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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 March 31, 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)
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<S> <C>
IOWA 42-1447959
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(State of Incorporation) (I.R.S. Employer
Identification No.)
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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 April 30, 2000: 4,694,385
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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>
MARCH 31, DECEMBER 31,
2000 1999
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<S> <C> <C>
ASSETS
Cash and investments:
Fixed maturity securities:
Available-for-sale, at market (amortized cost:
2000 - $1,243,416; 1999 - $1,070,465) $1,189,618 $ 997,020
Held for investment, at amortized cost (market:
2000 - $380,942; 1999 - $315,975) 411,322 398,467
Equity securities, at market (cost: 2000 -
$9,098; 1999 - $8,020) 7,953 7,613
Derivative instruments 52,246 44,210
Policy loans 244 231
Cash and cash equivalents 4,465 5,882
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Total cash and investments 1,665,848 1,453,423
Receivable from other insurance companies 509 598
Premiums due and uncollected 1,333 1,097
Accrued investment income 18,535 14,183
Receivables from related parties 30,151 18,896
Property, furniture and equipment, less accumulated
depreciation: 2000 - $1,822; 1999 - $1,632 1,229 1,346
Value of insurance in force acquired 673 752
Deferred policy acquisition costs 159,133 126,685
Intangibles, less accumulated amortization:
2000 - $742; 1999 - $681 2,177 2,238
Deferred income tax asset 34,372 43,037
Federal income taxes recoverable 3,269 1,663
Other assets 1,308 1,215
Assets held in separate account 553 371
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Total assets $1,919,090 $1,665,504
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(Continued on next page)
SEE ACCOMPANYING NOTES.
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American Equity Investment Life Holding Company
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
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<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy benefit reserves:
Traditional life insurance and accident and
health products $ 16,618 $ 15,060
Annuity and single premium universal life products 1,587,024 1,343,816
Other policy funds and contract claims 12,950 11,553
Provision for experience rating refunds 336 545
Amounts due to related parties 16,983 10,003
Notes payable 20,600 20,600
Amounts due under repurchase agreements 11,387 86,969
Amounts due on securities purchased 92,631 29,714
Other liabilities 13,747 13,567
Liabilities related to separate account 553 371
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Total liabilities 1,772,829 1,532,198
Commitments and contingencies
Minority interest in subsidiaries: company-obligated 99,112 98,982
mandatorily redeemable preferred securities of
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 - 25,000,000
shares authorized; issued and outstanding:
2000 - 4,694,385 shares; and 1999 - 4,712,310 shares 4,695 4,712
Additional paid-in capital 65,680 66,058
Accumulated other comprehensive loss (22,026) (35,235)
Retained-earnings deficit (1,825) (1,836)
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Total stockholders' equity 47,149 34,324
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Total liabilities and stockholders' equity $1,919,090 $1,665,504
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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)
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<CAPTION>
THREE MONTHS ENDED MARCH 31,
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2000 1999
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REVENUES:
Traditional life and accident and health insurance premiums $ 3,443 $ 2,941
Annuity and single premium universal life product charges 1,406 417
Net investment income 9,259 10,065
Realized gains on sale of investments 6,213 3
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Total revenues 20,321 13,426
BENEFITS AND EXPENSES:
Insurance policy benefits and change in future policy benefits 1,954 1,549
Interest credited to account balances 11,891 5,684
Interest expense on notes payable 292 202
Interest expense on amounts due under repurchase agreements 668 699
Amortization of deferred policy acquisition costs and value of 206 1,691
insurance in force acquired
Other operating costs and expenses 3,431 3,353
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Total benefits and expenses 18,442 13,178
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Income before income taxes 1,879 248
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Income tax benefit (expense):
Current 1,606 (3,560)
Deferred (1,612) 3,375
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(6) (185)
Minority interest in subsidiaries:
