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

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FORM 10-Q

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

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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 October 20, 2003: 14,594,035

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)

			September 30, 2003		December 31, 2002
Assets
Cash and investments:
	Fixed maturity securities:
		Available for sale, at market (amortized cost: 2003—$3,456,256; 2002—$3,796,914)	$	3,401,864	$	3,753,144
		Held for investment, at amortized cost (market: 2003—$1,672,713; 2002—$1,151,337)		1,757,469		1,149,510
	Equity securities, available for sale, at market (cost: 2003—$32,238; 2002—$18,051)			31,728		17,006
	Mortgage loans on real estate			527,383		334,339
	Derivative instruments			87,083		52,313
	Policy loans			313		295
	Cash and cash equivalents			11,005		21,163

Total cash and investments				5,816,845		5,327,770
Premiums due and uncollected				1,572		1,371
Accrued investment income				38,235		36,716
Receivables from related parties				13,953		20,949
Property, furniture, and equipment, less allowances for depreciation of $4,221 in 2003 and $4,011 in 2002				1,650		1,675
Deferred policy acquisition costs				669,570		595,450
Deferred income tax asset				54,117		50,711
Other assets				35,313		4,814
Assets held in separate account				3,141		2,810

Total assets			$	6,634,396	$	6,042,266

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

				September 30, 2003			December 31, 2002
Liabilities and Stockholders' Equity
Liabilities:
	Policy benefit reserves:
		Traditional life and accident and health insurance products		$	41,819		$	33,089
		Annuity and single premium universal life products			6,137,738			5,419,276
	Other policy funds and contract claims				55,545			35,644
	Amounts due to related party under General Agency Commission and Servicing Agreement				26,171			40,345
	Other amounts due to related parties				10,334			4,363
	Notes payable				31,833			43,333
	Company-obligated mandatorily redeemable preferred securities of American Equity Capital Trust II				74,959			—
	Amounts due to reinsurer				—			10,908
	Amounts due under repurchase agreements				48,341			241,731
	Federal income taxes payable				5,378			8,187
	Other liabilities				79,789			24,616
	Liabilities related to separate account				3,141			2,810

Total liabilities					6,515,048			5,864,302
Minority interests in subsidiaries:
	Company-obligated mandatorily redeemable preferred securities of subsidiary trusts:
			American Equity Capital Trust I		25,910			25,910
			American Equity Capital Trust II		—			74,576
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—14,594,035 shares; 2002—14,438,452 shares				14,594			14,438
	Additional paid-in capital				57,871			56,811
	Accumulated other comprehensive loss				(13,895	)		(11,944	)
	Retained earnings				34,243			17,548

Total stockholders' equity					93,438			77,478

Total liabilities and stockholders' equity				$	6,634,396		$	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 September 30,						Nine Months Ended September 30,
			2003			2002			2003		2002
Revenues:
	Traditional life and accident and health insurance premiums		$	4,230		$	3,394		$	11,088	$	10,714
	Annuity and single premium universal life product charges			4,279			3,922			15,504		10,398
	Net investment income			89,236			77,878			264,060		222,056
	Realized gains (losses) on investments			(907	)		608			6,881		90
	Change in fair value of derivatives			6,050			(12,482	)		25,141		(56,468	)

Total revenues				102,888			73,320			322,674		186,790
Benefits and expenses:
	Insurance policy benefits and change in future policy benefits			3,262			2,016			8,846		7,040
	Interest credited to account balances			66,503			47,681			176,318		126,704
	Change in fair value of embedded derivatives			(287	)		449			40,947		(16,962	)
	Interest expense on company-obligated mandatorily redeemable preferred securities of American Equity Capital Trust II			1,335			—			1,335		—
	Interest expense on notes payable			327			430			1,131		1,526
	Interest expense on General Agency Commission and Servicing Agreement			698			848			2,411		2,847
	Interest expense on amounts due under repurchase agreements			249			—			685		—
	Other interest expense			—			218			138		1,106
	Amortization of deferred policy acquisition costs			13,503			9,822			40,435		27,686
	Other operating costs and expenses			6,981			5,601			19,808		15,593

Total benefits and expenses				92,571			67,065			292,054		165,540

Income before income taxes and minority interests				10,317			6,255			30,620		21,250
Income tax expense				3,431			1,494			9,152		5,256

Income before minority interests				6,886			4,761			21,468		15,994
Minority interests in subsidiaries:
	Earnings attributable to company-obligated mandatorily redeemable preferred securities of subsidiary trusts:
		American Equity Capital Trust I		518			518			1,555		1,555
		American Equity Capital Trust II		—			1,342			2,685		4,029

Net income			$	6,368		$	2,901		$	17,228	$	10,410

Earnings per common share			$	0.39		$	0.18		$	1.05	$	0.64

Earnings per common share—assuming dilution (as restated for the nine months ended September 30, 2002 from previously reported amount of $0.57)			$	0.34		$	0.16		$	0.90	$	0.55

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		—		—			—			—			10,410			10,410
	Change in net unrealized investment gains/losses		—		—			—			26,198			—			26,198

Total comprehensive income																	36,608
Issuance of 34,228 shares of common stock			—		34			103			—			—			137
Acquisition of 102,750 shares of common stock			—		(103	)		(684	)		—			—			(787	)

Balance at September 30, 2002		$	625	$	14,448		$	56,871		$	(7,333	)	$	13,914		$	78,525

