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 March 31, 2002
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
APPLICABLE
TO CORPORATE ISSUERS:
Shares of common stock outstanding at April 30, 2002: 14,508,077
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
|
March 31, 2002 |
December 31, 2001 |
||||||
---|---|---|---|---|---|---|---|---|
Assets | ||||||||
Cash and investments: | ||||||||
Fixed maturity securities: | ||||||||
Available for sale, at market (amortized cost: 2002$3,560,684; 2001$3,101,040) | $ | 3,326,799 | $ | 2,974,761 | ||||
Held for investment, at amortized cost (market: 2002$406,275; 2001$412,378) | 461,200 | 454,605 | ||||||
Equity securities, at market (cost: 2002$19,289; 2001$18,609) | 19,062 | 18,245 | ||||||
Mortgage loans on real estate | 120,050 | 108,181 | ||||||
Derivative instruments | 49,764 | 40,052 | ||||||
Policy loans | 297 | 291 | ||||||
Cash and cash equivalents | 191,244 | 184,130 | ||||||
Total cash and investments | 4,168,416 | 3,780,265 | ||||||
Receivable from other insurance companies |
16 |
83 |
||||||
Premiums due and uncollected | 1,464 | 1,386 | ||||||
Accrued investment income | 32,252 | 22,100 | ||||||
Receivables from related parties | 27,785 | 29,978 | ||||||
Property, furniture and equipment, less allowances for depreciation of $3,366 in 2002 and $3,150 in 2001 | 1,544 | 1,622 | ||||||
Value of insurance in force acquired | 389 | 415 | ||||||
Deferred policy acquisition costs | 552,128 | 492,757 | ||||||
Intangibles, less accumulated amortization of $1,017 in 2002 and $987 in 2001 | 2,118 | 2,148 | ||||||
Deferred income tax asset | 81,840 | 51,244 | ||||||
Federal income taxes recoverable | 3,306 | 4,224 | ||||||
Other assets | 2,721 | 2,365 | ||||||
Assets held in separate account | 3,937 | 3,858 | ||||||
Total assets | $ | 4,877,916 | $ | 4,392,445 | ||||
2
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands, except per share data)
(Unaudited)
|
March 31, 2002 |
December 31, 2001 |
|||||||
---|---|---|---|---|---|---|---|---|---|
Liabilities and Stockholders' Equity (Deficit) | |||||||||
Liabilities: | |||||||||
Policy benefit reserves: | |||||||||
Traditional life and accident and health insurance products | $ | 27,542 | $ | 25,490 | |||||
Annuity and single premium universal life products | 4,368,473 | 3,968,455 | |||||||
Other policy funds and contract claims | 24,354 | 22,046 | |||||||
Amounts due to related party under General Agency Commission and Servicing Agreement | 42,138 | 46,607 | |||||||
Other amounts due to related parties | 33,607 | 22,990 | |||||||
Notes payable | 43,333 | 46,667 | |||||||
Amounts due to reinsurers | 13,636 | 14,318 | |||||||
Amounts due on securities purchased | 198,415 | 66,504 | |||||||
Other liabilities | 34,693 | 32,788 | |||||||
Liabilities related to separate account | 3,937 | 3,858 | |||||||
Total liabilities | 4,790,128 | 4,249,723 | |||||||
Minority interests in subsidiaries: |
|||||||||
Company-obligated mandatorily redeemable preferred securities of subsidiary trusts | 100,155 | 100,155 | |||||||
Stockholders' equity (deficit): |
|||||||||
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: 200214,508,077 shares; 200114,516,974 shares | 14,508 | 14,517 | |||||||
Additional paid-in capital | 57,374 | 57,452 | |||||||
Accumulated other comprehensive loss | (91,636 | ) | (33,531 | ) | |||||
Retained earnings | 6,762 | 3,504 | |||||||
Total stockholders' equity (deficit) | (12,367 | ) | 42,567 | ||||||
Total liabilities and stockholders' equity (deficit) | $ | 4,877,916 | $ | 4,392,445 | |||||
See accompanying notes.
