UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2005 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to . |
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Commission File Number : 001-31911
American Equity Investment Life Holding Company
(Exact name of registrant as specified in its charter)
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Iowa |
42-1447959 |
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(State of Incorporation) |
(I.R.S. Employer Identification No.) |
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5000 Westown Parkway,
Suite 440 |
50266 |
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(Address of principal executive offices) |
(Zip Code) |
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Registrant’s telephone number, including area code |
(515) 221-0002 |
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(Telephone) |
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Securities registered pursuant to Section 12(b) of the Act: |
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Title of each class |
Name of each exchange on which registered |
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Common stock, par value $1 |
New York Stock Exchange |
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1 |
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this From 10-K. o
Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
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Large accelerate filer o |
Accelerated filer x |
Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes o No x
Aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $412,329,840 based on the closing price of $11.88 per share, the closing price of the common stock on the New York Stock Exchange on June 30, 2005.
Shares of common stock outstanding as of February 28, 2006: 55,557,430
Documents incorporated by reference: Portions of the registrant’s definitive proxy statement for the annual meeting of shareholders to be held June 8, 2006, which will be filed within 120 days after December 31, 2005, are incorporated by reference into Part III of this report.
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2005
TABLE OF CONTENTS
We were formed on December 15, 1995 to develop, market, issue and administer annuities and life insurance. We are a full service underwriter of a broad array of annuity and insurance products through our two life insurance subsidiaries, American Equity Investment Life Insurance Company (“American Equity Life”) and American Equity Investment Life Insurance Company of New York. Our business consists primarily of the sale of fixed rate and index annuities and, accordingly, we have only one business segment. Our business strategy is to focus on our annuity business and earn predictable returns by managing investment spreads and investment risk. We are currently licensed to sell our products in 49 states and the District of Columbia.
Investor related information, including periodic reports filed on Forms 10-K, 10-Q and 8-K and all amendments to such reports may be found on our internet website at www.american-equity.com as soon as reasonably practicable after such reports are filed with the SEC. In addition, we have available on our website our: (i) code of business conduct and ethics; (ii) audit committee charter; (iii) compensation committee charter; (iv) nominating/corporate governance committee charter and (v) corporate governance guidelines.
Our target market includes the group of individuals ages 45-75 who are seeking to accumulate tax-deferred savings. We believe that significant growth opportunities exist for annuity products because of favorable demographic and economic trends. According to the U.S. Census Bureau, there were 35 million Americans age 65 and older in 2000, representing 12% of the U.S. population. By 2030, this sector of the population is expected to increase to 20% of the total population. Our fixed rate and index annuity products are particularly attractive to this group as a result of the guarantee of principal with respect to those products, competitive rates of credited interest, tax-deferred growth and alternative payout options.
According to LIMRA International, total industry sales of individual annuities were $216.5 billion in 2005 and $220.8 billion in 2004. Fixed annuity sales, which include index and fixed rate annuities were $78.9 billion in 2005 and $87.9 billion in 2004. Sales of index annuities increased 18% to $27.3 billion in 2005 from $23.1 billion in 2004. We believe index annuities, which have a crediting rate linked to the change in various indices, appeal to policyholders interested in participating in returns linked to equity and/or bond markets without the risk of loss of principal. Our wide range of fixed rate and index annuity products has enabled us to enjoy favorable growth during volatile equity and bond markets.
Our business strategy is to focus on our annuity business and earn predictable returns by managing investment spreads and investment risk. Key elements of this strategy include the following:
Expand our Current Independent Agency Network. We believe that our successful relationships with approximately 70 national marketing organizations and, through them, 52,000 independent agents, represent a significant competitive advantage. We intend to grow and enhance our core distribution channel by expanding our relationships with national marketing organizations and independent agents, by addressing their product needs and by providing the highest quality service possible.
Continue to Introduce Innovative and Competitive Products. We intend to be at the forefront of the fixed and index annuity industry in developing and introducing innovative and new competitive
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products. We were the first companys to introduce an index annuity which allowed policyholders to earn returns linked to the Dow Jones Indexsm. We were also one of the first companies to offer an index annuity offering a choice among interest crediting strategies which includes both equity and bond indices as well as a traditional fixed rate strategy. We believe that our continued focus on anticipating and being responsive to the product needs of our independent agents and policyholders will lead to increased customer loyalty, revenues and profitability.
Use our Expertise to Achieve Targeted Spreads on Annuity Products. We have had a successful track record in achieving the targeted spreads on our annuity products. We intend to leverage our experience and expertise in managing the investment spread during a range of interest rate environments to achieve our targeted spreads.
Maintain our Profitability Focus and Improve Operating Efficiency. We are committed to improving our profitability by advancing the scope and sophistication of our investment management and spread capabilities and continuously seeking out operating efficiencies within our company. We have made substantial investments in technology improvements to our business, including the development of a password-secure website which allows our independent agents to receive proprietary sales, marketing and product materials and the implementation of software designed to enable us to operate in a completely paperless environment with respect to policy administration. Further, we have implemented competitive incentive programs for our national marketing organizations, agents and employees to stimulate performance.
Take Advantage of the Growing Popularity of Index Products. We believe that the growing popularity of index products that allow equity and bond market participation without the risk of loss of the premium deposit presents an attractive opportunity to grow our business. We intend to capitalize on our reputation as a leading marketer of index annuities in this expanding segment of the annuity market.
Our products include fixed rate annuities, index annuities, a variable annuity and life insurance.
Fixed Rate Annuities
These products, which accounted for approximately 7% and 16% of our total annuity deposits collected for the years ended December 31, 2005 and 2004, respectively, include single premium deferred annuities (“SPDAs”), flexible premium deferred annuities (“FPDAs”) and single premium immediate annuities (“SPIAs”). An SPDA generally involves the tax-deferred accumulation of interest on a single premium paid by the policyholder. The annuitant may elect to take the proceeds of the annuity either in a single payment or in a series of payments for life, for a fixed number of years, or for a combination of these payment options. We also sell SPDAs under which the annual crediting rate is guaranteed for up to a five-year period. FDPAs are similar to SPDAs in many respects, except that the FPDA allows additional deposits in varying amounts by the policyholder without a new application.
Our SPDAs and FPDAs (excluding the multi-year rate guaranteed products) generally have an interest rate (the “crediting rate”) that is guaranteed by us for the first policy year. After the first policy year, we have the discretionary ability to change the crediting rate once annually to any rate at or above a guaranteed minimum rate. The guaranteed rate on our non-multi-year rate guaranteed policies in force and new issues ranges from 2.20% to 4.00%. The guaranteed rate on our multi-year rate guaranteed policies in force ranges from 3.05% to 7.00%. The initial crediting rate is largely a function of the interest rate we can earn on invested assets acquired with new annuity deposits and the rates offered on similar products by our competitors. For subsequent adjustments to crediting rates, we take into account the yield
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on our investment portfolio, annuity surrender assumptions, competitive industry pricing and crediting rate history for particular groups of annuity policies with similar characteristics.
Approximately 96%, 99% and 92% of our fixed rate annuity sales during the years ended December 31, 2005, 2004 and 2003, respectively, were “bonus” products. The initial crediting rate on these products specifies a bonus crediting rate ranging from 1% to 7% of the annuity deposit. After the first year, the bonus interest portion of the initial crediting rate is automatically discontinued, and the renewal crediting rate is established. Generally, there is a compensating adjustment in the commission paid to the agent to offset the first year interest bonus. In all situations, we obtain an acknowledgment from the policyholder, upon policy issuance, that a specified portion of the first year interest will not be paid in renewal years. As of December 31, 2005, crediting rates on our outstanding fixed rate annuities generally ranged from 3.00% to 5.10%, excluding interest bonuses guaranteed for the first year. The average crediting rate on fixed rate annuities including interest bonuses at December 31, 2005 was 4.36%, and the average crediting rate on those products excluding bonuses was 4.18%.
Policyholders are typically permitted to withdraw all or a part of the premium paid, plus accrued interest credited to the account (the “accumulation value”), subject to the assessment of a surrender charge for withdrawals in excess of specified limits. Most of our SPDAs and FPDAs provide for penalty-free withdrawals of up to 10% of the accumulation value each year after the first year, subject to limitations. Withdrawals in excess of allowable penalty-free amounts are assessed a surrender charge during a penalty period which generally ranges from 3 to 15 years after the date the policy is issued. This surrender charge is initially 8.25% to 25% of the accumulation value and generally decreases by approximately one to two percentage points per year during the surrender charge period. Surrender charges are set at levels aimed at protecting us from loss on early terminations and reducing the likelihood of policyholders terminating their policies during periods of increasing interest rates. This practice lengthens the effective duration of the policy liabilities and enhances our ability to maintain profitability on such policies.
Our SPIAs are designed to provide a series of periodic payments for a fixed period of time or for life, according to the policyholder’s choice at the time of issue. The amounts, frequency, and length of time of the payments are fixed at the outset of the annuity contract. SPIAs are often purchased by persons at or near retirement age who desire a steady stream of payments over a future period of years. The implicit interest rate on SPIAs is based on market conditions when the policy is issued. The implicit interest rate on our outstanding SPIAs averaged 3.60% and 3.83% at December 31, 2005 and 2004, respectively.
Index Annuities
Index annuities accounted for approximately 93% and 84% of the total annuity deposits collected for the years ended December 31, 2005 and 2004, respectively. These products allow policyholders to link returns to the performance of a particular index without the risk of loss of their principal. Most of these products allow policyholders to transfer funds once a year among several different crediting strategies, including one or more index based strategies and a traditional fixed rate strategy.
The annuity contract value is equal to the premiums paid increased for returns which are based upon a percentage (the “participation rate”) of the annual appreciation (based in certain situations on monthly averages or monthly point-to-point calculations) in a recognized index or benchmark. The participation rate, which we may reset annually, generally varies among the index products from 50% to 100%. Some products apply an overall limit (or “cap”), ranging from 5% to 13% , on the amount of annual interest the policyholder may earn in any one contract year, and the applicable cap may also be adjusted annually subject to stated minimums. In addition, some of the products also have an “asset fee” ranging from 1.5% to 5%, which is deducted from the interest to be credited. The minimum guaranteed contract values are equal to 80% to 100% of the premium collected plus interest credited at an annual rate ranging from 2%
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to 3.5%. We purchase options on the applicable indices as an investment to provide the income needed to fund the amount of the index credits on the index products. The setting of the participation rates, caps and asset fees is a function of the interest rate we can earn on the invested assets acquired with annuity fund deposits, cost of options and features offered on similar products by competitors. Approximately 66%, 57% and 39% of our index annuity sales for the years ended December 31, 2005, 2004 and 2003, respectively, were “premium bonus” products. The initial annuity deposit on these policies is increased at issuance by the specified premium bonus ranging from 1.5% to 10%. Generally, there is a compensating adjustment in the commission paid to the agent to offset the premium bonus.
The index annuities provide for penalty-free withdrawals of up to 10% of premium or accumulation value (depending on the product) in each year after the first year of the annuity’s term. Other withdrawals are subject to a surrender charge ranging initially from 4.5% to 20% over a surrender period ranging from 5 to 17 years. During the applicable surrender charge period, the surrender charges on some index products remain level, while on other index products, the surrender charges decline by one to two percentage points per year. The annuitant may elect to take the proceeds of the annuity either in a single payment or in a series of payments for life, for a fixed number of years, or a combination of these payment options.
Variable Annuities
Variable annuities differ from fixed rate and index annuities in that the policyholder, rather than the insurance company, bears the investment risk and the policyholder’s return of principal and rate of return are dependent upon the performance of the particular investment option selected by the policyholder. Profits on variable annuities are derived from the fees charged to contract owners rather than from the investment spread.
Life Insurance
These products include traditional ordinary and term, universal life and other interest-sensitive life insurance products. We have approximately $2.8 billion of life insurance in force as of December 31, 2005. We intend to continue offering a complete line of life insurance products for individual and group markets. Premiums related to this business accounted for 2% of the revenues in the year ended December 31, 2005 and 3% of the revenues in the years ended December 31, 2004 and 2003.
Investment activities are an integral part of our business, and net investment income is a significant component of our total revenues. Profitability of many of our products is significantly affected by spreads between interest yields on investments and rates credited on annuity liabilities. Although substantially all credited rates on non-multi-year rate guaranteed SPDAs and FPDAs may be changed annually, subject to minimum guarantees, changes in crediting rates may not be sufficient to maintain targeted investment spreads in all economic and market environments. In addition, competition and other factors, including the potential for increases in surrenders and withdrawals, may limit our ability to adjust or to maintain crediting rates at levels necessary to avoid narrowing of spreads under certain market conditions. For the year ended December 31, 2005, the weighted average yield, computed on the average amortized cost basis of our investment portfolio, was 6.18% and the weighted average cost of our liabilities, excluding interest bonuses guaranteed for the first year of the annuity contract, was 3.70%.
We manage the indexed-based risk component of our index annuities by purchasing call options on the applicable indices to fund the annual index credits on these annuities and by adjusting the participation rates, cap rates and other product features to reflect the change in the cost of such options (which varies based on market conditions). All of such options are purchased to fund the index credits on our index
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annuities at their respective anniversary dates, and new options are purchased at each of the anniversary dates to fund the next annual index credits.
For additional information regarding the composition of our investment portfolio and our interest rate risk management, see Quantitative and Qualitative Disclosures About Market Risk and note 2 to our audited consolidated financial statements.
We market our products through a variable cost brokerage distribution network of approximately 70 national marketing organizations and through them, 52,000 independent agents as of December 31, 2005. We emphasize high quality service to our agents and policyholders along with the prompt payment of commissions to our agents. We believe this has been significant in building excellent relationships with our existing agency force.
Our independent agents and agencies range in profile from national sales organizations to personal producing general agents. We aggressively recruit new agents and expect to continue to expand our independent agency force. In our recruitment efforts, we emphasize that agents have direct access to our executive officers, giving us an edge in recruiting over larger and foreign-owned competitors. We also have favorable relationships with our national marketing organizations, which have enabled us to efficiently sell through an expanded number of independent agents. We are currently licensed to sell our products in 49 states and the District of Columbia. We have applied for a license to sell our products in the one remaining state.
The insurance distribution system is comprised of insurance brokers and marketing organizations. We are pursuing a strategy to increase the size of our distribution network by developing additional relationships with national and regional marketing organizations. These organizations typically recruit agents for us by advertising our products and our commission structure, through direct mail advertising, or through seminars for insurance agents and brokers. These organizations bear most of the cost incurred in marketing our products. We compensate marketing organizations by paying them a percentage of the commissions earned on new annuity policy sales generated by the agents recruited in such organizations. We also conduct incentive programs for marketing organizations and agents from time to time, including equity-based programs for our leading national marketers. For additional information regarding our equity-based programs for our leading national marketers see note 10 to our audited consolidated financial statements. We generally do not enter into exclusive arrangements with these marketing organizations.
Two of our national marketing organizations accounted for more than 10% of the annuity deposits collected during 2005 representing 15% and 11% of the annuity deposits and insurance premiums collected. The states with the largest share of direct premiums collected during 2005 were: California (10.1%), Florida (10.0%), Texas (9.2%), Illinois (7.8%) and Pennsylvania (5.6%).
We operate in a highly competitive industry. Many of our competitors are substantially larger and enjoy substantially greater financial resources, higher ratings by rating agencies, broader and more diversified product lines and more widespread agency relationships. Our annuity products compete with index, fixed rate and variable annuities sold by other insurance companies and also with mutual fund products, traditional bank investments and other investment and retirement funding alternatives offered by asset managers, banks, and broker-dealers. Our insurance products compete with other insurance companies, financial intermediaries and other institutions based on a number of features, including crediting rates, policy terms and conditions, service provided to distribution channels and policyholders, ratings, reputation and broker compensation.
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The sales agents for our products use the ratings assigned to an insurer by independent rating agencies as one factor in determining which insurer’s annuity to market. In recent years, the market for annuities has been dominated by those insurers with the highest ratings. American Equity Life has received a financial strength rating of “B++” (Very Good) with a stable outlook from A.M. Best Company and “BBB+” with a stable outlook from Standard & Poor’s. A.M. Best Company and Standard & Poor’s changed their outlook on our rating from negative to stable subsequent to the completion of our December 2003 initial public offering. In July, 2002, A.M. Best Company and Standard & Poor’s adjusted our financial strength ratings from “A-”(Excellent) to “B++”(Very Good) and “A-” to “BBB+”, respectively. The degree to which ratings adjustments have effected sales and persistency is unknown. Our ability to grow sales of new annuities and the level of surrenders of our existing annuity contracts in force during 2006 may be affected by the current ratings.
Financial strength ratings generally involve quantitative and qualitative evaluations by rating agencies of a company’s financial condition and operating performance. Generally, rating agencies base their ratings upon information furnished to them by the insurer and upon their own investigations, studies and assumptions. Ratings are based upon factors of concern to policyholders, agents and intermediaries and are not directed toward the protection of investors and are not recommendations to buy, sell or hold securities.
A.M. Best Company ratings currently range from “A++” (Superior) to “F” (In Liquidation), and include 16 separate ratings categories. Within these categories, “A++” (Superior) and “A+” (Superior) are the highest, followed by “A” (Excellent) and “A-” (Excellent) then followed by “B++” (Very Good) and “B+” (Very Good). Publications of A.M. Best Company indicate that the “B++” rating is assigned to those companies that, in A.M. Best Company’s opinion, have demonstrated a good ability to meet their ongoing obligations to policyholders.
Standard & Poor’s insurer financial strength ratings currently range from “AAA” to “NR”, and include 21 separate ratings categories. Within these categories, “AAA” and “AA” are the highest, followed by “A” and “BBB”. Publications of Standard & Poor’s indicate that an insurer rated “BBB” or higher is regarded as having strong financial security characteristics, but is somewhat more likely to be affected by adverse business conditions than are higher rated insurers.
A.M. Best Company and Standard & Poor’s review their ratings of insurance companies from time to time. There can be no assurance that any particular rating will continue for any given period of time or that it will not be changed or withdrawn entirely if, in their judgment, circumstances so warrant. If our ratings were to be adjusted again for any reason, we could experience a material decline in the sales of our products and the persistency of our existing business.
Coinsurance
American Equity Life has entered into two coinsurance agreements with EquiTrust Life Insurance Company (“EquiTrust”), an affiliate of Farm Bureau Life Insurance Company (“Farm Bureau”), covering 70% of certain of our fixed rate and index annuities issued from August 1, 2001 through December 31, 2001, 40% of those contracts issued during 2002 and 2003, and 20% of those contracts issued from January 1, 2004 to July 31, 2004, when the agreement was suspended by mutual consent of the parties. As a result of the suspension, new business will no longer be ceded to EquiTrust unless and until the parties mutually agree to resume the coinsurance of new business. The business reinsured under these agreements is not eligible for recapture before the expiration of 10 years. EquiTrust has received a financial strength rating of “A” from A.M. Best Company. As of December 31, 2005, Farm Bureau beneficially owned 9.9% of our issued and outstanding common stock.
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Total annuity deposits ceded were $4.7 million, $202.1 million and $649.4 million for the years ended December 31, 2005, 2004 and 2003, respectively. We received expense allowances of $2.0 million, $22.6 million and $65.6 million under this agreement for the years ended December 31, 2005, 2004 and 2003, respectively. The balance due under this agreement to EquiTrust was $27.7 million at December 31, 2005 and $32.0 million at December 31, 2004, and represents the fair value of the call options related to the ceded business held by us to fund the index credits and cash due to or from EquiTrust related to the transfer of ceded annuity deposits. At December 31, 2005 and 2004, the aggregate policy benefit reserves transferred to EquiTrust under these agreements were $2.0 billion and $2.1 billion, respectively. We remain liable with respect to the policy liabilities ceded to EquiTrust should it fail to meet the obligations assumed by it. None of the coinsurance deposits with EquiTrust are deemed by management to be uncollectible.
American Equity Life has also entered into a modified coinsurance agreement to cede 70% of its variable annuity business to EquiTrust. Separate account deposits ceded under this agreement during the years ended December 31, 2005, 2004 and 2003 were immaterial. Under this agreement and related administrative services agreements, we paid EquiTrust $0.2 million for the each of years ended December 31, 2005, 2004 and 2003. The modified coinsurance agreement will continue until termination by written notice at the election of either party. Any such termination will apply to the submission or acceptance of new policies, and business reinsured under the agreement prior to any such termination is not eligible for recapture before the expiration of 10 years.