Earnings attributable company-obligated mandatorily
redeemable preferred securities of subsidiary trusts (1,862) -
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Net income $ 11 $ 63
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Basic earnings per common share $ 0.002 $ 0.014
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Diluted earnings per common share $ 0.002 $ 0.011
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</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)
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<CAPTION>
THREE MONTHS ENDED MARCH 31,
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2000 1999
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OPERATING ACTIVITIES
Net income $ 11 $ 63
Adjustments to reconcile net income to net cash used in
operating activities:
Adjustments related to interest sensitive products:
Interest credited to account balances 11,891 5,684
Annuity and single premium universal life product (1,406) (417)
charges
Increase in traditional life insurance and accident and
health reserves 1,558 553
Policy acquisition costs deferred:
Commissions paid to related party (28,128) (12,304)
Other (978) (547)
Amortization of deferred policy acquisition costs 127 1,596
Provision for depreciation and other amortization 330 300
Amortization of discount and premiums on fixed maturity
securities and derivative instruments 1,778 (3,704)
Increase in federal income taxes recoverable (1,606) -
Deferred income taxes 1,612 (3,375)
Change in federal income taxes payable - 1,710
Other (7,706) (7,504)
Realized gains on sale of investments (6,213) (3)
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Net cash used in operating activities (28,730) (17,948)
</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)
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<CAPTION>
THREE MONTHS ENDED MARCH 31,
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2000 1999
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<S> <C> <C>
INVESTING ACTIVITIES
Sales, maturities or repayments of investments:
Fixed maturity securities - available-for-sale $ 575,624 $ 231,347
Derivative instruments 7,177 -
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582,801 231,347
Acquisition of investments:
Fixed maturity securities - available-for-sale (682,697) (371,676)
Fixed maturity securities - held for investment (7,246)
Equity securities (1,078) (6,078)
Derivative instruments (16,544) (5,552)
Policy loans (13) (23)
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(707,578) (383,329)
Purchases of property, furniture and equipment (73) (110)
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Net cash used in investing activities (124,850) (152,092)
FINANCING ACTIVITIES
Receipts credited to annuity and single premium universal
life policyholder account balances 253,567 149,888
Return of annuity and single premium universal life
policyholder account balances (25,427) (10,627)
Increase (decrease) in amounts due under repurchase (75,582) 19,979
agreements
Re-acquisition of common stock (398) -
Net proceeds from issuance of common stock 3 -
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Net cash provided by financing activities 152,163 159,240
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Decrease in cash and cash equivalents (1,417) 7,148
Cash and cash equivalents at beginning of period 5,882 15,892
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Cash and cash equivalents at end of period $ 4,465 $ 23,040
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during period for:
Interest $ 1,073 $ 952
Income taxes - 1,850
Non-cash financing and investing activities:
Bonus interest deferred as policy acquisition costs 2,119 1,690
</TABLE>
SEE ACCOMPANYING NOTES
Page 6 of 18
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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)
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ACCUMULATED
ADDITIONAL OTHER RETAINED TOTAL
PREFERRED COMMON PAID-IN COMPREHENSIVE EARNINGS/ STOCKHOLDERS'
STOCK STOCK CAPITAL INCOME/(LOSS) DEFICIT EQUITY
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<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 625 4,712 66,058 (35,235) (1,836) 34,324
Comprehensive income:
Net income for period - - - - 11 11
Change in net unrealized
investment gains - - - 13,209 - 13,209
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Total comprehensive income 13,220(1)
Issuance of 200 shares
of common stock - 1 2 - - 3
Acquisition of 18,125 shares
of common stock - (18) (380) - - (398)
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Balance at March 31, 2000 625 4,695 65,680 (22,026) (1,825) 47,149
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</TABLE>
(1) Total comprehensive loss at March 31, 1999 was $2,760, and was comprised
of net income of $63 and an increase in net unrealized depreciation of
available-for-sale fixed maturity securities of $2,823 for the three months
then ended.
