AMERICAN EQUITY INVESTMENT LIFE HOLDING CO - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
o	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
(Exact name of registrant as specified in its charter)

Iowa		42-1447959
(State of Incorporation)		(I.R.S. Employer Identification No.)

5000 Westown Parkway, Suite 440
West Des Moines, Iowa 50266
(Address of principal executive offices)

(515) 221-0002
(Telephone)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

APPLICABLE TO CORPORATE ISSUERS:

Shares of common stock outstanding at April 25, 2003: 14,438,452

PART I.—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)

			March 31, 2003		December 31, 2002
Assets
Cash and investments:
	Fixed maturity securities:
		Available for sale, at market (amortized cost: 2003—$3,431,092; 2002—$3,796,914)	$	3,381,069	$	3,753,144
		Held for investment, at amortized cost (market: 2003—$1,319,074; 2002—$1,151,337)		1,317,942		1,149,510
		Equity securities, available for sale, at market (cost: 2003—$24,791; 2002—$18,051)		23,598		17,006
	Mortgage loans on real estate			397,569		334,339
	Derivative instruments			51,856		52,313
	Policy loans			302		295
	Cash and cash equivalents			215,573		21,163

Total cash and investments				5,387,909		5,327,770
Premiums due and uncollected				1,516		1,371
Accrued investment income				32,660		36,716
Receivables from related parties				18,722		20,949
Property, furniture and equipment, less allowances for depreciation of $4,231 in 2003 and $4,011 in 2002				1,528		1,675
Deferred policy acquisition costs				615,101		595,450
Deferred income tax asset				49,444		50,711
Federal income taxes recoverable				1,617		—
Other assets				17,752		4,814
Assets held in separate account				2,722		2,810

Total assets			$	6,128,971	$	6,042,266

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands, except per share data)
(Unaudited)

			March 31, 2003			December 31, 2002
Liabilities and Stockholders' Equity
Liabilities:
	Policy benefit reserves:
		Traditional life and accident and health insurance products	$	34,994		$	33,089
		Annuity and single premium universal life products		5,555,634			5,419,276
	Other policy funds and contract claims			38,635			35,644
	Amounts due to related party under General Agency Commission and Servicing Agreement			35,695			40,345
	Other amounts due to related parties			8,681			4,363
	Notes payable			39,500			43,333
	Amount due to reinsurer			10,908			10,908
	Amounts due under repurchase agreements			—			241,731
	Amounts due on securities purchased			191,572			103
Federal income taxes payable				—			8,187
	Other liabilities			30,064			24,513
	Liabilities related to separate account			2,722			2,810

Total liabilities				5,948,405			5,864,302
Minority interests in subsidiaries:
	Company-obligated mandatorily redeemable preferred securities of subsidiary trusts			100,616			100,486
Stockholders' equity:
	Series Preferred Stock, par value $1 per share, 2,000,000 shares authorized; 625,000 shares of 1998 Series A Participating Preferred Stock issued and outstanding			625			625
	Common Stock, par value $1 per share, 75,000,000 shares authorized; issued and outstanding: 2003—14,438,452 shares; 2002—14,438,452 shares			14,438			14,438
	Additional paid-in capital			56,811			56,811
	Accumulated other comprehensive loss			(13,949	)		(11,944	)
	Retained earnings			22,025			17,548

Total stockholders' equity				79,950			77,478

Total liabilities and stockholders' equity			$	6,128,971		$	6,042,266

See accompanying notes.

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)

		Three Months Ended March 31,
		2003			2002
Revenues:
	Traditional life and accident and health insurance premiums	$	3,602		$	2,937
	Annuity and single premium universal life product charges		5,731			3,017
	Net investment income		90,642			67,586
	Realized gains (losses) on investments		196			(1,087	)
	Change in fair value of derivatives		(13,962	)		(9,672	)

Total revenues			86,209			62,781
Benefits and expenses:
	Insurance policy benefits and change in future policy benefits		2,323			2,321
	Interest credited to account balances		53,704			36,222
	Change in fair value of embedded derivatives		1,944			5,345
	Interest expense on notes payable		435			557
	Interest expense on General Agency Commission and Servicing Agreement		909			1,050
	Interest expense on amounts due under repurchase agreements		436			—
	Other interest expense		73			117
	Amortization of deferred policy acquisition costs		11,490			7,160
	Other operating costs and expenses		6,199			3,279

Total benefits and expenses			77,513			56,051

Income before income taxes and minority interests			8,696			6,730
Income tax expense			2,358			1,610

Income before minority interests			6,338			5,120
Minority interests in subsidiaries:
	Earnings attributable to company-obligated mandatorily redeemable preferred securities of subsidiary trusts		1,861			1,862

Net income		$	4,477		$	3,258

Earnings per common share		$	0.27		$	0.20

Earnings per common share — assuming dilution		$	0.25		$	0.18

See accompanying notes.