Financial Reinsurance
American Equity Life has entered into three reinsurance transactions with Hannover Life Reassurance Company of America, (“Hannover”), which are treated as reinsurance under statutory accounting practices and as financial reinsurance under accounting principles generally accepted in the United States, (“GAAP”). The statutory surplus benefits under these agreements are eliminated under GAAP and the associated charges are recorded as risk charges and included in other operating costs and expenses in the consolidated statements of income. Hannover has received a financial strength rating of “A+” from A.M. Best Company. The first transaction became effective November 1, 2002 (the “2002 Hannover Transaction”), the second transaction became effective September 30, 2003 (the “2003 Hannover Transaction”) and the third transaction became effective October 1, 2005 (the “2005 Hannover Transaction”). The agreements for the 2002 and 2003 Hannover Transactions include a coinsurance segment and a yearly renewable term segment reinsuring a portion of death benefits payable on certain annuities issued from January 1, 2002 to December 31, 2002 and issued from January 1, 2003 to September 30, 2003. The coinsurance segments provide reinsurance to the extent of 6.88% (2002 Hannover Transaction) and 13.41% (2003 Hannover Transaction) of all risks associated with our annuity policies covered by these reinsurance agreements. The 2002 Hannover Transaction provided $29.8 million in net statutory surplus benefit during 2002 and the 2003 Hannover Transaction provided $29.7 million in net statutory surplus benefit during 2003. The statutory surplus benefits provided by the 2002 and 2003 Hannover Transactions were reduced by $13.4 million in 2005, $13.1 million in 2004 and $6.8 million in 2003. The remaining statutory surplus benefit under the 2002 and 2003 Hannover Transactions will be reduced as follows: 2006 - $12.4 million; 2007 - $13.2 million; 2008 - $6.4 million. The 2005 Hannover Transaction is a yearly renewable term reinsurance agreement on inforce business covering 40% of waived surrender charges related to penalty free withdrawals and deaths. We pay quarterly reinsurance premiums under this agreement with an experience refund calculated on a quarterly basis resulting in a risk charge equal to approximately 4.6% of the reserve credit. The reserve credit recorded on a statutory basis by American Equity Life at December 31, 2005 was $59.0 million. Risk charges attributable to the 2005, 2003 and 2002 Hannover Transactions of $2.5 million, $2.2 million and $1.6 million were incurred during 2005, 2004 and 2003, respectively.
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The statutory surplus benefit provided by the 2003 Hannover Transaction replaced the statutory surplus benefit previously provided by a financial reinsurance agreement with a subsidiary of Swiss Reinsurance Company. We terminated this agreement and recaptured all reserves subject to this agreement effective September 30, 2003. This agreement was effective January 1, 2001, and provided an initial statutory surplus benefit of $35.0 million in 2001. The statutory surplus benefit remaining at January 1, 2003 was $30.9 million, all of which was eliminated during 2003. Risk charges and interest expense incurred on the cash portion of the surplus benefit provided by the agreement were $0.2 million for the year ended December 31, 2003.
Indemnity Reinsurance
Consistent with the general practice of the life insurance industry, American Equity Life enters into agreements of indemnity reinsurance with other insurance companies in order to reinsure portions of the coverage provided by its life and accident and health insurance products. Indemnity reinsurance agreements are intended to limit a life insurer’s maximum loss on a large or unusually hazardous risk or to diversify its risks. The maximum loss retained by us on all life insurance policies we have issued was $0.1 million or less as of December 31, 2005. Indemnity reinsurance does not discharge the original insurer’s primary liability to the insured. American Equity Life’s reinsured business related to these blocks of business is primarily ceded to two reinsurers. Reinsurance related to life and accident and health insurance that was ceded by us primarily to two reinsurers was immaterial. We believe the assuming companies will be able to honor all contractual commitments, based on our periodic review of their financial statements, insurance industry reports and reports filed with state insurance departments.
Life insurance companies are subject to regulation and supervision by the states in which they transact business. State insurance laws establish supervisory agencies with broad regulatory authority, including the power to:
· grant and revoke licenses to transact business;
· regulate and supervise trade practices and market conduct;
· establish guaranty associations;
· license agents;
· approve policy forms;
· approve premium rates for some lines of business;
· establish reserve requirements;
· prescribe the form and content of required financial statements and reports;
· determine the reasonableness and adequacy of statutory capital and surplus;
· perform financial, market conduct and other examinations;
· define acceptable accounting principles;
· regulate the type and amount of permitted investments;
· limit the amount of dividends and surplus note payments that can be paid without obtaining regulatory approval.
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Our life subsidiaries are subject to periodic examinations by state regulatory authorities. In 2005, the Iowa Insurance Division completed an examination of American Equity Life as of December 31, 2003. No adjustments to our financial statements were recommended or required as a result of this examination. The New York Insurance Department is currently conducting an examination of American Equity Life Insurance Company of New York as of December 31, 2004. We have not been informed of any material adjustments which will be recommended or required as a result of this examination.
The payment of dividends or the distributions, including surplus note payments, by our life subsidiaries is subject to regulation by each subsidiary’s state of domicile’s insurance department. Currently, American Equity Life may pay dividends or make other distributions without the prior approval of its state of domicile’s insurance department, unless such payments, together with all other such payments within the preceding twelve months, exceed the greater of (1) American Equity Life’s statutory net gain from operations for the preceding calendar year, or (2) 10% of American Equity Life’s statutory surplus at the preceding December 31. For 2006, up to approximately $68.7 million can be distributed as dividends by American Equity Life without prior approval of its state of domicile’s insurance department. In addition, dividends and surplus note payments may be made only out of earned surplus, and all surplus note payments are subject to prior approval by regulatory authorities. American Equity Life had approximately $92.5 million of earned surplus at December 31, 2005.
Most states have also enacted regulations on the activities of insurance holding company systems, including acquisitions, extraordinary dividends, the terms of surplus notes, the terms of affiliate transactions and other related matters. We are registered pursuant to such legislation in Iowa. Recently, a number of state legislatures have considered or have enacted legislative proposals that alter and, in many cases, increase the authority of state agencies to regulate insurance companies and holding company systems.
Most states, including Iowa and New York where our life subsidiaries are domiciled, have enacted legislation or adopted administrative regulations affecting the acquisition of control of insurance companies as well as transactions between insurance companies and persons controlling them. The nature and extent of such legislation and regulations currently in effect vary from state to state. However, most states require administrative approval of the direct or indirect acquisition of 10% or more of the outstanding voting securities of an insurance company incorporated in the state. The acquisition of 10% of such securities is generally deemed to be the acquisition of “control” for the purpose of the holding company statutes and requires not only the filing of detailed information concerning the acquiring parties and the plan of acquisition, but also administrative approval prior to the acquisition. In many states, the insurance authority may find that “control” in fact does not exist in circumstances in which a person owns or controls more than 10% of the voting securities.
Although the federal government does not directly regulate the business of insurance, federal legislation and administrative policies in several areas, including pension regulation, age and sex discrimination, financial services regulation, securities regulation and federal taxation can significantly affect the insurance business. In addition, legislation has been passed which could result in the federal government assuming some role in regulating insurance companies and which allows combinations between insurance companies, banks and other entities.
In 1998, the Securities and Exchange Commission (“SEC”) requested comments as to whether index annuities, such as those sold by us, should be treated as securities under the federal securities laws rather than as insurance products. Treatment of these products as securities would likely require additional registration and licensing of these products and the agents selling them, as well as cause us to seek additional marketing relationships for these products. No action has been taken by the SEC on this issue.
State insurance regulators and the National Association of Insurance Commissioners, or NAIC, are continually reexamining existing laws and regulations and developing new legislation for the passage by
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state legislatures and new regulations for adoption by insurance authorities. Proposed laws and regulations or those still under development pertain to insurer solvency and market conduct and in recent years have focused on:
· insurance company investments;
· risk-based capital (“RBC”) guidelines, which consist of regulatory targeted surplus levels based on the relationship of statutory capital and surplus, with prescribed adjustments, to the sum of stated percentages of each element of a specified list of company risk exposures;
· the implementation of non-statutory guidelines and the circumstances under which dividends may be paid;
· product approvals;
· agent licensing;
· underwriting practices;
· insurance and annuity sales practices.
The NAIC’s RBC requirements are intended to be used by insurance regulators as an early warning tool to identify deteriorating or weakly capitalized insurance companies for the purpose of initiating regulatory action. The RBC formula defines a new minimum capital standard which supplements low, fixed minimum capital and surplus requirements previously implemented on a state-by-state basis. Such requirements are not designed as a ranking mechanism for adequately capitalized companies.
The NAIC’s RBC requirements provide for four levels of regulatory attention depending on the ratio of a company’s total adjusted capital to its RBC. Adjusted capital is defined as the total of statutory capital, surplus, asset valuation reserve and certain other adjustments. Calculations using the NAIC formula at December 31, 2005, indicate that the ratio of total adjusted capital to RBC for us exceeded the highest level at which regulatory action might be initiated by approximately 2.3 times.
Our life subsidiaries also may be required, under the solvency or guaranty laws of most states in which they do business, to pay assessments up to certain prescribed limits to fund policyholder losses or liabilities of insolvent insurance companies. These assessments may be deferred or forgiven under most guaranty laws if they would threaten an insurer’s financial strength and, in certain instances, may be offset against future premium taxes. Assessments related to business reinsured for periods prior to the effective date of the reinsurance are the responsibility of the ceding companies.
The annuity and life insurance products that we market generally provide the policyholder with a federal income tax advantage, as compared to certain other savings investments such as certificates of deposit and taxable bonds, in that federal income taxation on any increases in the contract values (i.e., the “inside build-up”) of these products is deferred until it is received by the policyholder. With other savings investments, the increase in value is generally taxed each year as it is realized. Additionally, life insurance death benefits are generally exempt from income tax.
From time to time, various tax law changes have been proposed that could have an adverse effect on our business, including the elimination of all or a portion of the income tax advantage described above for annuities and life insurance. If legislation were enacted to eliminate the tax deferral for annuities, such a change would have an adverse effect on our ability to sell non-qualified annuities. Non-qualified annuities are annuities that are not sold to an individual retirement account or other qualified retirement plan.
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In June 2001, the Economic Growth and Tax Relief Reconciliation Act of 2001 (the “2001 Act”) was enacted. The 2001 Act implemented a staged decrease in individual tax rates that began in 2001 and was accelerated when the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the “2003 Act”) was enacted. While the decreases in rates are temporary (the pre-2001 rates will return in 2011), the present value of the tax deferred advantage of annuities and life insurance products is less, which might hinder our ability to sell such products and/or increase the rate at which our current policyholders surrender their policies.
Our life subsidiaries are taxed under the life insurance company provisions of the Internal Revenue Code of 1986, as amended (the “Code”). Provisions in the Code require a portion of the expenses incurred in selling insurance products to be capitalized and deducted over a period of years, as opposed to being immediately deducted in the year incurred. This provision increases the current income tax expense charged to gain from operations for statutory accounting purposes which reduces statutory net income and surplus and, accordingly, may decrease the amount of cash dividends that may be paid by our life subsidiaries.
As of December 31, 2005, we had approximately 270 full-time employees, of which approximately 260 are located in West Des Moines, Iowa, and 10 are located in the Pell City, Alabama office. We have experienced no work stoppages or strikes and consider our relations with our employees to be excellent. None of our employees are represented by a union.
We face competition from companies that have greater financial resources, broader arrays of products, higher ratings and stronger financial performance, which may impair our ability to retain existing customers, attracts new customers and maintain our profitability and financial strength.
We operate in a highly competitive industry. Many of our competitors are substantially larger and enjoy substantially greater financial resources, higher ratings by rating agencies, broader and more diversified product lines and more widespread agency relationships. Our annuity products compete with index, fixed rate and variable annuities sold by other insurance companies and also with mutual fund products, traditional bank investments and other retirement funding alternatives offered by asset managers, banks and broker-dealers. Our insurance products compete with those of other insurance companies, financial intermediaries and other institutions based on a number of factors, including premium rates, policy terms and conditions, service provided to distribution channels and policyholders, ratings by rating agencies, reputation and commission structures. While we compete with numerous other companies, we view the following as our most significant competitors:
· Allianz Life Insurance Company of North America;
· Midland National Life Insurance Company;
· AmerUs Group Co.;
· Fidelity & Guaranty Life Insurance Company; and
· ING USA Annuity & Life Insurance Company.
Our ability to compete depends in part on product pricing which is driven by our investment performance. We will not be able to accumulate and retain assets under management for our products if our investment results underperform the market or the competition, since such underperformance likely would result in asset withdrawals and reduced sales.
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We compete for distribution sources for our products. We believe that our success in competing for distributors depends on factors such as our financial strength, the services we provide to, and the relationships we develop with, these distributors and offering competitive commission structures. Our distributors are generally free to sell products from whichever providers they wish, which makes it important for us to continually offer distributors products and services they find attractive. If our products or services fall short of distributors’ needs, we may not be able to establish and maintain satisfactory relationships with distributors of our annuity and life insurance products. Our ability to compete in the past has also depended in part on our ability to develop innovative new products and bring them to market more quickly than our competitors. In order for us to compete in the future, we will need to continue to bring innovative products to market in a timely fashion. Otherwise, our revenues and profitability could suffer.
National banks, with pre-existing customer bases for financial services products, may increasingly compete with insurers, as a result of legislation removing restrictions on bank affiliations with insurers. This legislation, the Gramm-Leach-Bliley Act of 1999, permits mergers that combine commercial banks, insurers and securities firms under one holding company. Until passage of the Gramm-Leach-Bliley Act, prior legislation had limited the ability of banks to engage in securities-related businesses and had restricted banks from being affiliated with insurance companies. The ability of banks to increase their securities-related business or to affiliate with insurance companies may materially and adversely affect sales of all of our products by substantially increasing the number and financial strength of our potential competitors.
General economic conditions, including changing interest rates and market volatility, affect both the risks and the returns on both our products and our investment portfolio.
The fair value of our investments and our investment performance, including yields and realization of gains or losses, may vary depending on economic and market conditions. Such conditions include the shape of the yield curve, the level of interest rates and recognized equity and bond indices, including, without limitation, the S&P 500 Index®, the Dow Jones IndexSM and the NASDAQ-100 Index® (the “Indices”). Interest rate risk is our primary market risk exposure. Substantial and sustained increases and decreases in market interest rates can materially and adversely affect the profitability of our products, our ability to earn predictable returns, the fair value of our investments and the reported value of stockholders’ equity.
From time to time, for business or regulatory reasons, we may be required to sell certain of our investments at a time when their fair value is less than the carrying value of these securities. Rising interest rates may cause declines in the value of our fixed maturity securities. With respect to our available for sale fixed maturity securities, such declines (net of income taxes and certain adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements) reduce our reported stockholders’ equity and book value per share. We have a portfolio of held for investment securities which consists principally of long duration bonds issued by U.S. government agencies, the value of which is also sensitive to interest rate changes.
We may also have difficulty selling our commercial mortgage loans because they are less liquid than our publicly traded securities. As of December 31, 2005, our commercial mortgage loans represented approximately 12.6% of the value of our invested assets. If we require significant amounts of cash on short notice, we may have difficulty selling these loans at attractive prices or in a timely manner, or both.
A key component of our net income is the investment spread. A narrowing of investment spreads may adversely affect operating results. Although we have the right to adjust interest crediting rates (referred to as “participation”, “asset fee” or “cap” rates for index annuities) on most products, changes to crediting rates may not be sufficient to maintain targeted investment spreads in all economic and market environments. In general, our ability to lower crediting rates is subject to a minimum crediting rate filed
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with and approved by state regulators. In addition, competition and other factors, including the potential for increases in surrenders and withdrawals, may limit our ability to adjust or maintain crediting rates at levels necessary to avoid the narrowing of spreads under certain market condition. Our policy structure generally provides for resetting of policy crediting rates at least annually and imposes withdrawal penalties for withdrawals during the first three to 17 years a policy is in force.
Our spreads may be compressed in declining interest rate environments. A substantial portion of our fixed income securities have call features and are subject to redemption currently or in the near future. 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 or better than those of the redeemed bonds. As indicated above, we have a certain ability to mitigate this risk by lowering interest crediting rates subject to minimum crediting rates in the policy terms.
Managing the investment spread on our index annuities is more complex than it is for fixed rate annuity products. Index products are credited with a percentage (known as the “participation rate”) of gains in the Indices. Some of our index products have an annual asset fee which is deducted from the amount credited to the policy. In addition, caps are set on some products to limit the maximum amount which may be credited on a particular product. To fund the earnings to be credited to the index products, we purchase options on the Indices. The price of such options generally increases with increases in the volatility in the Indices and interest rates, which may either narrow the spread or cause us to lower participation rates. Thus, the volatility of the Indices adds an additional degree of uncertainty to the profitability of the index products. We attempt to mitigate this risk by resetting participation rates and asset fees annually and adjusting the applicable caps.
Our investment portfolio is also subject to credit quality risks which may diminish the value of our invested assets and affect our sales, profitability and reported book value per share.
We are subject to the risk that the issuers of our fixed maturity securities and other debt securities (other than our U.S. agency securities), and borrowers on our commercial mortgages, will default on principal and interest payments, particularly if a major downturn in economic activity occurs. At December 31, 2005, 84.8% of our invested assets consisted of fixed maturity securities, of which 1.3% were below investment grade. At December 31, 2005, there were no delinquencies in our commercial mortgage loan portfolio. An increase in defaults on our fixed maturity securities and commercial mortgage loan portfolios could harm our financial strength and reduce our profitability. We use derivative instruments to fund the annual credits on our index annuities. We purchase derivative instruments, consisting primarily of one-year call options, from a number of counterparties. Our policy is to acquire such options only from counterparties rated “A-” or better by a nationally recognized rating agency. If, however, our counterparties fail to honor their obligations under the derivative instruments, we will have failed to provide for crediting to policyholders related to the appreciation in the applicable indices. Any such failure could harm our financial strength and reduce our profitability.
Our reinsurance program involves risks because we remain liable with respect to the liabilities ceded to reinsurers if the reinsurers fail to meet the obligations assumed by them.
Our life insurance subsidiaries cede insurance to other insurance companies through reinsurance. In particular, American Equity Life has entered into two coinsurance agreements with EquiTrust, an affiliate of Farm Bureau covering 70% of certain of our fixed rate and index annuities issued from August 1, 2001 through December 31, 2001, 40% of those contracts for 2002 and 2003 and 20% of those contracts issued from January 1, 2004 to July 31, 2004, when the agreement was suspended by mutual consent of the parties. As a result of the suspension, new business is no longer ceded to EquiTrust unless and until the parties mutually agree to resume the coinsurance of new business. At December 31, 2005, the aggregate policy benefit reserve transferred to EquiTrust was approximately $2.0 billion. EquiTrust has been
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assigned a financial strength rating of “A” by A.M. Best Company. We remain liable with respect to the policy liabilities ceded to EquiTrust should it fail to meet the obligations assumed by it. As of December 31, 2005, Farm Bureau beneficially owned approximately 9.9% of our common stock.
In addition, we have entered into other type of reinsurance transactions including indemnity and financial reinsurance. Should any of these reinsurers fail to meet the obligations assumed under such reinsurance, we remain liable with respect to the liabilities ceded.
We may experience volatility in net income due to accounting standards for derivatives.
The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 133, which became effective for us on January 1, 2001. Under SFAS No. 133, as amended, all derivative instruments (including certain derivative instruments embedded in other contracts) are recognized in the balance sheet at their fair values and changes in fair value are recognized immediately in earnings. This impacts the items of revenue and expense we report on our index business as follows:
· We must mark to market the purchased call options we use to fund the annual index credits on our index annuities based upon quoted market prices from related counterparties. We record the change in fair value of these options as a component of our revenues. Included within the change in fair value of the options is an element reflecting the time value of the options, which initially is their purchase cost declining to zero at the end of their one-year lives. The change in fair value of derivatives also includes proceeds received at expiration of the one-year option terms and gains or losses recognized upon early termination. For the years ended December 31, 2005, 2004 and 2003, the change in fair value of derivatives was $(18.0) million, $28.7 million and $52.5 million, respectively.