Page 7 of 18
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American Equity Investment Life Holding Company
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2000
NOTE A- BASIS OF PRESENTATION
The unaudited consolidated financial statements as of March 31, 2000 and for
the periods ended March 31, 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 three
months ended March 31, 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 $45,969,000 and $64,598,000 for the three months ended
March 31, 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
5.75% and 5.57% for the three months ended March 31, 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. No
additional borrowings under this line occurred in the first quarter of 2000.
Page 8 of 18
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NOTE D - EARNINGS PER SHARE
The following table sets forth the computation of basic earnings per common
share and diluted earnings per common share:
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<CAPTION>
THREE MONTHS ENDED MARCH 31
2000 1999
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<S> <C> <C>
NUMERATOR:
Net income (loss) $ 11 $ 63
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Numerator for basic and diluted
earnings per share 11 63
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DENOMINATOR:
Weighted average shares outstanding - 4,703,547 4,581,962
denominator for basic earnings per
common share
Effect of dilutive securities:
Preferred stock 625,000 625,000
Warrants 92,423 126,515
Stock options and subscription rights 713,943 470,825
Deferred compensation agreements 224,760 17,187
Denominator for diluted earnings per share -
adjusted weighted average shares
outstanding 6,359,673 5,821,489
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Basic earnings per common share $ 0.002 $ 0.014
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Diluted earnings per common share $ 0.002 $ 0.011
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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.
NOTE E - SUBSEQUENT EVENTS
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 9 of 18
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American Equity Investment Life Holding Company
Notes to Consolidated Financial Statements (Unaudited)
NOTE F - 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 G - 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. Under the terms of the original agreement, the Service
Company was required to pay the greater of (a) 5% of the premiums collected
by the Company on the sale of certain annuity products, or (b) 50% of the
agent's commissions payable by the Company on the sale of those same
policies. In return, the Company agreed to pay quarterly renewal commissions
to the Service Company equal to .3275% of the premiums received by the
Company on policies that still remain in force. In addition, the Company has
agreed to pay supplemental commissions should lapses in any quarter exceed
1.88%, or certain other circumstances arise. The Agreement terminates on June
30, 2005.
On December 31, 1997, the Service Company and the Company amended the
Agreement to provide for the payment of 100% of the agents' commissions by
the Service Company for policies issued from July 1, 1997 through December
31, 1997. In return, the Company agreed to pay the Service Company quarterly
renewal commissions of .7% of the premiums received by the Company before
January 1, 1998 that still remain in force, and .325% for in-force amounts
received thereafter. The revised quarterly renewal commission schedule
commenced December 31, 1997. For policies issued from January 1, 1998 through
August 30, 1999, the original agreement remains in effect and, accordingly,
the Company pays renewal commissions of .325% of the premiums received on
such policies which remain in force.
On June 30, 1999, the Service Company and the Company further amended the
Agreement to provide for the payment of 30% of agents' commissions by the
Service Company for policies issued on or after September 1, 1999, and the
Company agreed to pay the Service company quarterly renewal commissions of
.25% for in force amounts received thereafter.
During the three months ended March 31, 2000 and 1999, the Service Company
paid $8,400,000 and $7,700,000 respectively, to agents of the Company and the
Company paid renewal commissions to the Service Company of $5,000,000 and
$2,648,000. At March 31, 2000 and December 31, 1999, accounts payable to the
Service Company aggregated $15,583,000 and $10,003,000, respectively, and is
included in amounts due to related parties.
Page 10 of 18
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American Equity Investment Life Holding Company
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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 March 31, 2000 and December 31, 1999, the net amount advanced to
the Service Company totaled $23,956,000 and $18,175,000, respectively.
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 March 31, 2000, and the consolidated results of operations for
the periods ended March 31, 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 18
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American Equity Investment Life Holding Company
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Our business has continued to grow rapidly, with reserves for annuities
and single premium universal life policies increasing from $223,450,000 at
March 31,1998 to $679,045,000 at March 31,1999 and $1,587,024,000 at March
31, 2000. Deposits from sales of annuities and single premium universal life
policies during the three months ended March 31, 2000 increased 69% to
$253,567,000 compared to $149,888,000 for the same period in 1999. The
increased production is a direct result of the growth in our agency force
which increased from 10,525 agents at December 31, 1998 to 18,000 agents at
December 31, 1999 and 19,100 agents at March 31, 2000.
