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 June 30, 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 (State of Incorporation)		42-1447959 (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 12, 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes 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 July 29, 2003: 14,331,088

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)

			June 30, 2003		December 31, 2002
Assets
Cash and investments:
	Fixed maturity securities:
		Available for sale, at market (amortized cost: 2003—$3,105,060; 2002—$3,796,914)	$	3,085,017	$	3,753,144
		Held for investment, at amortized cost (market: 2003—$1,871,535; 2002—$1,151,337)		1,874,065		1,149,510
	Equity securities, available for sale, at market (cost: 2003—$54,674; 2002—$18,051)			55,674		17,006
	Mortgage loans on real estate			465,278		334,339
	Derivative instruments			90,103		52,313
	Policy loans			298		295
	Cash and cash equivalents			15,071		21,163

Total cash and investments				5,585,506		5,327,770
Premiums due and uncollected				1,487		1,371
Accrued investment income				22,695		36,716
Receivables from related parties				16,342		20,949
Property, furniture, and equipment, less allowances for depreciation of $3,976 in 2003 and $4,011 in 2002				1,513		1,675
Deferred policy acquisition costs				618,343		595,450
Deferred income tax asset				40,311		50,711
Federal income taxes recoverable				6,995		—
Other assets				37,029		4,814
Assets held in separate account				2,722		2,810

Total assets			$	6,332,943	$	6,042,266

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

			June 30, 2003			December 31, 2002
Liabilities and Stockholders' Equity
Liabilities:
	Policy benefit reserves:
		Traditional life and accident and health insurance products	$	37,211		$	33,089
		Annuity and single premium universal life products		5,829,914			5,419,276
	Other policy funds and contract claims			47,080			35,644
	Amounts due to related party under General Agency Commission and Servicing Agreement			30,977			40,345
	Other amounts due to related parties			27,490			4,363
	Notes payable			35,667			43,333
	Amounts due to reinsurer			682			10,908
	Amounts due under repurchase agreements			100,000			241,731
	Federal income taxes payable			—			8,187
	Other liabilities			25,735			24,616
	Liabilities related to separate account			2,722			2,810

Total liabilities				6,137,478			5,864,302
Minority interests in subsidiaries:
	Company-obligated mandatorily redeemable preferred securities ofsubsidiary trusts			100,747			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—14,331,088 shares; 2002—14,438,452 shares			14,331			14,438
	Additional paid-in capital			56,220			56,811
	Accumulated other comprehensive loss			(4,866	)		(11,944	)
	Retained earnings			28,408			17,548

Total stockholders' equity				94,718			77,478

Total liabilities and stockholders' equity			$	6,332,943		$	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 June 30,					Six Months Ended June 30,
		2003		2002			2003		2002
Revenues:
	Traditional life and accident and health insurance premiums	$	3,256	$	4,383		$	6,858	$	7,320
	Annuity and single premium universal life product charges		5,494		3,459			11,225		6,476
	Net investment income		84,182		76,592			174,824		144,178
	Realized gains (losses) on investments		7,592		569			7,788		(518	)
	Change in fair value of derivatives		33,053		(34,314	)		19,091		(43,986	)

Total revenues			133,577		50,689			219,786		113,470
Benefits and expenses:
	Insurance policy benefits and change in future policy benefits		3,261		2,703			5,584		5,024
	Interest credited to account balances		56,111		42,801			109,815		79,023
	Change in fair value of embedded derivatives		39,290		(22,756	)		41,234		(17,411	)
	Interest expense on notes payable		369		539			804		1,096
	Interest expense on General Agency Commission and Servicing Agreement		804		949			1,713		1,999
	Interest expense on amounts due under repurchase agreements		—		—			436		—
	Other interest expense		65		771			138		888
	Amortization of deferred policy acquisition costs		15,442		10,756			26,932		17,890
	Other operating costs and expenses		6,628		6,661			12,827		9,966

Total benefits and expenses			121,970		42,424			199,483		98,475

Income before income taxes, minority interests			11,607		8,265			20,303		14,995
Income tax expense			3,363		2,152			5,721		3,762

Income before minority interests			8,244		6,113			14,582		11,233
Minority interests in subsidiaries:
	Earnings attributable to company-obligated mandatorily redeemable preferred securities of subsidiary trusts		1,861		1,862			3,722		3,724

Net income		$	6,383	$	4,251		$	10,860	$	7,509

Earnings per common share		$	0.39	$	0.26		$	0.67	$	0.46

Earnings per common share—assuming dilution		$	0.37	$	0.23		$	0.61	$	0.41

See accompanying notes.