· Under SFAS No. 133, the future annual index credits on our index annuities are treated as a “series of embedded derivatives” over the expected life of the applicable contracts. We are required to estimate the fair value of policy liabilities for index annuities, including the embedded derivatives, by valuing the “host” (or guaranteed) component of the liabilities and projecting (i) the expected index credits on the next policy anniversary dates and (ii) the net cost of annual options we will purchase in the future to fund index credits. Our estimates of the fair value of these embedded derivatives are based on assumptions related to underlying policy terms (including annual participation rates, asset fees, cap rates and minimum guarantees), index values, notional amounts, strike prices and expected lives of the policies. The change in fair value of embedded derivatives generally increases with increases in volatility in the Indices and interest rates. The change in fair value of the embedded derivatives will not correspond to the change in fair value of the purchased options because the purchased options are one-year options while the options valued in the fair value of embedded derivatives cover the expected life of the contracts which typically exceed 10 years. The change in fair value of embedded derivatives related to our index annuities included in the consolidated statements of income was $26.4 million, $(8.6) million and $66.8 million for the years ended December 31, 2005, 2004 and 2003, respectively.
· We adjust the amortization of deferred policy acquisition costs and deferred sales inducements to reflect the impact of the items discussed above. Amortization of deferred policy acquisition costs and deferred sales inducements decreased by $12.3 million for the year ended December 31, 2005, increased by $6.4 million for the year ended December 31, 2004 and decreased by $1.7 million for the year ended December 31, 2003 as a result of the application of SFAS No. 133.
The application of SFAS No. 133 in future periods to our index annuity business may cause substantial volatility in our reported net income.
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If we do not manage our growth effectively, our financial performance could be adversely affected; our historical growth rates may not be indicative of our future growth.
We have experience rapid growth since our formation in December 1995. For the year ended December 31, 2005, our deposits from sales of new annuities were $2.9 billion. Our work force has grown from approximately 65 employees and 4,000 independent agents as of December 31, 1997 to approximately 270 employees and 52,000 independent agents as of December 31, 2005. We intend to continue to grow by recruiting new independent agents, increasing the productivity of our existing agents, expanding our insurance distribution network, developing new products, expanding into new product lines, becoming licensed in all 50 states and continuing to develop new incentives for our sales agents. Future growth will impose significant added responsibilities on our management, including the need to identify, recruit, maintain and integrate additional employees, including management. There can be no assurance that we will be successful in expanding our business or that our systems, procedures and controls will be adequate to support our operations as they expand. In addition, due to our rapid growth and resulting increased size, it may be necessary to expand the scope of our investing activities to asset classes in which we historically have not invested or have not had significant exposure. If we are unable to adequately manage our investments in these classes, our financial condition or operating results in the future could be less favorable than in the past. Further, although recently deemphasized, we have utilized reinsurance in the past to support our growth. The future availability of reinsurance is uncertain. Our failure to manage growth effectively, or our inability to recruit, maintain and integrate additional qualified employees and independent agents, could have a material adverse effect on our business, financial condition or results of operations. In addition, due to our rapid growth, our historical growth rates are not likely to accurately reflect our future growth rates or our growth potential. We cannot assure you that our future revenues will increase or that we will continue to be profitable.
We must retain and attract key employees or else we may not grow or be successful.
We are dependent upon our executive management for the operation and development of our business. Our executive management team includes:
· David J. Noble, Chairman, Chief Executive Officer, President and Treasurer;
· John M. Matovina, Vice Chairman;
· Kevin R. Wingert, President of American Equity Life;
· James R. Gerlach, Executive Vice President;
· Terry A. Reimer, Executive Vice President;
· Debra J. Richardson, Senior Vice President; and
· Wendy L. Carlson, General Counsel and Chief Financial Officer.
Although we have change in control agreements with members of our executive management team, we do not have employment contracts with any of the members of our executive management team. Although none of our executive management team has indicated that they intend to terminate their employment with us, there can be no assurance that these employees will remain with us for any particular period of time. Also, we do not maintain “key person” life insurance for any of our personnel.
If we are unable to attract and retain national marketing organizations and independent agents, sales of our products may be reduced.
We distribute our annuity products through a variable cost distribution network which included over 70 national marketing organizations and approximately 52,000 independent agents as of December 31,
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2005. We must attract and retain such marketers and agents to sell our products. Insurance companies compete vigorously for productive agents. W e compete with other life insurance companies for marketers and agents primarily on the basis of our financial position, support services, compensation and product features. Such marketers and agents may promote products offered by other life insurance companies that may offer a larger variety of products than we do. Our competitiveness for such marketers and agents also depends upon the long-term relationships we develop with them. If we are unable to attract and retain sufficient marketers and agents to sell our products, our ability to compete and our revenues would suffer.
We may require additional capital to support sustained future growth which may not be available when needed or may be available only on unfavorable terms.
Our long-term strategic capital requirements will depend on many factors including the accumulated statutory earnings of our life insurance subsidiaries and the relationship between the statutory capital and surplus of our life insurance subsidiaries and (i) the rate of growth in sales of our products; and (ii) the levels of credit risk and/or interest rate risk in our invested assets. To support long-term capital requirements, we may need to increase or maintain the statutory capital and surplus of our life insurance subsidiaries through additional financings, which could include debt, equity, financial reinsurance and/or other surplus relief transactions. Such financings, if available at all, may be available only on terms that are not favorable to us. If we cannot maintain adequate capital, we may be required to limit growth in sales of new annuity products, and such action could adversely affect our business, financial condition or results of operations.
Changes in state and federal regulation may affect our profitability.
We are subject to regulation under applicable insurance statutes, including insurance holding company statutes, in the various states in which our life insurance subsidiaries write insurance. Our life insurance subsidiaries are domiciled in New York and Iowa. We are currently licensed to sell our products in 49 states and the District of Columbia. Insurance regulation is intended to provide safeguards for policyholders rather than to protect shareholders of insurance companies or their holding companies.
Regulators oversee matters relating to trade practices, policy forms, claims practices, guaranty funds, types and amounts of investments, reserve adequacy, insurer solvency minimum amounts of capital and surplus, transactions with related parties, changes in control and payment of dividends.
State insurance regulators and the National Association of Insurance Commissions (“NAIC”) continually reexamine existing laws and regulations, and may impose changes in the future.
Our life insurance subsidiaries are subject to the NAIC’s risk-based capital requirements which are intended to be used by insurance regulators as an early warning tool to identify deteriorating or weakly capitalized insurance companies for the purpose of initiating regulatory action. Our life insurance subsidiaries also may be required, under solvency or guaranty laws of most states in which they do business, to pay assessments up to certain prescribed limits to fund policyholder losses or liabilities or insolvent insurance companies.
Although the federal government does not directly regulate the insurance business, federal legislation and administrative policies in several areas, including pension regulation, age and sex discrimination, financial services regulation, securities regulation and federal taxation, can significantly affect the insurance business. As increased scrutiny has been placed upon the insurance regulatory framework, a number of state legislatures have considered or enacted legislative proposals that alter, and in many cases increase, state authority to regulate insurance companies and holding company systems. In addition, legislation has been introduced in Congress which could result in the federal government assuming some role in the regulation of the insurance industry. The regulatory framework at the state and federal level applicable to our insurance products is evolving. The changing regulatory framework could affect the
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design of such products and our ability to sell certain products. Any changes in these laws and regulations could materially and adversely affect our business, financial condition or results of operations.
Recently, suits have been brought against, and guilty pleas accepted from, participants in the insurance industry alleging certain illegal actions by these participants. Although we do not do business with the parties to the suits or those pleading guilty, are not involved in the suits at all and do not believe that our business practices are of the same nature as those the suits allege to have occurred, we cannot be certain of what ultimate effect the suits, as well as any increased regulatory oversight that might result from the suits, might have on the insurance industry as a whole, and thus on our business.
Changes in federal income taxation laws, including recent reduction in individual income tax rates, may affect sales of our products and profitability.
The annuity and life insurance products that we market generally provide the policyholder with certain federal income tax advantages. For example, federal income taxation on any increases in the contract values (i.e. the “inside build-up”) of these products is deferred until it is received by the policyholder. With other savings investments, such as certificates of deposit and taxable bonds, the increase in value is generally taxed each year as it is realized. Additionally, life insurance death benefits are generally exempt from income tax.
From time to time, various tax law changes have been proposed that could have an adverse effect on our business, including the elimination of all or a portion of the income tax advantages described above for annuities and life insurance. If legislation were enacted to eliminate the tax deferral for annuities, such a change would have an adverse effect on our ability to sell non-qualified annuities. Non-qualified annuities are annuities that are not sold to an individual retirement account or other qualified retirement plan.
In June 2001, the Economic Growth and Tax Relief Reconciliation Act of 2001 was enacted, which implement a staged reduction in individual federal income tax rates that began in 2001. The enactment of the Jobs and Growth Tax Relief Reconciliation Act of 2003 accelerated such rate reductions. While the reduction in income tax rates is temporary (pre-2001 rates will return in 2011), the present value of the tax deferred advantage of annuities and life insurance products is less, which might hinder our ability to sell such products and/or increase the rate at which our current policyholders surrender their policies.
We face risks relating to litigation, including the costs of such litigation, management distraction and the potential for damage awards, which may adversely impact our business.
We are occasionally involved in litigation, both as a defendant and as a plaintiff. In addition, state regulatory bodies, such as state insurance departments, the SEC, the National Association of Securities Dealers, Inc., the Department of Labor, and other regulatory bodies regularly make inquiries and conduct examinations or investigations concerning our compliance with, among other things, insurance laws, securities laws, the Employee Retirement Income Security Act of 1974, as amended, and laws governing the activities of broker-dealers. Companies in the life insurance and annuity business have faced litigation, including class action lawsuits, alleging improper product design, improper sales practices and similar claims. We are currently a defendant in several purported class action lawsuits filed in state and federal courts alleging, among other things, improper sales practices. In these lawsuits, the plaintiffs are seeking, among other things, returns of premiums and other compensatory and punitive damages. We have reached a final settlement in one of these cases, the impact of which is expected to be immaterial. No class has been certified in any of the other pending cases at this time. Although we have denied all allegations in the lawsuits and intend to vigorously defend them, the lawsuits are in the early stages of litigation and neither the outcomes nor a range of possible outcomes can be determined at this time. Although we do not believe that these lawsuits will have a material adverse effect on our business, financial condition or results of
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operations, there can be no assurance that such litigation, or any future litigation, will not have such an effect, whether financially, through distraction of our management or otherwise.
A downgrade in our credit or financial strength ratings may increase our future cost of capital and may reduce new sales, adversely affect relationships with distributors and increase policy surrenders and withdrawals.
Currently, our senior unsecured indebtedness carries a “bb+” rating from A.M. Best and a “BB+” rating from Standard & Poor’s. Our ability to maintain such ratings is dependent upon the results of operations of our subsidiaries and our financial strength. If we fail to preserve the strength of our balance sheet and to maintain a capital structure that rating agencies deem suitable, it could result in a downgrading of the ratings applicable to our senior unsecured indebtedness. A downgrading would likely reduce the fair value of the common stock and may increase our future cost of capital.
Financial strength ratings are important factors in establishing the competitive position of life insurance and annuity companies. In recent years, the market for annuities has been dominated by those insurers with the highest ratings. A ratings downgrade, or the potential for a ratings downgrade, could have a number of adverse effects on our business. For example, distributors and sales agents for life insurance and annuity products use the ratings as one factor in determining which insurer’s annuities to market. A ratings downgrade could cause those distributors and agents to seek alternative carriers. In addition, a ratings downgrade could materially increase the number of policy or contract surrenders we experience.
Financial strength ratings generally involve quantitative and qualitative evaluations by rating agencies of a company’s financial condition and operating performance. Generally, rating agencies base their ratings upon information furnished to them by the insurer and upon their own investigations, studies and assumptions. Ratings are based upon factors of concern to agents, policyholders and intermediaries and are not directed toward the protection of investors and are recommendations to buy, sell or hold securities.
American Equity Life has received financial strength ratings of “B++” (Very Good) with a stable outlook from A.M. Best Company and “BBB+” with a stable outlook from Standard & Poor’s. A.M. Best ratings currently range from “A++” (Superior) to “F” (In Liquidation), and include 16 separate ratings categories. Within these categories, “A++” (Superior) and “A+” (Superior) are the highest, followed by “A” (Excellent), “A-” (Excellent), “B++”(Very Good) and “B+”(Very Good). Publications of A.M. Best indicate that the “B++” rating is assigned to those companies that, in A.M. Best’s opinion, have demonstrated a good ability to meet their ongoing obligations to policyholders. Standard & Poor’s insurer financial strength ratings currently range from “AAA” to “NR”, and include 21 separate ratings categories. Within these categories, “AAA” and “AA” are the highest, followed by “A” and “BBB”. Publications of Standard & Poor’s indicate that an insurer rated “BBB” or higher is regarded as having strong financial security characteristics, but is somewhat more likely to be affected by adverse business conditions than are higher rated insurers.
A.M. Best and Standard & Poor’s review their ratings of insurance companies from time to time. There can be no assurance that any particular rating will continue for any given period of time or that it will not be changed or withdrawn entirely if, in their judgment, circumstances so warrant. If our ratings were to be downgraded for any reason, we could experience a material decline in the sales of our products and the persistency of our existing business.
Our system of internal controls ensures the accuracy or completeness of our disclosures and a loss of public confidence in the quality of our internal controls or disclosures could have a negative impact on us.
Section 404 of the Sarbanes-Oxley Act of 2002, or the SOA, requires us to provide an annual report on our internal controls over financial reporting, including an assessment as to whether or not our internal controls over financial reporting are effective. We are also required to have our auditors attest to our
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assessment and to opine on the effectiveness of our internal controls over financial reporting. We have in the past discovered, and may in the future discover areas of our internal controls that need remediation. If we determine that our remediation has been ineffective, or we identify additional material weaknesses in our internal controls over financial reporting, we could be subjected to additional regulatory scrutiny, future delays in filing our financial statements and a loss of public confidence in the reliability of our financial statements, which could have a negative impact on our liquidity, access to capital markets, and financial condition.
In addition, we do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Based on the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events. Therefore, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Also, while we document our assumptions and review financial disclosures with the audit committee of our board of directors, the regulations and literature governing our disclosures are complex and reasonable persons may disagree as to their application to a particular situation or set of circumstances.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
We do not own any real estate. We lease space for our principal offices in West Des Moines, Iowa, pursuant to written leases for approximately 53,700 square feet. The leases expire on April 30, 2009 and have a renewal option for an additional five year term at a rental rate equal to the prevailing fair market rate. We also lease space for our office in Pell City, Alabama, pursuant to a written lease dated January 1, 2005, for approximately 5,680 square feet. This lease expires on December 31, 2007.
We are occasionally involved in litigation, both as a defendant and as a plaintiff. In addition, state regulatory bodies, such as state insurance departments, the Securities and Exchange Commission, the National Association of Securities Dealers, Inc., the Department of Labor, and other regulatory bodies regularly make inquiries and conduct examinations or investigations concerning our compliance with, among other things, insurance laws, securities laws, the Employee Retirement Income Security Act of 1974, as amended and laws governing the activities of broker-dealers.
Companies in the life insurance and annuity business have faced litigation, including class action lawsuits, alleging improper product design, improper sales practices and similar claims. We are currently a defendant in several purported class action lawsuits alleging improper sales practices. In these lawsuits, the plaintiffs are seeking returns of premiums and other compensatory and punitive damages. We have reached a settlement in one of these cases, which is pending appeal. The impact of the settlement is deemed to be immaterial. No class has been certified in any of the other pending cases at this time. Although we have denied all allegations in these lawsuits and intend to vigorously defend against them, the
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lawsuits are in the early stages of litigation and neither their outcomes nor a range of possible outcomes can be determined at this time. However, we do not believe that these lawsuits will have a material adverse effect on our business, financial condition or results of operations.
In addition, we are from time to time, subject to other legal proceedings and claims in the ordinary course of business, none of which we believe are likely to have a material adverse effect on our financial position, results of operations or cash flows. There can be no assurance that such litigation, or any future litigation, will not have a material adverse effect on our business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock began trading on the New York Stock Exchange (“NYSE”) under the symbol “AEL” following our initial public offering (“IPO”). The following table sets forth, for the periods indicated, the high, low and closing prices per share of American Equity Investment Life Holding Company’s common stock as quoted on the NYSE.
|
2005 |
|
High |
|
Low |
|
Close |
|
|||
|
First Quarter |
|
$ |
12.92 |
|
$ |
10.14 |
|
$ |
12.79 |
|
|
Second Quarter |
|
$ |
12.79 |
|
$ |
10.08 |
|
$ |
11.88 |
|
|
Third Quarter |
|
$ |
11.96 |
|
$ |
10.41 |
|
$ |
11.35 |
|
|
Fourth Quarter |
|
$ |
13.06 |
|
$ |
10.83 |
|
$ |
13.05 |
|
|
2004 |
|
|
|
|
|
|
|
|||
|
First Quarter |
|
$ |
13.15 |
|
$ |
10.05 |
|
$ |
12.85 |
|
|
Second Quarter |
|
$ |
13.10 |
|
$ |
9.75 |
|
$ |
9.95 |
|
|
Third Quarter |
|
$ |
10.22 |
|
$ |
8.79 |
|
$ |
9.49 |
|
|
Fourth Quarter |
|
$ |
11.00 |
|
$ |
9.41 |
|
$ |
10.77 |
|
As of December 31, 2005, the Company had 55,527,180 shares issued and outstanding and approximately 10,100 shareholders. In 2005 and 2004, we paid an annual cash dividend of $0.04 and $0.02, respectively, per share on our common stock. We intend to continue to pay an annual cash dividend on such shares so long as we have sufficient capital and/or future earnings to do so. However, we anticipate retaining most of our future earnings, if any, for use in our operations and the expansion of our business. Any further determination as to dividend policy will be made by our board of directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition and future prospects and such other factors as our board of directors may deem relevant.
Our credit agreement limits our ability to declare or pay dividends in any fiscal year to 33% of our consolidated net income for the prior year. In addition, since we are a holding company, our ability to pay cash dividends depends in large measure on our subsidiaries’ ability to make distributions of cash or property to us. Iowa insurance laws restrict the amount of distributions American Equity Life can pay to us without the approval of the Iowa Insurance Division. See Management’s Discussion and Analysis of Financial Condition and Results of Operations and notes 7 and 11 to our audited consolidated financial statements.
On December 9, 2003, we completed an initial public offering of 18,700,000 shares of our common stock at a price of $9.00 per share. The managing underwriters for the offering were Merrill Lynch, Pierce, Fenner & Smith Incorporated, Advest, Inc., Raymond James & Associates, Inc. and Sanders Morris Harris Inc. The shares of common stock sold in the offering were registered under the Securities Act of 1933, as amended, on a Registration Statement on Form S-1 (Registration No. 333-108794) that was declared effective by the Securities and Exchange Commission on December 3, 2003. Pursuant to the over-allotment option granted to the underwriters in the offering, the underwriters purchased an additional 2,000,000 shares on December 29, 2003 and an additional 805,000 shares on January 7, 2004, which fully exercised the over-allotment option. The offering did not terminate until after the sale of all of the securities registered on the Registration Statement. The aggregate gross proceeds to us from our initial public offering were approximately $193.5 million. The aggregate net proceeds to us from the offering were approximately $178.0 million, after deducting an aggregate of approximately $13.5 million in underwriting discounts and commissions paid to the underwriters and an estimated $2.0 million in other
Page 23 of 55
expenses incurred in connection with the offering. In connection with the IPO, we did not make any payments, directly or indirectly, to any of our directors or officers, or, to our knowledge, any of their associates, or to any person owning ten percent or more of any class of our equity securities, or to any of our affiliates. All of the net proceeds were contributed to our life subsidiaries to fund future growth of our annuity business.
On December 20, 2005, we completed an additional offering of 13,000,000 shares of our common stock at a price of $11.60 per share. The managing underwriters for the offering were Raymond James & Associates, Inc., Friedman, Billings, Ramsey & Co., Inc., SunTrust Robinson Humphrey, Cochran, Caronia Securities, LLC and Oppenheimer & Co., Inc. Pursuant to the over-allotment option granted to the underwriters in the offering, the underwriters purchased an additional 1,950,000 shares on December 30, 2005. The aggregate gross proceeds to us from this additional offering were approximately $173.4 million. The aggregate net proceeds to us from the offering approximately $163.5 million after deducting an aggregate of approximately $9.1 million in underwriting discounts and commissions paid to the underwriters and an estimated $0.8 million in other expenses incurred in connection with the offering. The net proceeds are available to be contributed to our life subsidiaries to fund future growth of our annuity business.
There were no sales of unregistered equity securities during 2005.