Our net income decreased 83% to $11,000 for the first quarter of 2000,
compared to $63,000 for the same period in 1999. This decrease is primarily
attributable to a decline in net investment income during the first quarter
of 2000.
Traditional life and accident and health insurance premiums increased
17% to $3,443,000 for the first quarter of 2000, compared to $2,941,000 for
the same period in 1999. This increase is principally attributable to
increases 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 expense charges assessed
against single premium universal life policyholder account balances)
increased 237% to $1,406,000 for the first quarter of 2000, compared to
$417,000 for the same period in 1999. This increase is 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
$25,427,000 for the three months ended March 31,2000 compared to $10,627,000
for the same period in 1999.
Net investment income decreased 8% to $9,259,000 in the first quarter of
2000, compared to $10,065,000 for the same period in 1999. Invested assets
(amortized cost basis) increased 122% to $1,692,110,000 at March 31, 2000
compared to $763,459,000 at March 31, 1999, while the annualized effective
yield earned on invested assets was 7.4% at March 31, 2000 compared to 7.3%
at March 31, 1999. The decrease in net investment income is offset by an
increase in realized gains on the sale of investments to $6,213,000, compared
to $3,000 for the same period in 1999. The decrease in net investment income
and the increase in realized gains on the sale of investments were
principally attributable to an investment program involving the use of total
return exchange agreements. The Company experienced net losses of $5,283,000
on these agreements in the first quarter of 2000 consisting of realized gains
on the early termination of seven total return swap agreements of $7,177,000
and net investment expense of $12,460,000 related to payments made on
specified settlement dates. All total return exchange agreements were
terminated in February 2000 and will not impact future quarterly results. Net
realized gains on the sale of investments includes $964,000 of losses on the
sale of certain corporate fixed maturity securities.
Traditional life and accident and health insurance benefits increased
26% to $1,954,000 in the first quarter of 2000, compared to $1,549,000 for
the same period in 1999. This increase is principally attributable to an
increase in reserves related to the increase in direct life insurance
premiums.
Page 12 of 18
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American Equity Investment Life Holding Company
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Interest credited to annuity and single premium universal life
policyholder account balances increased 109% to $11,891,000 in the first
quarter of 2000, compared to $5,684,000 for the same period in 1999. This
increase is principally attributable to the increase in annuity liabilities.
At March 31, 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 5.11%, compared to 5.18% at
March 31, 1999. The weighted average crediting rate including interest rate
and premium bonuses guaranteed for the first year of the annuity contract was
6.35% at March 31, 2000 compared to 6.79% at March 31, 1999.
Interest expense on notes payable increased 44% to $292,000 for the
first quarter of 2000, compared to $202,000 for the same period in 1999. The
increase is attributable to increases in the outstanding borrowings in the
third and fourth quarters of 1999, offset in part by a decrease in the
average applicable interest rate.
Interest expense on amounts due under repurchase agreements decreased 4%
to $668,000 in the first quarter of 2000, compared to $699,000 for the same
period in 1999. This decrease increase is principally attributable to the
decrease in the average borrowings in the first quarter of 2000 compared to
the same period in 1999, offset in part by an increase in the average cost of
funds borrowed See Note B of the Notes to Consolidated Financial Statements.
Amortization of deferred policy acquisition costs and value of insurance
in force acquired decreased 88% to $206,000 in the first quarter of 2000,
compared to $1,691,000 for the same period in 1999. This decrease is
primarily due to the decline in gross profits on our annuity business in the
first quarter of 2000. Gross profits declined as a result of the decline in
net investment income attributable to losses on total return exchange
agreements discussed above.