3
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
|
Three Months Ended March 31, |
|||||||
---|---|---|---|---|---|---|---|---|
|
2002 |
2001 |
||||||
Revenues: | ||||||||
Traditional life and accident and health insurance premiums | $ | 2,937 | $ | 3,282 | ||||
Annuity and single premium universal life product charges | 3,017 | 2,661 | ||||||
Net investment income | 51,891 | 25,020 | ||||||
Realized gains (losses) on sales of investments | (1,087 | ) | 156 | |||||
Unrealized gains (losses) on derivatives | 6,023 | (9,238 | ) | |||||
Total revenues | 62,781 | 21,881 | ||||||
Benefits and expenses: |
||||||||
Insurance policy benefits and change in future policy benefits | 2,321 | 2,197 | ||||||
Interest credited to account balances | 36,222 | 13,848 | ||||||
Change in fair value of embedded derivatives | 5,345 | (4,190 | ) | |||||
Interest expense on notes payable | 557 | 896 | ||||||
Interest expense on General Agency Commission and Servicing Agreement | 1,050 | 1,582 | ||||||
Interest expense on amounts due under repurchase agreements | | 951 | ||||||
Interest expense due to reinsurer | 117 | | ||||||
Amortization of deferred policy acquisition costs and value of insurance in force acquired | 7,186 | 439 | ||||||
Other operating costs and expenses | 3,253 | 3,863 | ||||||
Total benefits and expenses | 56,051 | 19,586 | ||||||
Income before income taxes, minority interests and cumulative effect of change in accounting principle | 6,730 | 2,295 | ||||||
Income tax expense |
(1,610 |
) |
(117 |
) |
||||
Income before minority interests and cumulative effect of change in accounting principle | 5,120 | 2,178 | ||||||
Minority interests in subsidiaries: | ||||||||
Earnings attributable to company-obligated mandatorily redeemable preferred securities of subsidiary trusts | (1,862 | ) | (1,862 | ) | ||||
Income before cumulative effect of change in accounting principle | 3,258 | 316 | ||||||
Cumulative effect of change in accounting for derivatives | | (799 | ) | |||||
Net income (loss) | $ | 3,258 | $ | (483 | ) | |||
Earnings (loss) per common share: |
||||||||
Income before accounting change | $ | 0.20 | $ | 0.02 | ||||
Cumulative effect of change in accounting for derivatives | | (0.05 | ) | |||||
Earnings (loss) per common share | $ | 0.20 | $ | (0.03 | ) | |||
Earnings (loss) per common shareassuming dilution: |
||||||||
Income before accounting change | $ | 0.18 | $ | 0.02 | ||||
Cumulative effect of change in accounting for derivatives | | (0.05 | ) | |||||
Earnings (loss) per common shareassuming dilution | $ | 0.18 | $ | (0.03 | ) | |||
See accompanying notes.
4
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, 2001 | $ | 625 | $ | 14,530 | $ | 57,577 | $ | (16,876 | ) | $ | 2,796 | $ | 58,652 | |||||||
Comprehensive income: | ||||||||||||||||||||
Net loss for period | | | | | (483 | ) | (483 | ) | ||||||||||||
Change in net unrealized investment gains/losses | | | | 6,575 | | 6,575 | ||||||||||||||
Total comprehensive income | 6,092 | |||||||||||||||||||
Issuance of 4,500 shares of common stock | | 5 | 29 | | | 34 | ||||||||||||||
Balance at March 31, 2001 | $ | 625 | $ | 14,535 | $ | 57,606 | $ | (10,301 | ) | $ | 2,313 | $ | 64,778 | |||||||
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 | ) | ||||||
See accompanying notes.
