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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 June 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 42-1447959
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(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
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(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
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APPLICABLE TO CORPORATE ISSUERS:
Shares of common stock outstanding at July 31, 2000: 14,501,242
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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>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
<S> <C> <C>
ASSETS
Cash and investments:
Fixed maturity securities:
Available-for-sale, at market (amortized cost:
2000 - $1,411,043; 1999 - $1,070,465) $1,309,351 $ 997,020
Held for investment, at amortized cost (market:
2000 - $316,660; 1999 - $315,975) 417,117 398,467
Equity securities, at market (cost: 2000 -
$9,357; 1999 - $8,020) 7,419 7,613
Derivative instruments 42,509 44,210
Policy loans 240 231
Cash and cash equivalents 22,579 5,882
----------- ------------
Total cash and investments 1,799,215 1,453,423
Receivable from other insurance companies 475 598
Premiums due and uncollected 1,232 1,097
Accrued investment income 19,536 14,183
Receivables from related parties 35,084 18,896
Property, furniture and equipment, less accumulated
depreciation: 2000 - $2,006; 1999 - $1,632 1,093 1,346
Value of insurance in force acquired 593 752
Deferred policy acquisition costs 188,327 126,685
Intangibles, less accumulated amortization:
2000 - $804; 1999 - $681 2,298 2,238
Deferred income tax asset 49,741 43,037
Federal income taxes recoverable 3,815 1,663
Other assets 3,547 1,215
Assets held in separate account 704 371
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Total assets $2,105,660 $1,665,504
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</TABLE>
(Continued on next page)
SEE ACCOMPANYING NOTES.
Page 2 of 19
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American Equity Investment Life Holding Company
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except per share data )
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy benefit reserves:
Traditional life insurance and accident and health products $ 17,742 $ 15,060
Annuity and single premium universal life products 1,773,671 1,343,816
Other policy funds and contract claims 14,032 11,553
Provision for experience rating refunds 444 545
Amounts due to related parties 12,518 10,003
Notes payable 32,100 20,600
Amounts due under repurchase agreements 89,957 86,969
Amounts due on securities purchased 29,994 29,714
Other liabilities 12,328 13,567
Liabilities related to separate account 704 371
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Total liabilities 1,983,490 1,532,198
Commitments and contingencies
Minority interest in subsidiaries: company-obligated
mandatorily redeemable preferred securities of 99,242 98,982
subsidiary trusts
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 - 75,000,000
shares authorized; issued and outstanding: 14,471 4,712
2000 - 14,471,142 shares; and 1999 - 4,712,310 shares
Additional paid-in capital 57,209 66,058
Accumulated other comprehensive loss (48,496) (35,235)
Retained-earnings deficit (881) (1,836)
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Total stockholders' equity 22,928 34,324
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Total liabilities and stockholders' equity $ 2,105,660 $ 1,665,504
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</TABLE>
SEE ACCOMPANYING NOTES.
Page 3 of 19
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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 JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Traditional life and accident and
health insurance premiums $ 2,741 $ 3,072 $ 6,184 $ 6,013
Annuity and single premium
universal life product charges 1,883 629 3,288 1,046
Net investment income 24,490 12,902 33,749 22,967
Realized gains (losses) on sale of
investments (18) (33) 6,196 (30)
--------- --------- --------- ---------
Total revenues 29,096 16,570 49,417 29,996
BENEFITS AND EXPENSES:
Insurance policy benefits and
change in future policy benefits 2,148 2,381 4,103 3,930
Interest credited to account balances 12,698 6,695 24,589 12,379
Interest expense on notes payable 556 167 847 369
Interest expense on amounts due
under repurchase agreements 1,050 985 1,718 1,684
Amortization of deferred policy
acquisition costs and value of 5,426 2,201 5,632 3,909
insurance in force acquired
Other operating costs and expenses 3,975 3,318 7,405 6,654
--------- --------- --------- ---------
Total benefits and expenses 25,853 15,747 44,294 28,925
--------- --------- --------- ---------
Income before income taxes 3,243 823 5,123 1,071
--------- --------- --------- ---------
Income tax (expense) benefit:
Current (1,554) (4,551) 53 (8,111)
Deferred 1,116 4,188 (496) 7,563
--------- --------- --------- ---------
(438) (363) (444) (548)
Minority interest in subsidiaries:
Earnings attributable to company-
obligated mandatorily redeemable
preferred securities of subsidiary trusts (1,862) - (3,724) -
--------- --------- --------- ---------
Net income $ 943 $ 460 $ 955 $ 523
========= ========= ========= =========
Basic earnings per common share $ 0.07 $ 0.03 $ 0.07 $ 0.04
========= ========= ========= =========
Diluted earnings per common share $ 0.05 $ 0.03 $ 0.05 $ 0.03
========= ========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES.
