compensation payable in the form of 9,040 shares of
common stock.
In October, 1999, American Equity Capital Trust II (Trust II"), a
wholly-owned subsidiary of the Company, issued 97,000 shares of 5%
Trust Preferred Securities (liquidation value $97,000,000) (the "5%
Trust Preferred Securities") to an institutional investor (the
"Purchaser"). The 5% Trust Preferred Securities have been assigned a
fair value of $72,490,000 (based upon an effective 7%
yield-to-maturity). The consideration received by Trust II in
connection with the issuance of the 5% Trust Preferred Securities
consisted of fixed income trust preferred securities of equal value
which were owned by the Purchaser and issued by an affiliate of the
Purchaser in May, 1997. This affiliate of the Purchaser is a
significant beneficial holder of common stock of the Company.
Page 16 of 18
<PAGE>
In connection with Trust II's issuance of the 5% Trust Preferred
Securities and the related purchase by the Company of all of Trust II's
common securities, the Company issued to Trust II $100,000,000 in
principal amount of its 5% Subordinated Debentures, due June 1, 2047
(the "5% Debentures"). The sole assets of Trust II are the 5%
Debentures and any interest accrued thereon. The interest payment dates
on the 5% Debentures correspond to the distribution dates on the 5%
Trust Preferred Securities. The 5% Trust Preferred Securities mature
simultaneously with the Debentures. All of the 5% Trust Preferred
Securities are unconditionally guaranteed by the Company to the extent
of the assets of Trust II.
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, 1999.
Page 17 of 18
<PAGE>
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 11, 1999 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