Issuer Purchases of Equity Securities
We did not have any issuer purchases of equity securities for the quarter ended December 31, 2005.
Page 24 of 55
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The summary consolidated financial and other data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes appearing elsewhere in this report. The results for past periods are not necessarily indicative of results that may be expected for future periods.
|
|
|
Year ended December 31, |
|
|||||||||||||
|
|
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
|||||
|
|
|
(Dollars in thousands, except per share data) |
|
|||||||||||||
|
Consolidated Statements of Income Data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Traditional life and accident and health insurance premium s |
|
$ |
13,578 |
|
$ |
15,115 |
|
$ |
13,686 |
|
$ |
13,664 |
|
$ |
13,141 |
|
|
Annuity and single premium universal life product charges |
|
25,686 |
|
22,462 |
|
20,452 |
|
15,376 |
|
12,520 |
|
|||||
|
Net investment income |
|
554,118 |
|
428,385 |
|
357,295 |
|
308,548 |
|
209,086 |
|
|||||
|
Realized gains (losses) on investments |
|
(7,635 |
) |
943 |
|
6,946 |
|
(122 |
) |
787 |
|
|||||
|
Change in fair value of derivatives |
|
(18,029 |
) |
28,696 |
|
52,525 |
|
(57,753 |
) |
(55,158 |
) |
|||||
|
Total revenues |
|
567,718 |
|
495,601 |
|
450,904 |
|
279,713 |
|
180,376 |
|
|||||
|
Benefits and expenses |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Insurance policy benefits and change in future policy benefits |
|
13,375 |
|
13,423 |
|
11,824 |
|
9,317 |
|
9,762 |
|
|||||
|
Interest credited to account balances |
|
306,608 |
|
305,762 |
|
248,075 |
|
183,503 |
|
100,125 |
|
|||||
|
Change in fair value of embedded derivatives |
|
31,087 |
|
(8,567 |
) |
66,801 |
|
(5,027 |
) |
12,921 |
|
|||||
|
Interest expense on amounts due to related party under General Agency Commission and Servicing Agreement(b) |
|
— |
|
— |
|
— |
|
3,596 |
|
5,716 |
|
|||||
|
Interest expense on notes payable |
|
16,324 |
|
2,358 |
|
2,713 |
|
1,901 |
|
2,881 |
|
|||||
|
Interest expense on subordinated debentures(b) |
|
14,145 |
|
9,609 |
|
7,661 |
|
— |
|
— |
|
|||||
|
Interest expense on amounts due under repurchase agreements and other interest expense |
|
11,280 |
|
3,148 |
|
1,278 |
|
1,777 |
|
1,504 |
|
|||||
|
Amortization of deferred policy acquisition costs |
|
68,109 |
|
67,867 |
|
47,450 |
|
34,060 |
|
20,838 |
|
|||||
|
Other operating costs and expenses |
|
35,896 |
|
32,520 |
|
25,794 |
|
21,635 |
|
17,176 |
|
|||||
|
Total benefits and expenses |
|
496,824 |
|
426,120 |
|
411,596 |
|
250,762 |
|
170,923 |
|
|||||
|
Income before income taxes, minority interests and cumulative effect of change in accounting principle |
|
70,894 |
|
69,481 |
|
39,308 |
|
28,951 |
|
9,453 |
|
|||||
|
Income tax expense(b) |
|
25,402 |
|
40,611 |
|
13,505 |
|
7,299 |
|
333 |
|
|||||
|
Income before minority interests and cumulative effect of change in accounting principle |
|
45,492 |
|
28,870 |
|
25,803 |
|
21,652 |
|
9,120 |
|
|||||
|
Minority interests in subsidiaries: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Minority interest(b) |
|
2,500 |
|
(453 |
) |
363 |
|
— |
|
— |
|
|||||
|
Earnings attributable to company-obligated mandatorily redeemable preferred securities of subsidiary trusts(b) |
|
— |
|
— |
|
— |
|
7,445 |
|
7,449 |
|
|||||
|
Income before cumulative effect of change in accounting principle |
|
42,992 |
|
29,323 |
|
25,440 |
|
14,207 |
|
1,671 |
|
|||||
|
Cumulative effect of change in accounting for derivatives(a) |
|
— |
|
— |
|
— |
|
— |
|
(799 |
) |
|||||
|
Net income(c) |
|
$ |
42,992 |
|
$ |
29,323 |
|
$ |
25,440 |
|
$ |
14,207 |
|
$ |
872 |
|
|
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Income before cumulative effect of change in accounting principle |
|
$ |
1.09 |
|
$ |
0.77 |
|
$ |
1.45 |
|
$ |
0.87 |
|
$ |
0.10 |
|
|
Cumulative effect of change in accounting for derivatives(a) |
|
— |
|
— |
|
— |
|
— |
|
(0.05 |
) |
|||||
|
Earnings per common share |
|
$ |
1.09 |
|
$ |
0.77 |
|
$ |
1.45 |
|
$ |
0.87 |
|
$ |
0.05 |
|
|
Earnings per common share—assuming dilution: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Income before cumulative effect of change in accounting principle |
|
$ |
0.99 |
|
$ |
0.71 |
|
$ |
1.21 |
|
$ |
0.76 |
|
$ |
0.09 |
|
|
Cumulative effect of change in accounting for derivatives(a) |
|
— |
|
— |
|
— |
|
— |
|
(0.04 |
) |
|||||
|
Earnings per common share—assuming dilution |
|
$ |
0.99 |
|
$ |
0.71 |
|
$ |
1.21 |
|
$ |
0.76 |
|
$ |
0.05 |
|
|
Dividends declared per common share |
|
$ |
0.04 |
|
$ |
0.02 |
|
$ |
0.01 |
|
$ |
0.01 |
|
$ |
0.01 |
|
Page 25 of 55
|
|
|
At December 31, |
|
|||||||||||||
|
|
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
|||||
|
|
|
(Dollars in thousands, except per share data) |
|
|||||||||||||
|
Consolidated Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total assets |
|
$ |
14,042,794 |
|
$ |
11,087,288 |
|
$ |
8,962,841 |
|
$ |
7,327,789 |
|
$ |
4,819,220 |
|
|
Policy benefit reserves |
|
12,237,988 |
|
9,807,969 |
|
8,315,874 |
|
6,737,888 |
|
4,420,720 |
|
|||||
|
Amounts due to related party under General Agency Commission and Servicing Agreement(b) |
|
— |
|
— |
|
— |
|
40,345 |
|
46,607 |
|
|||||
|
Notes payable(b) |
|
281,043 |
|
283,375 |
|
46,115 |
|
43,333 |
|
46,667 |
|
|||||
|
Subordinated debentures(b) |
|
230,658 |
|
173,576 |
|
116,425 |
|
— |
|
— |
|
|||||
|
Company-obligated mandatorily redeemable preferred securities issued by subsidiary trusts(b) |
|
— |
|
— |
|
— |
|
100,486 |
|
100,155 |
|
|||||
|
Total stockholders’ equity |
|
519,358 |
|
305,543 |
|
263,716 |
|
77,478 |
|
42,567 |
|
|||||
|
|
|
At and for the Year Ended December 31, |
|
|||||||||||||
|
|
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
|||||
|
|
|
(Dollars in thousands, except per share data) |
|
|||||||||||||
|
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Book value per share(d) |
|
$ |
9.35 |
|
$ |
7.97 |
|
$ |
7.19 |
|
$ |
4.67 |
|
$ |
2.24 |
|
|
Return on equity(e) |
|
11.0 |
% |
10.3 |
% |
28.3 |
% |
23.7 |
% |
1.7 |
% |
|||||
|
Number of agents |
|
51,744 |
|
45,940 |
|
42,239 |
|
41,396 |
|
33,894 |
|
|||||
|
Life subsidiaries’ statutory capital and surplus |
|
$ |
686,841 |
|
$ |
608,930 |
|
$ |
374,587 |
|
$ |
227,199 |
|
$ |
177,868 |
|
|
Life subsidiaries’ statutory net gain (loss) from operations before income taxes and realized capital gains (losses) |
|
112,498 |
|
93,640 |
|
45,822 |
|
53,535 |
|
(5,675 |
) |
|||||
|
Life subsidiaries’ statutory net income (loss)(c) |
|
40,534 |
|
47,711 |
|
25,404 |
|
26,010 |
|
(17,187 |
) |
|||||
(a) The accounting change resulted from the adoption of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, which became effective on January 1, 2001.
(b) On December 31, 2003, retroactive to January 1, 2003, we adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51. During the first quarter of 2005, retroactive to January 1, 2003, we adopted FASB Staff Position No. FIN 46(R)-5, Implicit Variable Interests under FIN 46. See note 1 to our audited consolidated financial statements.
(c) Our GAAP net income and statutory net loss in 2001, were affected by a decision to maintain a significant liquid investment position after the September 11, 2001 terrorist attacks.
(d) Book value per share is calculated as total stockholders’ equity less the liquidation preference of our series preferred stock divided by the total number of shares of common stock outstanding.
(e) We define return on equity as net income divided by average total stockholders’ equity. Average total stockholders’ equity is determined based upon the total stockholders’ equity at the beginning and the end of the year. The computations of average stockholders’ equity for 2005 and 2003 have been calculated on a weighted average basis to recognize the significant increases in stockholders’ equity that resulted from the receipt of the net proceeds from our public offerings of common stock in December 2005 and 2003.
Page 26 of 55
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis reviews our consolidated financial position at December 31, 2005 and 2004, and our consolidated results of operations for the three years in the period ended December 31, 2005, and where appropriate, factors that may affect future financial performance. This discussion should be read in conjunction with our consolidated financial statements, notes thereto and selected consolidated financial data appearing elsewhere in this report.
Cautionary Statement Regarding Forward-Looking Information
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. We caution that these statements may and often do vary from actual results and the differences between these statements and actual results can be material. Accordingly, we cannot assure you that actual results will not differ materially from those expressed or implied by the forward-looking statements. Factors that could contribute to these differences 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 fair value of our investments and the lapse rate and profitability of our policies;
· customer response to new products and marketing initiatives;
· changes in the 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 filings with the Securities and Exchange Commission or private placement memorandums.
We specialize in the sale of individual annuities (primarily deferred annuities) and, to a lesser extent, we also sell life insurance policies. Under accounting principles generally accepted in the United States, or GAAP, premium collections for deferred annuities are reported as deposit liabilities instead of as revenues. Sources of revenues for products accounted for as deposit liabilities are net investment income, surrender charges deducted from the account balances of policyholders in connection with withdrawals, realized gains and losses on investments and changes in fair value of derivatives. Components of expenses for products accounted for as deposit liabilities are interest credited to account balances, changes in fair value of embedded derivatives, amortization of deferred policy acquisition costs and deferred sales inducements, other operating costs and expenses and income taxes.
Earnings from products accounted for as deposit liabilities are primarily generated from the excess of net investment income earned over the interest credited to the policyholder, or the “investment spread”. In the case of index annuities, the investment spread consists of net investment income in excess of the cost of
Page 27 of 55
the options purchased to fund the index-based component of the policyholder’s return and amounts credited as a result of minimum guarantees.
Our investment spread is summarized as follows:
|
|
|
Year Ended December 31, |
|
||||
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
Average yield on invested assets |
|
6.18% |
|
6.28% |
|
6.43% |
|
|
Cost of money: |
|
|
|
|
|
|
|
|
Aggregate |
|
3.70% |
|
3.90% |
|
4.13% |
|
|
Average net index costs for index annuities |
|
3.38% |
|
3.37% |
|
3.46% |
|
|
Average crediting rate for fixed rate annuities: |
|
|
|
|
|
|
|
|
Annually adjustable |
|
3.32% |
|
3.47% |
|
3.69% |
|
|
Multi-year rate guaranteed |
|
5.56% |
|
5.57% |
|
5.70% |
|
|
Investment spread: |
|
|
|
|
|
|
|
|
Aggregate |
|
2.48% |
|
2.38% |
|
2.30% |
|
|
Index annuities |
|
2.80% |
|
2.91% |
|
2.97% |
|
|
Fixed rate annuities: |
|
|
|
|
|
|
|
|
Annually adjustable |
|
2.86% |
|
2.81% |
|
2.74% |
|
|
Multi-year rate guaranteed |
|
0.62% |
|
0.71% |
|
0.73% |
|
The cost of money, average crediting rates and investment spreads are computed without the impact of amortization of deferred sales inducements. See Critical Accounting Policies—Deferred Policy Acquisition Costs and Deferred Sales Inducements. With respect to our index annuities, the cost of money includes the average crediting rate on amounts allocated to the fixed rate options, expenses we incur to fund the annual index credits and minimum guaranteed interest credited on the index business. Proceeds received upon expiration or early termination of call options purchased to fund annual index credits are recorded as part of the change in fair value of derivatives, and are largely offset by an expense for interest credited to annuity policyholder account balances. See Critical Accounting Policies—Derivative Instruments—Index Products.
Our profitability depends in large part upon the amount of assets under our management, investment spreads we earn on our policyholders’ account balances, our ability to manage our investment portfolio to maximize returns and minimize risks such as interest rate changes, defaults or impairment of assets, our ability to manage costs of the options purchased to fund the annual index credits on our index annuities, our ability to manage the costs of acquiring new business (principally commissions to agents and first year bonuses credited to policyholders) and our ability to manage our operating expenses.
The increasing complexity of the business environment and applicable authoritative accounting guidance require us to closely monitor our accounting policies. We have identified four critical accounting policies that are complex and require significant judgment. The following summary of our critical accounting policies is intended to enhance your ability to assess our financial condition and results of operations and the potential volatility due to changes in estimates.
Valuation of Investments
Our fixed maturity securities (bonds and redeemable preferred stocks maturing more than one year after issuance) and equity securities (common and non-redeemable preferred stocks) classified as available for sale are reported at estimated fair value. Unrealized gains and losses, if any, on these securities are included directly as a separate component of stockholders’ equity, net of income taxes and certain
Page 28 of 55
adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements. Fair values for securities that are actively traded are determined using quoted market prices. For fixed maturity securities that are not actively traded, fair values are estimated using price matrices developed using yield data and other factors relating to instruments or securities with similar characteristics. The carrying amounts of all our investments are reviewed on an ongoing basis for credit deterioration. If this review indicates a decline in fair value that is other than temporary, our carrying amount in the investment is reduced to its fair value and a specific write down is taken. Such reductions in carrying amount are recognized as realized losses and charged to earnings.
Our periodic assessment of our ability to recover the amortized cost basis of investments that have materially lower quoted market prices requires a high degree of management judgment and involves uncertainty. Factors considered in evaluating whether a decline in value is other than temporary include:
· the length of time and the extent to which the fair value has been less than cost;
· the financial condition and near-term prospects of the issuer;
· whether the investment is rated investment grade;
· whether the issuer is current on all payments and all contractual payments have been made as agreed;
· our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery;
· consideration of rating agency actions;
· changes in cash flows of asset-backed and mortgage-backed securities.
In addition, for securities expected to be sold, an other than temporary impairment charge is recognized if we do not expect the fair value of a security to recover to cost or amortized cost prior to the expected date of sale. Once an impairment charge has been recorded, we then continue to review the other than temporarily impaired securities for appropriate valuation on an ongoing basis. Realized losses through a charge to earnings may be recognized in future periods should we later conclude that the decline in fair value below amortized cost is other than temporary pursuant to our accounting policy described above.
Page 29 of 55
At December 31, 2005 and 2004, the amortized cost and estimated fair value of fixed maturity securities and equity securities that were in an unrealized loss position were as follows:
|
|
|
December 31, 2005 |
|
December 31, 2004 |
|
||||||||||||||||||||||||||||||
|
|
|
Number of |
|
Amortized |
|
Unrealized |
|
Estimated |
|
Number of |
|
Amortized |
|
Unrealized |
|
Estimated |
|
||||||||||||||||||
|
|
|
Positions |
|
Cost |
|
Losses |
|
Fair Value |
|
Positions |
|
Cost |
|
Losses |
|
Fair Value |
|
||||||||||||||||||
|
|
|
|
|
(Dollars in thousands) |
|
|
|
(Dollars in thousands) |
|
||||||||||||||||||||||||||
|
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
United States Government full faith and credit |
|
|
2 |
|
|
$ |
902 |
|
|
$ |
(24 |
) |
|
|
$ |
878 |
|
|
|
1 |
|
|
$ |
502 |
|
|
$ |
(10 |
) |
|
|
$ |
492 |
|
|
|
United States Government sponsored agencies |
|
|
70 |
|
|
2,822,317 |
|
|
(67,471 |
) |
|
|
2,754,846 |
|
|
|
31 |
|
|
1,705,235 |
|
|
(58,749 |
) |
|
|
1,646,486 |
|
|
||||||
|
Public utilities |
|
|
15 |
|
|
84,690 |
|
|
(1,306 |
) |
|
|
83,384 |
|
|
|
— |
|
|
— |
|
|
— |
|
|
|
— |
|
|
||||||
|
Corporate securities |
|
|
54 |
|
|
374,502 |
|
|
(12,596 |
) |
|
|
361,906 |
|
|
|
11 |
|
|
65,488 |
|
|
(6,916 |
) |
|
|
58,572 |
|
|
||||||
|
Redeemable preferred stocks |
|
|
10 |
|
|
35,013 |
|
|
(2,076 |
) |
|
|
32,937 |
|
|
|
4 |
|
|
20,000 |
|
|
(584 |
) |
|
|
19,416 |
|
|
||||||
|
Mortgage and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
United States Government and agencies |
|
|
7 |
|
|
47,053 |
|
|
(160 |
) |
|
|
46,893 |
|
|
|
2 |
|
|
5,873 |
|
|
(72 |
) |
|
|
5,801 |
|
|
||||||
|
Non-government |
|
|
25 |
|
|
280,226 |
|
|
(12,933 |
) |
|
|
267,293 |
|
|
|
12 |
|
|
278,393 |
|
|
(15,279 |
) |
|
|
263,114 |
|
|
||||||
|
|
|
|
183 |
|
|
$ |
3,644,703 |
|
|
$ |
(96,566 |
) |
|
|
$ |
3,548,137 |
|
|
|
61 |
|
|
$ |
2,075,491 |
|
|
$ |
(81,610 |
) |
|
|
$ |
1,993,881 |
|
|
|
Held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
United States Government sponsored agencies |
|
|
81 |
|
|
$ |
4,541,914 |
|
|
$ |
(113,290 |
) |
|
|
$ |
4,428,624 |
|
|
|
56 |
|
|
$ |
3,213,468 |
|
|
$ |
(94,958 |
) |
|
|
$ |
3,118,510 |
|
|
|
|
|
|
81 |
|
|
$ |
4,541,914 |
|
|
$ |
(113,290 |
) |
|
|
$ |
4,428,624 |
|
|
|
56 |
|
|
$ |
3,213,468 |
|
|
$ |
(94,958 |
) |
|
|
$ |
3,118,510 |
|
|
|
Equity securities, available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Non-redeemable preferred stocks |
|
|
12 |
|
|
$ |
44,665 |
|
|
$ |
(2,075 |
) |
|
|
$ |
42,590 |
|
|
|
3 |
|
|
$ |
14,784 |
|
|
$ |
(294 |
) |
|
|
$ |
14,490 |
|
|
|
Common stocks |
|
|
5 |
|
|
8,816 |
|
|
(1,534 |
) |
|
|
7,282 |
|
|
|
3 |
|
|
2,945 |
|
|
(572 |
) |
|
|
2,373 |
|
|
||||||
|
|
|
|
17 |
|
|
$ |
53,481 |
|
|
$ |
(3,609 |
) |
|
|
$ |
49,872 |
|
|
|
6 |
|
|
$ |
17,729 |
|
|
$ |
(866 |
) |
|
|
$ |
16,863 |
|
|
Page 30 of 55
The amortized cost and estimated fair value of fixed maturity securities at December 31, 2005 and 2004, by contractual maturity, that were in an unrealized loss position are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. All of our mortgage-backed and asset-backed securities provide for periodic payments throughout their lives, and are shown below as a separate line.
|
|
|
December 31, 2005 |
|
December 31, 2004 |
|
||||||||||||||||||||
|
|
|
Available-for-sale |
|
Held for investment |
|
Available-for-sale |
|
Held for investment |
|
||||||||||||||||
|
|
|
Amortized |
|
Estimated |
|
Amortized |
|
Estimated |
|
Amortized |
|
Estimated |
|
Amortized |
|
Estimated |
|
||||||||
|
|
|
Cost |
|
Fair Value |
|
Cost |
|
Fair Value |
|
Cost |
|
Fair Value |
|
Cost |
|
Fair Value |
|
||||||||
|
|
|
(Dollars in thousands) |
|
(Dollars in thousands) |
|
||||||||||||||||||||
|
Due after one year through five years |
|
$ |
31,264 |
|
$ |
29,906 |
|
$ |
— |
|
$ |
— |
|
$ |
5 |
|
$ |
5 |
|
$ |
— |
|
$ |
|
|
|
Due after five years through ten years |
|
367,098 |
|
351,739 |
|
— |
|
— |
|
224,858 |
|
213,750 |
|
— |
|
— |
|
||||||||
|
Due after ten years through twenty years |
|
1,821,658 |
|
1,783,303 |
|
347,612 |
|
343,806 |
|
681,795 |
|
653,505 |
|
745,904 |
|
740,631 |
|
||||||||
|
Due after twenty years |
|
1,097,404 |
|
1,069,003 |
|
4,194,302 |
|
4,084,818 |
|
884,567 |
|
857,706 |
|
2,467,564 |
|
2,377,879 |
|
||||||||
|
|
|
3,317,424 |
|
3,233,951 |
|
4,541,914 |
|
4,428,624 |
|
1,791,225 |
|
1,724,966 |
|
3,213,468 |
|
3,118,510 |
|
||||||||
|
Mortgage-backed and asset-backed securities |
|
327,279 |
|
314,186 |
|
— |
|
— |
|
284,266 |
|
268,915 |
|
— |
|
— |
|
||||||||
|
|
|
$ |
3,644,703 |
|
$ |
3,548,137 |
|
$ |
4,541,914 |
|
$ |
4,428,624 |
|
$ |
2,075,491 |
|
$ |
1,993,881 |
|
$ |
3,213,468 |
|
$ |
3,118,510 |
|
See Financial Condition—Investments for significant concentrations in the investment portfolio.