Page 4 of 19
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American Equity Investment Life Holding Company
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
2000 1999
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 955 $ 523
Adjustments to reconcile net income to net cash used in operating activities:
Adjustments related to interest sensitive products:
Interest credited to account balances 24,589 12,379
Annuity and single premium universal life product
charges (3,288) (1,046)
Increase in traditional life insurance and accident and
health reserves 2,682 1,704
Policy acquisition costs deferred:
Commissions paid to related party (51,836) (28,781)
Other (1,584) (1,295)
Amortization of deferred policy acquisition costs 5,473 3,716
Provision for depreciation and other amortization 655 515
Amortization of discount and premiums on fixed maturity
securities and derivative instruments 4,996 (8,541)
Increase in federal income taxes recoverable (2,152) -
Deferred income taxes 496 (7,563)
Change in federal income taxes payable - 1,111
Amounts due to related parties 2,515 3,563
Receivables from related parties (16,188) (4,692)
Other (6,569) 3,710
Realized losses (gains) on sale of investments (6,196) 30
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Net cash used in operating activities (45,452) (24,667)
</TABLE>
(Continued on next page)
SEE ACCOMPANYING NOTES.
Page 5 of 19
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American Equity Investment Life Holding Company
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
2000 1999
--------- ---------
<S> <C> <C>
INVESTING ACTIVITIES
Sales, maturities or repayments of investments:
Fixed maturity securities - available-for-sale $ 594,481 $ 245,008
Derivative instruments 7,177 -
--------- ---------
601,658 245,008
Acquisition of investments:
Fixed maturity securities - available-for-sale (927,145) (223,457)
Fixed maturity securities - held for investment (7,246) (341,708)
Equity securities (1,337) -
Derivative instruments (34,949) (15,468)
Policy loans (9) (33)
--------- ---------
(970,686) (580,666)
Purchases of property, furniture and equipment (121) (110)
--------- ---------
Net cash used in investing activities (369,149) (335,768)
FINANCING ACTIVITIES
Receipts credited to annuity and single premium universal
life policyholder account balances 471,746 361,796
Return of annuity and single premium universal life
policyholder account balances (55,663) (22,888)
Financing fees incurred and deferred (183) -
Proceeds from notes payable 11,500 -
Increase in amounts due under repurchase agreements 2,988 14,963
Re-acquisition of common stock (600) -
Net proceeds from issuance of common stock 1,510 1,347
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Net cash provided by financing activities 431,298 355,218
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Decrease in cash and cash equivalents 16,697 (5,217)
Cash and cash equivalents at beginning of period 5,882 15,892
--------- ---------
Cash and cash equivalents at end of period $ 22,579 $ 10,675
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during period for:
Interest $ 2,565 $ 2,104
Income taxes - 7,000
Non-cash financing and investing activities:
Bonus interest deferred as policy acquisition costs 4,378 4,034
</TABLE>
SEE ACCOMPANYING NOTES.
Page 6 of 19
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American Equity Investment Life Holding Company
Consolidated Statements 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
Comprehensive loss:
Net income for period - - - - 955 955
Change in net unrealized
investment gains/losses - - - (13,261) - (13,261)
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Total comprehensive loss (12,306)
Issuance of 138,575 shares of
common stock - 139 1,371 - - 1,510
Acquisition of 81,513 shares
of common stock - (82) (518) - - (600)
3-for-1 stock split - 9,702 (9,702) - - -
----------- --------- ----------- ------------- ---------- --------------
Balance at June 30, 2000 $625 $14,471 $57,209 $(48,496) $(881) $22,928
=========== ========= =========== ============= ========== ==============
</TABLE>
Total comprehensive loss for the six months ended June 30, 1999 was
$7,747, and was comprised of net income of $523 and a decrease in net
unrealized depreciation of available-for-sale fixed maturity securities
of $8,270.
Total comprehensive loss for the second quarter of 2000 was $25,526,
and was comprised of net income of $944 and a decrease in net
unrealized depreciation of available-for-sale fixed maturity securities
of $26,470.
Total comprehensive loss for the second quarter of 1999 was $4,988, and
was comprised of net income of $460 and a decrease in net unrealized
depreciation of available-for-sale fixed maturity securities of $5,448.
