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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1999 or
[ ] 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 (515) 221-0002
West Des Monies, Iowa 50266 --------------
------------------------------- (Telephone)
(Address of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $1 per share
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for 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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Aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant: No public market exists nor has active trading
occurred.
Shares of common stock outstanding as of February 29, 2000: 4,712,310
Documents incorporated by reference: Portions of the registrant's
definitive proxy statement for the annual meeting of shareholders to be held
June 30, 2000 are incorporated by reference into Part III of this report.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
From 10-K. [_]
PART I
Item 1. Business
American Equity Investment Life Holding Company was formed on December 15,
1995, to develop, market, issue and administer annuities and life insurance
through its life insurance subsidiary. We are a full service under writer of a
broad array of annuity and insurance products. Our business consists primarily
of the sale of equity-index and fixed rate annuities. Our business strategy is
to focus on our annuity business and earn predicable returns by managing
investment spreads and investment risk.
As a foundation for beginning our business, we acquired two blocks of
in-force insurance from American Life and Casualty Insurance Company, the
principal operating subsidiary of The Statesman Group, Inc., of which our
Chairman, David J. Noble, and our Executive Vice Presidents, James M. Gerlach
and Terry A. Reimer, were previously officers. In September 1996, we acquired
Century Life Insurance Company which expanded our licensing authority to 23
states and the District of Columbia. We then merged our life subsidiary into
Century Life Insurance Company and renamed the merged entity "American Equity
Investment Life Insurance Company."
We were incorporated in the State of Delaware on December 15, 1995, and
reincorporated in the State of Iowa on January 7, 1998. Our executive offices
are located at 5000 Westown Parkway, Suite 440, West Des Moines, IA 50266, and
our telephone number is (515) 221-0002. Information contained on our website is
not a part of this report.
Products
Our products include equity-index annuities, fixed rate annuities, a
variable annuity and life insurance.
Equity-Index Annuities. Equity-index annuities accounted for approximately
64% of the total annuity deposits collected during 1999. These products allow
purchasers to earn investment returns linked to equity index appreciation
without the risk of loss of their principal.
The annuity contract value is equal to the premiums paid, increased for
returns which are based upon a percentage (the "participation rate") of the
annual appreciation (based in certain situations on monthly averages) in a
recognized index or benchmark. The participation rate, which we may reset
annually, generally varies among the equity-index products from 65% to 100%.
Some of the products also have an "asset fee" of from 1% to 4% which is deducted
from the interest to be credited. The asset fees may be adjusted annually by us,
subject to stated maximums. In addition, some products apply an overall maximum
limit (or "cap") on the amount of annual interest the policyholder may earn in
any one contract year, and the applicable cap also may be adjusted annually
subject to stated minimums. The minimum guaranteed contract values are equal to
80% to 100% of the premium collected plus interest credited at an annual rate of
3%. The annuities provide for penalty-free withdrawals of up to 10% of premium
or accumulation value (depending on the product) in each year after the first
year of the annuity's term. Other withdrawals are subject to a surrender charge
ranging initially from 9% to 25% over a surrender period of from five to fifteen
years. During the applicable surrender charge period, the surrender charges on
some equity-index products remain level, while on other equity-index products,
the surrender charges decline by one to two percentage points per year. After a
number of years, as specified in the annuity contract, the annuitant may elect
to take the proceeds of the annuity either in a single payment or in a series of
payments for life, for a fixed number of years, or for a combination of these
payment options. We purchase call options on the applicable indexes as an
investment to provide the income needed to fund the amount of the annual
appreciation required to be credited on the equity-index products.
Page 2 of 24
Fixed Rate Annuities. These products, which accounted for approximately 36%
of the total annuity deposits collected during 1999, include single premium
deferred annuities ("SPDAs"), flexible premium deferred annuities ("FPDAs") and
single premium immediate annuities ("SPIAs"). An SPDA generally involves the
tax-deferred accumulation of interest on a single premium paid by the
policyholder. After a number of years, as specified in the annuity contract, the
annuitant may elect to take the proceeds of the annuity either in a single
payment or in a series of payments for life, for a fixed number of years, or for
a combination of these payment options. FPDAs are similar to SPDAs in many
respects, except that the FPDA allows additional premium payments in varying
amounts by the policyholder without the filing of a new application. Our SPDAs
and FPDAs generally have an interest rate (the "crediting rate") that is
guaranteed by us for the first policy year. After the first policy year, we have
the discretionary ability to change the crediting rate to any rate at or above a
guaranteed minimum rate. The guaranteed rate on all policies in force and new
issues ranges from 3% to 4%. The initial crediting rate is largely a function of
the interest rate we can earn on invested assets acquired with new annuity fund
deposits and the rates offered on similar products by our competitors. For
subsequent adjustments to crediting rates, we take into account the yield on our
investment portfolio, annuity surrender assumptions, competitive industry
pricing and crediting rate history for particular groups of annuity policies
with similar characteristics.
Approximately 90% of our fixed rate annuity sales have been "bonus"
products. The initial crediting rate on these products specifies a bonus
crediting rate ranging from 1% to 7% of the annuity deposit for the first policy
year only. After the first year, the bonus interest portion of the initial
crediting rate is automatically discontinued, and the renewal crediting rate is
established. Generally, there is a compensating adjustment in the commission
paid to the agent to offset the first year interest bonus. In all situations,
we obtain an acknowledgement from the policyholder, upon policy issuance, that a
specified portion of the first year interest will not be paid in renewal years.
As of December 31, 1999, crediting rates on our outstanding SPDAs and FPDAs
generally ranged from 5.00% to 5.85% excluding interest bonuses guaranteed for
the first year. The average crediting rate on FPDAs and SPDAs including interest
bonuses was 6.51%, and the average crediting rate on those products excluding
bonuses was 5.11%.
The policyholder is typically permitted to withdraw all or a part of the
premium paid, plus accumulated interest credited to the account (the
"accumulation value"), subject to the assessment of a surrender charge for
withdrawals in excess of specified limits. Most of our SPDAs and FPDAs provide
for penalty-free withdrawals of up to 10% of the accumulation value each year
after the first year, subject to limitations. Withdrawals in excess of allowable
penalty-free amounts are assessed a surrender charge during a penalty period
which generally ranges from five to fifteen years after the date the policy is
issued. This surrender charge is initially 9% to 25% of the accumulation value
and generally decreases by approximately one to two percentage points per year
during the surrender charge period. Surrender charges are set at levels to
protect us from loss on early terminations and to reduce the likelihood of
policyholders terminating their policies during periods of increasing interest
rates. This practice lengthens the effective duration of the policy liabilities
and enables us to maintain profitability on such policies.
Our SPIAs are designed to provide a series of periodic payments for a fixed
period of time or for life, according to the policyholder's choice at the time
of issue. The amounts, frequency, and length of time of the payments are fixed
at the outset of the annuity contract. SPIAs are often purchased by persons at
or near retirement age who desire a steady stream of payments over a future
period of years. The single premium is often the payout from a terminated
annuity contract. The implicit interest rate on SPIAs is based on market
conditions when the policy is issued. The implicit interest rate on our
outstanding SPIAs averaged 5.10% at December 31, 1999.
Page 3 of 24
Variable Annuity. Variable annuities differ from equity-index and fixed
rate annuities in that the policyholder, rather than the insurance company,
bears the investment risk and the policyholder's rate of return is dependent
upon the performance of the particular investment option selected by the
policyholder. Profits on variable annuities are derived from the fees charged to
policyholders. Sales to date have been insignificant.
In December 1997, we entered into a strategic alliance with Farm Bureau
Life Insurance Company for the development, marketing and administration of
variable annuity products. This agreement enabled us to introduce variable
products into our product line. An affiliate of Farm Bureau provides the
administrative support necessary to manage this business, and is paid an
administrative fee for those services. We share in 30% of the risks, costs and
operating results of these products through a reinsurance arrangement. See the
discussion under Reinsurance for additional information regarding this
arrangement as well as Farm Bureau's beneficial ownership of our common stock.
Our variable product became available for sale in the third quarter of 1998.
Life Insurance. These products include traditional ordinary and term,
universal life and other interest-sensitive life insurance products. As a result
of the acquisition of the National Guard Life insurance business from American
Life and Casualty Insurance Company we are one of the largest life insurance
Icarriers for members of the state National Guard Associations, with more than
$1.5 billion of life insurance in force. We intend to continue offering a
complete line of life insurance products for individual and group markets.
Investments
Investment activities are an integral part of our business, and investment
income is a significant component of our total revenues. Profitability of many
of our products is significantly affected by spreads between interest yields on
investments and rates credited on annuity liabilities. Although substantially
all credited rates on SPDAs and FPDAs may be changed annually, changes in
crediting rates may not be sufficient to maintain targeted investment spreads in
all economic and market environments. In addition, competition and other
factors, including the potential for increases in surrenders and withdrawals,
may limit our ability to adjust or to maintain crediting rates at levels
necessary to avoid narrowing of spreads under certain market conditions. As of
December 31, 1999, the average yield, computed on the amortized cost basis of
our investment portfolio, was 7.41%; the average interest rate credited or
accruing to our fixed rate annuity liabilities, excluding interest bonuses
guaranteed for the first year of the annuity contract, was 5.11%.
We manage the index-based risk component of our equity-index annuities by
purchasing call options on the applicable indexes to hedge such risk and
adjusting the participation rates, asset fee rates and other product features to
reflect the change in the cost of such options (which varies based on market
conditions).
For additional information regarding the composition of our investment
portfolio and our interest rate risk management, see Management's Discussion and
AInalysis of Financial Condition and Results of Operations, Quantitative and
Qualitative Disclosures About Market Risk, and Note 3 of the Notes to the
Audited Consolidated Financial Statements included elsewhere in this report.
Page 4 of 24
Marketing
We market our products primarily to individuals in the United States ages
45-75 who are seeking to accumulate tax-deferred savings. We believe that
significant growth opportunities exist for annuity products because of favorable
demographic and economic trends. According to the U.S. Census Bureau, there were
33.5 million Americans age 65 and older in 1995, representing 13% of the U.S.
population. By 2030, this sector of the population is expected to increase to
22% of the total population. Our products are particularly attractive to this
group as a result of the guarantee of principal, competitive rates of credited
interest, tax-deferred growth and alternative payout options.
We market our products through a variable cost brokerage distribution
network. We emphasize high quality service to our agents and policyholders.
Approximately 95% of new annuity policies are issued within 48 hours of our
receipt of the application and initial premium, and commissions to agents are
paid weekly. We believe these factors have been significant in building
excellent relationships with our existing agency force.
We have recruited approximately 18,000 independent agents and agencies
ranging in profile from national sales organizations to personal producing
general agents. We aggressively recruit new agents and expect to continue to
expand our independent agency force. In our recruitment efforts, we emphasize
that agents have direct access to our executive officers, giving us an edge in
recruiting over larger and foreign-owned competitors. We are currently licensed
to sell our products in 42 states and the District of Columbia. We have applied
or anticipate applying for licenses to sell our products in the remaining
states.
The insurance brokerage distribution system is comprised of insurance
brokers and marketing organizations. We are pursuing a strategy to increase the
size of our brokerage distribution network by developing relationships with
national and regional marketing organizations. These organizations typically
recruit agents for us by advertising our products and our commission structure,
through direct mail advertising, or through seminars for insurance agents and
brokers. These organizations bear most of the cost incurred in marketing our
products. We compensate marketing organizations by paying them a percentage of
the commissions earned on new annuity and life policy sales generated by the
agents recruited in such organizations. We also conduct other incentive programs
for agents from time to time. We generally do not enter into exclusive
arrangements with these marketing organizations.
Two of our national marketing organizations accounted for more than 10% of
the annuity deposits and insurance premiums collected during 1999. One of these
organizations produced approximately 15% of the collections and the other
produced approximately 13%. The states with the largest share of direct premiums
collected are: California (16.4%), Florida (15.9%), Michigan (5.9%), Texas
(5.4%) and Arizona (5.2%).
Competition and Ratings
We operate in a highly competitive industry. Most of our competitors are
substantially larger and enjoy substantially greater financial resources, higher
ratings by rating agencies, broader and more diversified product lines and more
widespread agency relationships. Our annuity products compete with equity-index,
fixed rate and variable annuities sold by other insurance companies and also
with mutual fund products, traditional bank investments and other investment and
retirement funding alternatives. Insurers compete with other insurance
companies, financial intermediaries and other institutions based on a number of
factors, including premium rates, policy terms and conditions, service provided
to distribution channels and policyholders, ratings by rating agencies,
reputation and broker compensation.
Page 5 of 24
The sales agents for our products use the ratings assigned to an insurer by
independent rating agencies as one factor in determining which insurer's annuity
to market . In recent years, the market for annuities has been dominated by
those insurers with the highest ratings. Our life subsidiary has received a
rating of A- (Excellent) from A. M. Best Company and Api from Standard & Poor's.
Ratings generally involve quantitative and qualitative evaluations of a
company's financial condition and operating performance. Generally, rating
agencies base their ratings upon information furnished to them by the insurer
and upon their own investigations, studies and assumptions. Ratings are based
upon factors of concern to policyholders, agents and intermediaries and are not
directed toward the protection of investors and are not recommendations to buy,
sell or hold securities.
A. M. Best ratings currently range from A++ (Superior) to F (In
Liquidation), and include 15 separate ratings categories. Within these
categories, A++ (Superior) and A+ (Superior) are the highest, followed by A
(Excellent) and A- (Excellent). Publications of A. M. Best indicate that the A
and A- ratings are assigned to those companies that, in A. M. Best's opinion,
have demonstrated excellent overall performance when compared to the standards
established by A. M. Best and have demonstrated a strong ability to meet their
obligations to policyholders over a long period of time.
Standard & Poor's insurer financial strength ratings currently range from
AAA to NR, and include 10 separate ratings categories. Within these categories,
AAA and AA are the highest, followed by A and BBB. Publications of Standard &
Poor's indicate that an insurer rated "BBB" or higher is regarded as having
financial security characteristics that outweigh any vulnerabilities, and is
highly likely to have the ability to meet financial commitments. In addition, an
insurer with a rating of A is regarded as having strong financial security
characteristics. Ratings denoted with a "pi" subscript are insurer financial
strength ratings based on an analysis of an insurer's published financial
information and additional information in the public domain. They do not reflect
in-depth meetings with an insurer's management and are therefore based on less
comprehensive information than ratings without a "pi" subscript.
A.M. Best and Standard & Poor's review their ratings of insurance companies
from time to time. There can be no assurance that any particular rating will
continue for any given period of time or that it will not be changed or
withdrawn entirely if, in their judgment, circumstances so warrant. If our
ratings were to be downgraded for any reason, we could experience a material
decline in the sales of our products and the persistency of our in-force
business.
Reinsurance
Consistent with the general practice of the life insurance industry, our
life subsidiary enters into agreements of indemnity reinsurance with other
insurance companies in order to reinsure portions of the coverage provided by
its life and accident and health insurance products. Indemnity reinsurance
agreements are intended to limit a life insurer's maximum loss on a large or
unusually hazardous risk or to diversify its risks. Indemnity reinsurance does
not discharge the original insurer's primary liability to the insured. Our
reinsured business is primarily ceded to two reinsurers. We believe the assuming
companies are able to honor all contractual commitments, based on our periodic
review of their financial statements, insurance industry reports and reports
filed with state insurance departments. We do not use financial or surplus
relief reinsurance.
As of December 31, 1999, the policy risk retention limit was $100,000 or
less on all policies issued by us. Reinsurance ceded by us was immaterial and
reinsurance that we assumed (through the acquisition of two blocks of in-force
insurance from American Life and Casualty Insurance Company) represented
approximately 39% of net life insurance in force.
Page 6 of 24
During 1998, our life subsidiary entered into a modified coinsurance
agreement to cede 70% of its variable annuity business to an affiliate of Farm
Bureau Life Insurance Company. Farm Bureau beneficially owns 33.27% of the
Company's common stock. Under this agreement and related administrative services
agreements, the Company paid Farm Bureau's affiliate $155,908 and $77,954 for
the years ended December 31, 1999 and 1998, respectively. The modified
coinsurance agreement has an initial term of four years and will continue
thereafter until termination by written notice at the election of either party.
Any such termination will apply to the submission or acceptance of new policies,
and business reinsured under the agreement prior to any such termination is not
eligible for recapture before the expiration of 10 years.
Regulation
Life insurance companies are subject to regulation and supervision by
the states in which they transact business. State insurance laws establish
supervisory agencies with broad regulatory authority, including the power to:
o grant and revoke licenses to transact business;
o regulate and supervise trade practices and market conduct;
o establish guaranty associations;
o license agents;
o approve policy forms;
o approve premium rates for some lines of business;
o establish reserve requirements;
o prescribe the form and content of required financial statements and
reports;
o determine the reasonableness and adequacy of statutory capital and
surplus;
o perform financial, market conduct and other examinations;
o define acceptable accounting principles;
o regulate the type and amount of permitted investments; and
o limit the amount of dividends and surplus note payments that can be
paid without obtaining regulatory approval.