At December 31, 2005 and 2004, the fair value of investments we owned that were non-investment grade or not rated was $69.2 million and $63.9 million, respectively. Non-investment grade or not rated securities represented 0.9% and 0.8% at December 31, 2005 and 2004, respectively, of the fair value of our fixed maturity securities. The unrealized losses on investments we owned that were non-investment grade or not rated at December 31, 2005 and 2004 were $5.8 million and $10.2 million, respectively. The unrealized losses on such securities at December 31, 2005 and 2004 represented 2.8% and 5.7%, respectively, of gross unrealized losses on fixed maturity securities.
At each balance sheet date, we identify invested assets which have characteristics (i.e. significant unrealized losses compared to book value and industry trends) creating uncertainty as to our future assessment of an other than temporary impairment. We include these securities on a list which is referred to as our watch list. We exclude from this list securities with unrealized losses which are related to market movements in interest rates and which have no factors indicating that such unrealized losses may be other than temporary. At December 31, 2005, the amortized cost and estimated fair value of fixed maturity securities on the watch list are as follows:
|
|
|
Amortized |
|
Unrealized |
|
Estimated |
|
Maturity |
|
Months Below |
|
|||||||||||
|
Issuer |
|
|
|
Cost |
|
Losses |
|
Fair Value |
|
Date |
|
Amortized Cost |
|
|||||||||
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|||||||||||||||
|
Ford Motor Co. |
|
|
$ |
5,003 |
|
|
$ |
(1,553 |
) |
|
$ |
3,450 |
|
|
07/16/2031 |
|
|
4 |
|
|
||
Our analysis of Ford Motor Co. and its credit performance at December 31, 2005 is as follows:
Ford’s senior unsecured credit rating was lowered on August 24, 2005 due to intensified competition, high labor costs and consistently slipping market share in North America. W e determined that an other than temporary impairment charge on these securities was not necessary as Ford has strong liquidity allowing for time to correct market share losses and improve its cost structure.
The security on the watch list is current in respect to payments of principal and interest. We have concluded that we have the intent and the ability to hold this security for a period of time sufficient to
Page 31 of 55
allow for a recovery in fair value and that there was no other than temporary impairment on this investment at December 31, 2005.
We took write downs on certain other investments that we concluded did have an other than temporary impairment during 2005, 2004 and 2003 of $9.5 million, $12.8 million and $9.8 million, respectively. Following is a discussion of each security for which we have taken write downs during the years ended December 31, 2005, 2004 and 2003.
We own common stock of Ford Motor Company. While we believe that Ford’s strategy will improve its credit quality, the common stock could remain in an unrealized loss position for a significant time period. We wrote this security down by $0.6 million in the fourth quarter of 2005.
Preferred Plus Trust LMG-4 is a preferred stock backed by senior notes of Liberty Media Corporation. We wrote this security down by $0.5 million during the fourth quarter of 2005 based upon an announcement by Liberty Media Corporation’s management of a change in future business strategy and the potential for share buybacks. We sold this security subsequent to December 31, 2005.
Northwest Airlines Pass Thru Certificates 1999-1 Class C are backed by the general credit of Northwest Airlines as well as the collateral from a pool of airplanes. We wrote this security down by $5.8 million during the third quarter of 2005 based upon the uncertainty regarding the recovery of all principal and interest payments subsequent to Northwest Airlines bankruptcy filing on September 14, 2005. We sold this security subsequent to December 31, 2005 at a value in excess of its amortized cost.
Pegasus Aviation 1999-1A C1 is an asset-backed security backed by leases on airplanes. We wrote down this security during the fourth quarter of 2001 by $1.9 million. This write down resulted from changes in the amount of expected principal and interest payments on this security related to the downturn in the airline industry. Due to continuing problems in the airline industry and further deterioration in the underlying collateral, we took an additional write down of $1.6 million on this security during the third quarter of 2005.
Pegasus 2001-1A C2 is an asset-backed security backed by leases on airplanes. We wrote down this security during the third quarter of 2002 and the first quarter of 2003 by $3.0 million and $2.9 million, respectively. These write downs resulted from changes in the amount of expected principal and interest payments on this security related to the downturn in the airline industry. Due to continuing problems in the airline industry and further deterioration in the underlying collateral, we took an additional write down of $1.1 million on this security during the second quarter of 2005.
Diversified Asset Securities II Class B-1 is a pool of asset-backed securities that entitle the holders thereof to receive payments that depend primarily on the cash flow from a specified pool of financial assets. We wrote this security down by $1.5 million during the second quarter of 2004 based upon the deterioration of the underlying collateral along with a downgrade to below investment grade on June 2, 2004.
Oakwood Mortgage 1999-E Class M2 is an asset-backed security backed by installment sales contracts secured by manufactured homes and liens on real estate. We wrote down this security by $4.2 million in the third quarter of 2003 due to continuing high default rates for the manufactured housing industry causing doubt about the return of the entire principal balance. We wrote this security down by an additional $2.7 million during the fourth quarter of 2003 due to further deterioration in default rates. We sold this security during the second quarter of 2005 as discussed below.
Oakwood Mortgage 2000-C Class M1 is backed by installment sales contracts secured by manufactured homes and liens on real estate. We wrote this security down by $7.6 million in the first quarter of 2004 due to an increase in default rates and realized losses above expected levels along with a downgrade to below investment grade on March 8, 2004. We took an additional write down on this
Page 32 of 55
security of $3.7 million in the third quarter of 2004 due to continued deterioration in default rates. We sold this security during the second quarter of 2005 as discussed below.
In making the decisions to write down the securities described above, we considered whether the factors leading to those write downs impacted any other securities held in our portfolio. In cases where we determined that a decline in value was related to an industry-wide concern, we considered the impact of such concern on all securities we held within that industry classification.
Below is a list of securities which we have sold at a loss, excluding losses arising from interest rate changes and losses deemed immaterial. There were no material realized losses on the sales of securities during 2004.
|
Issuer |
|
|
|
Amortized |
|
Fair |
|
Realized |
|
Months Below |
|
|||||||||
|
|
|
(Dollars in thousands) |
|
|
|
|||||||||||||||
|
Year Ended December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Oakwood Mortgage 2000-C Class M1 |
|
|
$ |
4,505 |
|
|
$ |
2,332 |
|
|
$ |
2,173 |
|
|
|
9 |
|
|
||
|
Oakwood Mortgage 1999-E Class M2 |
|
|
733 |
|
|
182 |
|
|
551 |
|
|
|
3 |
|
|
|||||
|
|
|
|
$ |
5,238 |
|
|
$ |
2,514 |
|
|
$ |
2,724 |
|
|
|
|
|
|
||
|
Year Ended December 31, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Transamerica Capital |
|
|
$ |
6,765 |
|
|
$ |
6,437 |
|
|
$ |
328 |
|
|
|
9 |
|
|
||
|
Calpine Canada |
|
|
5,023 |
|
|
3,613 |
|
|
1,410 |
|
|
|
20 |
|
|
|||||
|
American Airlines |
|
|
1,750 |
|
|
902 |
|
|
848 |
|
|
|
10 |
|
|
|||||
|
Ford Motor Co. |
|
|
5,003 |
|
|
4,567 |
|
|
436 |
|
|
|
24 |
|
|
|||||
|
Juniper |
|
|
2,594 |
|
|
2,075 |
|
|
519 |
|
|
|
5 |
|
|
|||||
|
|
|
|
$ |
21,135 |
|
|
$ |
17,594 |
|
|
$ |
3,541 |
|
|
|
|
|
|
||
The decision to sell a security at a loss was concurrent with the decision that an initial or additional impairment charge was required. Accordingly, in all cases, this did not contradict our previous assertion that we had the ability and intent to hold the security until recovery in value. Each of these securities and the factors resulting in the sales of such securities are discussed individually below.
Oakwood Mortgage 2000-C Class M1 and Oakwood Mortgage 1999-E Class M2 are asset-backed securities backed by installment sales contracts secured by manufactured homes and liens on real estate. We wrote down Oakwood Mortgage 1999-E Class M2 by $4.2 million and $2.7 million during the third and fourth quarters of 2003, respectively. We wrote down Oakwood Mortgage 2000-C Class M1 by $7.6 million and $3.7 million during the first and fourth quarters of 2004, respectively. These write downs resulted from deterioration in default rates on the underlying collateral. Continued deterioration in the default rates on the underlying collateral led us to the decision that an additional impairment charge was required and concurrently we decided to sell these securities during 2005.
Transamerica Capital was sold during 2003 to reduce our exposure to European insurance companies and not as a result of deteriorating credit quality.
Calpine Canada was sold during 2003 because it engaged in re-financing activities that threatened its long term profitability and exacerbated its reliance on leverage. The wholesale power market in which it was engaged was expected to be weak.
Page 33 of 55
American Airlines pass thru certificates, which were collateralized by a pool of airplanes, were sold during 2003 as a result of inadequate collateral coverage in a potential bankruptcy situation and recent changes regarding the airline’s bank covenants regarding required minimum unrestricted cash balances.
Ford Motor Co. was determined to be an improving credit, however we decided to reduce our position in this security during 2003 to $10.0 million by selling $5.0 million principal amount of these securities at a loss of $0.4 million.
Juniper was a collateralized debt obligation backed by corporate debt obligations rated primarily below investment grade. In the first quarter of 2002, we wrote this security down as a result of downgrades and significant deterioration in the value of the underlying corporate debt. Continued deterioration led us to sell the security in 2003.
Our mortgage loans on real estate are reported at cost, adjusted for amortization of premiums and accrual of discounts. If we determine that the value of any mortgage loan is impaired, the carrying amount of the mortgage loan will be reduced to its fair value, based upon the present value of expected future cash flows from the loan discounted at the loan’s effective interest rate, or the fair value of the underlying collateral.
Derivative Instruments—Index Products
We offer a variety of index annuities with crediting strategies linked to several equity market indices, including the S&P 500, the Dow Jones Industrial Average and the NASDAQ 100. Several of these products also offer a bond strategy linked to the Lehman Aggregate Bond Index or the Lehman U.S. Treasury Bond Index. These products allow policyholders to earn returns linked to equity or bond index appreciation without the risk of loss of their principal. Most of these products allow policyholders to transfer funds once a year among several different crediting strategies, including one or more of the index based strategies and a traditional fixed rate strategy. Substantially all of our index products require annual crediting of interest and an annual reset of the applicable index on the contract anniversary date. The computation of the annual index credit is based upon either a one year annual point-to-point calculation (i.e., the gain in the applicable index from one anniversary date to the next anniversary date), a monthly averaging of the index during the contract year, or a one year monthly point-to-point calculation (the net gain determined by adding the twelve monthly gains and losses in the applicable index within the one year period from one anniversary date to the next anniversary date).
The annuity contract value is equal to the premiums paid plus annual index credits based upon a percentage, known as the “participation rate”, of the annual appreciation (based in some instances on monthly averages or monthly point-to-point calculations) in a recognized index or benchmark. The participation rate, which we may reset annually, generally varies among the index products from 50% to 100%. Some products apply an overall limit, or “cap”, ranging from 5% to 13%, on the amount of annual interest the policyholder may earn in any one contract year, and the applicable cap may also be adjusted annually subject to stated minimums. In addition, some of the products have an “asset fee” ranging from 1.5 to 5%, which is deducted from the interest to be credited. The minimum guaranteed contract values range from 80% to 100% of the premium collected plus interest credited on the minimum guaranteed contract value at an annual rate of 2% to 3.5%.
We purchase one-year call options on the applicable indices as an investment to provide the income needed to fund the amount of the annual index credits on the index products. New one-year options are purchased at the outset of each contract year. We budget an amount to purchase the specific options needed to fund the annual index credits, and the cost of the options represents our cost of providing the credits. The amount we budget for the purchase of index call options is based on our interest spread targets and is comparable to the credited rates of interest we offer on fixed rate annuities. For example, if the yield on our invested assets is 6.25% and our targeted spread is 2.50%, we allocate up to 3.75% of the premium
Page 34 of 55
in the first year or account balance after the first year to the purchase of one-year call options. Participation rates, which define the policyholder’s level of participation in index gains each year, are determined by option costs. For example, if, based on current market conditions, the amount allocated to the purchase of options is sufficient to purchase an option that will provide a return equal to 70% of the annual gain in the applicable index, we will set the policyholder’s participation rate at 70%. We have the ability to modify participation rates each year when a new option is purchased. In general, if option costs increase, participation rates may be decreased, and if option costs decrease, participation rates may be increased. We purchase call options weekly based upon new and renewing index account values during the applicable week, and the purchases are made by category according to the particular products and indices applicable to the new or renewing account values. Any proceeds received on the options at the expiration of the one-year term fund the related index credits to the policyholders. If there is no gain in an index, the policyholder receives a zero index credit on the policy, and we incur no costs beyond the option cost, except in cases where the minimum guaranteed value of a contract exceeds its index value.
Fair value changes associated with the call options are reported as an increase or decrease in revenues in our consolidated statements of income in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities”. The risk associated with prospective purchases of future one-year options is the uncertainty of the cost, which will determine whether we are able to earn our spread on our index business. All our index products permit us to modify participation rates, annual income caps or asset fees at least once a year. This feature is comparable to our fixed rate annuities, which allow us to adjust crediting rates annually. By modifying our participation rates or other features, we can limit our costs of purchasing the related one-year call options, except in cases where contractual features would prevent further modifications. Based upon actuarial testing which we conduct as a part of the design of our index products and on an ongoing basis, we believe the risk that contractual features would prevent us from controlling option costs is not material.
After the purchase of the one-year call options and payment of acquisition costs, we invest the balance of index premiums as a part of our general account invested assets. With respect to the index products, our investment spread is measured as the difference between the aggregate yield on the relevant portion of our invested assets, less the aggregate option costs and the costs associated with minimum guarantees. If the minimum guaranteed value of an index product exceeds the index value (computed on a cumulative basis over the life of the contract) then the general account earnings are available to satisfy the minimum guarantees. If there were little or no gains in the entire series of one-year options purchased over the expected life of an index annuity (typically 10 to 15 years), then we would incur expenses for credited interest over and above our option costs, causing our spread to tighten and reducing our profits or potentially resulting in losses on these products.
Under SFAS No. 133, all derivative instruments (including certain derivative instruments embedded in other contracts) associated with our index products are recognized in the balance sheet at their fair values and changes in fair value are recognized immediately in earnings. This impacts the items of revenue and expense we report on our index business as follows:
· We must mark to market the purchased call options we use to fund the annual index credits on our index annuities based upon quoted market prices from related counterparties. We record the change in fair value of these options as a component of our revenues. Included within the change in fair value of the options is an element reflecting the time value of the options, which initially is their purchase cost declining to zero at the end of their one-year lives. The change in fair value of derivatives also includes proceeds received at the expiration of the one year option terms and gains or losses recognized upon early termination.
· Under SFAS No. 133, the future annual index credits on our index annuities are treated as a “series of embedded derivatives” over the expected life of the applicable contracts. We are required to estimate the fair value of policy liabilities for index annuities, including the embedded derivatives,
Page 35 of 55
by valuing the “host” (or guaranteed) component of the liabilities and projecting (i) the expected index credits on the next policy anniversary dates and (ii) the net cost of annual options we will purchase in the future to fund index credits. Our estimates of the fair value of these embedded derivatives are based on assumptions related to underlying policy terms (including annual participation rates, cap rates, asset fees, and minimum guarantees), index values, notional amounts, strike prices and expected lives of the policies. The change in fair value of embedded derivatives increases with increases in volatility in the indices and interest rates. The change in fair value of the embedded derivatives will not correspond to the change in fair value of the purchased options because the purchased options are one-year options while the options valued in the fair value of embedded derivatives cover the expected life of the contracts which typically exceed 10 years.
· We adjust the amortization of deferred policy acquisition costs and deferred sales inducements to reflect the impact of the items discussed above.
The amounts reported with respect to our index business for SFAS No. 133 are summarized as follows:
|
|
|
Year Ended December 31, |
|
|||||||
|
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
|
(Dollars in thousands) |
|
|||||||
|
Change in fair value of derivatives: |
|
|
|
|
|
|
|
|||
|
Proceeds received at expiration or gains recognized upon early termination |
|
$ |
89,942 |
|
$ |
87,619 |
|
$ |
45,827 |
|
|
Cost of money for index annuities |
|
(114,234 |
) |
(59,432 |
) |
(55,889 |
) |
|||
|
Change in difference between fair value and remaining option cost at beginning and end of period |
|
6,263 |
|
509 |
|
62,587 |
|
|||
|
|
|
$ |
(18,029 |
) |
$ |
28,696 |
|
$ |
52,525 |
|
|
Change in fair value of embedded derivatives - index annuities |
|
$ |
26,461 |
|
$ |
(8,567 |
) |
$ |
66,801 |
|
|
Related increase (decrease) in amortization of deferred policy acquisition costs and deferred sales inducements |
|
$ |
(12,314 |
) |
$ |
6,408 |
|
$ |
(1,692 |
) |
Deferred Policy Acquisition Costs and Deferred Sales Inducements
Commissions and certain other costs relating to the production of new business are not expensed when incurred but instead are capitalized as deferred policy acquisition costs or deferred sales inducements. Only costs which are expected to be recovered from future policy revenues and gross profits may be deferred. Deferred policy acquisition costs consist principally of commissions and certain costs of policy issuance. Deferred sales inducements consist of first-year premium and interest bonuses credited to policyholder account balances. Amortization of deferred sales inducements is reported as a component of interest credited to account balances in the consolidated statements of income.
Deferred policy acquisition costs totaled $977.0 million and $713.0 million at December 31, 2005 and 2004, respectively. Deferred sales inducements totaled $315.9 million and $159.5 million at December 31, 2005 and 2004, respectively. For annuity and single premium universal life products, these costs are being amortized generally in proportion to expected gross profits from investments and, to a lesser extent, from surrender charges and mortality and expense margins. Current period amortization must be adjusted retrospectively if changes occur in estimates of future gross profits/margins (including the impact of realized investment gains and losses). Our estimates of future gross profits/margins are based on actuarial assumptions related to the underlying policies terms, lives of the policies, yield on investments supporting the liabilities and level of expenses necessary to maintain the polices over their entire lives.
Page 36 of 55
Deferred Income Tax Assets
As of December 31, 2005 and 2004, we had $92.5 million and $56.1 million, respectively, of net deferred income tax assets. The realization of these assets is based upon estimates of future taxable income, which requires management judgment. Based upon projections of future taxable income, and considering all other available evidence, management believes the realization of these assets is more likely than not and we have not recorded a valuation allowance against these assets.