Page 7 of 19
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American Equity Investment Life Holding Company
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2000
NOTE A- BASIS OF PRESENTATION
The unaudited consolidated financial statements as of June 30, 2000 and for the
periods ended June 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. (formed in 1998), 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. Operating results for the six months ended
June 30, 2000 are not necessarily indicative of the results that may be
reflected for the year ending December 31, 2000.
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
$53,403,000 and $64,738,000 for the six months ended June 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 6.43% and 5.27% for the six
months ended June 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 during the second
quarter of 2000.
Page 8 of 19
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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 JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 1999 2000 1999
----------- ------------ ------------ ------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
NUMERATOR:
Net income - numerator for basic and
diluted earnings per share $ 943 $ 460 $ 955 $ 523
=========== =========== =========== ===========
DENOMINATOR:
Weighted average shares outstanding -
denominator for basic earnings per
common share 14,359,905 13,975,305 14,275,305 13,860,597
Effect of dilutive securities:
Preferred stock 1,875,000 1,875,000 1,875,000 1,875,000
Warrants 20,004 223,977 20,004 223,977
Stock options and subscription rights 2,117,499 1,423,439 2,117,499 1,423,439
Deferred compensation agreements 758,268 40,599 758,268 40,599
----------- ---------- ------------ ----------
Adjusted weighted average shares
outstanding - denominator for diluted
earnings per common share 19,130,676 17,538,320 19,046,076 17,423,612
=========== =========== =========== ==========
Basic earnings per common share $ 0.07 $0.03 $0.07 $0.04
=========== =========== =========== ==========
Diluted earnings per common share $ 0.05 $0.03 $0.05 $0.03
=========== =========== =========== ==========
</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 on June 30, 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 outstanding for each
period presented.
Page 9 of 19
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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 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 Statement is effective for the Company in the year 2001, with
earlier adoption encouraged. 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 six months ended June 30, 2000 and 1999, the Service Company paid
$15,900,000 and $19,948,000 respectively, to agents of the Company and the
Company paid renewal commissions to the Service Company of $10,446,000 and
$5,963,000. At June 30, 2000 and December 31, 1999, accounts payable to the
Service Company aggregated $12,518,000 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 June 30, 2000 and December 31, 1999, the net amount advanced to
the Service Company was $30,426,000 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 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. 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 ("SMH") exercised warrants to purchase 56,875 shares of
common stock at an exercise price of $12 per share, resulting in proceeds of
$682,500.
Page 10 of 19
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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 June 30, 2000, and the consolidated results of operations for the
periods ended June 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:
- 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
- customer response to new products and marketing initiatives
- mortality and other factors which may affect the profitability
of our products
- changes in Federal income tax laws and regulations which may
affect the relative income tax advantages of our 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 risk factors or uncertainties listed from time to time in
our private placement memorandums or filings with the
Securities and Exchange Commission
Page 11 of 19
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American Equity Investment Life Holding Company
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RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Our business has continued to grow rapidly, with reserves for
annuities and single premium universal life policies increasing from
$384,079,000 at June 30, 1998 to $893,996,000 at June 30, 1999 and
$1,773,671,000 at June 30, 2000. Deposits from sales of annuities and single
premium universal life policies during the six months ended June 30, 2000
increased 30% to $471,746,000 compared to $361,796,000 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 19,900 agents at June 30, 2000.
Our net income increased 105% to $943,000 for the second quarter of
2000, and 83% to $955,000 for the six months ended June 30, 2000 compared to
$460,000 and $523,000, respectively, for the same periods in 1999. The trend in
net income is the direct result of the substantial growth in our annuity
business which began to accelerate in the third quarter of 1997.
Traditional life and accident and health insurance premiums decreased
11% to $2,741,000 for the second quarter of 2000, and increased 3% to $6,184,000
for the six months ended June 30, 2000 compared to $3,072,000 and $6,013,000,
respectively, for the same periods in 1999. These changes are principally
attributable to corresponding changes in direct sales of life products,
including new products introduced in 1999.
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 199% to $1,883,000 for the second quarter of 2000, and 214% to
$3,288,000 for the six months ended June 30, 2000 compared to $629,000 and
$1,046,000, 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 $55,663,000 for the six months ended June 30, 2000 compared to $22,888,000
for the same period in 1999.
Net investment income increased 90% to $24,490,000 in the second
quarter of 2000, and 47% to $33,749,000 for the six months ended June 30, 2000
compared to $12,902,000 and $22,967,000, respectively, for the same periods in
1999. Invested assets (amortized cost basis) increased 88% to $1,870,510,000 at
June 30, 2000 compared to $992,904,000 at June 30, 1999, while the annualized
effective yield earned on invested assets was 7.6% at June 30, 2000 compared to
7.5% at June 30, 1999.