Our life subsidiary is subject to periodic examinations by state regulatory
authorities. The Iowa Insurance Division completed an examination of our life
subsidiary as of December 31, 1997 in 1998. No adjustments were recommended or
required as a result of this examination.
Most states have also enacted regulations on the activities of insurance
holding company systems, including acquisitions, extraordinary dividends, the
terms of surplus notes, the terms of affiliate
Page 7 of 24
transactions and other related matters. We are registered pursuant to such
legislation in Iowa. Recently, a number of state legislatures have considered or
have enacted legislative proposals that alter, and in many cases, increase the
authority of state agencies to regulate insurance companies and holding company
systems.
Most states, including Iowa, where our life subsidiary is domiciled, have
enacted legislation or adopted administrative regulations affecting the
acquisition of control of insurance companies as well as transactions between
insurance companies and persons controlling them. The nature and extent of such
legislation and regulations currently in effect vary from state to state.
However, most states require administrative approval of the direct or indirect
acquisition of 10% or more of the outstanding voting securities of an insurance
company incorporated in the state. The acquisition of 10% of such securities is
generally deemed to be the acquisition of "control" for the purpose of the
holding company statutes and requires not only the filing of detailed
information concerning the acquiring parties and the plan of acquisition, but
also administrative approval prior to the acquisition. In many states, the
insurance authority may find that "control" in fact does not exist in
circumstances in which a person owns or controls more than 10% of the voting
securities.
Although the federal government does not directly regulate the business of
insurance, federal legislation and administrative policies in several areas,
including pension regulation, age and sex discrimination, financial services
regulation, securities regulation and federal taxation can significantly affect
the insurance business. In addition, legislation has been passed which could
result in the federal government assuming some role in regulating insurance
companies and which allows combinations between insurance companies, banks and
other entities.
The Securities and Exchange Commission has requested comments as to whether
equity-index annuities, such as those sold by us, should be treated as
securities under the Federal securities laws rather than as insurance products.
Treatment of these products as securities would likely require additional
registration and licensing of these products and the agents selling them, as
well as cause us to seek additional marketing relationships for these products.
In recent years, the National Association of Insurance Commissioners
("NAIC"), an association of state regulators and their staffs, has approved and
recommended to the states for adoption and implementation several model laws and
regulations including:
o investment reserve requirements;
o risk-based capital ("RBC") standards for determining the level of
statutory capital and surplus an insurer must maintain in relation to
its investment and insurance risks;
o codification of insurance accounting principles;
o additional investment restrictions;
o restrictions on an insurance company's ability to pay dividends; and
o life product illustrations
The NAIC is currently developing new model laws or regulations, including:
o product design standards;
Page 8 of 24
o reserve requirements; and
o annuity product illustrations.
These model laws and regulations may be adopted by the various states in
which our life subsidiary is licensed, but the ultimate content and timing of
any statutes and regulations adopted by the states cannot be determined at this
time. It is not possible to predict the future impact of changing state and
federal regulations on our operations. Furthermore, there can be no assurance
that existing insurance related laws and regulations will not become more
restrictive in the future or that laws and regulations enacted in the future
will not be more restrictive.
The NAIC's RBC requirements are intended to be used by insurance regulators
as an early warning tool to identify deteriorating or weakly capitalized
insurance companies for the purpose of initiating regulatory action. The RBC
formula defines a new minimum capital standard which supplements low, fixed
minimum capital and surplus requirements previously implemented on a
state-by-state basis. Such requirements are not designed as a ranking mechanism
for adequately capitalized companies.
The NAIC's RBC requirements provide for four levels of regulatory attention
depending on the ratio of a company's total adjusted capital to its RBC.
Adjusted capital is defined as the total of statutory capital, surplus, asset
valuation reserve and certain other adjustments. Calculations using the NAIC
formula at December 31, 1999, indicate that the ratio of total adjusted capital
to RBC for us exceeded by approximately 4 times the highest level at which
regulatory action might be triggered.
Our life subsidiary also may be required, under the solvency or guaranty
laws of most states in which it does business, to pay assessments up to certain
prescribed limits to fund policyholder losses or liabilities of insolvent
insurance companies. These assessments may be deferred or forgiven under most
guaranty laws if they would threaten an insurer's financial strength and, in
certain instances, may be offset against future premium taxes. Assessments
related to business reinsured for periods prior to the effective date of the
reinsurance are the responsibility of the ceding companies. Given the short
period of time since the inception of our business, we believe that assessments,
if any, will be minimal.
Federal Income Taxation
The annuity and life insurance products that we market and issue generally
provide the policyholder with an income tax advantage, as compared to other
savings investments, such as certificates of deposit and taxable bonds, in that
income taxation on any increases in the contract values of these products is
deferred until it is received by the policyholder. With other savings
investments, the increase in value is generally taxed as earned. Annuity
benefits and life insurance benefits, which accrue prior to the death of the
policyholder, are generally not taxable until paid. Life insurance death
benefits are generally exempt from income tax. Also, benefits received on
immediate annuities are recognized as taxable income ratably, as opposed to the
methods used for some other investments which tend to accelerate taxable income
into earlier years. The tax advantage for annuities and life insurance is
provided in the Internal Revenue Code of 1986, as amended (the "Code"), and is
generally followed in all states and other United States taxing jurisdictions.
From time to time, various tax law changes have been proposed that could
have an adverse effect on our business, including the elimination of all or a
portion of the income tax advantage for annuities and life insurance. If
legislation were enacted to eliminate the tax deferral for annuities, such a
change would have an adverse effect on our ability to sell non-qualified
annuities. Non-qualified annuities are
Page 9 of 24
annuities that are not sold to an individual retirement account or other
qualified retirement plan.
Our life subsidiary is taxed under the life insurance company provisions of
the Code. Provisions in the Code require a portion of the expenses incurred in
selling insurance products to be capitalized and deducted over a period of
years, as opposed to immediate deduction in the year incurred. This provision
increases the tax for statutory accounting purposes which reduces statutory
surplus and, accordingly, decreases the amount of cash dividends that may be
paid by our life subsidiary.
Employees
As of December 31, 1999, we had 113 full-time employees, of which 103 are
located in Des Moines, Iowa, and 10 are located in the Pell City, Alabama
offices. We have experienced no work stoppages or strikes and consider our
relations with our employees to be excellent. None of our employees are
represented by a union.
Other Subsidiaries
We formed American Equity Investment Properties, L.C., an Iowa limited
liability company to hold title to an office building in Birmingham, Alabama,
where a portion of our life subsidiary's operations were conducted. The building
was sold in 1998, and American Equity Investment Properties, L.C. now holds the
remaining cash proceeds from the sale of the building. There are no present
plans to dissolve American Equity Investment Properties, L.C., which may be used
in the future to facilitate other aspects of our business.
On February 16, 1998, we formed American Equity Capital, Inc., an Iowa
corporation, in connection with the introduction of variable products as a part
of our product mix. American Equity Capital, Inc. acts as the broker-dealer for
the sale of our variable products and will recruit other broker-dealers to
establish a distribution network for these products.
On July 9, 1999, we formed American Equity Capital Trust I, a Delaware
statutory business trust. On October 25, 1999, we formed American Equity Capital
Trust II, a Delaware statutory business trust. We formed these trusts in
connection with the issuance of two issues of trust preferred securities. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 8 of the Notes to the Audited Consolidated Financial
Statements included elsewhere in this report.
Item 2. Properties.
We do not own any real estate. We lease space for our principal offices in
West Des Moines, Iowa, pursuant to written leases for approximately 26,550
square feet at an annual rental of $480,588. The leases expire on June 30, 2004
and have a renewal option of an additional five year term at a rental rate equal
to the prevailing fair market value. We also lease space for our office in Pell
City, Alabama, pursuant to a written lease dated January 3, 2000, for
approximately 3,380 square feet at an annual rental of $43,095. This lease
expires on December 31, 2004.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Page 10 of 24
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no established public trading market for our common stock. As of
February 29, 2000, we had 284 common shareholders.
In 1999, we paid a cash dividend of $0.02 per share on our common stock and
our participating convertible preferred stock. We intend to continue to pay an
annual cash dividend on such shares so long as we have sufficient capital and/or
future earnings to do so. However, we anticipate retaining most of our future
earnings, if any, for use in our operations and the expansion of our business.
Our credit agreement contains a restrictive covenant which limits our
ability to declare or pay any dividends. In addition, since we are a holding
company, our ability to pay cash dividends depends in large measure on our
subsidiaries' ability to make distributions of cash or property to us. Iowa
insurance laws restrict the amount of distributions our life subsidiary can pay
to us without the approval of the Iowa Insurance Division. See Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Notes 7 and 10 of the Notes to the Audited Consolidated Financial Statements
included elsewhere in this report.
Any further determination as to dividend policy will be made by our board
of directors and will depend on a number of factors, including our future
earnings, capital requirements, financial condition and future prospects and
such other factors as our board of directors may deem relevant.
For information regarding unregistered sales of equity securities
Iduring 1999, see our Form 10-Qs for the quarters ending June 30, 1999 and
September 30, 1999.
Page 11 of 24
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data as of and for the
periods indicated should be read in conjunction with our consolidated financial
statements and related notes and Management's Discussion and Analysis of
Financial Condition and Results of Operations appearing elsewhere in this
report.
Year Ended December 31
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1999 1998 1997 1996
-------------- ------------ ------------ -----------
STATEMENT OF OPERATIONS DATA:
Revenues
Insurance policy income $ 13,746,532 $ 11,170,655 $ 11,436,803 $14,554,714
Net investment income 64,609,612 26,356,472 4,018,617 865,155
Realized gains on investments 1,454,417 426,782 -- --
-------------- ------------ ------------ -----------
Total revenue 79,810,561 37,953,909 15,455,420 15,419,869
Benefits and expenses
Insurance policy benefits and change
in future polic benefits 7,231,895 6,084,893 7,440,080 8,787,700
Interest credited to account balances 41,726,895 15,837,912 2,129,686 77,831
Interest expense on notes payable 896,383 788,770 979,826 493,801
Interest expense on amounts due under
repurchase agreements 3,490,849 1,528,718 291,547 --
Amortization of deferred policy
acquisition costs and value
of insurance in force acquired 11,240,271 3,946,133 1,143,032 879,916
Amortization of goodwill 70,000 70,000 70,000 17,500
Other operating costs and expenses 12,058,398 8,692,813 8,160,863 6,302,094
-------------- ------------ ------------ -----------
Total benefits and expenses 76,714,691 36,949,239 20,215,034 16,558,842
-------------- ------------ ------------ -----------
Income (loss) before income taxes 3,095,870 1,004,670 (4,759,614) (1,138,973)
Income tax (expense) benefit 1,369,835 (760,483) 1,390,226 --
-------------- ------------ ------------ -----------
4,465,705 244,187 (3,369,388) (1,138,973)
Minority interest in earnings of
subsidiaries:
Earnings attributable to company-
obligated mandatorily redeemable
preferred securities of subsidiary
trusts (2,022,359) -- -- --
-------------- ------------ ------------ -----------
Net income (loss) $ 2,443,346 $ 244,187 $ (3,369,388) $(1,138,973)
============== ============ ============ ===========
PER SHARE DATA:
Basic earnings (loss) per common share $ 0.52 $ 0.05 $ (2.11) $ (1.90)
Diluted earnings (loss) per common share 0.42 0.05 (2.11) (1.90)
Dividends declared per common share 0.02 -- -- --
BALANCE SHEET DATA (at period end):
Total assets $1,665,503,450 $683,011,836 $229,418,131 $35,214,597
Policy benefit reserves 1,358,875,848 541,082,179 155,998,268 11,846,566
Notes payable 20,600,000 10,000,000 10,000,000 10,000,000
Trust preferred securities issued by
subsidiary trusts 98,981,629 -- -- --
Stockholders' equity 34,324,291 66,130,521 54,426,049 10,137,102
OTHER FINANCIAL DATA:
Life subsidiary statutory capital and
surplus at December 31 $ 139,855,053 $ 80,947,913 $ 64,709,809 $17,302,272
Life subsidiary statutory net income
for the year ended December 31 17,837,476 4,803,545 4,470,284 1,174,811
Page 12 of 24
Item 7. Management's discussion and Analysis of Financial Condition and
Results of Operations
Management's discussion and analysis reviews our consolidated financial
position at December 31, 1999 and 1998, and our consolidated results of
operations for the three years ended December 31, 1999, and where appropriate,
factors that may affect future financial performance. This analysis should be
read in conjunction with the audited consolidated financial statements, notes
thereto and selected consolidated financial data appearing elsewhere in this
report.
All statements, trend analyses and other information contained in this
report and elsewhere (such as in filings by us with the Securities and Exchange
Commission, press releases, presentations by us or our management or oral
statements) relative to markets for our products and trends in our operations or
financial results, as well as other statements including words such as
"anticipate," "believe," "plan," "estimate," "expect," "intend," and other
similar expressions, constitute forward-looking statements under the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
subject to known and unknown risks, uncertainties and other factors which may
cause actual results to be materially different from those contemplated by the
forward-looking statements. Such factors include, among other things:
o general economic conditions and other factors, including prevailing
interest rate levels and stock and credit market performance which may
affect (among other things) our ability to sell our products, our
ability to access capital resources and the costs associated
therewith, the market value of our investments and the lapse rate and
profitability of policies
o customer response to new products and marketing initiatives
o mortality and other factors which may affect the profitability of our
products
o changes in the Federal income tax laws and regulations which may
affect the relative income tax advantages of our products
o increasing competition in the sale of annuities
o regulatory changes or actions, including those relating to regulation
of financial services affecting (among other things) bank sales and
underwriting of insurance products and regulation of the sale,
underwriting and pricing of products
o the risk factors or uncertainties listed from time to time in our
private placement memorandums or filings with the Securities and
Exchange Commission
Results of Operations
Business Overview. We effectively commenced business on January 1, 1996,
shortly after our formation and incorporation. As a foundation for beginning our
business, we acquired two blocks of in-force insurance from another insurance
company, of which several of our executive officers were previously employees.
Later in 1996, we acquired another life insurance company with no in-force
insurance which expanded our licensing authority to sell insurance and annuities
to 23 states and the District of Columbia. Since then, we have expanded our
licensing to 42 states and the District of Columbia.
Page 13 of 24
We specialize in the sale of individual annuities (primarily deferred
annuities) and, to a lesser extent, we also sell life insurance. Under generally
accepted accounting principles, premium collections for deferred annuities are
reported as deposit liabilities instead of as revenues. Earnings from products
accounted for as deposit liabilities are primarily generated from the excess of
net investment income earned over the interest credited to the policyholder, or
the "investment spread," as well as realized gains on investments. In the case
of equity-index annuities, the investment spread consists of net investment
income in excess of the amortization of the cost of the options purchased to
fund the index-based component of the policyholder's return. Revenue is also
recognized from surrender charges deducted from the policyholder's account
balance.
Commissions and certain other costs relating to the production of new and
renewal business are not expensed when incurred but instead are capitalized as
deferred policy acquisition costs. Deferred policy acquisition costs for
annuities are amortized into expense with the emergence of gross profits. Under
certain circumstances, deferred policy acquisition costs will be expensed
earlier than originally estimated, for example, when policy terminations are
higher than originally estimated and when investments relating to the
liabilities of such products are called or sold at a gain prior to anticipated
maturity.
We had net income of $2,443,000 for the year ended December 31, 1999,
compared to net income of $244,000 in 1998 and a net loss of $3,369,000 in 1997.
The trend in net income is a direct result of the substantial growth in our
annuity business which began to accelerate in the third quarter of 1997. Annuity
reserves grew from $23,657,000 at June 30, 1997 to $146,311,000 at December 31,
1997, $529,765,000 at December 31, 1998 and $1,342,256,000 at December 31, 1999.
New annuity deposits for the year ended December 31, 1999 increased 116% to
$814,605,000, compared to $377,917,000 for 1998. The 1998 amount represented a
166% increase over the 1997 amount of $141,854,000, of which $121,430,000 was
collected in the second half of the year. The increased annuity production is a
direct result of the growth in our agency force, which increased from
approximately 400 agents at December 31, 1996, to 4,450 agents at December 31,
1997, 10,525 agents at December 31, 1998 and 18,000 agents at December 31, 1999.
The growth in our annuity business resulted in a sizeable increase in our
investment spread for 1999 and 1998. While certain expenses also increased as a
result of the growth in our annuity business, the incremental profits from a
larger deposit base allowed us to offset a greater portion of our fixed
operating costs and expenses. Our 1999 results also benefitted from a gain of
$1,542,000 on the termination of a total return swap contract. Our 1998 results
also benefitted from a gain of $275,000 on the sale of an office building in
Birmingham, Alabama, from which our operations in that location were previously
conducted. The comparison of 1998 to 1997 was also favorably impacted by certain
costs and expenses recognized in 1997 as discussed below under Other operating
costs and expenses.