Results of Operations for the Three Years Ended December 31, 2005
Annuity deposits by product type collected during 2005, 2004 and 2003, were as follows:
|
|
|
Year Ended December 31, |
|
|||||||||
|
Product Type |
|
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
|
(Dollars in thousands) |
|
|||||||||
|
Index Annuities: |
|
|
|
|
|
|
|
|||||
|
Index Strategies |
|
$ |
1,780,092 |
|
$ |
1,119,398 |
|
$ |
768,105 |
|
||
|
Fixed Strategy |
|
908,868 |
|
545,630 |
|
330,539 |
|
|||||
|
|
|
2,688,960 |
|
1,665,028 |
|
1,098,644 |
|
|||||
|
Fixed Rate Annuities: |
|
|
|
|
|
|
|
|||||
|
Single-Year Rate Guaranteed |
|
193,288 |
|
287,619 |
|
564,256 |
|
|||||
|
Multi-Year Rate Guaranteed |
|
12,807 |
|
21,324 |
|
64,108 |
|
|||||
|
|
|
206,095 |
|
308,943 |
|
628,364 |
|
|||||
|
Total before coinsurance ceded |
|
2,895,055 |
|
1,973,971 |
|
1,727,008 |
|
|||||
|
Coinsurance ceded |
|
4,688 |
|
202,064 |
|
649,434 |
|
|||||
|
Net after coinsurance ceded |
|
$ |
2,890,367 |
|
$ |
1,771,907 |
|
$ |
1,077,574 |
|
||
For information related to our coinsurance agreements, see note 5 to our audited consolidated financial statements.
Gross annuity deposits for 2005 increased 47% compared to 2004, and increased 14% in 2004 compared to 2003, resulting from increased marketing efforts following the completion of our initial public offering (“IPO”).
Net annuity deposits after coinsurance increased 63% during 2005 compared to 2004, and increased 64% during 2004 compared to 2003, because we reduced the coinsurance percent in our coinsurance agreement with EquiTrust Life Insurance Company (“EquiTrust”), a subsidiary of FBL Financial Group, Inc. (“FBL”), from 40% in 2003 to 20% in 2004, and effective August 1, 2004, we suspended the EquiTrust coinsurance agreement.
Net income increased 47% to $43.0 million in 2005, and 15% to $29.3 million in 2004, from $25.4 million in 2003. The increases in net income were principally due to growth in the volume of business in force and increases in the investment spread earned on our annuity liabilities. Our net annuity liabilities (after coinsurance ceded) increased from $5.4 billion at the beginning of 2003 to $10.2 billion at the end of 2005. As set forth in a table included earlier in this item, we increased our aggregate investment spread to 2.48% in 2005 compared to 2.38% in 2004 and 2.30% in 2003. Net income in each year was also impacted by the application of SFAS No. 133 to our index annuity business which we estimate decreased net income in 2005 by $7.8 million , increased net income in 2004 by $1.7 million and decreased net income in 2003 by $1.6 million. Net income in 2003 was favorably impacted by realized gains on sales of investments of $2.5 million net of income taxes and certain adjustments for changes in amortization of deferred policy acquisition costs and deferred sales inducements.
The comparisons of net income also reflect the impact of the consolidation of the Service Company. As discussed in note 1 to our audited consolidated financial statements, we acquired the Service Company on September 2, 2005, resulting in the consolidation of the Service Company as a wholly-owned subsidiary
Page 37 of 55
of the Company, rather than an “implicit variable interest” under FSP FIN 46(R)-5. Prior to the acquisition, we had an implicit variable interest in the Service Company and we consolidated the Service Company under FSP FIN 46(R)-5 upon its adoption by us in the first quarter of 2005. As permitted by the FSP, we applied FSP FIN 46(R)-5 retroactive to January 1, 2003, the date of our original adoption of FIN 46. The consolidation of the Service Company reduced net income by $3.2 million for the year ended December 31, 2005. This amount was principally due to a $2.5 million distribution to the former shareholder of the Service Company prior to the September 2, 2005 acquisition and adjustments to the Service Company’s income tax liabilities as a result of a change in its effective income tax rate upon becoming a wholly-owned subsidiary of the Company. The adoption of FSP FIN 46(R)-5 and consolidation of the Service Company as an “implicit variable interest”resulted in an increase in income tax expense of $16.3 million during 2004 due to a change in the federal income tax status of the Service Company.
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 14% to $25.7 million in 2005, and 10% to $22.5 million in 2004, from $20.5 million in 2003. Withdrawals from annuity and single premium universal life policies subject to surrender charges were $179.3 million, $147.0 million and $166.9 million for 2005, 2004 and 2003, respectively. The average surrender charge collected on withdrawals subject to surrender charges was 14.2%, 15.2% and 12.2% for 2005, 2004 and 2003, respectively. The increase in average surrender charges collected in 2004 compared to 2003 was principally due to a higher amount of surrenders in 2003 related to products which had a market value adjustment feature which reduced the amount of surrender charges collected on these surrenders.
Net investment income increased 29% to $554.1 million in 2005 and 20% to $428.4 million in 2004 from $357.3 million in 2003. These increases are principally attributable to the growth in our annuity business and corresponding increases in our invested assets, offset by decreases in the average yield earned on investments. Invested assets (on an amortized cost basis) increased 32% to $10.5 billion at December 31, 2005 and 27% to $8.0 billion at December 31, 2004 compared to $6.2 billion at December 31, 2003, while the average yield earned on average invested assets was 6.18%, 6.28% and 6.43% for 2005, 2004 and 2003, respectively. The declines in the yield earned on average invested assets are principally attributable to the reinvestment of net proceeds from called securities at lower yields. See Quantitative and Qualitative Disclosures About Market Risk.
Realized gains (losses) on investments fluctuate from year to year due to changes in the interest rate and economic environment and the timing of the sale of investments. Realized gains and losses on investments include gains and losses on the sale of securities as well as losses recognized when the fair value of a security is written down in recognition of an “other than temporary” impairment. The components of realized gains (losses) on investments for the year ended December 31, 2005, 2004 and 2003 are summarized as follows:
Page 38 of 55
|
|
|
Year Ended December 31, |
|
|||||||
|
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
|
(Dollars in thousands) |
|
|||||||
|
Available for sale fixed maturity securities: |
|
|
|
|
|
|
|
|||
|
Gross realized gains |
|
$ |
5,334 |
|
$ |
13,720 |
|
$ |
19,922 |
|
|
Gross realized losses |
|
(3,642 |
) |
(220 |
) |
(4,216 |
) |
|||
|
Write downs (other than temporary impairments) |
|
(8,902 |
) |
(12,828 |
) |
(9,821 |
) |
|||
|
|
|
(7,210 |
) |
672 |
|
5,885 |
|
|||
|
Equity securities: |
|
|
|
|
|
|
|
|||
|
Gross realized gains |
|
135 |
|
272 |
|
1,358 |
|
|||
|
Gross realized losses |
|
— |
|
(1 |
) |
(297 |
) |
|||
|
Write downs (other than temporary impairments) |
|
(560 |
) |
— |
|
— |
|
|||
|
|
|
(425 |
) |
271 |
|
1,061 |
|
|||
|
|
|
$ |
(7,635 |
) |
$ |
943 |
|
$ |
6,946 |
|
See Financial Condition—Investments for additional discussion of write downs of the fair value of securities for other than temporary impairments.
Change in fair value of derivatives (call options purchased to fund annual index credits on index annuities) was a decrease of $18.0 million in 2005, and increases of $28.7 million in 2004 and $52.5 million in 2003. See Critical Accounting Policies—Derivative Instruments—Index Products for the components of the change in fair value of derivatives.
The difference between the change in fair value of derivatives between the periods is primarily due to the performance of the indices upon which our options are based. A substantial portion of our options are based upon the S&P 500 Index with the remainder based upon other equity and bond market indices. The range of index appreciation for options expiring during the years ended December 31, 2005, 2004 and 2003 is as follows:
|
|
|
Year Ended December 31, |
|
||||
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
S&P 500 Index |
|
|
|
|
|
|
|
|
Point-to-point strategy |
|
1.6% - 14.9% |
|
5.4% - 31.3% |
|
0.0% - 24.5% |
|
|
Monthly average strategy |
|
0.0% - 9.9% |
|
2.3% - 29.2% |
|
0.0% - 17.8% |
|
|
Monthly point-to-point strategy |
|
0.9% - 12.0% |
|
N/A |
|
N/A |
|
|
Lehman Brothers U.S. Aggregate and U.S. Treasury indices |
|
1.2% - 7.7% |
|
1.8% - 6.8% |
|
0.0% - 14.2% |
|
Actual amounts credited to policyholder account balances may be less than the index appreciation due to contractual features in the index annuity policies (participation rates, caps and asset fees) which allow us to manage the cost of the options purchased to fund the annual index credits.
The change in fair value of derivatives is also influenced by the aggregate cost of options purchased. The aggregate cost of options has increased primarily due to an increased amount of index annuities in force. The aggregate cost of options is also influenced by the amount of policyholder funds allocated to the various indices, market volatility which affects option pricing and the policy terms and historical experience which affects the strikes and caps of the options we purchase. See Critical Accounting Policies—Derivative Instruments—Index Products.
Page 39 of 55
Interest credited to account balances increased 1% to $306.6 million in 2005 and 23% to $305.8 million in 2004 from $248.1 million in 2003. The components of interest credited to account balances are summarized as follows:
|
|
|
Year Ended December 31, |
|
|||||||
|
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
|
(Dollars in thousands) |
|
|||||||
|
Index credits on index policies |
|
$ |
95,020 |
|
$ |
122,667 |
|
$ |
44,156 |
|
|
Interest credited on fixed rate annuities and amounts allocated to fixed rate option and minimum guaranteed interest for index annuities |
|
199,363 |
|
172,460 |
|
198,387 |
|
|||
|
Amortization of deferred sales inducements |
|
12,225 |
|
10,635 |
|
5,532 |
|
|||
|
|
|
$ |
306,608 |
|
$ |
305,762 |
|
$ |
248,075 |
|
The changes in index credits were attributable to changes in the appreciation of the underlying indices (see discussion above under change in fair value of derivatives) and the amount of funds allocated by policyholders to the respective index options. The increases in interest credited on fixed rate annuities and amounts allocated to the fixed rate option and minimum guaranteed interest for index annuities were due to the growth in the annuity liabilities outstanding, partially offset by decreases in interest crediting rates on many of our products which we implemented in connection with our spread management process (see table above for average crediting rates for fixed rate annuities). The average amount of annuity liabilities outstanding (net of annuity liabilities ceded under coinsurance agreements increased 28% for 2005 to $8.9 billion from $7.0 billion in 2004 and $5.9 billion in 2003. The increases in amortization of deferred sales inducements during 2005 and 2004 were principally attributable to growth in sales of premium and interest bonus products. Bonus products represented 68%, 64% and 58% of our total annuity deposits during 2005, 2004 and 2003, respectively. The increase in 2005 from this factor was offset by a $0.8 million reduction in amortization associated with net realized capital losses during the year.
Change in fair value of embedded derivatives was an increase of $31.1 million during 2005 compared to a decrease of $8.6 million in 2004 and an increase of $66.8 million in 2003. The change in the amount of expense recognized during 2005, 2004 and 2003 primarily resulted from the increase or decrease in expected index credits on the next policy anniversary dates, which are related to the change in the fair value of the options acquired to fund these index credits discussed above in the “Change in fair value of derivatives”. In addition, the host value of the index reserve liabilities increased primarily as a result of increases in index annuity premium deposits. See Critical Accounting Policies—Derivative Instruments—Index Products. Change in fair value of embedded derivatives also increased by $4.6 million in 2005 for the change in fair value of the conversion option embedded within our contingent convertible senior notes. This option is required to be marked to market in accordance with SFAS No. 133. See note 7 to our audited consolidated financial statements.
Interest expense on notes payable increased to $16.3 million in 2005 compared to $2.4 million in 2004 and $2.7 million in 2003. The increase in 2005 was primarily due to the issuance of $260.0 million of convertible senior notes at a fixed rate of 5.25% per annum during December 2004. The decrease in 2004 was principally due to a reduction in the principal amount of notes payable outstanding. See note 7 to our audited consolidated financial statements.
Interest expense on subordinated debentures for 2005 increased to $14.1 million in 2005 from $9.6 million in 2004. The comparable amount for 2003 was $7.7 million. These increases were primarily due to the issuance of additional floating rate subordinated debentures of $56.7 million, $59.3 million and $12.4 million during 2005, 2004 and 2003, respectively, and changes in weighted average interest rates which were 7.38%, 7.01% and 7.35% for 2005, 2004 and 2003, respectively. The amount of subordinated debentures outstanding at December 31, 2005 was $230.7 million compared to $173.6 million at December 31, 2004. See Financial Condition—Liabilities.
Page 40 of 55
Interest expense on amounts due under repurchase agreements increased to $11.3 million in 2005 from $3.1 million in 2004 and $1.3 million in 2003. The increases were principally due to increases in the borrowings outstanding which averaged $318.8 million, $196.3 million and $84.6 million during 2005, 2004 and 2003, respectively and increases in the weighted average interest rates on amounts borrowed which were 3.54%, 1.60% and 1.35% for 2005, 2004 and 2003, respectively.
Amortization of deferred policy acquisition costs increased 1% to $68.1 million in 2005 and 43% to $67.9 million in 2004 from $47.5 million in 2003. These increases are primarily due to additional annuity deposits as discussed above. The comparisons between years are further effected by amortization associated with net realized capital gains and losses and amortization associated with the application of SFAS No.133 to our index annuity business. Net realized capital gains and losses reduced amortization in 2005 by $2.7 million and increased amortization in 2003 by $3.1 million. As discussed above, the application of SFAS No. 133 to our index annuity business creates differences in the recognition of revenues and expenses from derivative instruments including the embedded derivative liabilities in our index annuity contracts. As a result, gross profits used to compute the amortization of deferred policy acquisition costs are adjusted to reflect the application of SFAS No. 133 to our index annuity business. These gross profit adjustments reduced amortization in 2005 and 2003 and increased amortization in 2004 as follows: 2005 - $(9.1) million; 2004 - $5.0 million; 2003 - $(1.5) million.
Other operating costs and expenses increased 10% to $35.9 million in 2005 and 26% to $32.5 million in 2004 from $25.8 million in 2003. The increase during 2005 compared to 2004 was principally attributable to an increase of $2.9 million in salaries and related costs of employment due to the growth in our annuity business and an increase of $1.8 million in legal fees. These increases were offset in part by a decrease of $1.2 million in insurance taxes and other assessments as no additional expense was incurred in 2005 related to guaranty fund assessments. The increase during 2004 compared to 2003 was principally attributable to $1.8 million of paid and accrued guaranty fund assessments related to the insolvency of London Pacific Life and Annuity Company, an increase of $1.4 million in salaries and related costs of employment due to the growth in our annuity business, $0.8 million in marketing and advertising costs, and $1.1 million in printing and postage costs related to existing policies and marketing of new policies.
Income tax expense decreased 37% to $25.4 million in 2005 from $40.6 million in 2004 from $13.5 million in 2003. As discussed above and in note 1 to our audited consolidated financial statements, income tax expense for 2004 increased by $16.3 million due to the change in the Service Company’s federal income tax status. Excluding the impact of this item, the increases in income tax expense were principally due to increases in pre-tax income. After taking into consideration the impact of the change in the Service Company’s federal income tax status in 2004, our effective tax rates for 2005, 2004, and 2003 were 36%, 35% and 34%, respectively. See note 6 to our audited consolidated financial statements.
Investments
Our investment strategy is to maintain a predominantly investment grade fixed income portfolio, provide adequate liquidity to meet our cash obligations to policyholders and others and maximize current income and total investment return through active investment management. Consistent with this strategy, our investments principally consist of fixed maturity securities and short-term investments.
Insurance statutes regulate the type of investments that our life subsidiaries are permitted to make and limit the amount of funds that may be used for any one type of investment. In light of these statutes and regulations and our business and investment strategy, we generally seek to invest in United States government agency securities and corporate securities rated investment grade by established nationally recognized rating organizations or in securities of comparable investment quality, if not rated.
Page 41 of 55
We have classified a portion of our fixed maturity investments as available for sale. Available for sale securities are reported at fair value and unrealized gains and losses, if any, on these securities (net of income taxes and certain adjustments for changes in amortization of deferred policy acquisition costs and deferred sales inducements) are included directly in a separate component of stockholders’ equity, thereby exposing stockholders’ equity to volatility due to changes in market interest rates and the accompanying changes in the reported value of securities classified as available-for-sale, with stockholders’ equity increasing as interest rates decline and, conversely, decreasing as interest rates rise.
Investments increased to $10.5 billion at December 31, 2005 compared to $8.0 billion at December 31, 2004 as a result of the growth in our annuity business discussed above. At December 31, 2005, the fair value of our available for sale fixed maturity and equity securities was $88.7 million less than the amortized cost of those investments, compared to $65.0 million at December 31, 2004. At December 31, 2005, the amortized cost of our fixed maturity securities held for investment exceeded the fair value by $112.8 million, compared to $92.7 million at December 31, 2004. The increase in net unrealized investment losses at December 31, 2005 compared to December 31, 2004 was generally related to an increase in market interest rates.
The composition of our investment portfolio is summarized in the table below:
|
|
|
December 31, |
|
||||||||||||
|
|
|
2005 |
|
2004 |
|
||||||||||
|
|
|
Carrying |
|
|
|
Carrying |
|
|
|
||||||
|
|
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
||||||
|
|
|
(Dollars in thousands) |
|
||||||||||||
|
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
United States Government full faith and credit |
|
$ |
2,774 |
|
|
— |
|
|
$ |
2,406 |
|
|
— |
|
|
|
United States Government sponsored agencies |
|
7,445,474 |
|
|
71.0 |
% |
|
5,728,488 |
|
|
72.0 |
% |
|
||
|
Public utilities |
|
133,346 |
|
|
1.3 |
% |
|
44,849 |
|
|
0.6 |
% |
|
||
|
Corporate securities |
|
674,230 |
|
|
6.4 |
% |
|
338,407 |
|
|
4.3 |
% |
|
||
|
Redeemable preferred stocks |
|
46,896 |
|
|
0.4 |
% |
|
35,369 |
|
|
0.4 |
% |
|
||
|
Mortgage and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Government |
|
220,379 |
|
|
2.1 |
% |
|
257,004 |
|
|
3.2 |
% |
|
||
|
Non-Government |
|
377,011 |
|
|
3.6 |
% |
|
397,293 |
|
|
5.0 |
% |
|
||
|
Total fixed maturity securities |
|
8,900,110 |
|
|
84.8 |
% |
|
6,803,816 |
|
|
85.5 |
% |
|
||
|
Equity securities |
|
84,846 |
|
|
0.8 |
% |
|
38,303 |
|
|
0.5 |
% |
|
||
|
Mortgage loans on real estate |
|
1,321,637 |
|
|
12.6 |
% |
|
959,779 |
|
|
12.1 |
% |
|
||
|
Derivative instruments |
|
185,391 |
|
|
1.8 |
% |
|
148,006 |
|
|
1.9 |
% |
|
||
|
Policy loans |
|
362 |
|
|
— |
|
|
362 |
|
|
— |
|
|
||
|
|
|
$ |
10,492,346 |
|
|
100.0 |
% |
|
$ |
7,950,266 |
|
|
100.0 |
% |
|
Page 42 of 55
The table below presents our total fixed maturity securities by NAIC designation and the equivalent ratings of a nationally recognized securities rating organization.