Realized gains (losses) on the sale of investments consisted of an
increase in realized losses to $33,000 in the second quarter of 2000 compared to
realized losses of $18,000 for the same period in 1999. For the six months ended
June 30, 2000, the Company had realized gains of $6,196,000 compared to realized
losses of $30,000 for the same period in 1999. The increase in realized gains in
the first six 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. The
Company received an adjustment of $1,878,000 in the second quarter of 2000 which
reduced the net investment expense on this program from $12,460,000 to
$10,582,000. For the six months ended June 30, 2000, the net realized
Page 12 of 19
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American Equity Investment Life Holding Company
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gains on the sale of investments includes $981,000 of losses on the sale of
certain corporate fixed maturity securities.
Traditional life and accident and health insurance benefits decreased
10% to $2,148,000 in the second quarter of 2000, and increased 4% to $4,103,000
for the six months ended June 30, 2000 compared to $2,381,000 and $3,930,000,
respectively, for the same periods in 1999. These changes are principally
attributable to corresponding changes in reserves related to the changes in
direct life insurance premiums.
Interest credited to annuity and single premium universal life
policyholder account balances increased 90% to $12,698,000 in the second quarter
of 2000, and 99% to $24,589,000 for the six months ended June 30, 2000 compared
to $6,695,000 and $12,379,000, respectively, for the same periods in 1999. These
increases are principally attributable to the increase in annuity liabilities.
At June 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 5.12%, compared to 5.15% at June 30,
1999. The weighted average crediting rate including interest rate and premium
bonuses guaranteed for the first year of the annuity contract was 6.24% at June
30, 2000 compared to 6.66% at June 30, 1999.
Interest expense on notes payable increased 233% to $556,000 for the
second quarter of 2000, and 130% to $847,000 for the six months ended June 30,
2000 compared to $167,000 and $369,000, 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
7% to $1,050,000 in the second quarter of 2000, and 2% to $1,718,000 for the six
months ended June 30, 2000 compared to $985,000 and $1,684,000, respectively,
for the same periods in 1999. This increase is principally attributable to the
increase in the average cost of funds borrowed in the second quarter of 2000
compared to the same period in 1999, offset in part by a decrease 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 147% to $5,426,000 in the second quarter
of 2000, and 44% to $5,632,000 for the six months ended June 30, 2000 compared
to $2,201,000 and $3,909,000, 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 20% to $3,975,000 in the
second quarter of 2000, and 11% to $7,405,000 for the six months ended June 30,
2000 compared to $3,318,000 and $6,654,000, 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 21% to $438,000 in the second quarter of
2000 and decreased 19% to $444,000 for the six months ended June 30, 2000
compared to $363,000 and $548,000, respectively, for the same periods in 1999.
The increase for the second quarter is principally due to an increase in net
income. The decrease for the six months ended June 30, 2000 is primarily
attributable to the tax deductibility of the dividends paid on redeemable
preferred securities issued by the Company's subsidiary trusts.
FINANCIAL CONDITION
Cash and investments increased 24% during the six months ended June
30, 2000 as a result of the growth in our annuity business discussed above.
At June 30, 2000, the fair value of our available-for-sale fixed maturity
securities and equity securities was $103,630,000 less than the amortized
cost of those investments as a result
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of the increase of approximately 75 basis points in mid-term and long-term
interest rates that occurred during the first half of 2000. At June 30, 2000,
the amortized cost of our fixed maturity securities held for investment
exceeded the market value by $100,457,000 for the same reason.
We did not issue any debt securities during the first six months of
2000. In April 2000, stockholders exercised warrants to purchase an aggregate of
80,000 shares of common stock at $10 per share, and 56,875 shares 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.
The statutory capital and surplus of our life insurance subsidiary at
June 30, 2000 was $140,855,000 and its statutory net income for the six months
ended June 30, 2000 was $2,273,000. The life insurance subsidiary made surplus
note interest payments to us of $1,000,000 during the six months ended June 30,
2000. For the remainder of 2000, up to $15,327,000 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 $27,498,000 of earned
surplus at June 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, $22,258,000 of the life insurance subsidiary's earned surplus
at June 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 $30,426,000 through June 30, 2000 pursuant to the promissory
note evidencing this agreement, including $15,900,000 to the affiliate for
the affiliate portion of first year commissions paid during the first six
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.
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 our operations.