Traditional life and accident and health insurance premiums decreased 2% to
$10,294,000 in 1999 and 8% to $10,528,000 in 1998 from $11,425,000 in 1997. The
majority of our traditional life and accident and health insurance premiums
consist of group policies sold to a limited market. Because our primary focus is
the sale of annuities, we have made no effort to expand sales of these products
to other markets. As a result, sales of such products have declined slightly.
Annuity and single premium universal life product charges (surrender
charges assessed against policy withdrawals and mortality and expense charges
assessed against single premium universal life policyholder account balances)
increased 437% to $3,452,000 in 1999, and 5,258% to $643,000 in 1998, from
$12,000 in 1997. These increases are principally attributable to the growth in
our annuity business
Page 14 of 24
and correspondingly, increases in annuity policy withdrawals subject to
surrender charges. Withdrawals from annuity and single premium universal life
policies were $60,845,000, $23,637,000 and $2,419,000 for 1999, 1998 and 1997,
respectively.
Net investment income increased 145% to $64,610,000 in 1999 and 556% to
$26,356,000 in 1998 from $4,019,000 in 1997. These increases are principally
attributable to the growth in our annuity business and correspondingly,
increases in our invested assets. Invested assets (amortized cost basis)
increased 147% to $1,499,730,000 at December 31, 1999 and 199% to $607,764,000
at December 31, 1998 compared to $203,034,000 at December 31, 1997, while the
effective yield earned on average invested assets was 7.34%, 7.46% and 7.80% for
1999, 1998, and 1997, respectively.
Realized gains on investments increased 241% to $1,454,000 in 1999 compared
to $427,000 in 1998 and $0 in 1997. The increase in 1999 was primarily
attributable to a gain realized on the termination of a total return swap
contract. In 1998, realized gains consisted of a gain of $152,000 on the sale of
fixed maturity securities and a gain of $275,000 on the sale of our office
building in Alabama.
Traditional life and accident and health insurance benefits increased 19%
to $7,232,000 in 1999 and decreased 18% to $6,085,000 in 1998 compared to
$7,440,000 in 1997. The increase in 1999 was attributable to an increase in
death benefits and surrenders, and the decrease in 1998 was attributable to a
decrease in those items for that year.
Interest credited to annuity policyholder account balances increased 163%
to $41,727,000 in 1999 and 644% to $15,838,000 in 1998 from $2,130,000 in 1997.
These increases are principally attributable to increases in annuity
liabilities. The amounts are also impacted by changes in the weighted average
crediting rate for our fixed rate annuity liabilities, which, excluding interest
rate bonuses guaranteed for the first year of the annuity contract, was 5.11%,
5.20% and 5.43% at December 31, 1999, 1998 and 1997, respectively. The weighted
average crediting rate, including interest rate bonuses guaranteed for the first
year of the annuity contract, was 6.51%, 7.05%, and 7.25% at December 31, 1999,
1998 and 1997, respectively.
Interest expense on notes payable increased 14% to $896,000 in 1999 and
decreased 19% to $789,000 in 1998 from $980,000 in 1997. The 1999 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. The 1998 decrease is attributable to lower interest rates. The
applicable interest rate declined from 8.41% for 1997 to 7.96% for 1998, and
7.52% for 1999.
Interest expense on amounts due under repurchase agreements increased 128%
to $3,491,000 in 1999 and 424% to $1,529,000 in 1998 from $292,000 in 1997.
These increases were principally attributable to larger average balances of
funds borrowed, offset in part by a lower cost of funds in 1999. See Note 7 of
the Notes to the Audited Consolidated Financial Statements included elsewhere in
this report.
Amortization of deferred policy acquisition costs and value of insurance in
force acquired increased 185% to $11,240,000 in 1999 and 245% to $3,946,000 in
1998 from $1,143,000 in 1997. These increases are primarily due to the growth in
our annuity business as discussed above.
Other operating costs and expenses increased 39% to $12,058,000 in 1999 and
7% to $8,693,000 in 1998 from $8,161,000 in 1997. These increases are
principally attributable to increases in employees and related salaries and
costs of employment. The comparison of 1998 to 1997 is also favorably impacted
by $1,864,000 of costs and expenses for two items in 1997. These items were: (i)
$1,236,000
Page 15 of 24
for agency and product development costs that were expensed in 1997 in the year
incurred rather than being capitalized and amortized to expense in subsequent
years and (ii) $628,000 for compensation expense as a result of an amendment to
the stock option agreement with our chairman and president. See Note 9 of the
Notes to the Audited Consolidated Financial Statements included elsewhere in
this report.
Income tax expense for 1999 was a benefit of $1,370,000 compared to an
expense of $760,000 in 1998, and a benefit of $1,390,000 in 1997. The benefit in
1999 is attributable to: (i) the elimination of the December 31, 1998 valuation
allowance on deferred income tax assets of $1,537,000 and (ii) tax benefits of
$708,000 attributable to the redeemable preferred securities of subsidiaries.
Excluding these two items, 1999 income tax expense would have been $815,000 for
an effective income tax rate of 27%. The effective income tax rates for 1998 and
1997, excluding the impact of changes in the valuation allowance for deferred
income tax assets were 36% and 44%, respectively. These effective income tax
rates varied from the applicable statutory federal income tax rates of 35% for
1999 and 34% for 1998 and 1997 principally because: (i) in 1999, the December
31, 1998 net deferred tax asset was adjusted to the 35% rate; (ii) in 1998, we
had certain nondeductible expenses; and (iii) in 1997, we qualified as a small
life insurance company under provisions of the Internal Revenue Code and
recognized the small company deduction only available to such companies. See
Note 6 of the Notes to the Audited Consolidated Financial Statements included
elsewhere in this report.
Minority interest in earnings of subsidiaries includes amounts for
distributions and the accretion of the issue discount on company-obligated
mandatorily redeemable preferred stocks of subsidiary trusts issued in 1999. Tax
benefits attributable to these amounts are reported as a reduction of income tax
expense. See Note 8 of the Notes to the Audited Consolidated Financial
Statements included elsewhere in this report.
Financial Condition
Investments. Our investment strategy is to maintain a predominantly
investment grade fixed income portfolio, provide adequate liquidity to meet our
cash obligations to policyholders and others and maximize current income and
total investment return through active investment management. Consistent with
this strategy, our investments principally consist of fixed maturity securities
and short-term investments. We also have approximately 3% of our invested assets
at December 31, 1999 in derivative instruments (equity market index call
options) purchased in connection with the issuance of equity-index annuities.
Insurance statutes regulate the type of investments that our life
subsidiary is permitted to make and limit the amount of funds that may be used
for any one type of investment. In light of these statutes and regulations and
our business and investment strategy, we generally seek to invest in United
States government and government-agency securities and corporate securities
rated investment grade by established nationally recognized rating organizations
or in securities of comparable investment quality, if not rated.
We have classified a substantial portion of our fixed maturity investments
as available-for-sale to maximize investment flexibility. 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, thereby exposing stockholders' equity to incremental
volatility due to changes in market interest rates and the accompanying changes
in the reported value of securities classified as available-for-sale, with
stockholders' equity increasing as interest rates decline and, conversely,
decreasing as interest rates rise.
Page 16 of 24
Liabilities. Our liability for policy benefit reserves increased
$817,794,000 and $385,084,000 during 1999 and 1998, respectively, to
$1,358,876,000 at December 31, 1999 and $541,082,000 at December 31, 1998,
primarily due to annuity sales as discussed above. Substantially all of our
annuity products have a surrender charge feature designed to reduce early
withdrawal or surrender of the policies and to partially compensate us for our
costs if policies are withdrawn early. Notwithstanding these policy features,
the withdrawal rates of policyholder funds may be affected by changes in
interest rates.
On October 18, 1996, we borrowed $10,000,000 from two banks under a
variable rate revolving credit agreement. Proceeds from the borrowing were
contributed to the capital and surplus of our life subsidiary ($6,000,000) and
used to refinance indebtedness we incurred to capitalize our life subsidiary at
the time of its formation ($4,000,000). During 1999, this line of credit was
increased to permit maximum borrowings of $25,000,000, and we borrowed an
additional $10,600,000, bringing our liability for notes payable to $20,600,000
at December 31, 1999. We loaned the proceeds of the 1999 borrowings to American
Equity Investment Service Company (see discussion that follows under Liquidity
of Parent Company). The loan matures on March 31, 2001 with an option for a four
year extension as a term loan. Under this agreement, we are required to maintain
minimum capital and surplus levels at our life subsidiary and meet certain other
financial and operating ratio requirements. We are also prohibited from
incurring other indebtedness for borrowed money without obtaining a waiver from
the lenders and from paying dividends on our capital stock in excess of 10% of
our consolidated net income for the prior fiscal year (except that in 1999 we
were permitted to make a dividend payment equal to 44% of our consolidated net
income for 1998).
Stockholders' Equity. We were initially capitalized in December, 1995 and
January, 1996 through the issuance of shares of Common Stock for cash of
$4,000,000. Subsequent to our initial capitalization (400,000 shares of Common
Stock after a May 29, 1996 100-for-1 stock split), we issued additional shares
of Common Stock, warrants to purchase shares of Common Stock and shares of
Series Preferred Stock convertible into shares of Common Stock in several
private placement offerings as follows:
No. Issued Warrant
------------------------- Exercise
Description Issue Price Shares Warrants Price
----------------------- ----------- ------------ ---------- --------
Common Stock & Warrants
--1996 $10.00 780,000 156,000 $10.00
--1997 10.00 3,998 798 10.00
--1998(1) 10.00 3,000 600 10.00
------------- --------
786,998 157,398(2)
--1997 12.00 570,416 114,083(3) 12.00
-- 68,250(4) 12.00
------------- --------
570,416 182,333
Common Stock - 1997 16.00 2,666,250
1998 Series A Participating
Preferred Stock - 1998 16.00 625,000
(1) issued to the placement agent in payment of a portion of the
compensation due to the placement agent
(2) exercised during 1998
(3) exercised during 1999
(4) issued to the placement agent as part of placement agent compensation;
expire on April 30, 2000
Page 17 of 24
The aggregate net proceeds from these offerings, including proceeds
received from the exercise of warrants, was $65,699,000, substantially all of
which were contributed to the capital and surplus of our life subsidiary or used
to fund the acquisition of the life insurance company acquired in 1996.
A portion of the 2,666,250 shares of Common Stock issued in 1997 at $16 per
share were issued in a rights offering to existing stockholders and in
connection therewith, certain of our officers and directors received management
subscription rights to purchase one share of Common Stock for each share owned
and one-half share of Common Stock for each stock option held on the offering
date. An aggregate of 719,125 management subscription rights were issued to nine
officers and directors at that time. The management subscription rights have an
exercise price of $16.00 per share and expire on December 1, 2002. Farm Bureau
Life Insurance Company purchased 1,562,500 shares of Common Stock in this
offering and received a right of first refusal to maintain a 20% ownership
interest in our capital stock.
The 625,000 shares of 1998 Series A Participating Preferred Stock issued in
1998 have participating dividend rights with the shares of Common Stock, when
and as such dividends are declared. The preferred shares are convertible into
shares of Common Stock on a one for one basis upon the earlier of the initial
public offering of our Common Stock or December 31, 2003.
In September, 1999, American Equity Capital Trust I ("Trust I"), our
wholly-owned subsidiary, issued $25,970,000 of 8% Convertible Trust Preferred
Securities (the "8% Trust Preferred Securities"). In connection with Trust I's
issuance of the 8% Trust Preferred Securities and the related purchase by us of
all of Trust I's common securities, we issued $26,773,000 in principal amount of
our 8% Convertible Junior Subordinated Debentures, due September 30, 2029 (the
"8% Debentures") to Trust I. The sole assets of Trust I are the 8% Debentures
and any interest accrued thereon. Each 8% Trust Preferred Security is
convertible into one share of our common stock 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 common stock sold in connection with our 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 8% Debentures
correspond to the distribution dates on the 8% Trust Preferred Securities. The
8% Trust Preferred Securities, which have a liquidation value of $30 per share
plus accrued and unpaid distributions, mature simultaneously with the 8%
Debentures. As of December 31, 1999, 865,671.33 shares of 8% Trust Preferred
Securities were outstanding, all of which are unconditionally guaranteed by us
to the extent of the assets of Trust I.
In October, 1999, American Equity Capital Trust II ("Trust II"), our
wholly-owned subsidiary, issued 97,000 shares of 5% Trust Preferred Securities
(the "5% Trust Preferred Securities"). The 5% Trust Preferred Securities, which
have a liquidation value of $100 per share ($97,000,000 in the aggregate) 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 issued by the parent of
Farm Bureau Life insurance Company. Farm Bureau beneficially owns 33.27% of our
common stock.
In connection with Trust II's issuance of the 5% Preferred Securities and
the related purchase by us of all of Trust II's common securities, we issued
$100,000,000 in principal amount of our 5% Subordinated Debentures, due June 1,
2047 (the "5% Debentures") to Trust II. 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 5%
Debentures. All of the 5% Trust Preferred Securities are unconditionally
guaranteed by us to the extent of the assets of Trust II.
Page 18 of 24
Liquidity for Insurance Operations. Our life subsidiary generally receives
adequate cash flow from premium collections and investment income to meet its
obligations. Annuity and life insurance liabilities are generally long-term in
nature. Policyholders may, however, withdraw funds or surrender their policies,
subject to surrender and withdrawal penalty provisions. At December 31, 1999,
approximately 98% of our annuity liabilities were subject to penalty upon
surrender.
We believe that the diversity of our investment portfolio and the
concentration of investments in high-quality, liquid securities provides
sufficient liquidity to meet foreseeable cash requirements. The investment
portfolio at December 31, 1999 included $1,434,164,883 of publicly traded
investment grade bonds. Although there is no present need or intent to dispose
of such investments, our life subsidiary could readily liquidate portions of its
investments, if such a need arose. In addition, investments could be used to
facilitate borrowings under reverse-repurchase agreements or dollar-roll
transactions. Such borrowings have been used by our life subsidiary from time to
time to increase our return on investments and to improve liquidity.
Liquidity of Parent Company. The parent company is a legal entity separate
and distinct from its subsidiaries, and has no business operations. The parent
company needs liquidity primarily to service its debt, including the
subordinated debentures issued to subsidiary trusts, pay operating expenses and
pay dividends to stockholders. The primary sources of funds for these payments
are: (i) interest received on trust preferred securities received in connection
with the issuance of the 5% Trust Preferred Securities; (ii) principal and
interest payments received on the parent company's note receivable from American
Equity Investment Service Company (see discussion that follows); (iii) dividends
on capital stock and surplus note interest payments from our life subsidiary;
(iv) cash on hand ($683,000 at December 31, 1999); and (v) cash ($835,000 at
December 31, 1999) that may be distributed by the American Equity Investment
Properties, L.C. which holds the remaining cash proceeds from the sale of the
office building in Birmingham, Alabama that was sold in 1998. The parent company
may also obtain cash by issuing debt or equity securities.
The payment of dividends or the distributions, including surplus note
payments, by our life subsidiary is subject to regulation by the Iowa Insurance
Division. Currently, our life subsidiary may pay dividends or make other
distributions without the prior approval of the Iowa Insurance Division, unless
such payments, together with all other such payments within the preceding twelve
months, exceed the greater of (1) our life subsidiary's net gain from operations
(excluding net realized capital gains or losses) for the preceding calendar
year, or (2) 10% of our statutory surplus at the preceding December 31. For
2000, up to $16,326,000 can be distributed as dividends or surplus note payments
without prior approval of the Iowa Insurance Division. In addition, 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 subsidiary had $29,259,000 of earned surplus at December 31, 1999.
The maximum distribution permitted by law or contract is not necessarily
indicative of an insurer's actual ability to pay such distributions, which may
be constrained by business and regulatory considerations, such as the impact of
such distributions on surplus, which could affect the insurer's ratings or
competitive position, the amount of premiums that can be written and the ability
to pay future dividends or make other distributions. Further, the Iowa insurance
laws and regulations require that the statutory surplus of our life subsidiary
following any dividend or distribution must be reasonable in relation to our
outstanding liabilities and adequate for its financial needs.
The transfer of funds by our life subsidiary is also restricted by certain
covenants in our loan agreement which, among other things, requires the life
subsidiary to maintain statutory capital and surplus (including the asset
valuation and interest maintenance reserves) of $120,000,000 plus 25% of
statutory
Page 19 of 24
net income for periods subsequent to December 31, 1999. Under the most
restrictive of these limitations, $21,450,000 of earned surplus at December 31,
1999 would be available for distribution by our life subsidiary to the parent
company in the form of dividends or other distributions.
Statutory accounting practices prescribed or permitted for our life
subsidiary differ in many respects from those governing the preparation of
financial statements under generally accepted accounting principles ("GAAP").
Accordingly, statutory operating results and statutory capital and surplus may
differ substantially from amounts reported in the GAAP basis financial
statements for comparable items. Information as to statutory capital and surplus
and statutory net income for our life subsidiary as of December 31, 1999 and
1998 and for the years ended December 31, 1999, 1998 and 1997 is included in
Note 10 of the Notes to Audited Consolidated Financial Statements included
elsewhere in this report.