|
|
|
|
|
December 31, |
|
||||||||||||||
|
|
|
|
|
2005 |
|
2004 |
|
||||||||||||
|
|
|
|
|
Carrying |
|
|
|
Carrying |
|
|
|
||||||||
|
NAIC |
|
Rating Agency |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
||||||||
|
|
|
|
|
(Dollars in thousands) |
|
||||||||||||||
|
|
1 |
|
|
Aaa/Aa/A |
|
$ |
8,368,330 |
|
|
94.0 |
% |
|
$ |
6,585,322 |
|
|
96.8 |
% |
|
|
|
2 |
|
|
Baa |
|
416,614 |
|
|
4.7 |
% |
|
162,298 |
|
|
2.4 |
% |
|
||
|
|
3 |
|
|
Ba |
|
93,335 |
|
|
1.0 |
% |
|
20,555 |
|
|
0.3 |
% |
|
||
|
|
4 |
|
|
B |
|
3,396 |
|
|
0.1 |
% |
|
14,124 |
|
|
0.2 |
% |
|
||
|
|
5 |
|
|
Caa and lower |
|
11,719 |
|
|
0.1 |
% |
|
13,298 |
|
|
0.2 |
% |
|
||
|
|
6 |
|
|
In or near default |
|
6,716 |
|
|
0.1 |
% |
|
8,219 |
|
|
0.1 |
% |
|
||
|
|
|
|
|
|
|
$ |
8,900,110 |
|
|
100.0 |
% |
|
$ |
6,803,816 |
|
|
100.0 |
% |
|
At December 31, 2005 and 2004, we held $1.3 billion and $1.0 billion, respectively, of mortgage loans with commitments outstanding of $75.1 million at December 31, 2005. 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. As of December 31, 2005, there were no delinquencies or defaults in our mortgage loan portfolio. The commercial mortgage loan portfolio is diversified by geographic region and specific collateral property type as follows:
|
|
|
December 31, |
|
||||||||||||
|
|
|
2005 |
|
2004 |
|
||||||||||
|
|
|
Carrying |
|
|
|
Carrying |
|
|
|
||||||
|
|
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
||||||
|
|
|
(Dollars in thousands) |
|
||||||||||||
|
Geographic distribution |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
East |
|
$ |
283,085 |
|
|
21.4 |
% |
|
$ |
196,805 |
|
|
20.5 |
% |
|
|
Middle Atlantic |
|
93,579 |
|
|
7.1 |
% |
|
80,098 |
|
|
8.3 |
% |
|
||
|
Mountain |
|
198,476 |
|
|
15.0 |
% |
|
148,608 |
|
|
15.5 |
% |
|
||
|
New England |
|
47,839 |
|
|
3.6 |
% |
|
50,624 |
|
|
5.3 |
% |
|
||
|
Pacific |
|
117,977 |
|
|
8.9 |
% |
|
84,860 |
|
|
8.8 |
% |
|
||
|
South Atlantic |
|
213,423 |
|
|
16.1 |
% |
|
166,606 |
|
|
17.4 |
% |
|
||
|
West North Central |
|
258,181 |
|
|
19.6 |
% |
|
165,041 |
|
|
17.2 |
% |
|
||
|
West South Central |
|
109,077 |
|
|
8.3 |
% |
|
67,137 |
|
|
7.0 |
% |
|
||
|
|
|
$ |
1,321,637 |
|
|
100.0 |
% |
|
$ |
959,779 |
|
|
100.0 |
% |
|
|
Property type distribution |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Office |
|
$ |
384,606 |
|
|
29.1 |
% |
|
$ |
296,995 |
|
|
30.9 |
% |
|
|
Medical Office |
|
75,716 |
|
|
5.7 |
% |
|
65,396 |
|
|
6.8 |
% |
|
||
|
Retail |
|
285,715 |
|
|
21.6 |
% |
|
218,133 |
|
|
22.7 |
% |
|
||
|
Industrial/Warehouse |
|
346,461 |
|
|
26.2 |
% |
|
236,835 |
|
|
24.7 |
% |
|
||
|
Hotel |
|
52,274 |
|
|
4.0 |
% |
|
25,652 |
|
|
2.7 |
% |
|
||
|
Apartments |
|
68,795 |
|
|
5.2 |
% |
|
44,984 |
|
|
4.7 |
% |
|
||
|
Mixed use/other |
|
108,070 |
|
|
8.2 |
% |
|
71,784 |
|
|
7.5 |
% |
|
||
|
|
|
$ |
1,321,637 |
|
|
100.0 |
% |
|
$ |
959,779 |
|
|
100.0 |
% |
|
Page 43 of 55
Liabilities
Our liability for policy benefit reserves increased to $12.2 billion at December 31, 2005 compared to $9.8 billion at December 31, 2004, primarily due to additional annuity sales as discussed above. Substantially all of our annuity products have a surrender charge feature designed to reduce the risk of early withdrawal or surrender of the policies and to compensate us for our costs if policies are withdrawn early. Notwithstanding these policy features, the withdrawal rates of policyholder funds may be affected by changes in interest rates and other factors.
As part of our investment strategy, we enter into securities repurchase agreements (short-term collateralized borrowings). These borrowings are collateralized by investment securities with fair values approximately equal to the amount due. We earn investment income on the securities purchased with these borrowings at a rate in excess of the cost of these borrowings. Such borrowings averaged $318.8 million, $196.3 million and $84.6 million for the years ended December 31, 2005, 2004 and 2003, respectively. The weighted average interest rate on amounts due under repurchase agreements was 3.54%, 1.60% and 1.35% for the years ended December 31, 2005, 2004 and 2003, respectively.
In December 2004, we issued $260.0 million of contingent convertible senior notes due December 6, 2024. The notes are unsecured and bear interest at a fixed rate of 5.25% per annum. Interest is payable semi-annually in arrears on June 6 and December 6 of each year, beginning June 6, 2005. In addition to regular interest on the notes, beginning with the six-month interest period ending June 6, 2012, we will also pay contingent interest under certain conditions at a rate of 0.5% per annum based on the average trading price of the notes during a specified period.
The notes are convertible at the holders’ option prior to the maturity date into cash and shares of our common stock under certain conditions. The conversion price per share is $14.45 which represents a conversion rate of 69.2 shares of our common stock per $1,000 in principal amount of notes. Upon conversion, we will deliver to the holder cash equal to the aggregate principal amount of the notes to be converted and will deliver shares of our common stock for the amount by which the conversion value exceeds the aggregate principal amount of the notes to be converted (commonly referred to as “net share settlement”). See note 7 to the consolidated financial statements for additional details concerning the conversion features of the notes and the dilutive effect of the notes in our diluted earnings per share calculation.
We may redeem the notes at any time on or after December 15, 2011. The holders of the notes may require us to repurchase their notes on December 15, 2011, 2014, and 2019 and for a certain period of time following a change in control. The redemption price or the repurchase price shall be payable in cash and equal to 100% of the principal amount of the notes, plus accrued and unpaid interest (including contingent interest and liquidated damages, if any) up to but not including the date of redemption or repurchase.
The notes are senior unsecured obligations and rank equally in the right of payment with all existing and future senior indebtedness and senior to any existing and future subordinated indebtedness. The notes effectively rank junior in the right of payment to any existing and future secured indebtedness to the extent of the value of the assets securing such secured indebtedness. The notes are structurally subordinated to all liabilities of our subsidiaries.
Our subsidiary trusts have issued fixed rate and floating rate trust preferred securities and the trusts have used the proceeds from these offerings to purchase subordinated debentures from us. We also issued subordinated debentures to the trusts in exchange for all of the common securities of each trust. The sole assets of the trusts are the subordinated debentures and any interest accrued thereon. The terms of the preferred securities issued by each trust parallel the terms of the subordinated debentures. Our obligations under the subordinated debentures and related agreements provide a full and unconditional guarantee of payments due under the trust preferred securities. In accordance with Financial Accounting Standards
Page 44 of 55
Board Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51”, we do not consolidate our subsidiary trusts and record our subordinated debt obligations to the trusts and our equity investments in the trusts. See notes 1 and 9 to our audited consolidated financial statements for additional information concerning our subordinated debentures payable to and the preferred securities issued by the subsidiary trusts.
Following is a summary of subordinated debt obligations to the trusts at December 31, 2005 and 2004:
|
|
|
December 31, |
|
Interest |
|
|
|
||||
|
|
|
2005 |
|
2004 |
|
Rate |
|
Due Date |
|
||
|
|
|
(Dollars in thousands) |
|
|
|
|
|
||||
|
American Equity Capital Trust I |
|
$ |
23,903 |
|
$ |
24,073 |
|
8% |
|
September 30, 2029 |
|
|
American Equity Capital Trust II |
|
78,383 |
|
77,861 |
|
5% |
|
June 1, 2047 |
|
||
|
American Equity Capital Trust III |
|
27,840 |
|
27,840 |
|
Floating |
|
April 29, 2034 |
|
||
|
American Equity Capital Trust IV |
|
12,372 |
|
12,372 |
|
Floating |
|
January 8, 2034 |
|
||
|
American Equity Capital Trust VII |
|
10,830 |
|
10,830 |
|
Floating |
|
September 14, 2034 |
|
||
|
American Equity Capital Trust VIII |
|
20,620 |
|
20,600 |
|
Floating |
|
December 22, 2034 |
|
||
|
American Equity Capital Trust IX |
|
15,470 |
|
— |
|
Floating |
|
June 15, 2035 |
|
||
|
American Equity Capital Trust X |
|
20,620 |
|
— |
|
Floating |
|
September 15, 2035 |
|
||
|
American Equity Capital Trust XI |
|
20,620 |
|
— |
|
8.595% |
|
December 15, 2035 |
|
||
|
|
|
$ |
230,658 |
|
$ |
173,576 |
|
|
|
|
|
The interest rate for the floating rate subordinated debentures is based upon the three month London Interbank Offered Rate plus 4.00% for Trust III and IV, 3.75% for Trust VII and VIII and 3.65% for Trust IX and X. The interest rate for Trust XI is fixed at 8.595% for 5 years and then is floating based upon the three month London Interbank Offered Rate plus 3.65%.
American Equity Capital Trust I issued 865,671 shares of trust preferred securities, of which 2,000 shares are held by one of our subsidiaries. During 2005 and 2004, 5,667 and 88,000 shares of these trust preferred securities converted into 20,988 shares and 325,923 shares, respectively, of our common stock. The remaining 770,004 shares of these trust preferred securities not held by a subsidiary are convertible into 2,851,806 shares of our common stock.
American Equity Capital Trust II issued $97.0 million (97,000 shares) of 5% trust preferred securities and we issued $100 million of our 5% subordinated debentures. The consideration received by American Equity Capital Trust II in connection with the issue of its trust preferred securities consisted of fixed income trust preferred securities of equal value issued by FBL.
During the third quarter of 2004, we entered into a $50 million revolving line of credit with three banks. There is no amount outstanding under this revolving line of credit at December 31, 2005. See note 7 to our audited consolidated financial statements for additional details concerning the terms of the revolving line of credit.
At December 31, 2005, one of our subsidiaries had $16.4 million outstanding under a credit agreement with a third party. Quarterly payments in amounts ranging from $1.1 million to $1.5 million are payable over the next sixteen quarters with interest computed at a fixed rate of 11.2%. Cash and cash equivalents at December 31, 2005 include $2.6 million of restricted cash under the terms of the credit agreement. See note 7 to our audited consolidated financial statements for additional information concerning this credit agreement.
On February 15, 2006, American Equity Capital Trust XII (“Trust XII”) issued 30 million of floating rate (three month London Interbank Offered Rate plus 3.50%) trust preferred securities. In connection with the issuance of these trust preferred securities and the related purchase by us of all of Trust XII’s
Page 45 of 55
common securities, we issued $30.9 million in principal amount of floating rate subordinated debentures due April 7, 2036 to Trust XII.
Stockholders’ Equity
In 1997, in connection with a rights offering of shares of our common stock, we issued subscription rights to purchase an aggregate of 2,157,375 shares of our common stock to certain officers and directors. The subscription rights had an exercise price of $5.33 per share. Subscription rights with respect to 2,151,375 and 6,000 shares were exercised during 2005 and 2004, respectively.
During 1998, we issued 625,000 shares of 1998 Series A Participating Preferred Stock (aggregate liquidation preference of $10.0 million). During 2004, all of these shares converted into 1,875,000 shares of our common stock. Prior to conversion, these shares had participating dividend rights with the shares of our common stock, when and as such dividends were declared.
During 2003, we purchased 1,435,500 shares of our common stock at a total cost of $9.3 million ($6.49 per share). We issued these shares and 155,583 shares held as treasury stock to a rabbi trust established for the benefit of agents who have earned shares of our common stock under the American Equity Investment NMO Deferred Compensation Plan. See note 10 to our audited consolidated financial statements.
On December 9, 2003, we completed an initial public offering of 18,700,000 shares of our common stock at a price of $9.00 per share. Pursuant to the over-allotment option granted to the underwriters in this offering, the underwriters purchased an additional 2,000,000 shares on December 29, 2003 and an additional 805,000 shares on January 7, 2004, which fully exercised the over-allotment option. The proceeds from our initial public offering (including proceeds from shares issued pursuant to the over-allotment option), net of the underwriting discount and expenses, were approximately $178.0 million.
During 2005 and 2004, we issued 19,500 shares and 54,385 shares, respectively, of our common stock to an agent’s beneficiaries in relation to shares earned under the American Equity Investment NMO Deferred Compensation Plan. See note 10 to our audited consolidated financial statements.
On December 20, 2005, we completed an offering of 13,000,000 shares of our common stock at a price of $11.60 per share. Pursuant to the over-allotment option granted to the underwriters in this offering, the underwriters purchased an additional 1,950,000 shares on December 30, 2005. The proceeds from this offering (including proceeds from shares issued pursuant to the over-allotment option), net of the underwriting discount and expenses, were approximately $163.5 million.
Liquidity for Insurance Operations
Our life subsidiaries generally receive adequate cash flow from premium collections and investment income to meet their obligations. Annuity and life insurance liabilities are generally long-term in nature. Policyholders may, however, withdraw funds or surrender their policies, subject to surrender and withdrawal penalty provisions. At December 31, 2005, approximately 98% of our annuity liabilities were subject to penalty upon surrender, with a weighted average remaining surrender charge period of 12 years and a weighted average surrender charge rate of 13%.
We believe that the diversity of our investment portfolio and the concentration of investments in high-quality securities provides sufficient liquidity to meet foreseeable cash requirements. The investment portfolio at December 31, 2005 included $3.5 billion (amortized cost basis) of publicly traded available for sale investment grade bonds. Although there is no present need or intent to dispose of such investments, our life subsidiaries could readily liquidate portions of their investments, if such a need arose. See Quantitative and Qualitative Disclosures about Market Risk for further discussion of the related interest rate risk exposure. In addition, investments could be used to facilitate borrowings under repurchase
Page 46 of 55
agreements .. As indicated above, such borrowings have been used by American Equity Life from time to time to increase our return on investments.
Liquidity of Parent Company
We, as the parent company, are a legal entity separate and distinct from our subsidiaries, and have no business operations. We need liquidity primarily to service our debt, including the convertible senior notes and subordinated debentures issued to subsidiary trusts, pay operating expenses and pay dividends to stockholders. The primary sources of funds for these payments are: (i) investment advisory fees from our life subsidiaries; (ii) dividends on capital stock and surplus note interest payments from American Equity Life; and (iii) investment income on our investments. These sources provide adequate cash flow to us to meet our current and reasonably foreseeable future obligations. We may also obtain cash by drawing down our $50 million revolving line of credit or by issuing debt or equity securities.
The payment of dividends or distributions, including surplus note payments, by our life subsidiaries is subject to regulation by each subsidiary’s state of domicile’s insurance department. Currently, American Equity Life may pay dividends or make other distributions without the prior approval of its state of domicile’s insurance department, unless such payments, together with all other such payments within the preceding twelve months, exceed the greater of (1) American Equity Life’s net gain from operations for the preceding calendar year, or (2) 10% of American Equity Life’s statutory surplus at the preceding December 31. For 2006, up to approximately $68.7 million can be distributed as dividends by American Equity Life without prior approval of the Iowa Insurance Division. In addition, dividends and surplus note payments may be made only out of statutory earned surplus, and all surplus note payments are subject to prior approval by regulatory authorities in the life subsidiary’s state of domicile. American Equity Life had approximately $92.5 million of statutory earned surplus at December 31, 2005.
The maximum distribution permitted by law or contract is not necessarily indicative of an insurer’s actual ability to pay such distributions, which may be constrained by business and regulatory considerations, such as the impact of such distributions on surplus, which could affect the insurer’s ratings or competitive position, the amount of premiums that can be written and the ability to pay future dividends or make other distributions. Further, state insurance laws and regulations require that the statutory surplus of our life subsidiaries following any dividend or distribution must be reasonable in relation to their outstanding liabilities and adequate for their financial needs.
The transfer of funds by American Equity Life is also restricted by a covenant in our revolving line of credit agreement which requires American Equity Life to maintain a minimum risk-based capital ratio of 200%. American Equity Life’s risk-based capital ratio was 330% at December 31, 2005.
Statutory accounting practices prescribed or permitted for our life subsidiaries differ in many respects from those governing the preparation of financial statements under GAAP. Accordingly, statutory operating results and statutory capital and surplus may differ substantially from amounts reported in the GAAP basis financial statements for comparable items. Information as to statutory capital and surplus and statutory net income for our life subsidiaries as of December 31, 2005 and 2004 and for the years ended December 31, 2005, 2004 and 2003 is included in note 11 to our audited consolidated financial statements.
In the normal course of business, we enter into financing transactions, lease agreements, or other commitments. These commitments may obligate us to certain cash flows during future periods. The following table summarizes such obligations as of December 31, 2005.
Page 47 of 55
|
|
|
Payments Due by Period |
|
|||||||||||||
|
|
|
|
|
Less Than |
|
1 - 3 |
|
4 - 5 |
|
After 5 |
|
|||||
|
|
|
Total |
|
1 year |
|
Years |
|
Years |
|
Years |
|
|||||
|
|
|
(Dollars in thousands) |
|
|||||||||||||
|
Annuity and single premium universal life products(1) |
|
$ |
11,688,840 |
|
$ |
867,156 |
|
$ |
2,608,391 |
|
$ |
1,853,616 |
|
$ |
6,359,677 |
|
|
Notes payable, including interest payments |
|
539,735 |
|
19,437 |
|
37,497 |
|
31,701 |
|
451,100 |
|
|||||
|
Subordinated debentures, including interest payments(2) |
|
769,125 |
|
16,366 |
|
32,732 |
|
32,732 |
|
687,295 |
|
|||||
|
Operating leases |
|
4,059 |
|
1,290 |
|
2,378 |
|
391 |
|
— |
|
|||||
|
Mortgage loan funding |
|
75,080 |
|
75,080 |
|
— |
|
— |
|
— |
|
|||||
|
Total |
|
$ |
13,076,839 |
|
$ |
979,329 |
|
$ |
2,680,998 |
|
$ |
1,918,440 |
|
$ |
7,498,072 |
|
(1) Amounts shown in this table are projected payments through the year 2023 which we are contractually obligated to pay to our annuity policyholders. The payments are derived from actuarial models which assume a level interest rate scenario and incorporate assumptions regarding mortality and persistency, when applicable. These assumptions are based on our historical experience. Amounts shown are net of expected reinsurance recoveries.
(2) Amount shown is net of equity investments in the Capital Trusts due to the contractual right of offset upon repayment of the notes.
In March 2004, the FASB’s Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (EITF 03-1). EITF 03-1 provides guidance regarding the meaning of other-than-temporary impairment and its application to investments classified as either available for sale or held to maturity under FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and to equity securities accounted for under the cost method. Included in EITF 03-1 is guidance on how to account for impairments that are solely due to interest rate changes, including changes resulting from increases in sector credit spreads. This guidance was to become effective for reporting periods beginning after June 15, 2004. However, on September 30, 2004, the FASB issued a Staff Position that delayed the effective date for the recognition and measurement guidance of EITF 03-1 until additional clarifying guidance was issued. In June 2005, the FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment, but directed the staff to issue proposed EITF Issue No. 03-1 as final. The final FSP (retitled FSP FAS 115-1) is effective for us beginning on January 1, 2006. The new standard is not expected to have a material impact on our financial statements.
In December 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”). This standard requires expensing stock options and other share-based payments and supersedes SFAS No. 123, which had allowed companies to choose between expensing stock options or showing proforma disclosure only. This standard is effective for us as of January 1, 2006 and will apply to all awards granted, modified, cancelled or purchased after that date as well as the unvested portion of prior awards. We will adopt the standard as of the effective date and do not believe it will have a material effect on our financial statements as the unvested portion of prior awards is immaterial. The effect on future financial statements is undeterminable as the amount of future grants of stock awards is unknown.
In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections” (SFAS 154). The Statement replaces APB Opinion No. 20 and SFAS 3. SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting
Page 48 of 55
principle. However, if it is impracticable to determine the effects of such changes, then other rules apply. SFAS 154 is effective January 1, 2006. Currently, we are not aware of any circumstances that require the application of SFAS 154, and there is no anticipated impact on the financial statements.