Balance at January 1, 2003		$	625	$	14,438		$	56,811		$	(11,944	)	$	17,548		$	77,478
Comprehensive income:
	Net income for period		—		—			—			—			17,228			17,228
	Change in net unrealized investment gains/losses		—		—			—			(1,951	)		—			(1,951	)

Total comprehensive income																	15,277
Acquisition of 1,435,500 shares of common stock			—		(1,435	)		(7,879	)		—			—			(9,314	)
Issuance of 1,591,083 shares of common stock to the NMO Deferred Compensation Trust			—		1,591			8,939			—			(533	)		9,997

Balance at September 30, 2003		$	625	$	14,594		$	57,871		$	(13,895	)	$	34,243		$	93,438

Total comprehensive loss for the third quarter of 2003 was $2.7 million and was comprised of net income of $6.4 million and an increase in net unrealized depreciation of available for sale fixed maturity securities and equity securities of $9.1 million.

Total comprehensive income for the third quarter of 2002 was $13.9 million and was comprised of net income of $2.9 million and a decrease in net unrealized depreciation of available for sale fixed maturity securities and equity securities of $11.0 million.

See accompanying notes.

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

			Nine months ended September 30,
			2003			2002
Operating activities
Net income			$	17,228		$	10,410
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		176,318			126,704
		Annuity and single premium universal life product charges		(15,504	)		(10,398	)
	Change in fair value of embedded derivatives			40,947			(16,962	)
	Increase in traditional life insurance and accident and health reserves			8,730			5,180
	Policy acquisition costs deferred			(81,936	)		(130,616	)
	Amortization of deferred policy acquisition costs			40,435			27,686
	Provision for depreciation and other amortization			979			821
	Amortization of discount and premiums on fixed maturity securities			(117,072	)		(92,087	)
	Realized gains on investments			(6,881	)		(90	)
	Change in fair value of derivatives			(25,141	)		56,468
	Deferred income taxes			(2,355	)		(1,739	)
	Reduction of amounts due to related party under General Agency Commission and Servicing Agreement			(14,174	)		(13,398	)
	Changes in other operating assets and liabilities:
		Accrued investment income		(1,519	)		(1,625	)
		Receivables from related parties		6,996			(14,145	)
		Other assets		(875	)		259
		Federal income taxes payable		(2,809	)		3,521
		Other policy funds and contract claims		19,901			11,111
		Amount due to related party		11,283			3,242
		Other amounts due to related parties		—			(104	)
		Other liabilities		15,166			15,884
	Other			(302	)		21

Net cash provided (used in) by operating activities				69,415			(19,857	)
Investing Activities
Sales, maturities, or repayments of investments:
	Fixed maturity securities—available for sale			2,097,038			2,638,159
	Fixed maturity securities—held for investment			869,205			—
	Equity securities—available for sale			32,317			10,525
	Mortgage loans on real estate			7,073			1,874
	Derivative instruments			34,693			7,301

				3,040,326			2,657,859
Acquisition of investments:
	Fixed maturity securities—available for sale			(1,670,114	)		(3,287,204	)
	Fixed maturity securities—held for investment			(1,419,534	)		(215,161	)
	Equity securities—available for sale			(46,670	)		(7,554	)
	Mortgage loans on real estate			(200,117	)		(146,635	)
	Derivative instruments			(49,634	)		(74,081	)
	Policy loans			(18	)		(1	)

				(3,386,087	)		(3,730,636	)
Purchases of property, furniture and equipment				(667	)		(1,004	)

Net cash used in investing activities				(346,428	)		(1,073,781	)

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

		Nine months ended September 30,
		2003			2002
Financing activities
Receipts credited to annuity and single premium universal life policyholder account balances		$	846,080		$	1,254,495
Return of annuity and single premium universal life policyholder account balances			(354,021	)		(232,740	)
Financing fees incurred and deferred			(92	)		—
Decrease in amounts due under repurchase agreements			(193,390	)		—
Repayments of notes payable			(11,500	)		(10,000	)
Amounts due to reinsurer			(10,908	)		(2,046	)
Net acquisition of common stock			(9,314	)		(650	)

Net cash provided by financing activities			266,855			1,009,059

Decrease in cash and cash equivalents			(10,158	)		(84,579	)
Cash and cash equivalents at beginning of period			21,163			184,130

Cash and cash equivalents at end of period		$	11,005		$	99,551

Supplemental disclosures of cash flow information
Cash paid during period for:
	Interest on notes payable and repurchase agreements	$	1,994		$	2,847
	Income taxes—life subsidiary		14,315			3,474
Non-cash financing and investing activities:
	Bonus interest deferred as policy acquisition costs		24,636			20,680
	Issuance of 1,591,083 shares of common stock to NMO Deferred Compensation Trust		9,997			—

See accompanying notes.

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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 nine-month periods ended September 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/A for the year ended December 31, 2002.

In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51". This Interpretation provides guidance for determining when a variable interest entity, as defined in the Interpretation, should be consolidated in an issuer's financial statements. The Interpretation is effective for periods ending after December 15, 2003. The subsidiary trusts which have issued the company-obligated mandatorily redeemable preferred securities and are currently included in the Company's consolidated financial statements, will be deconsolidated upon adoption of the Interpretation. The effect of such deconsolidation will be to replace the obligations of the trusts to the preferred security holders with the Company's subordinated debt obligations to the trusts and the Company's equity investments in the trusts. Similarly, the earnings attributable to company-obligated mandatorily redeemable preferred securities of American Equity Capital Trus