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands, except per share data)
(Unaudited)

		Preferred Stock		Common Stock			Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Retained Earnings		Total Stockholders' Equity (Deficit)
Balance at January 1, 2002		$	625	$	14,517		$	57,452		$	(33,531	)	$	3,504	$	42,567
Comprehensive loss:
	Net income for period		—		—			—			—			3,258		3,258
	Change in net unrealized investment gains/losses		—		—			—			(58,105	)		—		(58,105	)

Total comprehensive loss																(54,847	)
Net acquisition of 8,897 shares of common stock			—		(9	)		(78	)		—			—		(87	)

Balance at March 31, 2002		$	625	$	14,508		$	57,374		$	(91,636	)	$	6,762	$	(12,367	)

Balance at January 1, 2003		$	625	$	14,438		$	56,811		$	(11,944	)	$	17,548	$	77,478
Comprehensive income:
	Net income for period		—		—			—			—			4,477		4,477
	Change in net unrealized investment gains/losses		—		—			—			(2,005	)		—		(2,005	)

Total comprehensive income																2,472

Balance at March 31, 2003		$	625	$	14,438		$	56,811		$	(13,949	)	$	22,025	$	79,950

See accompanying notes.

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)

			Three months ended March 31,
			2003			2002
Operating activities
Net income			$	4,477		$	3,258
	Adjustments to reconcile net income to net cash provided by operating expenses:
	Adjustments related to interest sensitive products:
		Interest credited to account balances		53,704			36,222
		Annuity and single premium universal life product charges		(5,731	)		(3,017	)
	Change in fair value of embedded derivatives			1,944			5,345
	Increase in traditional life insurance and accident and health reserves			1,905			2,052
	Policy acquisition costs deferred			(20,196	)		(41,714	)
	Amortization of deferred policy acquisition costs			11,490			7,160
	Provision for depreciation and other amortization			276			272
	Amortization of discount and premiums on fixed maturity securities			(44,205	)		(21,998	)
	Realized losses (gains) on investments			(196	)		1,087
	Change in fair value of derivatives			13,962			9,672
	Deferred income taxes			2,347			692
	Reduction of amounts due to related party under General Agency Commission and Servicing Agreement			(4,650	)		(4,469	)
	Changes in other operating assets and liabilities:
		Accrued investment income		4,056			(10,152	)
		Receivables from related parties		2,227			2,193
		Federal income taxes recoverable/payable		(9,804	)		918
		Other policy funds and contract claims		2,991			2,308
		Other amounts due to related parties		11,402			9,635
		Other liabilities		5,551			1,905
	Other			(1,238	)		(353	)

Net cash provided by operating activities				30,312			1,016
Investing Activities
Sales, maturities, or repayments of investments:
	Fixed maturity securities—available for sale			628,630			130,990
	Fixed maturity securities—held for investment			55,830			—
	Equity securities—available for sale			1,798			492
	Mortgage loans on real estate			1,870			481
	Derivative instruments			4,282
				692,410			131,963
Acquisition of investments:
	Fixed maturity securities—available for sale			(58,748	)		(440,610	)
	Fixed maturity securities—held for investment			(204,756	)		—
	Equity securities—available for sale			(8,498	)		(1,172	)
	Mortgage loans on real estate			(65,100	)		(12,350	)

	Derivative instruments			(24,871	)		(22,199	)

	Policy loans			(7	)		(6	)

				(361,980	)		(476,337	)
Purchases of property, furniture and equipment				(73	)		(138	)

Net cash provided by (used in) investing activities				330,357			(344,512	)

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)

		Three months ended March 31,
		2003			2002
Financing activities
Receipts credited to annuity and single premium universal life policyholder account balances		$	199,233		$	421,048
Return of annuity and single premium universal life policyholder account balances			(119,928	)		(66,335	)
Decrease in amounts due under repurchase agreements			(241,731	)		—
Repayments of notes payable			(3,833	)		(3,334	)
Amounts due to reinsurers			—			(682	)
Net acquisition of common stock			—			(87	)

Net cash provided by (used in) financing activities			(166,259	)		350,610

Increase in cash and cash equivalents			194,410			7,114
Cash and cash equivalents at beginning of period			21,163			184,130

Cash and cash equivalents at end of period		$	215,573		$	191,244

Supplemental disclosures of cash flow information
Cash paid during period for:
	Interest on notes payable and repurchase agreements	$	833		$	500
	Income taxes—life subsidiaries		9,815			—
Non-cash financing and investing activities:
	Bonus interest deferred as policy acquisition costs		7,138			6,740

See accompanying notes.