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. This agreement initially benefits
the life subsidiary's statutory surplus by extending the payment of a portion of
the first year commissions on new annuity business written by the life
subsidiary over a longer period of time, and thereby enabling the life
subsidiary to conduct a comparatively greater volume of business. In subsequent
periods, the life subsidiary's statutory surplus is reduced through the payment
of renewal commissions to the affiliate on this business based upon the account
balances of the annuities remaining in force for a period of five years (see
Note 11 of the Notes to the Audited Consolidated Financial Statements included
elsewhere in this report).
The aggregate amount of first year commissions paid by the affiliate with
funds obtained from sources other than the life subsidiary was $69,127,000 from
the inception of the agreement through December 31, 1999, and the aggregate
amount of renewal commissions paid by the life subsidiary to the affiliate for
the same period was $22,708,000.
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 advanced $18,175,000 through December 31, 1999 pursuant to
the promissory note evidencing this agreement. 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, of which $4,400,000 was available for borrowing at December 31, 1999. We
anticipate increasing the maximum borrowing level under our bank line of credit
in 2000 in order to be able to continue to make funds available to the affiliate
to fund its portion of first year commissions.
Future payments by the life subsidiary on business in force at December 31,
1999 are dependent upon the account balances of the annuities remaining in force
on each remaining quarterly renewal commission payment date. Assuming that the
account balances remain constant over such remaining renewal commission payments
dates, future renewal commission payments by the life subsidiary would be
$4,756,556 per quarterly payment until December, 2002 and $3,685,274 per
quarterly payment from January, 2003 until June, 2005. All such payments would
be capitalized as deferred policy acquisition costs and amortized to expense
pursuant to the Company's stated accounting policy.
Page 20 of 24
Inflation
Inflation does not have a significant effect on our balance sheet; we have
minimal investments in property, equipment or inventories. To the extent that
interest rates may change to reflect inflation or inflation expectations, there
would be an effect on our balance sheet and operations. Higher interest rates
experienced in recent periods have decreased the value of our fixed maturity
investments. It is likely that declining interest rates would have the opposite
effect. It is not possible to calculate the effect such changes in interest
rates have had on our operating results.
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. This system was 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 is 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 electronic funds transfers,
phone systems or utilities.
Page 21 of 24
Pending Accounting Change
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities." Statement
No. 133 requires companies to record derivatives on the balance sheet as assets
or liabilities, measured at fair value. Accounting for gains or losses resulting
from changes in the values of those derivatives is dependent on the use of the
derivative and whether it qualifies for hedge accounting. The Statement is
effective for us in the year 2001, with earlier adoption encouraged. We have not
yet determined the effect that adoption of this new Statement will have on our
operations or financial position.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest rate risk is our primary market risk exposure. Substantial and
sustained increases and decreases in market interest rates can affect the
profitability of our products and the market value of our investments.
The profitability of most of our products depends on the spreads between
interest yield on investments and rates credited on insurance liabilities. We
have the ability to adjust crediting rates (participation or asset fee rates for
equity-index annuities) on substantially all of our annuity policies at least
annually (subject to minimum guaranteed values). In addition, substantially all
of our annuity products have surrender and withdrawal penalty provisions
designed to encourage persistency and to help ensure targeted spreads are
earned. However, competitive factors, including the impact of the level of
surrenders and withdrawals, may limit our ability to adjust or maintain
crediting rates at levels necessary to avoid narrowing of spreads under certain
market conditions.
A major component of our interest rate risk management program is
structuring the investment portfolio with cash flow characteristics consistent
with the cash flow characteristics of our insurance liabilities. We use computer
models to simulate cash flows expected from our existing business under various
interest rate scenarios. These simulations enable us to measure the potential
gain or loss in fair value of our interest rate-sensitive financial instruments,
to evaluate the adequacy of expected cash flows from our assets to meet the
expected cash requirements of our liabilities and to determine if it is
necessary to lengthen or shorten the average life and duration of our investment
portfolio. (The "duration" of a security is the time weighted present value of
the security's expected cash flows and is used to measure a security's
sensitivity to changes in interest rates). When the durations of assets and
liabilities are similar, exposure to interest rate risk is minimized because a
change in value of assets should be largely offset by a change in the value of
liabilities. At December 31, 1999, 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 6.9 years.
If interest rates were to increase 10% from levels at December 31, 1999, 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 $62,673,000. 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 22 of 24
Item 8. Consolidated Financial Statements and Supplementary Data.
The financial statements are included as a part of this report on form 10-K
on pages F-1 through F-29.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
The information required by Part III is incorporated by reference from our
definitive proxy statement to be filed with the Commission pursuant to
Regulation 14A within 120 days after December 31, 1999.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Financial Statements and Financial Statement Schedules. See Index to
Consolidated Financial Statements on page F-1 for a list of financial statements
and financial statement schedules included in this report.
All other schedules to the consolidated financial statements required by
Article 7 of Regulation S-X are omitted because they are not applicable, not
required, or because the information is included elsewhere in the consolidated
financial statements or notes thereto.
Exhibits. See Exhibit Index immediately preceding the Exhibits for a list
of Exhibits filed with this report.
Reports on Form 8-K. No reports on Form 8-K were filed during the quarter
ended December 31, 1999.
Page 23 of 24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, this 20th day of
March, 2000.
AMERICAN EQUITY INVESTMENT
LIFE HOLDING COMPANY
By: /s/ D.J. NOBLE
-----------------------------------
D.J. Noble, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
registration statement has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:
Signature Title (Capacity) Date
- --------- ---------------- ----
/s/ D.J. NOBLE Chairman of the Board and President, March 20, 2000
- ------------------------ (Principal Executive Officer)
D.J. Noble
/S/ WENDY L. CARLSON Chief Financial Officer and General Counsel March 20, 2000
- ------------------------ (Principal Financial Officer)
Wendy L. Carlson
/s/ TERRY A. REIMER Chief Operating Officer and Executive
- ------------------------ Vice President (Principal Accounting Officer March 20, 2000
Terry A. Reimer
/s/ JAMES M. GERLACH Director March 20, 2000
- ------------------------
James M. Gerlach
/s/ ROBERT L. HILTON Director March 20, 2000
- ------------------------
Robert L. Hilton
/s/ BEN T. MORRIS Director March 20, 2000
- ------------------------
Ben T. Morris
/s/ DAVID S. MULCAHY Director March 20, 2000
- ------------------------
David S. Mulcahy
/s/ A.J. STRICKLAND, III Director March 20, 2000
- ------------------------
A.J. Strickland, III
/s/ HARLEY A. WHITFIELD Director March 20, 2000
- ------------------------
Harley A. Whitfield
/s/ JOHN C. ANDERSON Director March 20, 2000
- ------------------------
John C. Anderson
Page 24 of 24
American Equity Investment Life
Holding Company
Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
Index to Financial Statements
Report of Independent Auditors..............................................F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets.................................................F-3
Consolidated Statements of Operations.......................................F-5
Consolidated Statements of Changes in Stockholders' Equity..................F-6
Consolidated Statements of Cash Flows.......................................F-8
Notes to Consolidated Financial Statements.................................F-10
Schedules
Schedule I - Summary of Investments - Other Than
Investments in Related Parties.........................................F-30
Schedule II - Condensed Financial Information of Registrant
(Parent Company).......................................................F-31
Schedule III - Supplementary Insurance Information.........................F-36
Schedule IV - Reinsurance..................................................F-37
F-1
Report of Independent Auditors
The Board of Directors and Stockholders
American Equity Investment Life Holding Company
We have audited the accompanying consolidated balance sheets of American Equity
Investment Life Holding Company as of December 31, 1999 and 1998, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1999. Our audits also included the financial statement schedules listed in the
Index on page F-1. These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American Equity
Investment Life Holding Company at December 31, 1999 and 1998, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
/s/ Ernst & Young LLP
Des Moines, Iowa
March 1, 2000
F-2
American Equity Investment Life Holding Company
Consolidated Balance Sheets
December 31
1999 1998
-------------- ------------
Assets
Cash and investments:
Fixed maturity securities:
Available-for-sale, at market (amortized cost:
1999 - $1,070,465,367; 1998 - $600,300,562) $ 997,019,819 $601,897,562
Held for investment, at amortized cost
(market: 1999 - $315,974,664) 398,467,247 --
Equity securities, at market
(cost: 1999 - $8,019,999) 7,613,489 --
Derivative instruments 44,209,883 16,171,621
Policy loans 231,068 192,184
Cash and cash equivalents 5,881,515 15,891,779
-------------- ------------
Total cash and investments 1,453,423,021 634,153,146
Receivable from other insurance companies 597,956 616,737
Premiums due and uncollected 1,097,105 1,684,698
Accrued investment income 14,183,386 2,946,796
Receivables from related parties 18,896,009 89,427
Property, furniture and equipment, less accumulated
depreciation: 1999 - $1,632,011; 1998 - $859,085 1,346,325 1,242,228
Value of insurance in force acquired 752,427 1,068,906
Deferred policy acquisition costs 126,684,495 32,005,772
Intangibles, less accumulated amortization
1999 - $681,412; 1998 - $472,306 2,238,004 646,142
Deferred income tax asset 43,036,868 8,289,499
Federal income taxes recoverable 1,662,522 -
Other assets 1,214,545 117,035
Assets held in separate account 370,787 151,450
-------------- ------------
Total assets $1,665,503,450 $683,011,836
============== ============
See accompanying notes.
F-3
American Equity Investment Life Holding Company
Consolidated Balance Sheets
(continued)
December 31
1999 1998
-------------------- --------------------
Liabilities and Stockholders' Equity
Liabilities:
Policy benefit reserves:
Traditional life and accident and health
insurance products $ 15,059,895 $ 11,317,156
Annuity and single premium universal life products 1,343,815,953 529,765,023
Other policy funds and contract claims 11,553,574 6,315,598
Provision for experience rating refunds 544,610 833,679
Amounts due to related parties 10,003,258 2,438,600
Notes payable 20,600,000 10,000,000
Amounts due under repurchase agreements 86,968,750 49,000,000
Amounts due on securities purchased 29,713,749 -
Federal income taxes payable -- 1,648,822
Other liabilities 13,566,954 5,410,987
Liabilities related to separate account 370,787 151,450
-------------------- --------------------
Total liabilities 1,532,197,530 616,881,315
Commitments and contingencies
Minority interest in subsidiaries: company-obligated
mandatorily redeemable preferred securities of
subsidiary trusts 98,981,629 --
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 - 4,712,310 shares; 1998 - 4,581,962 shares 4,712,310 4,581,962
Additional paid-in capital 66,057,863 64,783,117
Accumulated other comprehensive income (loss) (35,234,635) 420,035
Retained-earnings deficit (1,836,247) (4,279,593)
-------------------- --------------------
Total stockholders' equity 34,324,291 66,130,521
-------------------- --------------------
Total liabilities and stockholders' equity $ 1,665,503,450 $ 683,011,836
==================== ====================
See accompanying notes
F-4
American Equity Investment Life Holding Company
Consolidated Statements of Operations
Year ended December 31
1999 1998 1997
----------- ----------- -----------
Revenues:
Traditional life and accident and
health insurance premiums $10,294,437 $10,528,108 $11,424,907
Annuity and single premium
universal life product charges 3,452,095 642,547 11,896
Net investment income 64,609,612 26,356,472 4,018,617
Realized gains on investments 1,454,417 426,782 --
----------- ----------- -----------
Total revenues 79,810,561 37,953,909 15,455,420
Benefits and expenses:
Insurance policy benefits and change
in future policy benefits 7,231,895 6,084,893 7,440,080
Interest credited to account balances 41,726,895 15,837,912 2,129,686
Interest expense on notes payable 896,383 788,770 979,826
Interest expense on amounts due
under repurchase agreements 3,490,849 1,528,718 291,547
Amortization of deferred policy
acquisition costs and value of
insurance in force acquired 11,240,271 3,946,133 1,143,032
Amortization of goodwill 70,000 70,000 70,000
Other operating costs and expenses 12,058,398 8,692,813 8,160,863
----------- ----------- -----------
Total benefits and expenses 76,714,691 36,949,239 20,215,034
----------- ----------- -----------
Income (loss) before income taxes 3,095,870 1,004,670 (4,759,614)
Income tax benefit (expense):
Current (14,188,656) (5,311,080) (2,565,057)
Deferred 15,558,491 4,550,597 3,955,283
----------- ----------- -----------
1,369,835 (760,483) 1,390,226
Minority interests in subsidiaries:
Earnings attributable to company-
obligated mandatorily redeemable preferred
securities of subsidiary trusts (2,022,359) -- --
----------- ----------- -----------
Net income (loss) $ 2,443,346 $ 244,187 $(3,369,388)
=========== =========== ===========
Basic earnings (loss) per common share $ 0.52 $ 0.05 $ (2.11)
=========== =========== ===========
Diluted earnings (loss) per common share $ 0.42 $ 0.05 $ (2.11)
=========== =========== ===========
See accompanying notes.
F-5
Consolidated Statements of Changes in Stockholders' Equity
American Equity Investment Life Holding Company
Preferred
Stock
--------
Balance at January 1, 1997 $ --
Comprehensive loss:
Net loss for year --
Change in net unrealized investment gains/losses --
Total comprehensive loss
Issuance of 3,240,864 shares of common stock,
less issuance expenses of $2,928,493 --
Compensation expense related to issuance of stock
options and warrants --
--------
Balance at December 31, 1997 --
Comprehensive income:
Net income for year --
Change in net unrealized investment gains/losses --
Total comprehensive income
Issuance of 161,098 shares of common stock, less issuance
expenses of $329,700 --
Issuance of 625,000 shares of 1998 Series A Participating
Preferred Stock, less issuance expenses of $31,930 625,000
--------
Balance at December 31, 1998 625,000
Comprehensive loss:
Net income for year --
Change in net unrealized investment gains/losses --
Total comprehensive loss
Issuance of 130,348 shares of common stock, less issuance
expenses of $21,756 --
Dividends on preferred stock ($.02 per share) --
Dividends on common stock ($.02 per share) --
--------
Balance at December 31, 1999 $625,000
========
See accompanying notes.
F-6
American Equity Investment Life Holding Company
Consolidated Statements of Changes in Stockholders' Equity
(continued)
Accumulated
Additional Other Retained- Total
Paid-In Comprehensive Earnings Stockholders'
Common Stock Capital Income (Loss) Deficit Equity
- ---------- ----------- ------------ ----------- ------------
$1,180,000 $10,313,050 $ (201,556) $(1,154,392) $ 10,137,102
-- -- -- (3,369,388) (3,369,388)
-- -- 411,856 -- 411,856
------------
(2,957,532)
3,240,864 43,377,615 -- -- 46,618,479
-- 628,000 -- -- 628,000
- ---------- ----------- ------------ ----------- ------------
4,420,864 54,318,665 210,300 (4,523,780) 54,426,049
-- -- -- 244,187 244,187
-- -- 209,735 -- 209,735
------------
453,922
161,098 1,121,382 -- -- 1,282,480
-- 9,343,070 -- -- 9,968,070
- ---------- ----------- ------------ ----------- ------------
4,581,962 64,783,117 420,035 (4,279,593) 66,130,521
-- -- -- 2,443,346 2,443,346
-- -- (35,654,670) -- (35,654,670)
------------
(33,211,324)
130,348 1,381,492 -- -- 1,511,840
-- (12,500) -- -- (12,500)
-- (94,246) -- -- (94,246)
- ---------- ----------- ------------ ----------- ------------
$4,712,310 $66,057,863 $(35,234,635) $(1,836,247) $ 34,324,291
========== =========== ============ =========== ============
See accompanying notes.
F-7
American Equity Investment Life Holding Company
Consolidated Statements of Cash Flows
Year ended December 31
1999 1998 1997
------------ ------------ -----------
Operating activities
Net income (loss) $ 2,443,346 $ 244,187 $(3,369,388)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Adjustments related to interest sensitive products:
Interest credited to account balances 41,726,895 15,837,912 2,129,686
Annuity and single premium universal life (3,452,095) (642,547) (11,896)
product charges
Increase in traditional life and accident and
health insurance reserves 3,742,739 1,629,777 287,197
Policy acquisition costs deferred:
Commissions paid to related party (73,804,373) (24,164,726) (3,353,491)
Other (3,590,628) (1,908,540) (789,435)
Amortization of deferred policy acquisition costs 10,923,792 3,672,039 761,032
Amortization of discount and premiums on
fixed maturity securities and derivative
instruments (10,765,015) (12,975,476) (997,853)
Provision for depreciation and other amortization 1,298,511 991,569 913,168
Compensation expense related to issuance of
stock options and warrants -- -- 628,000
Realized gains on investments (1,454,417) (426,782) --
Deferred income taxes (15,558,491) (4,550,597) (3,955,283)
Change in other operating assets and liabilities:
Federal income taxes recoverable (1,662,522) -- --
Federal income taxes payable (1,648,822) (913,920) 2,562,742
Accrued investment income (11,236,590) (1,184,172) (1,347,769)
Other policy funds and contract claims 5,237,976 3,960,442 1,279,542
Amounts due to related parties 7,564,658 -- --
Receivables from related parties (18,806,582) -- --
Other liabilities 8,155,967 4,309,326 2,282,475
Other (650,621) (72,751) (271,762)
------------ ------------ -----------
Net cash used in operating activities (61,536,272) (16,194,259) (3,253,035)
See accompanying notes.