5
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
|
Three months ended March 31, |
||||||||
---|---|---|---|---|---|---|---|---|---|
|
2002 |
2001 |
|||||||
Operating activities | |||||||||
Net income (loss) | $ | 3,258 | $ | (483 | ) | ||||
Cumulative effect of change in accounting for derivatives | | 799 | |||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||
Adjustments related to interest sensitive products: | |||||||||
Interest credited to account balances | 36,222 | 13,848 | |||||||
Annuity and single premium universal life product charges | (3,017 | ) | (2,661 | ) | |||||
Change in fair value of embedded derivatives | 5,345 | (4,190 | ) | ||||||
Increase in traditional life insurance and accident and health reserves | 2,052 | 1,616 | |||||||
Policy acquisition costs deferred | (41,714 | ) | (30,188 | ) | |||||
Amortization of deferred policy acquisition costs | 7,160 | 360 | |||||||
Provision for depreciation and other amortization | 272 | 291 | |||||||
Amortization of discount and premiums on fixed maturity securities and derivative instruments | (6,303 | ) | 5,459 | ||||||
Realized losses (gains) on sales of investments | 1,087 | (156 | ) | ||||||
Unrealized losses (gains) on derivatives | (6,023 | ) | 9,238 | ||||||
Deferred income tax expense (benefit) | 692 | (2,580 | ) | ||||||
Reduction of amounts due to related party under General Agency Commission and Servicing Agreement | (4,469 | ) | (4,198 | ) | |||||
Changes in other operating assets and liabilities: | |||||||||
Accrued investment income | (10,152 | ) | (8,098 | ) | |||||
Receivables from related parties | 2,193 | 5,599 | |||||||
Federal income taxes recoverable | 918 | 2,596 | |||||||
Other policy funds and contract claims | 2,308 | 1,419 | |||||||
Other amounts due to related parties | 9,635 | (4,000 | ) | ||||||
Other liabilities | 1,905 | 58,008 | |||||||
Other | (353 | ) | (1,700 | ) | |||||
Net cash provided by operating activities | 1,016 | 40,979 |
6
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
|
Three months ended March 31, |
|||||||
---|---|---|---|---|---|---|---|---|
|
2002 |
2001 |
||||||
Investing Activities |
||||||||
Sales, maturities, or repayments of investments: | ||||||||
Fixed maturity securitiesavailable for sale | 130,990 | 59,703 | ||||||
Equity securities | 492 | 1,200 | ||||||
Mortgage loans on real estate | 481 | | ||||||
131,963 | 60,903 | |||||||
Acquisition of investments: |
||||||||
Fixed maturity securitiesavailable for sale | (440,610 | ) | (190,694 | ) | ||||
Equity securities | (1,172 | ) | (1,169 | ) | ||||
Mortgage loans on real estate | (12,350 | ) | | |||||
Derivative instruments | (22,199 | ) | (21,336 | ) | ||||
Policy loans | (6 | ) | (18 | ) | ||||
(476,337 | ) | (213,217 | ) | |||||
Purchases of property, furniture and equipment |
(138 |
) |
(215 |
) |
||||
Net cash used in investing activities | (344,512 | ) | (152,529 | ) | ||||
Financing activities |
||||||||
Receipts credited to annuity and single premium universal life policyholder account balances | 421,048 | 500,277 | ||||||
Return of annuity and single premium universal life policyholder account balances | (66,335 | ) | (47,596 | ) | ||||
Decrease in amounts due under repurchase agreements | | (110,000 | ) | |||||
Repayments of notes payable | (3,334 | ) | | |||||
Amounts due to reinsurers | (682 | ) | 8,120 | |||||
Net proceeds (payments) from issuance/acquisition of common stock | (87 | ) | 34 | |||||
Net cash provided by financing activities | 350,610 | 350,835 | ||||||
Increase in cash and cash equivalents | 7,114 | 239,285 | ||||||
Cash and cash equivalents at beginning of period |
184,130 |
175,724 |
||||||
Cash and cash equivalents at end of period | $ | 191,244 | $ | 415,009 | ||||
Supplemental disclosures of cash flow information | ||||||||
Cash paid during period for: | ||||||||
Interest on notes payable and repurchase agreements | $ | 500 | $ | 1,868 | ||||
Income taxeslife subsidiaries | | 100 | ||||||
Non-cash financing and investing activities: | ||||||||
Bonus interest deferred as policy acquisition costs | 6,740 | 3,531 |
See accompanying notes.
7
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(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, 2002, are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. For further information, refer to our consolidated financial statements and notes for the year ended December 31, 2001 included in our annual report on Form 10-K.
2. Accounting Changes
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and other Intangible Assets. Under the new Statements, goodwill and intangibles with indefinite lives will no longer be amortized but will be subject to impairment tests at least on an annual basis. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Value of insurance in force acquired will continue to be amortized over the expected future gross profits of the acquired block of business. The adoption of these Statements on January 1, 2002 did not have a material impact to the Company. The Company's intangible assets at March 31, 2002 consist of deferred debt and trust preferred security costs of $1,785,000 and other intangible assets not subject to amortization of $333,000 related to insurance licences acquired in connection with the purchase of an inactive life insurance company in 1996.
3. 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 Form 10-K for December 31, 2001.
During the three months ended March 31, 2002 and 2001, the Company paid renewal commissions to the Service Company of $5,519,000 and $6,572,000, respectively, which were used to reduce the amount due under the General Agency Commission and Servicing Agreement, and amounts attributable to imputed interest.
During 1999, the Company agreed to loan to the Service Company up to $50,000,000 pursuant to a promissory note bearing interest at the "reference rate" of the financial institution which is the Company's principal lender. Principal and interest are payable quarterly over five years from the date of the advance. At March 31, 2002 and December 31, 2001, amounts receivable from the Service Company totaled $27,042,000 and $29,139,000, respectively.