During the first quarter of 1998, we developed a strategy to identify
and then test our internal computer programs which are date sensitive. Our
systems for administering our group life policies were identified as having
two-digit date codes. Conversion to four-digit codes and testing of such
converted systems commenced
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in the second 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 our 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 us with a letter of
year 2000 compliance for this system. However, we 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.
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 our ongoing business operations was the financial institution
with which we electronically interface each business day for the processing of
premium collections and commission payments. Integrated testing between us 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.
Additionally, we instituted a corporate wide disaster recovery plan for
our data systems which included our Iowa and Alabama locations. Both locations
were prepared to serve the other in the event of a prolonged business outage.
The plan incorporated 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.
We experienced no disruptions or other problems with our computer
systems on January 1, 2000 or thereafter in connection with date-sensitive
processing. We experienced no disruptions in other services such as electronic
funds transfers, phone systems, or utilities. We are continuing to monitor our
systems to detect any year 2000 problems.
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
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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 June 30, 2000, the effective duration
of our fixed maturity securities and short-term investments was approximately
7.7 years and the estimated duration of our insurance liabilities was
approximately 6.7 years.
If interest rates were to increase 10% from levels at June 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 and
insurance in force acquired would decrease by approximately $70,494,000. 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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PART II.
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) At the annual meeting of shareholders held June 22, 2000, the
shareholders approved an amendment to the Articles of Incorporation of
the Company to increase the number of authorized shares of common stock
from 25,000,000 to 75,000,000. See Item 4(c)(ii) below.
(c) In April, 2000, certain stockholders exercised warrants to purchase
80,000 shares of common stock at $10 per share, and 56,875 shares of
common stock at $12 per share, resulting in total proceeds of
approximately $1,482,500 before the costs of issuance.
In June, 2000, one employee exercised options to purchase 1,500 shares
of common stock at $16 per share, resulting in proceeds of
approximately $24,000.
In June, 2000, one employee purchased 954 shares of common stock at $20
per share, resulting in proceeds of approximately $19,080.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's annual shareholders meeting was held on
June 22, 2000.
(b) and (c) (i) Election of the following directors to the Company's Board of
Directors:
<TABLE>
<CAPTION>
AGAINST OR
FOR WITHHELD
---------------------- -----------------
<S> <C> <C>
John C. Anderson 3,843,785 868,725
Robert L. Hilton 3,845,785 866,725
John M. Matovina 3,845,785 866,725
James M. Gerlach 3,845,785 866,725
Ben T. Morris 3,845,785 866,725
David S. Mulcahy 3,845,785 866,725
David J. Noble 3,845,785 866,725
A. J. Strickland III 3,845,785 866,725
Harley A. Whitfield 3,845,785 866,725
</TABLE>
(ii) Approval of Amendment to Articles of Incorporation -
Increase in Authorized Common Shares. Shareholders
approved an amendment to the Company's Articles of
Incorporation to increase the number of authorized
shares of its Common Stock, par value $1 per share,
from 25,000,000 to 75,000,000 shares. There were
3,762,785 votes cast for the amendment; 73,000 cast
against; and 12,000 abstentions.
(iii) Approval of Amendment to Articles of Incorporation -
Create a classified Board of Directors with staggered
three-year terms. Shareholders approved an amendment
to the Company's Articles of Incorporation to divide
the directors of the Corporation into three classes,
designated Class I, Class II and Class III. Each
class shall consist, as
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nearly as may be possible, of one-third of the total
number of directors constituting the entire board of
directors. The term of the initial Class I directors
shall terminate on the date of the 2001 Annual
Meeting; the term of the Class II directors shall
terminate on the date of the 2002 Annual Meeting; and
the term of the initial Class III directors shall
terminate on the date of the 2003 Annual Meeting.
There were 3,832,285 votes cast for the amendment;
9,500 cast against; and 6,000 abstentions.
(iv) Approval of the 2000 Employee Stock Option Plan.
There were 3,691,785 votes cast for the plan; 100,750
cast against; and 55,250 abstentions.
(v) Approval of the 2000 Director Stock Option Plan.
There were 3,703,785 votes cast for the plan; 100,750
cast against; and 43,250 abstentions.
(vi) Ratification of the appointment of Ernst & Young, LLP
as Independent Auditors for 2000. There were
3,844,585 votes cast for the ratification; 2,000 cast
against; and 1,200 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Part 6 Articles of Amendment to Articles of Incorporation
10.6 Forgivable Loan Agreement dated April 30, 2000
between American Equity Investment Life Holding
Company and D.J. Noble
10.7 2000 Employee Stock Option Plan
10.8 2000 Director Stock Option Plan
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended
June 30, 2000.
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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: August 11, 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)
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