F-8
American Equity Investment Life Holding Company
Consolidated Statements of Cash Flows
(continued)
Year ended December 31
1999 1998 1997
--------------- ------------- -------------
Investing activities
Sales, maturities or repayments of investments:
Fixed maturity securities - available-for-sale $ 308,669,843 $ 222,745,031 $ 22,591,487
Derivative instruments 1,541,669 -- --
--------------- ------------- -------------
310,211,512 222,745,031 22,591,487
Acquisitions of investments:
Fixed maturity securities - available-for-sale (734,248,023) (602,830,456) (200,181,267)
Fixed maturity securities - held for investment (310,499,557) -- --
Equity securities (8,019,999) -- --
Derivative instruments (39,396,518) (11,539,179) (1,815,674)
Proceeds received from futures contract 4,969,781
Policy loans (38,884) (8,831) (26,830)
--------------- ------------- -------------
(1,087,233,200) (614,378,466) (202,023,771)
Proceeds from sale of property -- 2,094,619 --
Purchases of property, furniture and equipment (877,023) (625,567) (1,123,129)
--------------- ------------- -------------
Net cash used in investing activities (777,898,711) (390,164,383) (180,555,413)
Financing activities
Receipts credited to annuity and single
premium universal life policyholder
account balances 816,126,324 377,917,332 141,853,600
Return of annuity and single premium universal
life policyholder account balances (60,844,621) (23,637,290) (2,419,197)
Financing fees deferred (1,800,968) -- --
Proceeds from notes payable 10,600,000 -- --
Increase in amounts due under repurchase agreements 37,968,750 49,000,000 --
Proceeds from issuance of company-obligated
mandatorily redeemable preferred securities of
subsidiary trusts 25,970,140 -- --
Net proceeds from sale of preferred stock -- 9,968,070 --
Net proceeds from issuance of common stock 1,511,840 1,282,480 46,618,479
Dividends paid (106,746) -- --
--------------- ------------- -------------
Net cash provided by financing activities 829,424,719 414,530,592 186,052,882
--------------- ------------- -------------
Increase (decrease) in cash and cash equivalents (10,010,264) 8,171,950 2,244,434
Cash and cash equivalents at beginning of year 15,891,779 7,719,829 5,475,395
--------------- ------------- -------------
Cash and cash equivalents at end of year $ 5,881,515 $ 15,891,779 $ 7,719,829
=============== ============= =============
Supplemental disclosures of cash flow information
Cash paid during year for:
Interest $ 4,903,561 $ 1,995,789 $ 1,113,886
Income taxes 17,500,000 6,225,000 2,315
Non-cash investing and financing activities:
Bonus interest deferred as policy acquisition costs 7,602,004 5,909,679 1,035,325
Issuance of common stock in payment of deferred
compensation 90,400 -- --
Exchange of held for investment fixed maturity securities
for company-obligated mandatorily redeemable
preferred securities of subsidiary trusts 72,490,000 -- --
See accompanying notes.
F-9
American Equity Investment Life Holding Company
Notes to Consolidated Financial Statements
December 31, 1999
1. Organization and Significant Accounting Policies
Organization
American Equity Investment Life Holding Company (the Company), through its
wholly-owned subsidiary, American Equity Investment Life Insurance Company, is
licensed to sell insurance products in 42 states and the District of Columbia at
December 31, 1999. The Company offers a broad array of annuity and insurance
products. The Company's business consists primarily of the sale of equity-index
and fixed rate annuities. In 1998, the Company began offering variable annuity
products. The Company operates solely in the life insurance business.
Consolidation and Basis of Presentation
The consolidated financial statements 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 inter-company accounts and
transactions have been eliminated.
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant estimates and
assumptions are utilized in the calculation of value of insurance in force
acquired, deferred policy acquisition costs, policyholder liabilities and
accruals and valuation allowances on investments. It is reasonably possible that
actual experience could differ from the estimates and assumptions utilized.
Certain amounts in the 1998 and 1997 consolidated financial statements have been
reclassified to conform to the 1999 financial statement presentation.
Investments
Fixed maturity securities (bonds and redeemable preferred stocks that mature
more than one year after issuance) that may be sold prior to maturity are
classified as available-for-sale. Available-for-sale securities are reported at
estimated fair value and unrealized gains and losses, if any, on these
securities are included directly in a separate component of stockholders'
equity, net of income taxes and 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.
Fixed maturity securities that the Company has the positive intent and ability
to hold to maturity are classified 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. Premiums and discounts are amortized/accrued using methods which
result in a constant yield over the securities' expected lives.
Equity securities, comprised of common and non-redeemable preferred stocks, are
reported at market value. Unrealized gains and losses are included directly in a
separate component of stockholders' equity, net of income taxes.
F-10
The Company sells deferred annuity products with an additional benefit provision
based on the increase, if any, in specified equity market indexes or benchmarks.
The Company has purchased one-year option contracts with characteristics similar
to the additional benefit provisions to hedge potential increases to
policyholder benefits resulting from these additional benefit provisions. The
cost of the options is amortized over the life of the contracts and is recorded,
net of proceeds received upon expiration, as a component of net investment
income.
These options are reported at fair value in the consolidated balance sheets. The
options are purchased at the time the related annuity policies are issued, with
similar maturity dates and benefit features that fluctuate as the value of the
options change. Changes in the unrealized appreciation of the options
($12,762,839, $8,061,627 and $839,359 during the years ended December 31, 1999,
1998 and 1997, respectively) are offset by changes to the policy benefit
liabilities in the consolidated statements of operations.
The Company's hedging strategy attempts to mitigate any potential risk of loss
under these agreements through a regular monitoring process which evaluates the
program's effectiveness. The Company is exposed to risk of loss in the event of
nonperformance by the counterparties and, accordingly, the Company purchases its
option contracts from multiple counterparties and evaluates the creditworthiness
of all counterparties prior to purchase of the contracts. At December 31, 1999,
all of these options had been purchased from nationally recognized investment
banking institutions with a Standard and Poor's credit rating of BBB+ or higher.
Policy loans are reported at unpaid principal.
The carrying values of all the Company's investments are reviewed on an ongoing
basis for credit deterioration. If this review indicates a decline in market
value that is other than temporary, the Company's carrying value in the
investment is reduced to its estimated realizable value and a specific writedown
is taken. Such reductions in carrying value are recognized as realized losses
and charged to income. Realized gains and losses on sales are determined on the
basis of specific identification of investments.
Market values, as reported herein, of fixed maturity and equity securities are
based on the latest quoted market prices, or for those fixed maturity securities
not readily marketable, at values which are representative of the market values
of issues of comparable yield and quality.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
Deferred Policy Acquisition Costs
To the extent recoverable from future policy revenues and gross profits, certain
costs of producing new business, principally commissions, first-year bonus
interest and certain costs of policy issuance (including policy issue costs of
$2,949,107 in 1999, $1,908,540 in 1998 and $789,435 in 1997) have been deferred.
For annuity and single premium universal life products, these costs are being
amortized generally in proportion to expected gross profits from surrender
charges and investment, mortality, and expense margins. That amortization is
adjusted retrospectively when estimates of future gross profits/margins
(including the impact of realized investment gains and losses) to be realized
from a group of products are revised. Deferred policy acquisition costs are also
adjusted for the change in amortization that would have occurred if
available-for-sale fixed maturity securities had been sold at their aggregate
market value and the proceeds reinvested at current yield. The impact of this
adjustment is included in accumulated other comprehensive income (loss) within
stockholders' equity.
For traditional life and accident and health insurance, deferred policy
acquisition costs are being amortized over the premium-paying period of the
related policies in proportion to premium revenues recognized, principally using
the same assumptions for interest, mortality and withdrawals that are used for
computing liabilities for future policy benefits subject to traditional
"lock-in" concepts.
F-11
Value of Insurance In Force Acquired
The value of insurance in force acquired represents that actuarially determined
present value of the projected future cash flows from the insurance contracts
that were acquired pursuant to two reinsurance agreements. This balance is
amortized, evaluated for recovery and adjusted for the impact of unrealized
gains and losses in the same manner as deferred policy acquisition costs
described above.
Intangibles
Intangibles consist of deferred debt and trust preferred security issue costs
and the excess of the purchase price paid over the fair value of the net assets
acquired (goodwill) in connection with the purchase of an inactive life
insurance company in 1996. Deferred issue costs are being amortized over the
life of the related agreement using the interest method. Goodwill is being
amortized over 10 years using the straight-line method.
Property, Furniture and Equipment
Property and furniture and equipment, comprised primarily of office furniture
and equipment, data processing equipment and capitalized software costs, are
reported at cost less allowances for depreciation. Depreciation expense is
determined primarily using the straight-line method over the estimated useful
lives of the assets.
Separate Accounts
The separate account assets and liabilities represent funds that are separately
administered for the benefit of variable annuity policyholders who bear the
underlying investment risk. The separate account assets and liabilities are
carried at fair value. Revenues and expenses related to the separate account
assets and liabilities, to the extent of premiums received from and benefits
paid or provided to the separate account policyholders, are excluded from the
amounts reported in the consolidated statements of operations. The Company
receives various fees (mortality, expense and surrender charges assessed against
policyholder account balances) that are included as revenues in the consolidated
statements of operations.
Future Policy Benefits
Future policy benefit reserves for annuity and single premium universal life
products are computed under a retrospective deposit method and represent policy
account balances before applicable surrender charges. Policy benefits and claims
that are charged to expense include benefit claims incurred in the period in
excess of related policy account balances. Interest crediting rates for these
products ranged from 3.0% to 12.0% in 1999 and 1998, and from 3.0% to 12.4% in
1997. A portion of this amount ($7,602,004, $5,909,679 and $1,035,325 during the
years ended December 31, 1999, 1998 and 1997, respectively) represents an
additional interest credit on first-year premiums payable until the first
contract anniversary date (first-year bonus interest). Such amounts have been
offset against interest credited to account balances and deferred as policy
acquisitions costs.
The liability for future policy benefits for traditional life insurance is based
on net level premium reserves, including assumptions as to interest, mortality,
and other assumptions underlying the guaranteed policy cash values. Reserve
interest assumptions are level and range from 3.0% to 6.0%. The liabilities for
future policy benefits for accident and health insurance are computed using a
net level premium method, including assumptions as to morbidity and other
assumptions based on the Company's experience, modified as necessary to give
effect to anticipated trends and to include provisions for possible unfavorable
deviations. Policy benefit claims are charged to expense in the period that the
claims are incurred.
Unpaid claims include amounts for losses and related adjustment expenses and are
determined using individual claim evaluations and statistical analysis. Unpaid
claims represent estimates of the ultimate net costs of all losses, reported and
unreported, which remain unpaid at December 31 of each year. These estimates are
necessarily subject to the impact of future changes in claim severity, frequency
and other factors. In spite of the variability inherent in such situations,
management believes that the unpaid claim amounts are adequate. The estimates
are continuously reviewed and as adjustments to these amounts become necessary,
such adjustments are reflected in current operations.
F-12
Certain policies of the Company include provisions for refunds of premiums based
upon annual experience of the underlying business equal to net premiums received
less a 16% administrative fee and less claims incurred. Such amounts (1999 -
$1,206,348; 1998 - $523,807; and 1997 - $711,129) are reported as a reduction of
traditional life and accident and health insurance premiums in the consolidated
statements of operations.
Deferred Income Taxes
Deferred income tax assets or liabilities are computed based on the temporary
differences between the financial statement and income tax bases of assets and
liabilities using the enacted marginal tax rate. Deferred income tax expenses or
credits are based on the changes in the asset or liability from period to
period. Deferred income tax assets are subject to ongoing evaluation of whether
such assets will be realized. The ultimate realization of deferred income tax
assets depends on generating future taxable income during the periods in which
temporary differences become deductible. If future income is not generated as
expected, deferred income tax assets may need to be written off.
Stockholders' Equity
During 1999, the Company increased the number of authorized shares of common
stock, $1 par value, from 10,000,000 to 25,000,000. In connection with the
issuance of the Company's common stock under certain private placement
offerings, the Company issued warrants to purchase one additional share of
common stock for every five shares that were purchased. In addition, warrants to
purchase 80,000 shares of the Company's common stock were issued in 1997 in
connection with the amendment of the Stock Option Agreement with the Company's
chairman (see Note 9). During 1999, 114,083 warrants were exercised at a price
of $12.00 per share. During 1998, 157,398 warrants were exercised at a price of
$10.00. At December 31, 1999, the Company had warrants for 148,250 shares
outstanding with exercise prices of $12.00 per share (68,250 shares) and $10.00
per share (80,000 shares). All of the warrants expire on April 30, 2000.
During 1998, the Company issued 625,000 shares of 1998 Series A Participating
Preferred Stock, at par, under a private placement offering in exchange for cash
of $10,000,000. These shares have participating dividend rights with shares of
the Company's common stock, when and as such dividends are declared. These
shares are convertible into shares of the Company's common stock on a
one-for-one basis and have no voting rights.
Recognition of Premium Revenues and Costs
Revenues for annuity and single premium universal life products consist of
surrender charges assessed against policyholder account balances and mortality
and expense charges (single premium universal life products only) during the
period. Expenses related to these products include interest credited to
policyholder account balances and benefit claims incurred in excess of
policyholder account balances (single premium universal life products only).
Traditional life and accident and health insurance premiums are recognized as
revenues over the premium-paying period. Future policy benefits and policy
acquisition costs are recognized as expenses over the life of the policy by
means of the provision for future policy benefits and amortization of deferred
policy acquisition costs.
All insurance-related revenues, benefits, losses and expenses are reported net
of reinsurance ceded.
Comprehensive Income (Loss)
Comprehensive income (loss) includes all changes in stockholders' equity during
a period except those resulting from investments by and distributions to
stockholders. Other comprehensive income (loss) excludes net realized investment
gains (losses) included in net income (loss) which merely represent transfers
from unrealized to realized gains and losses. These amounts totaled $983,264 and
$35,886 in 1999 and 1998, respectively. Such amounts, which have been measured
through the date of sale, are net of adjustments to deferred policy acquisition
costs and income taxes totaling $471,153 in 1999 and $115,864 in 1998.
F-13
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.
2. Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating the
fair values of financial instruments:
Fixed maturity securities: Quoted market prices, when available, or price
matrices for securities which are not actively traded, developed using yield
data and other factors relating to instruments or securities with similar
characteristics.
Equity securities: Quoted market prices, where available.
Derivative instruments: Quoted market prices from related counterparties.
Policy loans: The Company has not attempted to determine the fair values
associated with its policy loans, as management believes any differences between
the Company's carrying value and the fair values afforded these instruments are
immaterial to the Company's financial position and, accordingly, the cost to
provide such disclosure is not worth the benefit to be derived.
Cash and cash equivalents: Amounts reported in the consolidated balance sheets
for these instruments approximate their fair values.
Separate account assets and liabilities: Reported at estimated fair value in the
consolidated balance sheets.
Annuity and single premium universal life policy reserves: Fair values of the
Company's liabilities under contracts not involving significant mortality or
morbidity risks (principally deferred annuities), are stated at the cost the
Company would incur to extinguish the liability (i.e., the cash surrender
value). The Company is not required to and has not estimated the fair value of
its liabilities under other contracts.
Notes payable and amounts due under repurchase agreements: As all notes and
short-term indebtedness under repurchase agreements have variable interest
rates, the amounts reported in the consolidated balance sheets for these
instruments approximate their fair values.
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts: Fair values are estimated by discounting expected cash flows using
interest rates currently being offered for similar securities.