4. Reclassifications
Certain amounts in the unaudited consolidated financial statements for the period ended March 31, 2001 have been reclassified to conform to the financial statement presentation for March 31, 2002 and December 31, 2001.
8
5. Earnings Per Share
The following table sets forth the computation of earnings per common share and earnings per common shareassuming dilution:
|
Three Months Ended March 31, |
|||||||
---|---|---|---|---|---|---|---|---|
|
2002 |
2001 |
||||||
|
(Dollars in thousands, except per share data) |
|||||||
Numerator: | ||||||||
Income before cumulative effect of change in accounting principle | $ | 3,258 | $ | 316 | ||||
Cumulative effect of change in accounting for derivative instruments | | (799 | ) | |||||
Net income (loss) | $ | 3,258 | $ | (483 | ) | |||
Denominator: | ||||||||
Weighted average shares outstanding | 14,513,417 | 14,531,842 | ||||||
Participating preferred stock | 1,875,000 | 1,875,000 | ||||||
Denominator for earnings (loss) per common share | 16,388,417 | 16,406,842 | ||||||
Effect of dilutive securities: | ||||||||
Warrants | 9,307 | 4,932 | ||||||
Stock options and management subscription rights | 403,065 | 952,913 | ||||||
Deferred compensation agreements | 1,088,354 | 753,111 | ||||||
Denominator for earnings (loss) per common shareassuming dilution | 17,889,143 | 18,117,798 | ||||||
Earnings (loss) per common share: | ||||||||
Income before cumulative effect of change in accounting principle | $ | 0.20 | $ | 0.02 | ||||
Cumulative effect of change in accounting for derivatives | | (0.05 | ) | |||||
Earnings (loss) per common share | $ | 0.20 | $ | (0.03 | ) | |||
Earnings (loss) per common shareassuming dilution: | ||||||||
Income before cumulative effect of change in accounting principle | $ | 0.18 | $ | 0.02 | ||||
Cumulative effect of change in accounting for derivatives | | (0.05 | ) | |||||
Earnings (loss) per common shareassuming dilution | $ | 0.18 | $ | (0.03 | ) | |||
9
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, 2002, and the consolidated results of operations for the periods ended March 31, 2002 and 2001, and where appropriate, factors that may affect future financial performance. This analysis should be read in conjunction with the unaudited consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q, and the audited consolidated financial statements, notes thereto and selected consolidated financial data appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2001.
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:
Results of Operations
Three Months Ended March 31, 2002 and 2001
Our business has continued to grow rapidly, with reserves for annuities and single premium universal life policies increasing from $3,968,455,000 at December 31, 2001 to $4,368,473,000 at March 31, 2002. Deposits from sales of annuities and single premium universal life policies during the three months ended March 31, 2002, before reinsurance ceded, increased 22% to $610,526,000 compared to $500,277,000 for the same period in 2001. Deposits for the first quarter of 2002 were reduced by $189,478,000 for amounts ceded to an affiliate insurance company as part of a coinsurance agreement as described in Note 5 of the Notes to Consolidated Financial Statements found in the Annual Report on Form 10-K. The continued strong production is a direct result of the growth in our agency force which increased from 22,000 agents at December 31, 2000 to 34,000 agents at December 31, 2001 and 37,000 agents at March 31, 2002.
10
Our net income increased $2,942,000 to $3,258,000 for the first quarter of 2002, compared to income before cumulative effect of change in accounting principle of $316,000 for the same period in 2001. This increase is primarily attributable to an increase in net investment income during the first quarter of 2002. Following is a reconciliation of net income to adjusted operating income which excludes the impact of Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as well as realized gains and losses on investments, neither of which management believes are indicative of operating trends.
|
2002 |
2001 |
|||||||
---|---|---|---|---|---|---|---|---|---|
Net income (loss) | $ | 3,258 | $ | (483 | ) | ||||
Adjustments: | |||||||||
Net realized gains (losses) on sales of investments | (289 | ) | 101 | ||||||
Impact of SFAS No.133 | |||||||||
Unrealized gains (losses) on derivatives | 3,915 | (6,005 | ) | ||||||
Adjustments for changes in amortization of deferred acquisition costs | 45 | 2,241 | |||||||
Change in fair value of embedded derivatives | (3,474 | ) | 2,723 | ||||||
Cumulative effect of change in accounting for derivatives | | (799 | ) | ||||||
Adjusted net operating income | $ | 3,061 | $ | 1,256 | |||||
Adjusted net operating income per common share: | |||||||||
Earnings per common share | $ | 0.19 | $ | 0.08 | |||||
Earnings per common shareassuming dilution | $ | 0.17 | $ | 0.07 | |||||
Weighted average common shares: |
|||||||||
Earnings per common share | 16,388,417 | 16,406,842 | |||||||
Earnings per common shareassuming dilution | 17,889,143 | 18,117,798 |
The adjustments for net realized gains (losses) on investments and the impact of SFAS No. 133 are net of income taxes attributable to those items. The adjustment for net realized gains (losses) is also net of adjustments for changes in amortization of deferred acquisition costs.