Other operating costs and expenses increased 2% to $3,431,000 in the
first quarter of 2000, compared to $3,353,000 for the same period in 1999.
This increase is principally attributable to an increase in home office staff
and related salaries and costs of employment.
Income tax expense decreased 97% to $6,000 in the first quarter of 2000
compared to $185,000 for the same period in 1999. The decrease 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 15% during the three months ended March
31, 2000 as a result of the growth in our annuity business discussed above.
At March 31, 2000, the fair value of our available-for-sale fixed maturity
securities and equity securities was $54,943,000 less than the amortized cost
of those investments as a result of the increase of approximately 75 basis
points in mid-term and long-term interest rates that occurred primarily in
1999 and to a lesser extent in the first quarter of 2000. At March 31, 2000,
the amortized cost of our fixed maturity securities held for investment
exceeded the market value by $30,380,000 for the same reason.
We did not issue any debt securities during the first three 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.
Page 13 of 18
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American Equity Investment Life Holding Company
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The statutory capital and surplus of our life insurance subsidiary at
March 31, 2000 was $140,859,000 and its statutory net income for the three
months ended March 31, 2000 was $1,525,000. The life insurance subsidiary
made surplus note interest payments to us of $507,000 during the three months
ended March 31,2000. For the remainder of 2000, up to $11,852,000 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 $30,388,000 of
earned surplus at March 31, 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 the greater of $120,000,000 plus 25% of statutory net income for
periods subsequent to December 31, 1999. Under the most restrictive of these
limitations, $22,562,000 of the life insurance subsidiary's earned surplus at
March 31, 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 $23,956,000 through March 31, 2000 pursuant to the promissory
note evidencing this agreement, including $8,400,000 to the affiliate for the
affiliate portion of first year commissions paid during the first quarter 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.
Page 14 of 18
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American Equity Investment Life Holding Company
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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 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
Page 15 of 18
<PAGE>
American Equity Investment Life Holding Company
-----------------------------------------------------------------
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 March 31, 2000,
the effective duration of our fixed maturity securities and short-term
investments was approximately 8.6 years and the estimated duration of our
insurance liabilities was approximately 7.1 years.
If interest rates were to increase 10% from levels at March 31, 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 $79,173,000. 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.
Page 16 of 18
<PAGE>
American Equity Investment Life Holding Company
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PART II.
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
<S> <C> <C>
(a) Exhibits:
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended
March 31, 2000.
</TABLE>
Page 17 of 18
<PAGE>
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.
<TABLE>
<CAPTION>
<S> <C>
Date: May 12, 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)
</TABLE>
Page 18 of 18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 1,189,618
<DEBT-CARRYING-VALUE> 411,322
<DEBT-MARKET-VALUE> 0
<EQUITIES> 7,953
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,661,383
<CASH> 4,465
<RECOVER-REINSURE> 509
<DEFERRED-ACQUISITION> 159,133
<TOTAL-ASSETS> 1,919,090
<POLICY-LOSSES> 1,603,642
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 12,950
<NOTES-PAYABLE> 20,600
99,112
625
<COMMON> 4,695
<OTHER-SE> 41,829
<TOTAL-LIABILITY-AND-EQUITY> 1,919,090
4,849
<INVESTMENT-INCOME> 9,259
<INVESTMENT-GAINS> 6,213
<OTHER-INCOME> 0
<BENEFITS> 13,845
<UNDERWRITING-AMORTIZATION> 206
<UNDERWRITING-OTHER> 3,431
<INCOME-PRETAX> 1,879
<INCOME-TAX> 6
<INCOME-CONTINUING> 11
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11
<EPS-BASIC> .002
<EPS-DILUTED> .002
<RESERVE-OPEN> 594
<PROVISION-CURRENT> 417
<PROVISION-PRIOR> (253)
<PAYMENTS-CURRENT> 72
<PAYMENTS-PRIOR> 28
<RESERVE-CLOSE> 642
<CUMULATIVE-DEFICIENCY> (253)
</TABLE>