F-14
The following sets forth a comparison of the fair values and carrying amounts of
the Company's financial instruments:
December 31
1999 1998
------------------------------ ---------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------------- -------------- ------------- ------------
Assets
Fixed maturity securities:
Available-for-sale $ 997,019,819 $ 997,019,819 $601,897,562 $601,897,562
Held-for-investment 398,467,247 315,974,664 -- --
Equity securities 7,613,489 7,613,489 -- --
Derivative instruments 44,209,883 44,209,883 16,171,621 16,171,621
Policy loans 231,068 231,068 192,184 192,184
Cash and cash equivalents 5,881,515 5,881,515 15,891,779 15,891,779
Separate account assets 370,787 370,787 151,450 151,450
Liabilities
Annuity and single premium
universal life reserves 1,343,815,953 1,149,271,147 529,765,023 458,253,796
Notes payable 20,600,000 20,600,000 10,000,000 10,000,000
Amounts due under repurchase
agreements 86,968,750 86,968,750 49,000,000 49,000,000
Separate account liabilities 370,787 370,787 151,450 151,450
Company-obligated mandatorily
redeemable preferred securities
of subsidiary trusts 98,981,629 98,981,629 -- --
F-15
3. Investments
At December 31, 1999 and 1998, the amortized cost and estimated fair value of
fixed maturity securities and equity securities were as follows:
Gross Gross
Amortized Unrealized Unrealized Estimated
December 31, 1999 Cost Gains Losses Fair Value
- --------------------------------- -------------- ---------- ------------ ------------
Fixed maturity securities
Available-for-sale
United States Government
and agencies $ 642,115,817 $ 111,819 $(39,229,308) $602,998,328
State, municipal and
other governments 4,539,257 -- (379,607) 4,159,650
Public utilities 12,201,799 -- (1,362,599) 10,839,200
Corporate securities 300,422,046 408,652 (28,539,013) 272,291,685
Redeemable preferred stocks 9,240,340 -- (824,220) 8,416,120
Mortgage and asset-backed
securities 101,946,108 642,075 (4,273,347) 98,314,836
-------------- ---------- ------------ ------------
$1,070,465,367 $1,162,546 $(74,608,094) $997,019,819
============== ========== ============ ============
Held for investment
United States Government
and agencies $ 323,311,715 $ -- $(74,631,915) $248,679,800
Redeemable preferred stocks 75,155,532 -- (7,860,668) 67,294,864
-------------- ---------- ------------ ------------
$ 398,467,247 $ -- $(82,492,583) $315,974,664
============== ========== ============ ============
Equity securities
Non-redeemable preferred
stocks $ 6,850,000 $ -- $ (227,160) $ 6,622,840
Common stocks 1,169,999 -- (179,350) 990,649
-------------- ---------- ------------ ------------
$ 8,019,999 $ -- $ (406,510) $ 7,613,489
============== ========== ============ ============
December 31, 1998
- ------------------------------------
Fixed maturity securities
Available-for-sale
United States Government
and agencies $ 385,393,461 $ 854,292 $ (23,637) $386,224,116
State, municipal and other
governments 4,227,231 -- (3,231) 4,224,000
Public utilities 9,869,720 194,810 -- 10,064,530
Corporate securities 191,393,819 1,036,268 (525,097) 191,904,990
Mortgage and asset-backed
securities 9,416,331 64,400 (805) 9,479,926
-------------- ---------- ------------ ------------
$ 600,300,562 $2,149,770 $ (552,770) $601,897,562
============== ========== ============ ============
F-16
The amortized cost and estimated fair value of fixed maturity securities at
December 31, 1999, by contractual maturity, are shown below. Actual maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties. All of
the Company's mortgage-backed and asset-backed securities provide for periodic
payments throughout their lives, and are shown below as a separate line.
Available-for-sale Held for investment
----------------------------------- ---------------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------------- ------------ ------------ -------------
Due after one year through five years $ 13,815,639 $ 13,480,248 $ -- $ --
Due after five years through ten years 148,996,868 144,701,650 -- --
Due after ten years through twenty years 492,734,730 469,617,702 -- --
Due after twenty years 312,972,022 270,905,383 398,467,247 315,974,664
-------------- ------------ ------------ ------------
968,519,259 898,704,983 398,467,247 315,974,664
Mortgage-backed and asset-backed
securities 101,946,108 98,314,836 -- --
-------------- ------------ ------------ ------------
$1,070,465,367 $997,019,819 $398,467,247 $315,974,664
============== ============ ============ ============
Net unrealized gains (losses) on available-for-sale fixed maturity securities
and equity securities reported as a separate component of stockholders' equity
were comprised of the following at December 31, 1999 and 1998:
December 31
1999 1998
------------ ----------
Net unrealized gains (losses) on available-for-sale
fixed maturity and equity securities $(73,852,058) $1,597,000
Adjustments for assumed changes in amortization of
deferred policy acquisition costs 19,644,927 (960,583)
Deferred income tax benefit (expense) 18,972,496 (216,382)
------------ ----------
Net unrealized gains (losses) reported as accumulated
other comprehensive income (loss) $(35,234,635) $ 420,035
============ ==========
Components of net investment income are as follows:
Year ended December 31
1999 1998 1997
----------- ----------- ----------
Fixed maturity securities $69,877,178 $28,304,437 $5,131,361
Equity securities 456,000 -- --
Derivative instruments (6,151,600) (1,767,580) (589,484)
Policy loans 19,722 8,338 12,281
Cash and cash equivalents 487,254 331,530 124,393
Other 951,035 55,109 --
----------- ----------- ----------
65,639,589 26,931,834 4,678,551
Less investment expenses (1,029,977) (575,362) (659,934)
----------- ----------- ----------
Net investment income $64,609,612 $26,356,472 $4,018,617
=========== =========== ==========
F-17
An analysis of sales, maturities, and principal repayments of the Company's
available-for-sale fixed maturity securities for the year ended December 31,
1999 is as follows:
Gross Gross Proceeds
Amortized Realized Realized from
Cost Gains Losses Sale
------------ -------- ---------- ------------
Year ended December 31, 1999
Scheduled principal repayments,
calls and tenders $195,837,799 $ -- $ -- $195,837,799
Sales 112,919,296 322,454 (409,706) 112,832,044
------------ -------- --------- ------------
$308,757,095 $322,454 $(409,706) $308,669,843
============ ======== ========= ============
Year ended December 31, 1998
Scheduled principal repayments
calls and tenders $157,731,977 $ -- $ -- $157,731,977
Sales 64,861,304 163,865 (12,115) 65,013,054
------------ -------- -------- ------------
$222,593,281 $163,865 $(12,115) $222,745,031
============ ======== ======== ============
For the year ended December 31, 1999, realized gains on investments consisted of
net losses of $87,252 on the sale of available-for-sale fixed maturity
securities and a gain of $1,541,669 on the termination of a total return swap.
For the year ended December 31, 1998, realized gains of $426,782 consisted of
net gains on sales of available-for-sale fixed maturities of $151,750 and a gain
on the sale of real property of $275,032. The Company did not have any realized
gains for the year ended December 31, 1997.
The change in unrealized appreciation/depreciation on investments for the year
ended December 31, 1999 aggregated ($75,449,058), and consisted of unrealized
depreciation on available-for-sale fixed maturity securities and equity
securities of $75,042,548 and $406,510, respectively. The changes in unrealized
appreciation/depreciation on investments aggregated $905,405 and $893,151 for
the years ended December 31, 1998 and 1997, respectively, and were entirely
attributable to available-for-sale fixed maturity securities. The change in net
unrealized appreciation/depreciation is recorded net of adjustments to deferred
policy acquisition costs and deferred income taxes totaling $39,794,388 in 1999,
$695,670 in 1998 and $481,295 in 1997.
As a part of its asset-liability management activities, the Company from time to
time purchases financial futures instruments and total return exchange
agreements. The operations of the Company are subject to risk of interest rate
fluctuations to the extent that there is a difference between the amount of the
Company's interest-earning assets and interest-bearing liabilities that mature
in specified periods. The principal objective of the Company's asset-liability
management activities is to provide maximum levels of net investment income
while maintaining acceptable levels of interest rate and liquidity risk, and
facilitating the funding needs of the Company. Financial futures contracts are
commitments to either purchase or sell a financial instrument at a specific
future date for a specified price and may be settled in cash or through delivery
of the financial instrument. Total return exchange agreements generally involve
the exchange of the total return or yield on a referenced security for a
specified interest rate.
If a financial futures contract used to manage interest rate risk is terminated
early or results in payments based on the change in value of the underlying
asset, any resulting gain or loss is deferred and amortized as an adjustment to
the yield of the designated asset over its remaining life as long as the
transaction qualifies for hedge accounting. The effectiveness of the hedge is
measured by a historical and probable future high correlation of changes in the
fair value of the hedging instruments with changes in value of the hedged item.
If correlation ceases to exist, hedge accounting will be terminated and gains or
losses recorded in income. To date, high correlation has been achieved. Deferred
gains totaling $4,969,781 for 1999 ($0 in 1998) are included in held for
investment fixed maturities and will be amortized as an adjustment to interest
income over the life of the hedged instrument. The notional amount of
outstanding agreements to sell securities was $204,600,000 at
F-18
December 31, 1999. A fixed maturity security with an amortized cost of
$14,932,303 has been deposited with a broker dealer to establish a margin
account for the futures contracts.
For total return exchange agreements, the differential of the total return yield
or interest to be paid or received on a settlement date is recognized as an
adjustment to investment income. If a total return swap agreement is terminated
early any resulting gain or loss is recognized as realized gain or loss. In
1999, the Company recognized net investment expense of $2,069,355 related to
payments made on settlement dates, and realized a gain of $1,541,669 on the
termination of one total return swap agreement. The notional amount of
outstanding agreements was $332,000,000 at December 31, 1999.
At December 31, 1999, affidavits of deposits covering fixed maturity securities
and short-term investments with a amortized cost of $1,388,740,914 were on
deposit with state agencies to meet regulatory requirements.
At December 31, 1999, the following investments in any person or its affiliates
(other than bonds issued by agencies of the United States Government) exceeded
10% of stockholders' equity:
Estimated Amortized Estimated Amortized
Issuer Fair Value Cost Issuer Fair Value Cost
- ----------------------------------- ----------- ----------- ------------------------ ---------- ----------
FBL Capital Trust I $67,294,864 $75,155,532 United Dominion Realty $4,802,600 $5,162,500
AIG Global Trust 19,000,000 19,000,008 U.S. Tr Cap A 144A 5,262,046 5,355,772
Knight Funding, Ltd 19,053,000 18,430,348 Nationwide Health Prop. 4,890,600 6,043,729
Northwest Airlines 10,135,483 10,123,774 BT Capital Trust 4,868,000 5,334,466
Sutter CBO 10,353,000 10,000,000 Health Care Properties 4,815,000 5,000,000
South Street CBO 9,520,839 9,737,000 Keycorp Inst.. Cap-A 144A 4,701,920 5,265,316
FMR Corp. 9,662,600 10,084,411 Chase Capital I 4,894,450 5,166,715
Nations Bank 9,890,000 13,059,307 Fortress CBO C 4,482,500 4,634,799
Evaluated Loan Collateral 9,108,000 9,108,000 Harcourt Gen. Inc. 4,607,000 4,944,039
M&I Capital Trust 9,125,000 10,406,323 BS Com. Mtg. 1999-C1-D 4,295,800 4,723,306
American Financial Group 8,793,200 9,357,988 Orng & Rkld Utilities 4,397,000 4,962,985
Genamerica Capital I 8,586,000 9,593,719 Simon Debartolo 4,375,586 5,005,544
Jet Equipment Trust 8,250,000 8,214,878 Developers Div. Rlty 4,215,250 5,013,067
Ikon Capital, Inc. 7,841,120 7,975,587 NJ Econ Dev Authority 4,159,650 4,539,257
JPM Capital Trust 7,700,000 8,473,156 Citicorp Capital II 4,018,006 4,322,442
Bear Stearns M.T. Notes 7,680,000 7,930,144 Witco Corp. 3,845,000 4,698,565
Commercial Net I 7,388,480 7,699,283 Southern Co. Cap. Trust 3,823,200 4,261,940
Land O' Lake Capital Tr. 6,837,432 8,078,789 First Industrial LP Mtn 3,800,000 4,090,222
New Plan Excel Realty Tr. 6,622,840 6,850,000 New Plan Realty Tr. Mtn 3,654,800 4,171,590
Engelhard Corp. 5,516,400 5,896,425 Spieker Properties 3,583,720 4,031,540
Farmers Exchange Capital 5,250,000 5,800,300 Lehman Bros. Holdings 3,508,000 4,879,094
Hilton Hotels Corp. 5,246,850 5,966,360 Nascor 1998-026-A13 3,442,684 3,423,260
Health Care Property 5,146,680 5,565,410 EOP Operating LP 3,436,400 3,973,337
Juniper 99 A-3a 4,615,650 5,000,000
F-19
4. Value of Insurance In Force Acquired
An analysis of the value of insurance in force acquired for the years ended
December 31, 1999, 1998 and 1997 is as follows:
Year ended December 31
1999 1998 1997
---------- ---------- ---------
Balance at beginning of year $1,068,906 $1,343,000 $1,725,000
Accretion of interest during
the year 55,000 71,000 91,000
Amortization of asset (371,479) (345,094) (473,000)
---------- ---------- ----------
Balance at end of year $ 752,427 $1,068,906 $1,343,000
========== ========== ==========
Amortization of the value of insurance in force acquired for the next five years
is expected to be as follows: 2000 - $232,000; 2001 - $104,000; 2002 - $104,000;
2003 - $103,000; and 2004 - $104,000.
5. Reinsurance and Policy Provisions
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
reinsurance to other insurance enterprises or reinsurers. Reinsurance coverages
for life insurance vary according to the age and risk classification of the
insured. The Company does not use financial or surplus relief reinsurance.
Reinsurance contracts do not relieve the Company of its obligations to its
policyholders. To the extent that reinsuring companies are later unable to meet
obligations under reinsurance agreements, the Company's life insurance
subsidiary would be liable for these obligations, and payment of these
obligations could result in losses to the Company. To limit the possibility of
such losses, the Company evaluates the financial condition of its reinsurers,
and monitors concentrations of credit risk. Insurance premiums have been reduced
by $1,110,871, $567,027 and $722,545 and insurance benefits have been reduced by
$335,558, $375,592 and $503,154 during the years ended December 31, 1999, 1998
and 1997, respectively, as a result of cession agreements.
No allowance for uncollectible amounts has been established against the
Company's asset for amounts receivable from other insurance companies since none
of the receivables are deemed by management to be uncollectible.
During 1998, the company entered into a modified coinsurance agreement to cede
70% of its variable annuity business to Equitrust Life Insurance Company
("Equitrust"). Equitrust is an affiliate of Farm Bureau Life Insurance Company
which beneficially owns 33.27% of the Company's common stock. Under this
agreement and related administrative services agreements, the Company paid
Equitrust $155,908 and $77,954 for the years ended December 31, 1999 and 1998,
respectively. The modified coinsurance agreement has an initial term of four
years and will continue thereafter until termination by written notice at the
election of either party. Any such termination will apply to the submission or
acceptance of new policies, and business reinsured under the agreement prior to
any such termination is not eligible for recapture before the expiration of 10
years. Equitrust (or one of its affiliates) provides the administrative support
necessary to manage this business.
F-20
The activity in the liability for unpaid claims and related adjustment expense
for the years ended December 31, 1999, 1998 and 1997, net of reinsurance, is
summarized as follows:
Unpaid Claims Unpaid
Liability at Claims
Beginning of Claims Claims Liability at
Year Incurred Paid End of Year
------------- ----------- ----------- -----------
Year ended December 31, 1999
1999 $ -- $ 550,877 $ 319,145 $ 231,732
1998 and prior 672,661 (186,097) 124,112 362,452
----------- ----------- ----------- -----------
672,661 $ 364,780 $ 443,257 594,184
=========== ===========
Active life reserve 1,518,222 1,575,828
----------- -----------
Total accident and health reserves $ 2,190,883 $ 2,170,012
=========== ===========
Year ended December 31, 1998
1998 $ -- $ 580,845 $ 318,507 $ 262,338
1997 and prior 667,287 (133,100) 123,864 410,323
----------- ----------- ----------- -----------
667,287 $ 447,745 $ 442,371 672,661
=========== ===========
Active life reserve 1,406,694 1,518,222
----------- -----------
Total accident and health reserves $ 2,073,981 $ 2,190,883
=========== ===========
Year ended December 31, 1997
1997 $ -- $ 556,302 $ 296,060 $ 260,242
1996 and prior 629,651 (107,471) 115,135 407,045
----------- ----------- ----------- -----------
629,651 $ 448,831 $ 411,195 667,287
=========== ===========
Active life reserve 1,350,132 1,406,694
----------- -----------
Total accident and health reserves $ 1,979,783 $ 2,073,981
=========== ===========
6. Income Taxes
The Company files a consolidated federal income tax return with all its
subsidiaries except American Equity Investment Life Insurance Company, which
files a separate federal income tax return and American Equity Investment
Properties, L.C., which is taxed as a partnership and, as such, all taxable
income is allocated to its owners.
Deferred income taxes are established by the Company and its subsidiaries based
upon the temporary differences among financial reporting and tax bases of assets
and liabilities within each entity, the reversal of which will result in taxable
or deductible amounts in future years when the related asset or liability is
recovered or settled, measured using the enacted tax rates.
F-21
Income tax benefit (expense) differed from that computed at the applicable
statutory federal income tax rate (35% in 1999; 34% in 1998 and 1997) as
follows.