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements of American Equity Investment Life Holding Company (the Company) have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by GAAP for complete financial statements. The unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring items, which are necessary to present fairly our financial position and results of operations on a basis consistent with the prior audited financial statements. Operating results for the three-month period ended March 31, 2003, are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. For further information, refer to our consolidated financial statements and notes for the year ended December 31, 2002 included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002.

Certain amounts in the unaudited consolidated financial statements for the period ended March 31, 2002 have been reclassified to conform to the financial statement presentation for March 31, 2003 and December 31, 2002.

2. General Agency Commission and Servicing Agreement

The Company has a General Agency Commission and Servicing Agreement with American Equity Investment Service Company (the Service Company), wholly-owned by the Company's chairman, whereby, the Service Company acts as a national supervisory agent with responsibility for paying commissions to agents of the Company. This Agreement is more fully described in Note 8 to the Audited Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002.

During the three months ended March 31, 2003 and 2002, the Company paid renewal commissions to the Service Company of $5.6 million and $5.5 million, respectively, which were used to reduce the amount due under the General Agency Commission and Servicing Agreement, and amounts attributable to imputed interest.

As a source of funds, the Service Company borrowed money from the Company. At March 31, 2003 and December 31, 2002, the amounts receivable from the Service Company totaled $18.2 million and $20.5 million, respectively. Principal and interest are payable quarterly over five years from the date of the advance.

3. Earnings Per Share

The following table sets forth the computation of earnings per common share and earnings per common share—assuming dilution:

		Three Months Ended March 31,
		2003		2002
		(Dollars in thousands, except per share data)
Numerator:
Net income		$	4,477	$	3,258

Denominator:
Weighted average common shares outstanding and issuable			14,542,605		14,513,417
Participating preferred stock			1,875,000		1,875,000

Denominator for earnings per common share			16,417,605		16,388,417
Effect of dilutive securities:
	Warrants		—		9,307
	Stock options and management subscription rights		377,812		403,065
	Deferred compensation agreements		1,447,384		1,088,354

Denominator for earnings per common share—assuming dilution			18,242,801		17,889,143

Earnings per common share		$	0.27	$	0.20

Earnings per common share — assuming dilution		$	0.25	$	0.18

The effect of the convertible stock of the subsidiary trust has not been included in the computation of dilutive earnings per common share as the effect is antidilutive.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's discussion and analysis reviews our consolidated financial position at March 31, 2003, and the consolidated results of operations for the periods ended March 31, 2003 and 2002, and where appropriate, factors that may affect future financial performance. This analysis should be read in conjunction with the unaudited consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q, and the audited consolidated financial statements, notes thereto and selected consolidated financial data appearing in our Annual Report on Form 10-K for the year ended December 31, 2002.

All statements, trend analyses and other information contained in this report and elsewhere (such as in filings by us with the Securities and Exchange Commission, press releases, presentations by us or our management or oral statements) relative to markets for our products and trends in our operations or financial results, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include, among other things:

•: general economic conditions and other factors, including prevailing interest rate levels and stock and credit market performance which may affect (among other things) our ability to sell our

products, our ability to access capital resources and the costs associated therewith, the market value of our investments and the lapse rate and profitability of policies

•: customer response to new products and marketing initiatives
•: mortality and other factors which may affect the profitability of our products
•: changes in Federal income tax laws and regulations which may affect the relative income tax advantages of our products
•: increasing competition in the sale of annuities
•: regulatory changes or actions, including those relating to regulation of financial services affecting (among other things) bank sales and underwriting of insurance products and regulation of the sale, underwriting and pricing of products
•: the risk factors or uncertainties listed from time to time in our private placement memorandums or filings with the Securities and Exchange Commission

Results of Operations

Three Months Ended March 31, 2003 and 2002

New annuity deposits (net of reinsurance) were $199.2 million and $421.0 million for the three months ended March 31, 2003 and 2002, respectively. New annuity deposits before reinsurance totaled $319.2 million and $610.5 million for the three months ended March 31, 2003 and 2002, respectively. The reduction in new annuity deposits resulted from actions taken by us to manage our capital position, including reductions in our interest crediting rates on both new and existing annuities and suspension of sales of certain annuity products. We will continue to monitor our levels of production throughout 2003 and take such actions as we believe appropriate to help maintain our rate of production within the range that our statutory capital and surplus of our life subsidiaries will support.

Premiums and deposits (after cancellations and net of reinsurance) collected during the three months ended March 31, 2003 and 2002, by product category, were as follows:

		Three months ended March 31,
Product Type		Three months ended March 31,
Product Type		2003		2002
		(Dollars in thousands)
Equity Index Annuities:
	Index Strategies	$	76,112	$	113,831
	Fixed Strategy		41,062		89,442

			117,174		203,273
Fixed Rate Annuities:
	Single-Year Rate Guaranteed		68,242		85,116
	Multi-Year Rate Guaranteed		13,817		132,659

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