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(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
Balance at January 1, 2002		$	625	$	14,517		$	57,452		$	(33,531	)	$	3,504	$	42,567
Comprehensive income:
	Net income for period		—		—			—			—			7,509		7,509
	Change in net unrealized investment gains/losses		—		—			—			15,194			—		15,194

Total comprehensive income																22,703
Issuance of 34,228 shares of common stock			—		34			103			—			—		137
Acquisition of 109,000 shares of common stock			—		(109	)		(678	)		—			—		(787	)

Balance at June 30, 2002		$	625	$	14,442		$	56,877		$	(18,337	)	$	11,013	$	64,620

Balance at January 1, 2003		$	625	$	14,438		$	56,811		$	(11,944	)	$	17,548	$	77,478
Comprehensive income:
	Net income for period		—		—			—			—			10,860		10,860
	Change in net unrealized investment gains/losses		—		—			—			7,078			—		7,078

Total comprehensive income																17,938
Acquisition of 1,369,500 shares of common stock			—		(1,369	)		(7,533	)		—			—		(8,902	)
Transfer of 1,262,136 shares of common stock to the NMO Deferred Compensation Trust			—		1,262			6,942			—			—		8,204

Balance at June 30, 2003		$	625	$	14,331		$	56,220		$	(4,866	)	$	28,408	$	94,718

Total comprehensive income for the second quarter of 2003 was $15.5 million and was comprised of net income of $6.4 million and a decrease in net unrealized depreciation of available for sale fixed maturity securities and equity securities of $9.1 million.

Total comprehensive income for the second quarter of 2002 was $77.6 million and was comprised of net income of $4.3 million and a decrease in net unrealized depreciation of available for sale fixed maturity securities and equity securities of $73.3 million.

See accompanying notes.

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

			Six months ended June 30,
			2003			2002
Operating activities
Net income			$	10,860		$	7,509
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
	Adjustments related to interest sensitive products:
		Interest credited to account balances		109,815			79,023
		Annuity and single premium universal life product charges		(11,225	)		(6,476	)
	Change in fair value of embedded derivatives			41,234			(17,411	)
	Increase in traditional life insurance and accident and health reserves			4,122			4,681
	Policy acquisition costs deferred			(48,622	)		(87,870	)
	Amortization of deferred policy acquisition costs			26,932			17,890
	Provision for depreciation and other amortization			566			553
	Amortization of discount and premiums on fixed maturity securities			(86,474	)		(53,539	)
	Realized losses (gains) on investments			(7,788	)		518
	Change in fair value of derivatives			(19,091	)		43,986
	Deferred income taxes			6,588			(662	)
	Reduction of amounts due to related party under General Agency Commission and Servicing Agreement			(9,368	)		(8,939	)
	Changes in other operating assets and liabilities:
		Accrued investment income		14,021			(8,297	)
		Receivables from related parties		4,607			4,277
		Federal income taxes recoverable/payable		(15,182	)		6,339
		Other policy funds and contract claims		11,436			7,811
		Other amounts due to related parties		22,300			(3,469	)
		Other liabilities		9,288			(3,345	)
	Other			(910	)		1,248

Net cash provided (used in) by operating activities				63,109			(16,173	)
Investing Activities
Sales, maturities, or repayments of investments:
	Fixed maturity securities—available for sale			1,710,151			455,737
	Fixed maturity securities—held for investment			553,741			—
	Equity securities—available for sale			10,579			1,175
	Mortgage loans on real estate			4,121			1,037
	Derivative instruments			15,886			4,626

				2,294,478			462,575
Acquisition of investments:
	Fixed maturity securities—available for sale			(995,283	)		(828,983	)
	Fixed maturity securities—held for investment			(1,239,181	)		(215,161	)
	Equity securities—available for sale			(47,078	)		(4,229	)
	Mortgage loans on real estate			(135,060	)		(75,640	)
	Derivative instruments			(33,758	)		(47,933	)
	Policy loans			(3	)		(13	)