Year ended December 31
1999 1998 1997
----------- ----------- -----------
Income (loss) before income taxes $ 3,095,870 $ 1,004,670 $(4,759,614)
=========== =========== ===========
Income tax benefit (expense) on income (loss)
before income taxes at statutory rate $(1,083,555) $ (341,588) $ 1,618,269
Tax effect of:
Earnings on company-obligated
mandatorily redeemable preferred
securities of subsidiary trusts 708,000 -- --
State income taxes 61,000 59,000 129,000
Small company deduction -- -- 331,000
Change in valuation allowance on
deferred income tax assets 1,537,000 (397,000) (707,000)
Other 147,390 (80,895) 18,957
----------- ----------- -----------
Income tax benefit (expense) $ 1,369,835 $ (760,483) $ 1,390,226
=========== =========== ===========
The tax effect of individual temporary differences at December 31, 1999 and
1998, is as follows:
December 31
1999 1998
------------ ------------
Deferred income tax assets:
Policy benefit reserves $ 55,066,000 $ 17,810,000
Provision for experience rating refunds 191,000 283,000
Unrealized depreciation on available-for-sale fixed
maturity securities and equity securities 18,972,496 --
Deferred compensation 426,000 350,000
Net operating loss carryforwards 1,609,000 1,182,000
Other 15,372 66,000
------------ ------------
76,279,868 19,691,000
Deferred income tax liabilities:
Unrealized appreciation of available-for-sale
fixed maturity securities -- (216,382)
Accrued discount on fixed maturity securities (800,000) --
Deferred policy acquisition costs (31,861,000) (8,939,000)
Value of insurance in force acquired (263,000) (363,000)
Other (319,000) (346,119)
------------ ------------
(33,243,000) (9,864,501)
Valuation allowance on deferred income tax assets -- (1,537,000)
------------ ------------
Deferred income tax asset $ 43,036,868 $ 8,289,499
============ ============
The Company regularly reviews its needs for a valuation allowance against its
deferred income tax assets. During the year ended December 31, 1997, the
Company's life insurance company became taxable and it is expected that it will
continue to pay federal income taxes in the foreseeable future. As a result, the
valuation allowance pertaining to deferred income tax assets at this subsidiary
was eliminated at December 31, 1997. At December 31, 1998 and 1997, the Company
carried a valuation allowance against deferred income tax assets of the non-life
insurance entities due to the uncertainty of future income. However, this
valuation allowance was eliminated at December 31, 1999 as a result of the
Company's adoption of plans and policies relative to future taxable income or
loss of the non-life entities.
The Company has net operating loss carryforwards for tax purposes of $3,978,000
at December 31, 1999, which expire in 2010 through 2014. None of these
carryforwards is currently available to reduce the tax provisions for financial
reporting purposes.
F-22
7. Notes Payable and Amounts Due Under Repurchase Agreements
On October 18, 1996, the Company borrowed $10 million from two banks under a
variable rate revolving credit agreement with a maximum borrowing level of $10
million. During 1999, the maximum borrowing level was increased to $25,000,000,
and the Company borrowed an additional $10,600,000. The notes bear interest
(7.56% at December 31, 1999) at LIBOR plus a specified margin of up to 1.75% and
interest is payable quarterly. Principal and accrued interest is due and payable
on March 31, 2001, with an option for a four-year extension as a term loan.
Under the agreement, the Company is required to maintain minimum capital and
surplus levels at American Equity Investment Life Insurance Company and meet
certain other financial and operating ratio requirements. The Company is also
prohibited from incurring other indebtedness for borrowed money and from paying
dividends on its capital stock in excess of 10% of its consolidated net income
for the prior fiscal year (except that in 1999, the Company was permitted to
make the dividend payments reflected in the consolidated financial statements).
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
$68,139,218 and $28,216,906 for the years ended December 31, 1999 and 1998,
respectively, and were collateralized by investment securities with fair market
values approximately equal to the amount due. At December 31, 1999, the Company
has securities lending programs with First Union Securities, Inc. and Bear,
Stearns & Co., Inc. with amounts due to each of $57,906,250 and $29,062,500,
respectively. The weighted average interest rate on amounts due under repurchase
agreements was 5.12% and 5.42% for the years ended December 31, 1999 and 1998,
respectively.
8. Minority Interests in Subsidiary Trusts
During, 1999, American Equity Capital Trust I ("Trust I"), a wholly-owned
subsidiary of the Company, issued $25,970,140 of 8% Convertible Trust Preferred
Securities (the "8% Trust Preferred Securities"). In connection with Trust I's
issuance of the 8% Trust Preferred Securities and the related purchase by the
Company of all of Trust I's common securities, the Company issued $26,773,000 in
principal amount of its 8% Convertible Junior Subordinated Debentures, due
September 30, 2029 (the "8% Debentures") to Trust I. The sole assets of Trust I
are the 8% Debentures and any interest accrued thereon. Each 8% 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 8% Debentures correspond to the distribution dates
on the 8% Trust Preferred Securities. The 8% Trust Preferred Securities, which
have a liquidation value of $30 per share plus accrued and unpaid distributions,
mature simultaneously with the 8% Debentures. At December 31, 1999, 865,671.33
shares of 8% Trust Preferred Securities were outstanding, all of which are
unconditionally guaranteed by the Company to the extent of the assets of Trust
I.
Also during 1999, American Equity Capital Trust II ("Trust II"), a wholly-owned
subsidiary of the Company, issued 97,000 shares of 5% Trust Preferred Securities
(the "5% Trust Preferred Securities"). The 5% Trust Preferred Securities, which
have a liquidation value of $100 per share ($97,000,000 in the aggregate), 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 issued by the parent of
Farm Bureau Life insurance Company. Farm Bureau beneficially owns 33.27% of our
common stock.
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 $100,000,000 in principal amount of its 5% Subordinated
Debentures, due June 1, 2047 (the "5% Debentures") to Trust II. 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 5% Debentures. All of the 5% Trust Preferred Securities
are unconditionally guaranteed by the Company to the extent of the assets of
Trust II.
F-23
9. Retirement and Stock Compensation Plans
The Company has adopted a contributory defined contribution plan which is
qualified under Section 401(k) of the Internal Revenue Code. The plan covers
substantially all full-time employees of the Company, subject to minimum
eligibility requirements. Employees can contribute up to 15% of their annual
salary (with a maximum contribution of $10,000 in 1999, $10,000 in 1998, and
$9,500 in 1997) to the plan. The Company contributes an additional amount,
subject to limitations, based on the voluntary contribution of the employee.
Further, the plan provides for additional employer contributions based on the
discretion of the Board of Directors. Plan contributions charged to expense were
$41,703, $25,231 and $19,434 for the years ended December 31, 1999, 1998 and
1997 respectively.
The Company has entered into deferred compensation arrangements with certain
officers, directors, and consultants, whereby these individuals have agreed to
take common stock of the Company at a future date in lieu of current cash
payments. The common stock is to be issued in conjunction with a "trigger
event", as that term is defined in the individual agreements. At December 31,
1999 and 1998, these individuals have earned, and the Company has reserved for
future issuance, 96,060 and 96,958 shares of common stock, respectively,
pursuant to these arrangements. The Company has also accrued $1,097,933 and
$1,017,333 as an other liability at December 31, 1999 and 1998, respectively,
representing the value associated with the shares earned. In September, 1999, a
retired employee received a distribution of 9,040 shares in accordance with the
employee's deferred compensation arrangement.
During 1997, the Company established the American Equity Investment NMO Deferred
Compensation Plan whereby agents can earn common stock in addition to their
normal commissions. Awards are calculated using formulas determined annually by
the Company's Board of Directors and are generally based upon new annuity
deposits. For the years ended December 31, 1999, 1998 and 1997, agents earned
the right to receive 112,596, 83,861 and 13,131 shares, respectively. These
shares will be awarded at the end of the vesting period of 4 years for the 1999
and 1998 programs, and 3 years for the 1997 program. A portion of the awards may
be subject to forfeiture if certain production levels are not met over the
remaining vesting period. The Company recognizes commission expense as the
awards vest. For the years ended December 31, 1999 and 1998, agents vested in
53,042 and 25,342 shares of common stock, respectively, and the Company recorded
commission expense (which was subsequently capitalized as deferred policy
acquisition costs) of $1,379,092 and $295,354, respectively, under these plans.
Amounts accrued are reported as other liabilities until the stock has been
issued. At December 31, 1999, the Company has reserved 209,588 shares for future
issuance under the plans. Two of the Company's national marketing organizations
accounted for more than 10% of the annuity deposits and insurance premium
collections during 1999.
During 1997, a Stock Option Agreement with the Company's Chairman (and owner of
8.6% of its outstanding common stock at December 31, 1999) was amended to fix
the number of options and warrants to purchase shares of the Company's common
stock at 400,000. Certain of these options and warrants have an exercise price
of $10.00 per share and expire in 2000 (80,000 warrants) and 2007 (200,000
options). The remaining 120,000 options can be exercised at anytime at fair
value and expire in 2007. In connection with the 1997 amendment, the Company
recorded compensation expense of $628,000. In 1999, the Stock Option Agreement
was further amended to fix the exercise price of the 120,000 options previously
exercisable at fair market value at $22.00 per share.
The Company's 1996 Stock Option Plan authorizes the grants of options to
officers, directors and employees for up to 400,000 shares of the Company's
common stock. All options granted have 10 year terms, and vest and become fully
exercisable immediately. The Company has elected to follow Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and
related Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123, Accounting for Stock-Based Compensation, requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals the fair value of the underlying stock on the date of
grant, no compensation expense is recognized.
Changes in the number of stock options outstanding during the years ended
December 31, 1999, 1998 and 1997 are as follows (excluding options on 120,000
shares that were exercisable at fair value in 1998 and 1997 and converted to a
fixed exercise price in 1999):
F-24
Weighted-
Average
Exercise Total
Number of Price per Exercise
Shares Share Price
---------- ---------- -------------
Outstanding at January 1, 1997 612,000 $ 10.00 $ 6,120,000
Granted 341,700 10.98 3,750,400
Cancelled (412,000) 10.00 (4,120,000)
Exercised (200) 10.00 (2,000)
Forfeited (5,800) 10.00 (58,000)
---------- -----------
535,700 10.62 5,690,400
Outstanding at December 31, 1997
Granted 38,500 16.00 616,000
Canceled (16,500) 10.18 (168,000)
Exercised (700) 11.71 (8,200)
---------- -----------
Outstanding at December 31, 1998
557,000 11.01 6,130,200
Granted 95,920 22.44 2,152,240
Converted 120,000 22.00 2,640,000
Canceled (1,550) 20.06 (31,000)
Exercised (7,225) 10.27 (74,200)
---------- -----------
Outstanding at December 31, 1999 764,145 14.16 $10,817,240
========== ===========
Stock options outstanding at December 31, 1999 (all currently exercisable) are
follows:
Weighted-
Average
Remaining Life
Number (in Years)
------- --------------
Exercise price:
$10.00 375,000 7.18
$12.00 122,600 7.55
$16.00 51,675 8.73
$22.00 204,370 8.26
$26.00 10,500 9.92
-------
764,145 7.67
=======
At December 31, 1999, the Company had 47,730 shares of common stock available
for future grant under the 1996 Stock Option Plan.
On December 1, 1997, in connection with a rights offering of shares of the
Company's common stock, the Company issued subscription rights to purchase an
aggregate of 719,125 shares of the Company's common stock to certain officers
and directors. The subscription rights have an exercise price of $16.00 per
share, were fully exercisable immediately, and expire on December 1, 2002.
F-25
Pro forma information regarding net income is required by SFAS No. 123, and has
been determined as if the Company had accounted for its employee stock options
and subscription rights under the fair value method of that statement. The fair
value for these options was estimated at the date of grant using a minimum value
option pricing model (which is used for non-public companies) with the following
weighted-average assumptions:
Year ended December 31
1999 1998 1997
---- ---- ----
Risk-free interest rate 4.73% 5.40% 6.50%
Dividend yield 0% 0% 0%
Weighted-average expected life 3 years 3 years 3 years
The minimum value option pricing model is similar to the Black-Scholes option
valuation model (which is primarily used for public companies) except that it
excludes an assumption for the expected volatility of market price. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma net earnings and earnings per common share were as follows:
Year ended December 31
1999 1998 1997
---------- -------- -----------
Net income (loss), as reported $2,443,346 $244,187 $(3,369,388)
Net income (loss), pro forma 2,035,000 189,000 (4,903,000)
Basic earnings per common share, as reported 0.52 0.05 (2.11)
Basic earnings per common share, pro forma 0.43 0.04 (3.07)
Diluted earnings per common share, as reported 0.42 0.05 (2.11)
Diluted earnings per common share, pro forma 0.35 0.04 (3.07)
10. Life Insurance Subsidiary
Iowa Insurance Laws require domestic insurers to maintain a minimum of $5.0
million capital and surplus.
Prior approval of regulatory authorities is required for the payment of
dividends to the Company by its life insurance subsidiary which exceed an annual
limitation. During 2000, the life insurance subsidiary could pay dividends to
its parent of approximately $16,326,000 without prior approval from regulatory
authorities.
The financial statements of American Equity Investment Life Insurance Company
included herein differ from related statutory-basis financial statements
principally as follows: (a) the bond portfolio is segregated into
held-for-investment (carried at amortized cost), available-for-sale (carried at
fair value), and trading (carried at fair value) classifications rather than
generally being carried at amortized cost; (b) acquisition costs of acquiring
new business are deferred and amortized over the life of the policies rather
than charged to operations as incurred; (c) the excess of purchase price over
net assets acquired in business combinations is allocated to identifiable
intangibles such as value of insurance in force acquired, rather than being
entirely attributable to goodwill (a portion of which may be non-admitted); (d)
policy reserves on traditional life and accident and health insurance products
are based on reasonable assumptions of expected mortality, morbidity, interest
and withdrawals which include a provision for possible adverse deviation from
such assumptions which may differ from reserves based on statutory mortality
rates and interest; (e) future policy benefit reserves on certain universal life
and annuity products are based on full account values, rather than discounting
methodologies utilizing statutory interest rates; (f) reinsurance amounts are
shown as gross amounts, net of an allowance for uncollectible amounts, on the
consolidated balance sheet rather than netted against the corresponding
receivable or payable; (g) deferred income taxes are provided for the
F-26
difference between the financial statement and income tax bases of assets and
liabilities; (h) net realized gains or losses attributed to changes in the level
of interest rates in the market are recognized as gains or losses in the
statement of operations when the sale is completed rather than deferred and
amortized over the remaining life of the fixed maturity security or mortgage
loan; (i) declines in the estimated realizable value of investments are charged
to the statement of operations for declines in value, when such declines in
value are judged to be other than temporary rather than through the
establishment of a formula-determined statutory investment reserve (carried as a
liability), changes in which are charged directly to surplus, (j) agents'
balances and certain other assets designated as "non-admitted assets" for
statutory purposes are reported as assets rather than being charged to surplus;
(k) revenues for universal life and annuity products consist of policy charges
for the cost of insurance, policy administration charges, amortization of policy
initiation fees and surrender charges assessed rather than premiums received;
and (l) pension income or expense is recognized in accordance with SFAS No. 87,
Employers' Accounting for Pensions, rather than in accordance with rules and
regulations permitted by the Employee Retirement Income Security Act of 1974;
(m) surplus notes are reported as a liability rather than as a component of
capital and surplus; and (n) assets and liabilities are restated to fair values
when a change in ownership occurs, rather than continuing to be presented at
historical cost.
Net income for the life insurance subsidiary as determined in accordance with
statutory accounting practices was $17,837,476, $4,803,545 and $4,470,284 in
1999, 1998 and 1997, respectively, and total statutory capital and surplus of
the life insurance subsidiary was $139,855,053 and $80,947,913 at December 31,
1999 and 1998, respectively.
In 1998, the NAIC adopted codified statutory accounting principles
(Codification). Codification will likely change, to some extent, prescribed
statutory accounting practices and may result in changes to the accounting
practices that the Company uses to prepare its statutory-basis financial
statements, to be effective January 1, 2001. Codification will require adoption
by the various states before it becomes the prescribed statutory basis of
accounting for insurance companies domesticated within those states.
Accordingly, before Codification becomes effective for the Company, the State of
Iowa must adopt Codification as the prescribed basis of accounting on which
domestic insurers must report their statutory-basis results to the Insurance
Division, Department of Commerce, of the State of Iowa. At this time it is
anticipated that the State of Iowa will adopt Codification. However, based on
current guidance, management believes that the impact of Codification will not
be material to the Company's statutory-basis financial statements.
11. 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.
F-27
During the years ended December 31, 1999, 1998 and 1997, the Service Company
paid $37,722,852, $19,933,480, and $11,470,576 respectively, to agents of the
Company and the Company paid renewal commissions to the Service Company of
$14,566,020, $6,781,288 and $1,360,410, respectively. At December 31, 1999 and
1998, amounts payable to the Service Company by the life insurance subsidiary
included in amounts due to related parties were $10,003,258 and $2,438,600,
respectively.
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
December 31, 1999, amounts advanced to and interest receivable from the Service
company were $18,175,000 and $581,957, respectively.
The Company leases its home office space and certain equipment under operating
leases which expire through June 2004. During the years ended December 31, 1999,
1998 and 1997, rent expense on the home office space totaled $451,748, $350,174
and $334,627, respectively. At December 31, 1999, minimum rental payments due
under all noncancellable operating leases with initial terms of one year or more
are:
Year ending December 31:
2000 $ 538,000
2001 535,000
2002 528,000
2003 520,000
2004 265,000
-----------
$ 2,386,000
===========
Assessments are, from time to time, levied on the Company by life and health
guaranty associations by most states in which the Company is licensed to cover
losses to policyholders of insolvent or rehabilitated companies. In some states,
these assessments can be partially recovered through a reduction in future
premium taxes. Given the short period since inception, management believes that
assessments against the Company for failures known to date will be minimal.