Traditional life and accident and health insurance premiums decreased 11% to $2,937,000 for the first quarter of 2002, compared to $3,282,000 for the same period in 2001. These changes are principally attributable to corresponding changes in direct sales of life products.
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 13% to $3,017,000 for the first quarter of 2002, compared to $2,661,000 for the same period in 2001. These increases are principally attributable to the growth in our annuity business and correspondingly, an increase in annuity policy withdrawals subject to surrender charges. Withdrawals from annuity and single premium universal life policies were $66,335,000 for the three months ended March 31, 2002 compared to $47,596,000 for the same period in 2001.
Net investment income increased $26,871,000 to $51,891,000 in the first quarter of 2002, compared to $25,020,000 for the same period in 2001. Invested assets (amortized cost basis) increased 13% to $4,201,935,000 at March 31, 2002 compared to $3,720,435,000 at December 31, 2001, while the effective yield earned on invested assets (excluding cash and cash equivalents) was 7.1% for the three months ended March 31, 2002 compared to 7.3% for the same period in 2001. Net investment income also includes amounts related to the options we hold to fund the annual index credits on our equity index annuities. This includes gains received on such options, which are passed on to the equity index policyholders, and the cost of such options, which is amortized ratably over the life of the options. Gains received on options held for equity index policies were $1,687,000 and $854,000 for the three
11
months ended March 31, 2002 and 2001, respectively. Costs of amortization of such options were $16,926,000 and $17,464,000 for the three months ended March 31, 2002 and 2001 respectively.
Realized gains (losses) on the sale of investments consisted of net realized losses of $1,087,000 in the first quarter of 2002 compared to realized gains of $156,000 for the same period in 2001. In the first three months of 2002, net realized losses of $1,087,000 included: (i) realized gains of $913,000 on the sale of certain corporate fixed maturity and equity securities and (ii) the write down of $2,000,000 in the fair value of a security in recognition of an "other than temporary" impairment.
Unrealized gains (losses) on derivatives representing the change in fair value on the options we hold to fund the annual index credits on our equity index annuities were $6,023,000 in the first quarter of 2002, and ($9,238,000) for the three months ended March 31, 2001. These amounts arise from the adoption of SFAS No. 133 as of January 1, 2001, which requires the recognition of unrealized gains (losses) from the change in fair value of derivative securities that we hold even though any ultimate gain realized will be credited to the underlying policyholder. No losses will be incurred above the cost of the options, which we amortize as a charge against investment income over their one-year lives. See Note 1 of the Notes to Consolidated Financial Statements found in the Annual Report on Form 10-K.
Traditional life and accident and health insurance benefits increased 6% to $2,321,000 in the first quarter of 2002, compared to $2,197,000 for the same period in 2001. These increases are principally attributable to an increase in death benefits and surrenders.
Interest credited to annuity policyholder account balances increased $22,374,000 to $36,222,000 in the first quarter of 2002, compared to $13,848,000 for the same period in 2001. These increases are principally attributable to the increase in annuity liabilities.
The amounts are also impacted by changes in the weighted average crediting rates for our annuity liabilities, which are summarized as follows:
|
Fixed Rate (without bonuses) |
Fixed Rate (with bonuses) |
Equity Index Credits |
Equity Index Option Costs |
|||||
---|---|---|---|---|---|---|---|---|---|
March 31, 2002 | 5.49 | % | 6.04 | % | 3.04 | % | 4.01 | % | |
March 31, 2001 | 5.61 | % | 6.22 | % | 0.98 | % | 5.02 | % |
The above crediting rates on our fixed rate annuities includes both multi-year rate guaranteed and annually adjustable rate products. Such rates are disclosed with and without the impact of first-year bonuses paid to policyholders. Generally such bonuses are deducted from the commissions paid to sales agents on such products and deferred as policy acquisition costs. With respect to our equity index annuities, the weighted average option costs represent the expenses we incur to fund the annual index credits on the equity index business. Gains realized on such options are recorded in net investment income, and are also reflected as an expense in interest credited to annuity policyholder account balances. Option costs are amortized as a charge against net investment income.