				(2,450,363	)		(1,171,959	)
Purchases of property, furniture and equipment				(285	)		(421	)

Net cash used in investing activities				(156,170	)		(709,805	)

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

		Six months ended June 30,
		2003			2002
Financing activities
Receipts credited to annuity and single premium universal life policyholder account balances		$	492,356		$	841,996
Return of annuity and single premium universal life policyholder account balances			(236,771	)		(145,098	)
Financing fees incurred and deferred			(91	)		—
Decrease in amounts due under repurchase agreements			(141,731	)		—
Repayments of notes payable			(7,666	)		(6,667	)
Amounts due to reinsurers			(10,226	)		(1,364	)
Net acquisition of common stock			(8,902	)		(650	)

Net cash provided by financing activities			86,969			688,217

Decrease in cash and cash equivalents			(6,092	)		(37,761	)
Cash and cash equivalents at beginning of period			21,163			184,130

Cash and cash equivalents at end of period		$	15,071		$	146,369

Supplemental disclosures of cash flow information
Cash paid (received) during period for:
	Interest on notes payable and repurchase agreements	$	1,338		$	2,109
	Income taxes—life subsidiaries		14,315			(1,915	)
Non-cash financing and investing activities:
	Bonus interest deferred as policy acquisition costs		15,233			13,560
	Transfer of 1,262,136 shares of common stock to NMO Deferred Compensation Trust		8,204			—

See accompanying notes.

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 and six-month periods ended June 30, 2003, are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. For further information, refer to the 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.

In May 2003, the Financial Accounting Standards Board (FASB) issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". This Statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. Statement No. 150 must be applied immediately to instruments entered into or modified after May 31, 2003 and to all other instruments that exist as of the beginning of the third quarter of 2003. Our company-obligated mandatorily redeemable preferred securities of subsidiary trusts, with an aggregate carrying value of $100.7 million at June 30, 2003, will be reclassified to liabilities upon adoption of this Statement. There will not be any adjustment to the carrying values of these instruments upon reclassification. Amounts previously classified as dividends from these financial instruments (approximately $1.9 million per quarter) will be recorded as interest expense upon adoption of Statement No. 150 on a prospective basis. The adoption of Statement No. 150 will not impact net income applicable to common stock or earnings per common share.

In June 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (SOP) 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts". The SOP provides guidance on the accounting for sales inducements. We expect to adopt this SOP when it becomes effective in the first quarter of 2004 and will need to change our presentation of deferred expenses relating to sales inducements at the time.

Certain amounts in the unaudited consolidated financial statements for the period ended June 30, 2002 have been reclassified to conform to the financial statement presentation for June 30, 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 six months ended June 30, 2003 and 2002, the Company paid renewal commissions to the Service Company of $11.1 million and $10.9 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 one of its sources of funds the Service Company borrowed money from the Company. At June 30, 2003 and December 31, 2002, the amounts receivable from the Service Company totaled $15.8 million and $20.5 million, respectively. Principal and interest are payable quarterly over the five years from the date of the advance.

3. Reinsurance

The Company has given notice of termination and recapture of all reserves subject to a reinsurance agreement with a subsidiary of Swiss Reinsurance Company ("Swiss Re"). This agreement is more fully described in Note 5 to the Audited Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. The termination and recapture is to be effective on September 30, 2003.

The Company has also entered into a reinsurance transaction with Hannover Life Reassurance Company ("Hannover") to be effective on September 30, 2003. This transaction and the underlying agreement are similar to the transaction with Hannover that was entered into during 2002. The 2002 transaction with Hannover is more fully described in Note 5 to the Audited Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002.

Each of these transactions are treated as reinsurance under statutory accounting practices and as financial reinsurance under GAAP. The statutory surplus benefit that will be eliminated by the termination of the Swiss Re agreement will be replaced by the statutory surplus benefit provided by the new Hannover agreement. The termination of the Swiss Re agreement will result in the full repayment of the expense allowance allowed under the agreement which was previously being repaid ratably over a five-year period and is reported in the consolidated balance sheets as "Amounts due to Reinsu