F-28
12. Earnings per share
The following table sets forth the computation of basic earnings (loss)per
common share and diluted earnings per common share:
Year ended December 31
1999 1998 1997
----------- ----------- -----------
Numerator:
Net income (loss) $ 2,443,346 $ 244,187 $(3,369,388)
Dividends on preferred stock (12,500) -- --
----------- ----------- -----------
Numerator for basic earnings (loss) per
common share 2,430,846 244,187 (3,369,388)
Dividends on preferred stock 12,500 -- --
----------- ----------- -----------
Numerator for diluted earnings (loss) per common
share $ 2,443,346 $ 244,187 $(3,369,388)
=========== =========== ===========
Denominator:
Weighted average shares outstanding 4,669,429 4,464,912 1,598,695
Effect of dilutive securities:
Preferred stock 625,000 3,425 --
Warrants 84,586 117,370 --
Stock options and management subscription rights 342,801 114,788 --
Deferred compensation agreements 117,487 13,533 --
----------- ----------- -----------
Adjusted weighted average shares outstanding 5,839,303 4,714,028 1,598,695
=========== =========== ===========
Basic earnings (loss) per common share $ 0.52 $ 0.05 $ (2.11)
=========== =========== ===========
Diluted earnings (loss) per common share $ 0.42 $ 0.05 $ (2.11)
=========== =========== ===========
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.
F-29
Schedule I
Summary of Investments - Other Than
Investments in Related Parties
American Equity Investment Life Holding Company
December 31, 1999
Amount at Which
Shown in
Type of Investment Cost (1) Value Balance Sheet
- ------------------------------------------------ -------------- -------------- --------------
Fixed maturity securities
Available for sale
United States Government and agencies $ 642,115,817 $ 602,998,328 $ 602,998,328
State, municipal and other governments 4,539,257 4,159,650 4,159,650
Public utilities 12,201,799 10,839,200 10,839,200
Corporate securities 300,422,046 272,291,685 272,291,685
Redeemable preferred stocks 9,240,340 8,416,120 8,416,120
Mortgage and asset-backed securities 101,946,108 98,314,836 98,314,836
-------------- -------------- --------------
1,070,465,367 997,019,819 997,019,819
Held for investment
United States Government and agencies 323,311,715 248,679,800 323,311,715
Redeemable preferred stocks 75,155,532 67,294,864 75,155,532
-------------- -------------- --------------
398,467,247 315,974,664 398,467,247
-------------- -------------- --------------
Total fixed maturity securities 1,468,932,614 1,312,994,483 1,395,487,066
-------------- -------------- --------------
Equity securities:
Non-redeemable preferred stocks 6,850,000 6,622,840 6,622,840
Common stocks 1,169,999 990,649 990,649
-------------- -------------- --------------
Total equity securities 8,019,999 7,613,489 7,613,489
-------------- -------------- --------------
Derivative instruments 22,546,058 44,209,883
Policy loans 231,068 231,068
Short-term investments 45,000 45,000
-------------- --------------
Total investments $1,499,774,739 $1,447,586,506
============== ==============
(1) On the basis of cost adjusted for repayments and amortization of premiums
and accrual of discounts for fixed maturity securities and derivative
instruments.
F-30
Schedule II
Condensed Financial Information of Registrant
(Parent Company)
American Equity Investment Life Holding Company
Condensed Balance Sheets
December 31
1999 1998
------------- -------------
Assets
Cash and cash equivalents $ 682,980 $ 2,212,159
Fixed maturity security, held for investment, at amortized cost
(market: 1999 -$43,013,614) 46,667,553 --
Receivables from subsidiary (eliminated in consolidation) 3,194,630 --
Receivables from related parties 18,788,327 --
Property, furniture and equipment, less accumulated depreciation of
$760,956 in 1999 and $453,927 in 1998 211,050 518,079
Debt issue costs, less accumulated amortization of $453,912 in 1999 and
$314,805 in 1998 1,765,505 103,642
Deferred income tax asset 1,963,212 --
Investment income due and accrued 546,666 --
Other assets -- 27,699
------------- -------------
73,819,923 2,861,579
Investment in and advances to subsidiaries (eliminated in consolidation) 86,826,790 74,712,974
------------- -------------
Total assets $ 160,646,713 $ 77,574,553
============= =============
Liabilities and Stockholders' Equity
Liabilities:
Notes payable $ 20,600,000 $ 10,000,000
Payable to subsidiaries (eliminated in consolidation) 102,028,638 --
Amounts due to related parties 2,591,370 --
Other liabilities 1,102,414 1,444,032
------------- -------------
Total liabilities 126,322,422 11,444,032
Commitments and contingencies
Stockholders' equity:
Series Preferred Stock 625,000 625,000
Common Stock 4,712,310 4,581,962
Additional paid-in capital 66,057,863 64,783,117
Accumulated other comprehensive income (loss) (35,234,635) 420,035
Retained-earnings deficit (1,836,247) (4,279,593)
------------- -------------
Total stockholders' equity 34,324,291 66,130,521
------------- -------------
Total liabilities and stockholders' equity $ 160,646,713 $ 77,574,553
============= =============
See accompanying note to condensed financial statements.
F-31
Schedule II
Condensed Financial Information of Registrant
(Parent Company)
American Equity Investment Life Holding Company
Condensed Statements of Operations
Year ended December 31
1999 1998 1997
----------- ----------- -----------
Revenues:
Net investment income $ 1,022,500 $ 154,307 $ 50,161
Dividends from subsidiary (eliminated in consolidation) 3,000,000 -- --
Interest from subsidiary (eliminated in consolidation) 46,419 -- --
Surplus note interest from subsidiary
(eliminated in consolidation) 1,079,106 157,788 134,077
Interest on note receivable from related party
(eliminated in consolidation) 581,957 -- --
----------- ----------- -----------
Total revenues 5,729,982 312,095 184,238
Expenses:
Interest expense on notes payable 896,383 788,770 979,826
Interest expense on debentures issued to subsidiary trusts
(eliminated in consolidation) 2,068,778 -- --
Other operating costs and expenses 821,814 818,782 1,281,776
----------- ----------- -----------
Total expenses 3,786,975 1,607,552 2,261,602
----------- ----------- -----------
Income (loss) before income taxes, equity in undistributed
income (loss) of subsidiaries and earnings attributable
to company-obligated mandatorily redeemable preferred
securities of subsidiary trusts 1,943,007 (1,295,457) (2,077,364)
Deferred income tax benefit 1,963,212 -- --
----------- ----------- -----------
Income (loss) before equity in undistributed income (loss) of
subsidiaries and earnings attributable to company-obligated
mandatorily redeemable preferred securities of subsidiary trusts 3,906,219 (1,295,457) (2,077,364)
Equity in undistributed income (loss) of subsidiaries
(eliminated in consolidation) 559,486 1,539,644 (1,292,024)
----------- ----------- -----------
Income (loss) before earnings attributable to company-obligated
mandatorily redeemable preferred securities of subsidiary trusts 4,465,705 244,187 (3,369,388)
Minority interest in subsidiaries - earnings attributable to company-
obligated mandatorily redeemable preferred securities of
subsidiary trusts (2,022,359) -- --
----------- ----------- -----------
Net income (loss) $ 2,443,346 $ 244,187 $(3,369,388)
=========== =========== ===========
See accompanying note to condensed financial statements.
F-32
Schedule II
Condensed Financial Information of Registrant
(Parent Company)
American Equity Investment Life Holding Company
Condensed Statements of Cash Flows
Year ended December 31
1999 1998 1997
------------ ------------ ------------
Operating activities
Net income (loss) $ 2,443,346 $ 244,187 $ (3,369,388)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Provision for depreciation and amortization 446,136 401,624 306,082
Accrual of discount on fixed maturity security (333,753) -- --
Compensation expense related to issuance of stock options and warrants -- -- 628,000
Equity in undistributed loss (income) of subsidiaries (559,486) (1,539,644) 1,292,024
Minority interest in subsidiaries - earnings attributable to company-
obligated mandatorily redeemable preferred securities
of subsidiary trusts 2,022,359 -- --
Accrual of discount on debentures issued to subsidiary trusts 521,489 -- --
Deferred income taxes (1,963,212) -- --
Changes in operating assets and liabilities:
Receivable from subsidiaries (3,194,630) 126,775 (85,509)
Receivable from related party (613,327) -- --
Investment income due and accrued (546,666) -- --
Other assets 27,699 (25,657) (2,042)
Payable to subsidiaries 1,850 (17,247) (733,313)
Amounts due to related parties 2,591,370 -- --
Other liabilities (341,620) 481,802 128,634
------------ ------------ ------------
Net cash provided by (used in) operating activities 501,555 (328,160) (1,835,512)
F-33
Year ended December 31
1999 1998 1997
------------ ------------ ------------
Investing activities
Capital contributions to subsidiaries (6,075,159) (6,600,000) (42,500,000)
Purchase of surplus notes from subsidiary (17,000,000) (5,500,000) --
Purchase of note receivable from related party (18,175,000) -- --
Purchases of property, furniture and equipment -- (196,117) (514,269)
------------ ------------ ------------
Net cash provided by (used in) investing activities (41,250,159) (12,296,117) (43,014,269)
Financing activities
Financing fees deferred (1,800,968) -- --
Proceeds from notes payable 10,600,000 -- --
Proceeds from issuance of company-obligated mandatorily redeemable
preferred securities of subsidiary trusts 29,015,299 -- --
Net proceeds from sale of preferred stock -- 9,968,070 --
Net proceeds from issuance of common stock 1,511,840 1,282,480 46,618,479
Dividends paid (106,746) -- --
------------ ------------ ------------
Net cash provided by financing activities 39,219,425 11,250,550 46,618,479
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (1,529,179) (1,373,727) 1,768,698
Cash and cash equivalents at beginning of year 2,212,159 3,585,886 1,817,188
------------ ------------ ------------
Cash and cash equivalents at end of year $ 682,980 $ 2,212,159 $ 3,585,886
============ ============ ============
Supplemental disclosure of cash flow information
Cash paid during the year for interest:
Interest on notes payable $ 896,383 $ 467,111 $ 840,344
Interest paid to subsidiary trusts 1,547,289 -- --
Exchange of fixed maturity securities for debentures issued to
subsidiary trusts 72,490,000 -- --
Fixed maturity security contributed to subsidiary 26,156,200 -- --
See accompanying note to condensed financial statements.
F-34
Schedule II
Condensed Financial Information of Registrant
(Parent Company)
American Equity Investment Life Holding Company
Note to Condensed Financial Statements
December 31, 1999
1. Basis of Presentation
The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of American Equity
Investment Life Holding Company.
In the parent company-only financial statements, the Company's investment in and
advances to subsidiaries (which includes surplus notes issued by the Company's
life insurance subsidiary) is stated at cost plus equity in undistributed income
(losses) of subsidiaries since the date of acquisition and net unrealized
gains/losses on the subsidiaries' fixed maturity securities classified as
"available-for-sale" and equity securities in accordance with SFAS 115,
Accounting for Certain Investments in Debt and Equity Securities.
The parent company's fixed maturity security is held for investment.
See Note 7 to the consolidated financial statements for a description of the
parent company's notes payable.
F-35
Schedule III
Supplementary Insurance Information
American Equity Investment Life Holding Company
December 31, 1999
Future Policy
Deferred Benefits, Other Policy
Policy Losses, Claims Claims and Insurance
Acquisition and Loss Unearned Benefits Premiums
Segment Costs Expenses Premiums Payable and Charges
- ---------------------------- -------------- -------------- -------- ------------ -----------
Year ended December 31, 1999
Life insurance $126,684,495 $1,358,875,848 $ - $11,553,574 $13,746,532
Year ended December 31, 1998
Life insurance 32,005,772 541,082,179 - 6,315,598 11,170,655
Year ended December 31, 1997
Life insurance 4,282,491 155,998,268 - 2,355,156 11,436,803
Amortization
Benefits of Deferred
Net Claims, Losses Policy Other
Investment and Settlement Acquisition Operating Premiums
Segment Income Expenses Costs Expenses Written
- ---------------------------- - ---------- -------------- -------------- ----------- --------
Year ended December 31, 1999
Life insurance $64,609,612 $48,958,790 $10,923,792 $16,832,109 $ -
Year ended December 31, 1998
Life insurance 26,356,472 21,922,805 3,672,039 11,354,395 -
Year ended December 31, 1997
Life insurance 4,018,617 9,569,766 761,032 9,884,236 -
F-36
Schedule IV
Reinsurance
American Equity Investment Life Holding Company
Assumed from Percentage of
Gross Ceded to Other Amount Assumed
Segment Amount Other Companies Companies Net Amount to Net
-----------------------------------------------------------------------------------------------------------------------
December 31, 1999
Life insurance in force $1,555,677,000 $1,268,312 $ 990,516,000 $2,544,925,000 38.9%
============== ========== ============== ============== =====
Insurance premiums and
other considerations
Annuity and single
premium universal
life product
charges $ 3,452,095 $ -- $ -- $ 3,452,095 - %
Traditional life
insurance and
accident and health
insurance premiums 7,444,448 1,110,871 3,960,860 10,294,437 38.5%
-------------- ---------- -------------- -------------- -----
$ 10,896,543 $1,110,871 $ 3,960,860 $ 13,746,532 28.8%
============== ========== ============== ============== =====
December 31, 1998
Life insurance in force $ 1,407,000 $ -- $2,398,544,000 $2,399,951,000 99.9%
============== ========== ============== ============== =====
Insurance premiums and
other considerations
Annuity product charges $ 642,547 $ -- $ -- $ 642,547 - %
Traditional life insurance
and accident and health
insurance premiums 19,174 567,027 11,075,961 10,528,108 105.2%
-------------- ---------- -------------- -------------- -----
$ 661,721 567,027 $ 11,075,961 $ 11,170,655 99.2%
============== ========== ============== ============== =====
December 31, 1997
Life insurance in force $ -- $ -- $2,427,796,000 $2,427,796,000 100.0%
============== ========== ============== ============== =====
Insurance premiums and
other considerations
Annuity product charges $ 11,896 $ -- $ -- $ 11,896 - %
Traditional life insurance
and accident and health
insurance premiums -- 722,545 12,147,452 11,424,907 106.3%
-------------- ---------- -------------- -------------- -----
$ 11,896 $ 722,545 $ 12,147,452 $ 11,436,803 106.2%
============== ========== ============== ============== =====
F-37
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.1 Articles of Incorporation, including Articles of Amendment**
3.2 Amended and Restated Bylaws
4.1 Agreement dated December 4, 1997 between American Equity Investment
Life Holding Company and Farm Bureau Life Insurance Company re Right
of First Refusal*
4.2 Stockholders' Agreement dated April 30, 1997 among American Equity
Investment Life Holding Company, David J. Noble, Twenty Services,
Inc., Sanders Morris Mundy Inc. and stockholders*
4.3 Registration Rights Agreement dated April 30, 1997 between American
Equity Investment Life Holding Company and stockholders*
4.4 Amended and Restated Declaration of Trust of American Equity Capital
Trust I dated September 7, 1999
The Company agrees to furnish the Commission upon its request a copy
of any instrument defining the rights of holders of long-term debt of
the Company and its consolidated subsidiaries
9 Voting Trust Agreement dated December 30, 1997 among Farm Bureau Life
Insurance Company, American Equity Investment Life Holding Company and
David J. Noble, David S. Mulcahy and Debra J. Richardson (Voting
Trustees)*
10.1 Restated and Amended General Agency Commission and Servicing Agreement
dated June 30, 1997 between American Equity Investment Life Insurance
Company and American Equity Investment Service Company*
10.1-A 1999 General Agency Commission and Servicing Agreement dated as of
June 30, 1999 between American Equity Investment Life Insurance
Company and American Equity Investment Service Company
10.2 1996 Stock Option Plan*
10.3 Restated and Amended Stock Option and Warrant Agreement dated April
30, 1997 between American Equity Investment Life Holding Company and
D.J. Noble*
10.4 Warrant to Purchase Common Stock dated May 12, 1997 issued to Sanders
Morris Mundy Inc.*
10.5 Deferred Compensation Agreements between American Equity Investment
Life Holding Company and (a)ab James M. Gerlach dated June 6, 1996*
(b)abTerry A. Reimer dated November 11, 1996* (c)abDavid S. Mulcahy
dated December 31, 1997*
21 Subsidiaries of American Equity Investment Life Holding Company
27 Financial Data Schedule
- ----------
* Incorporated by reference to the Registration Statement on Form 10 dated
April 29, 1999
** Incorporated by reference to the Registration Statement on Form 10 dated
April 29, 1999 and Post-Effective Amendment No. 1 to the Registration
Statement on Form 10 dated July 20, 1999.