Change in fair value of embedded derivatives was $5,345,000 in the first quarter of 2002 and $(4,190,000) for the three months ended March 31, 2001. These amounts arise from the adoption of SFAS No. 133 as of January 1, 2001, which requires recognition of the change in estimated fair value of equity index annuity reserves. Under SFAS No. 133, the annual crediting liabilities on our equity index annuities are treated as a "series of embedded derivatives" over the life of the applicable contracts. We are required to estimate the fair value of these future liabilities by projecting the cost of the annual options we will purchase in the future to fund the index credits. See Note 1 of the Notes to Consolidated Financial Statements found in the Annual Report on Form 10-K.
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Interest expense on notes payable decreased 38% to $557,000 for the first quarter of 2002, compared to $896,000 for the same period in 2001. This decrease is attributable to a decrease in the average cost of funds borrowed.
Interest expense on General Agency Commission and Servicing Agreement decreased 34% to $1,050,000 for the first quarter of 2002, compared to $1,582,000 for the same period in 2001. The decrease for the first quarter of 2002 was principally attributable to a decrease in the amounts due under General Agency Commission and Servicing Agreement. See Note 8 of the Notes to Consolidated Financial Statements found in the Annual Report on Form 10-K..
Interest expense on amounts due under repurchase agreements was $951,000 for the first quarter of 2001. There was no interest expense on amounts due under repurchase agreements for the first quarter of 2002 as no borrowings were outstanding during the quarter.
Amortization of deferred policy acquisition costs and value of insurance in force acquired increased $6,747,000 to $7,186,000 in the first quarter of 2002, compared to $439,000 for the same period in 2001. This increase is primarily due to: (i) growth in our annuity business as discussed above; and (ii) the introduction of multi-year rate guaranteed products with shorter expected lives. See Note 1 of the Notes to Consolidated Financial Statements found in the Annual Report on Form 10-K.
Other operating costs and expenses decreased 16% to $3,253,000 in the first quarter of 2002, compared to $3,863,000 for the same period in 2001. This decrease is principally attributable to a decrease in salary expense, related benefits and certain marketing expenses.
Income tax expense increased $1,493,000 to $1,610,000 in the first quarter of 2002, compared to $117,000 for the same period in 2001. The increase is principally due to an increase in pretax income. The effective income tax rate for the 2002 periods is less than the applicable statutory federal income tax rate of 35% because of (i) tax benefits for earnings attributable to redeemable preferred securities of subsidiary trusts and (ii) state income tax benefits on the parent company's non-life loss (life insurance subsidiary taxable income is taxed at the 35% federal income tax rate and not generally subject to state income taxes).
Financial Condition
Investments
Cash and investments increased 10% to $4,168,416,000 at March 31, 2002 compared to $3,780,265,000 at December 31, 2001as a result of the growth in our annuity business discussed above offset by a decrease in the fair value of our available-for-sale fixed maturity and equity securities. At March 31, 2002, the fair value of our available-for-sale fixed maturity and equity securities was $234,112,000 less than the amortized cost of those investments, compared to $126,643,000 at December 31, 2001. At March 31, 2002, the amortized cost of our fixed maturity securities held for investment exceeded the market value by $54,925,000, compared to $42,227,000 at December 31, 2001. The increase in the net unrealized investment losses at March 31, 2002 compared to December 31, 2001 is related to an increase of approximately 35 basis points in market interest rates. Such unrealized losses are recognized in the accumulated other comprehensive loss component of stockholders' equity (deficit), net of related changes in the amortization patterns of deferred policy acquisition costs and deferred income taxes. The resulting deferred tax asset has been reviewed by management and no related valuation allowance was considered necessary at March 31, 2002. However, if management were to determine that an allowance was required in subsequent 2002 quarters, such amounts would increase the accumulated other comprehensive loss component of stockholders' equity (deficit).
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Our investment portfolio is summarized in the tables below:
|
March 31, 2002 |
December 31, 2001 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Carrying Amount |
Percent |
Carrying Amount |
Percent |
|||||||||
|
(Dollars in thousands) |
||||||||||||
Fixed maturities: | |||||||||||||
United States Government and agencies | $ | 2,394,034 | 57.4 | % | $ | 2,087,484 | 55.2 | % | |||||
State, municipal, and other governments | 5,033 | 0.1 | % | 5,099 | 0.1 | % | |||||||
Public utilities | 37,468 | 0.9 | % | 38,472 | 1.0 | % | |||||||
Corporate securities | 435,182 | 10.4 | % | 473,556 | 12.5 | % | |||||||
Redeemable preferred stocks | 92,158 | 2.2 | % | 92,649 | 2.5 | % | |||||||
Mortgage and asset-backed securities | |||||||||||||
Government | 620,988 | 14.9 | % | 528,325 | 14.0 | % | |||||||
Non-Government | 203,136 | 4.9 | % | 203,781 | 5.4 | % | |||||||
Total fixed maturities | 3,787,999 | 90.8 | % | 3,429,366 | 90.7 | % | |||||||
Equity securities | 19,062 | 0.5 | % | 18,245 | 0.5 | % | |||||||
Mortgage loans | 120,050 | 2.9 | % | 108,181 | 2.9 | % | |||||||
Derivative instruments | 49,764 | 1.2 | % | 40,052 | 1.1 | % | |||||||
Policy loans | 297 | 0.0 | % | 291 | 0.0 | % | |||||||
Cash and cash equivalents | 191,244 | 4.6 | % | 184,130 | 4.8 | % | |||||||
Total cash and investments | $ | 4,168,416 | 100.0 | % | $ | 3,780,265 | 100.0 | % | |||||
The table below presents our fixed maturity securities by NAIC designation and the equivalent ratings of the nationally recognized securities rating organizations.
|
|
March 31, 2002 |
||||||
---|---|---|---|---|---|---|---|---|
NAIC Designation |
Rating Agency Equivalent |
Carrying Amount |
Percent |
|||||
|
|
(Dollars in thousands) |
||||||
1 | Aaa/Aa/A | $ | 3,376,487 | 89.2 | % | |||
2 | Baa | 361,496 | 9.5 | % | ||||
3 | Ba | 39,584 | 1.0 | % | ||||
4 | B | 10,432 | 0.3 | % | ||||
5 | Caa and lower | | | |||||
6 | In or near default | | | |||||
Total fixed maturities | $ | 3,787,999 | 100.0 | % | ||||
During 2001, we began a commercial mortgage loan program. At March 31, 2002, we held $120,050,000 of mortgage loans compared to $108,181,000 at December 31, 2001. These mortgage loans are diversified as to property type, location, and loan size, and are collateralized by the related properties. Our mortgage lending policies establish limits on the amount that can be loaned to one borrower and require diversification by geographic location and collateral type. At March 31, 2002, the
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commercial mortgage loan portfolio is diversified by geographic region and specific collateral property type as follows:
|
March 31, 2002 |
||||||
---|---|---|---|---|---|---|---|
|
Carrying Amount |
Percent |
|||||
|
(Dollars in thousands) |
||||||
Geographic distribution | |||||||
East North Central | $ | 10,576 | 8.8 | % | |||
East South Central | 15,969 | 13.3 | % | ||||
Middle Atlantic | 18,264 | 15.2 | % | ||||
New England | 3,484 | 2.9 | % | ||||
South Atlantic | 50,000 | 41.7 | % | ||||
West North Central | 21,757 | 18.1 | % | ||||
Total | $ | 120,050 | 100.0 | % | |||
|
March 31, 2002 |
||||||
---|---|---|---|---|---|---|---|
|
Carrying Amount |
Percent |
|||||
|
(Dollars in thousands) |
||||||
Property type distribution | |||||||
Office | $ | 43,300 | 36.1 | % | |||
Retail | 29,946 | 24.9 | % | ||||
Industrial | 28,491 | 23.7 | % | ||||
Hotel | 13,084 | 10.9 | % | ||||
Mixed use/other | 5,229 | 4.4 | % | ||||
Total | $ | 120,050 | 100.0 | % | |||
Liquidity
We did not issue any debt securities during the first three months of 2002, although certain restrictive covenants of our credit agreement related to the Company's notes payable were amended during the quarter. Management may be required to take certain actions to remain in compliance with the amended covenants. For information related to the Company's notes payable and requirements under the related credit agreement, see Note 7 of the Notes to Consolidated Financial Statements found in the Annual Report on Form 10-K.
The statutory capital and surplus of our life insurance subsidiary at March 31, 2002 was $183,765,000. The life insurance subsidiary made surplus note interest payments to us of $660,000 during the three months ended March 31, 2002. For the remainder of 2002, up to $17,800,000 can be distributed by the life insurance subsidiary as dividends without prior regulatory approval. Dividends and surplus note payments may be made only out of earned surplus, and all surplus note payments are subject to prior approval by regulatory authorities. Our life insurance subsidiary had $13,958,000 of earned surplus at March 31, 2002.
The transfer of funds by our life insurance subsidiary is also restricted by certain covenants in our loan agreements, which, among other things, require the life insurance subsidiary to maintain statutory capital and surplus (including asset valuation and interest maintenance reserves) equal to a minimum of $140,000,000 plus 25% of statutory net income and 75% of the capital contributions to life insurance subsidiary for periods subsequent to December 31, 2000. Under the most restrictive of these limitations, none of our earned surplus at March 31, 2002 would be available for distribution by American Equity Life to the parent company in the form of dividends or other distributions.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We seek to invest our available funds in a manner that will maximize shareholder value and fund future obligations to policyholders and debtors, subject to appropriate risk considerations. We seek to meet this objective through investments that: (i) consist predominately of investment grade fixed maturity securities of very high credit quality; (ii) have projected returns which satisfy our spread targets; and (iii) have characteristics which support the underlying liabilities. Many of our products incorporate surrender charges, market interest rate adjustments or other features to encourage persistency.
We seek to maximize the total return on our available for sale investments through active investment management. Accordingly, we have determined that our available for sale portfolio of fixed maturity securities is available to be sold in response to: (i) changes in market interest rates; (ii) changes in relative values of individual securities and asset sectors; (iii) changes in prepayment risks; (iv) changes in credit quality outlook for certain securities; (v) liquidity needs: and (vi) other factors. We have a portfolio of held for investment securities which consists principally of zero coupon bonds issued by U.S. government agencies. These securities are purchased to secure long-term yields which meet our spread targets and support the underlying liabilities.
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 March 31, 2002, the effective duration of our cash and invested assets backing our insurance liabilities was approximately 10.2 years and the estimated duration of our insurance liabilities was approximately 6.8 years.
If interest rates were to increase 10% from levels at March 31, 2002, 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 $233,064,000 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
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differences may be material. Because we actively manage our investments and liabilities, our net exposure to interest rates can vary over time.
At March 31, 2002, 59.9% of our fixed income securities have call features and 4.7% are subject to current redemption. Another 45.6% will become subject to call redemption through December 31, 2002. During the first quarter of 2002, we received $15,000,000 in net redemption proceeds related to the exercise of such call options. We have reinvestment risk related to these redemptions to the extent we cannot reinvest the net proceeds in assets with credit quality and yield characteristics similar to the redeemed bonds. Such reinvestment risk typically occurs in a declining rate environment. Should rates decline to levels which tighten the spread between our average portfolio yield and average cost of credited income on our annuity liability reserves, we have the ability to reduce crediting rates on most of our annuity liabilities to maintain the spread at our targeted level. Approximately 71.2% of our annuity liabilities are subject to annual adjustment of the applicable crediting rates at our discretion, limited by minimum guaranteed crediting rates of 3 to 4%.
With respect to our equity index business, we purchase call options on the applicable equity indexes to fund the annual index credits on such annuities. These options are primarily one-year instruments purchased to match the funding requirements of the underlying policies. Our risk associated with the current options we hold is limited to the cost of such options, which we amortize in full over their one-year lives. Market value changes associated with those investments are substantially offset by an increase or decrease in the amounts added to policyholder account balances for equity-indexed products. In the first quarter of 2002, we realized gains of $1,687,000 on our equity index options, and we credited $1,801,000 to policy holders. On the respective anniversary dates of the equity index policies, we purchase new one-year call options to fund the next annual index credits. The risk associated with these prospective purchases is the uncertainty of the cost, which will determine whether we are able to earn our spread on our equity index business. This is a risk we manage through the terms of our equity index annuities, which permit us to change annual participation rates, asset fees, and/or caps, subject to guaranteed minimums. By reducing participation rates, asset fees or caps, we can limit option costs to budgeted amounts except in cases where the minimum guarantees would prevent further reductions. Based upon actuarial testing conducted as a part of the design of our equity index product, we believe the risk that minimum guarantees would prevent us from controlling option costs is negligible.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 10, 2002 | AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY |
|||
By: |
/s/ DAVID J. NOBLE David J. Noble, Chief Executive Officer (Principal Executive Officer) |
|||
By: |
/s/ WENDY L. CARLSON Wendy L. Carlson, Chief Financial Officer (Principal Financial Officer) |
|||
By: |
/s/ TED M. JOHNSON Ted M. Johnson, Vice PresidentAccounting (Principal Accounting Officer) |
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