In September 2005, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (AcSEC) issued Statement of Position 05-1 (“SOP 05-1”), “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts”. SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance contracts other than those specifically described in Statement of Financial Accounting Standards (SFAS) No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale on Investments”. SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights or coverages that occurs by exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 31, 2006. Retrospective application of SOP 05-1 to previously issued financial statements is not permitted. We are continuing to evaluate SOP 05-1 but do not believe that it will have a material impact on the financial statements.
Inflation does not have a significant effect on our balance sheet. We have minimal investments in property, equipment or inventories. To the extent that interest rates may change to reflect inflation or inflation expectations, there would be an effect on our balance sheet and operations. Higher interest rates experienced in recent periods have decreased the value of our fixed maturity investments. It is likely that declining interest rates would have the opposite effect. It is not possible to calculate the effect such changes in interest rates, if any, have had on our operating results.
ITEM 7A. 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; (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 long duration 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, the amount of interest we pay on our subordinated debentures, and the fair value of our investments. Our floating rate trust preferred securities issued by Trusts III, IV, VII, VIII, IX, X and XI (beginning on December 31, 2010) bear interest at the three month LIBOR plus 3.65% - 4.00%. Our outstanding balance of floating rate trust preferred securities was $104.5 million at December 31, 2005. The profitability of most of our products depends on
Page 49 of 55
the spreads between interest yield on investments and rates credited on insurance liabilities. We have the ability to adjust crediting rates (participation rates, asset fees or caps for 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.
If interest rates were to increase 10% (45 basis points) from levels at December 31, 2005, we estimate that the fair value of our fixed maturity securities would decrease by approximately $302.9 million. The impact on stockholders’ equity of such decrease (net of income taxes and certain adjustments for changes in amortization of deferred policy acquisition costs and deferred sales inducements) would be an increase of $41.5 million in the accumulated other comprehensive loss. The computer models used to estimate the impact of a 10% change in market interest rates incorporate numerous assumptions, require significant estimates and assume an immediate and parallel change in interest rates without any management of the investment portfolio in reaction to such change. Consequently, potential changes in value of our financial instruments indicated by the simulations will likely be different from the actual changes experienced under given interest rate scenarios, and the differences may be material. Because we actively manage our investments and liabilities, our net exposure to interest rates can vary over time. However, any such decreases in the fair value of our fixed maturity securities (unless related to credit concerns of the issuer requiring recognition of an other than temporary impairment) would generally be realized only if we were required to sell such securities at losses prior to the their maturity to meet our liquidity needs, which we manage using the surrender and withdrawal provisions of our annuity contracts and through other means as discussed earlier. See Financial Condition—Liquidity for Insurance Operations for a further discussion of the liquidity risk.
At December 31, 2005, 86% of our fixed income securities have call features and 15% were subject to call redemption. Another 68% will become subject to call redemption through December 31, 2006. During the years ended December 31, 2005 and 2004, we received $1.47 billion and $2.18 billion, respectively, 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 interest credited on our annuity liabilities, we have the ability to reduce crediting rates on most of our annuity liabilities to maintain the spread at our targeted level. At December 31, 2005, approximately 88% of our annuity liabilities are subject to annual adjustment of the applicable crediting rates at our discretion, limited by minimum guaranteed crediting rates of 2% to 4%.
Page 50 of 55
With respect to our index annuities, we purchase call options on the applicable indices 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. Fair value changes associated with those investments are substantially offset by an increase or decrease in the amounts added to policyholder account balances for index products. For the years ended December 31, 2005 and 2004, the annual index credits to policyholders on their anniversaries were $95.0 million and $122.7 million, respectively. Proceeds received at expiration of these options related to such credits were $89.9 million and $87.6 million, respectively. The difference between proceeds received at expiration of these options and index credits is primarily due to credits attributable to minimum guaranteed interest self funded by us. Within our hedging process we purchase options out of the money to the extent of anticipated minimum guaranteed interest on index policies. On the anniversary dates of the 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 index business. This is a risk we attempt to manage through the terms of our index annuities, which permit us to change annual participation rates, asset fees, and caps, subject to contractual features. By modifying participation rates, asset fees or caps, we can limit option costs to budgeted amounts, except in cases where the contractual features would prevent further modifications. Based upon actuarial testing which we conduct as a part of the design of our index products and on an ongoing basis, we believe the risk that contractual features would prevent us from controlling option costs is not material.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements are included as a part of this report on Form 10-K on pages F-1 through F-35.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Annual Report on Form 10-K, the Company’s management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on their evaluation of these disclosure controls and procedures, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act.
Management’s Report on Internal Control over Financial Reporting.
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in the Exchange Act Rule 13a-15(f). The Company’s internal control system is designed to provide reasonable assurance to the Company’s management and the board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined effective can provide only reasonable assurance with respect to financial statement preparation
Page 51 of 55
and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005 based upon criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the assessment, management determined that we maintained effective internal control over financial reporting as of December 31, 2005 based on those criteria.
KPMG LLP, the independent registered public accounting firm that audited the consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005. The report, which expressed unqualified opinions on management’s assessment and on the effectiveness of our internal control over financial reporting as of December 31, 2005, is included in this Item under the heading “Report of Independent Registered Public Accounting Firm”.
Report of Independent Registered Public Accounting Firm
The Board of Directors and
Stockholders
American Equity Investment Life Holding Company
We have audited management’s assessment, included in the accompanying management’s report on internal controls over financial reporting, that American Equity Investment Life Holding Company and Subsidiaries (the Company) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). American Equity Investment Life Holding Company and Subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial consolidated statements.
Page 52 of 55
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
In our opinion, management’s assessment that American Equity Investment Life Holding Company and Subsidiaries maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, American Equity Investment Life Holding Company and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of American Equity Investment Life Holding Company and Subsidiaries as of December 31, 2005, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the year ended December 31, 2005, and our report dated March 13, 2006, expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG
Des Moines, Iowa
March 13, 2006
Changes in Internal Control over Financial Reporting.
There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2005 that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.
There is no information required to be disclosed on Form 8-K for the quarter ended December 31, 2005 which has not been previously reported.
Page 53 of 55
The information required by Part III is incorporated by reference from our definitive proxy statement for our annual meeting of shareholders to be held June 8, 2006 to be filed with the Commission pursuant to Regulation 14A within 120 days after December 31, 2005.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements and Financial Statement Schedules. See Index to Consolidated Financial Statements and Schedules on page F-1 for a list of financial statements and financial statement schedules included in this report.
All other schedules to the consolidated financial statements required by Article 7 of Regulation S-X are omitted because they are not applicable, not required, or because the information is included elsewhere in the consolidated financial statements or notes thereto.
Exhibits. See Exhibit Index immediately preceding the Exhibits for a list of Exhibits filed with this report.
Page 54 of 55
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 14th day of March, 2006.
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AMERICAN EQUITY INVESTMENT LIFE |
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HOLDING COMPANY |
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By: |
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/s/ D.J. NOBLE |
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D.J. Noble, President |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this registration statement has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
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Signature |
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Title (Capacity) |
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Date |
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/s/ D.J. NOBLE |
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Chairman of the Board and President, |
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March 14, 2006 |
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D.J. Noble |
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(Principal Executive Officer) |
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/s/ WENDY L. CARLSON |
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Chief Financial Officer and General Counsel |
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Wendy L. Carlson |
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(Principal Financial Officer) |
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March 14, 2006 |
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/s/ TED M. JOHNSON |
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Vice President - Accounting |
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Ted M. Johnson |
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(Principal Accounting Officer) |
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March 14, 2006 |
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/s/ JOHN C. ANDERSON |
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Director |
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March 14, 2006 |
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John C. Anderson |
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/s/ JAMES M. GERLACH |
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Director |
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March 14, 2006 |
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James M. Gerlach |
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/s/ ROBERT L. HILTON |
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Director |
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March 14, 2006 |
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Robert L. Hilton |
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/S/ ROBERT L. HOWE |
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Director |
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March 14, 2006 |
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Robert L. Howe |
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/s/ JOHN M. MATOVINA |
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Director |
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March 14, 2006 |
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John M. Matovina |
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/s/ DAVID S. MULCAHY |
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Director |
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March 14, 2006 |
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David S. Mulcahy |
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/s/ A.J. STRICKLAND, III |
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Director |
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March 14, 2006 |
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A.J. Strickland, III |
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/s/ HARLEY A. WHITFIELD |
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Director |
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March 14, 2006 |
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Harley A. Whitfield |
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/s/ KEVIN R. WINGERT |
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Director |
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March 14, 2006 |
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Kevin R. Wingert |
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Page 55 of 55
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
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F-2 |
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Consolidated Financial Statements |
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F-4 |
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F-6 |
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F-7 |
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F-8 |
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F-10 |
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|
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Schedules |
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|
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Schedule I—Summary of Investments—Other Than Investments in Related Parties |
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F-42 |
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F-43 |
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F-48 |
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F-49 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
American Equity Investment Life Holding Company
We have audited the accompanying consolidated balance sheet of American Equity Investment Life Holding Company and Subsidiaries (the Company) as of December 31, 2005, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the year ended December 31, 2005. In connection with our audit of the consolidated financial statements, we also have audited the financial statement schedules listed in the Index on page F-1. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Equity Investment Life Holding Company and Subsidiaries as of December 31, 2005, and the results of its operations and its cash flows for the year ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of American Equity Investment Life Holding Company and Subsidiaries’ internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 13, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
|
/s/ KPMG |
Des Moines, Iowa
March 13, 2006
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
American Equity Investment Life Holding Company
We have audited the accompanying consolidated balance sheet of American Equity Investment Life Holding Company as of December 31, 2004, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2004. Our audits also included the financial statement schedules listed in the Index on page F-1 as of December 31, 2004 and for each of the two years in the period ended December 31, 2004. These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Equity Investment Life Holding Company at December 31, 2004, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, during the first quarter of 2005, the Company changed its method of accounting for a variable interest entity retroactive to January 1, 2003.
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/s/ Ernst & Young LLP |
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Des Moines, Iowa |
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March 11, 2005, except for the |
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fifth paragraph of Note 1, |
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as to which the date is November 11, 2005 |
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F-3
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
|
|
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|
|||||
|
|
|
2005 |
|
2004 |
|
||
|
Assets |
|
|
|
|
|
||
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Investments: |
|
|
|
|
|
||
|
Fixed maturity securities: |
|
|
|
|
|
||
|
Available for sale, at fair value (amortized cost: 2005—$4,274,159; 2004—$2,769,804) |
|
$ |
4,188,683 |
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$ |
2,705,323 |
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Held for investment, at amortized cost (fair value: 2005—$4,598,615; 2004—$4,005,775) |
|
4,711,427 |
|
4,098,493 |
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||
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Equity securities, available for sale, at fair value (cost: 2005—$88,060; 2004—$38,838) |
|
84,846 |
|
38,303 |
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|
Mortgage loans on real estate |
|
1,321,637 |
|
959,779 |
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||
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Derivative instruments |
|
185,391 |
|
148,006 |
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Policy loans |
|
362 |
|
362 |
|
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Total investments |
|
10,492,346 |
|
7,950,266 |
|
||
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Cash and cash equivalents |
|
112,395 |
|
66,542 |
|
||
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Coinsurance deposits—related party |
|
1,959,663 |
|
2,068,700 |
|
||
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Accrued investment income |
|
59,584 |
|
44,871 |
|
||
|
Deferred policy acquisition costs |
|
977,015 |
|
713,021 |
|
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Deferred sales inducements |
|
315,848 |
|
159,467 |
|
||
|
Deferred income tax asset |
|
92,459 |
|
56,142 |
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|
Federal income taxes recoverable |
|
1,829 |
|
— |
|
||
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Other assets |
|
31,655 |
|
28,279 |
|
||
|
Total assets |
|
$ |
14,042,794 |
|
$ |
11,087,288 |
|
F-4
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands, except per share data)
|
|
|
December 31, |
|
||||
|
|
|
2005 |
|
2004 |
|
||
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
||
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Liabilities: |
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|
|
|
|
||
|
Policy benefit reserves: |
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|
|
|
|
||
|
Traditional life and accident and health insurance products |
|
$ |
75,807 |
|
$ |
62,073 |
|
|
Annuity and single premium universal life products |
|
12,162,181 |
|
9,745,896 |
|
||
|
Other policy funds and contract claims |
|
126,387 |
|
94,410 |
|
||
|
Other amounts due to related parties |
|
27,677 |
|
31,955 |
|
||
|
Notes payable |
|
281,043 |
|
283,375 |
|
||
|
Subordinated debentures |
|
230,658 |
|
173,576 |
|
||
|
Amounts due under repurchase agreements |
|
396,697 |
|
264,875 |
|
||
|
Federal income taxes payable |
|
— |
|
8,554 |
|
||
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Other liabilities |
|
222,986 |
|
117,031 |
|
||
|
Total liabilities |
|
13,523,436 |
|
10,781,745 |
|
||
|
Stockholders’ equity: |
|
|
|
|
|
||
|
Common Stock, par value $1 per share, 75,000,000 shares authorized; issued and outstanding 2005—55,527,180 shares; 2004—38,360,343 shares |
|
55,527 |
|
38,360 |
|
||
|
Additional paid-in capital |
|
379,107 |
|
215,793 |
|
||
|
Accumulated other comprehensive loss |
|
(27,306 |
) |
(19,269 |
) |
||
|
Retained earnings |
|
112,030 |
|
70,659 |
|
||
|
Total stockholders’ equity |
|
519,358 |
|
305,543 |
|
||
|
Total liabilities and stockholders’ equity |
|
$ |
14,042,794 |
|
$ |
11,087,288 |
|
See accompanying notes to consolidated financial statements.
F-5
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
|
|
|
Year Ended December 31, |
|
|||||||
|
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
Revenues: |
|
|
|
|
|
|
|
|||
|
Traditional life and accident and health insurance premiums |
|
$ |
13,578 |
|
$ |
15,115 |
|
$ |
13,686 |
|
|
Annuity and single premium universal life product charges |
|
25,686 |
|
22,462 |
|
20,452 |
|
|||
|
Net investment income |
|
554,118 |
|
428,385 |
|
357,295 |
|
|||
|
Realized gains (losses) on investments |
|
(7,635 |
) |
943 |
|
6,946 |
|
|||
|
Change in fair value of derivatives |
|
(18,029 |
) |
28,696 |
|
52,525 |
|
|||
|
Total revenues |
|
567,718 |
|
495,601 |
|
450,904 |
|
|||
|
Benefits and expenses: |
|
|
|
|
|
|
|
|||
|
Insurance policy benefits and change in future policy benefits |
|
13,375 |
|
13,423 |
|
11,824 |
|
|||
|
Interest credited to account balances |
|
306,608 |
|
305,762 |
|
248,075 |
|
|||
|
Change in fair value of embedded derivatives |
|
31,087 |
|
(8,567 |
) |
66,801 |
|
|||
|
Interest expense on notes payable |
|
16,324 |
|
2,358 |
|
2,713 |
|
|||
|
Interest expense on subordinated debentures |
|
14,145 |
|
9,609 |
|
7,661 |
|
|||
|
Interest expense on amounts due under repurchase agreements |
|
11,280 |
|
3,148 |
|
1,278 |
|
|||
|
Amortization of deferred policy acquisition costs |
|
68,109 |
|
67,867 |
|
47,450 |
|
|||
|
Other operating costs and expenses |
|
35,896 |
|
32,520 |
|
25,794 |
|
|||
|
Total benefits and expenses |
|
496,824 |
|
426,120 |
|
411,596 |
|
|||
|
Income before income taxes and minority interests |
|
70,894 |
|
69,481 |
|
39,308 |
|
|||
|
Income tax expense |
|
25,402 |
|
40,611 |
|
13,505 |
|
|||
|
Income before minority interests |
|
45,492 |
|
28,870 |
|
25,803 |
|
|||
|
Minority interest |
|
2,500 |
|
(453 |
) |
363 |
|
|||
|
Net income |
|
$ |
42,992 |
|
$ |
29,323 |
|
$ |
25,440 |
|
|
Earnings per common share |
|
$ |
1.09 |
|
$ |
0.77 |
|
$ |
1.45 |
|
|
Earnings per common share—assuming dilution |
|
$ |
0.99 |
|
$ |
0.71 |
|
$ |
1.21 |
|
|
Weighted average common shares outstanding (in thousands): |
|
|
|
|
|
|
|
|||
|
Earnings per common share |
|
39,333 |
|
38,159 |
|
17,560 |
|
|||
|
Earnings per common share—assuming dilution |
|
44,513 |
|
43,096 |
|
22,170 |
|
|||
See accompanying notes to consolidated financial statements.
F-6
AMERICAN
EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
||||||||||||||||||
|
|
|
|
|
|
|
Additional |
|
Other |
|
|
|
Total |
|
||||||||||||||||||
|
|
|
Preferred |
|
Common |
|
Paid-in |
|
Comprehensive |
|
Retained |
|
Stockholders’ |
|
||||||||||||||||||
|
|
|
Stock |
|
Stock |
|
Capital |
|
Loss |
|
Earnings |
|
Equity |
|
||||||||||||||||||
|
Balance at December 31, 2002 |
|
|
$ |
625 |
|
|
|
$ |
14,438 |
|
|
|
$ |
56,811 |
|
|
|
$ |
(11,944 |
) |
|
|
$ |
17,548 |
|
|
|
$ |
77,478 |
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net income for year |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
25,440 |
|
|
|
25,440 |
|
|
||||||
|
Change in net unrealized investment gains/losses |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10,798 |
) |
|
|
— |
|
|
|
(10,798 |
) |
|
||||||
|
Total comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,642 |
|
|
||||||
|
Issuance of 20,700,000 shares of common stock less issuance expenses of $15,035 |
|
|
— |
|
|
|
20,700 |
|
|
|
150,565 |
|
|
|
— |
|
|
|
— |
|
|
|
171,265 |
|
|
||||||
|
Issuance of 1,591,083 shares of common stock to the NMO Deferred Compensation Trust |
|
|
— |
|
|
|
1,591 |
|
|
|
8,939 |
|
|
|
— |
|
|
|
(533 |
) |
|
|
9,997 |
|
|
||||||
|
Acquisition of 1,435,500 shares of common |
|
|
— |
|
|
|
(1,435 |
) |
|
|
(7,879 |
) |
|
|
— |
|
|
|
— |
|
|
|
(9,314 |
) |
|
||||||
|
Dividends on preferred stock ($0.03 per share) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(19 |
) |
|
|
(19 |
) |
|
||||||
|
Dividends on common stock ($0.01 per share) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(333 |
) |
|
|
(333 |
) |
|
||||||
|
Balance at December 31, 2003 |
|
|
625 |
|
|
|
35,294 |
|
|
|
208,436 |
|
|
|
(22,742 |
) |
|
|
42,103 |
|
|
|
263,716 |
|
|
||||||
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net income for year |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
29,323 |
|
|
|
29,323 |
|
|
||||||
|
Change in net unrealized investment gains/losses |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,473 |
|
|
|
— |
|
|
|
3,473 |
|
|
||||||
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,796 |
|
|
||||||
|
Issuance of 805,000 shares of common stock less issuance expenses of $507 |
|
|
— |
|
|
|
805 |
|
|
|
5,933 |
|
|
|
— |
|
|
|
— |
|
|
|
6,738 |
|
|
||||||
|
Exercise of 6,000 management subscription |
|
|
— |
|
|
|
6 |
|
|
|
26 |
|
|
|
— |
|
|
|
— |
|
|
|
32 |
|
|
||||||
|
Conversion of $2,640 of subordinated |
|
|
— |
|
|
|
326 |
|
|
|
2,159 |
|
|
|
— |
|
|
|
— |
|
|
|
2,485 |
|
|
||||||
|
Conversion of 625,000 shares of Series Preferred Stock |
|
|
(625 |
) |
|
|
1,875 |
|
|
|
(1,250 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
||||||
|
Issuance of 54,385 shares of common stock |
|
|
— |
|
|
|
54 |
|
|
|
489 |
|
|
|
— |
|
|
|
— |
|
|
|
543 |
|
|
||||||
|
Dividends on common stock ($0.02 per share) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(767 |
) |
|
|
(767 |
) |
|
||||||
|
Balance at December 31, 2004 |
|
|
— |
|
|
|
38,360 |
|
|
|
215,793 |
|
|
|
(19,269 |
) |
|
|
70,659 |
|
|
|
305,543 |
|
|
||||||
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net income for period |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
42,992 |
|
|
|
42,992 |
|
|
||||||
|
Change in net unrealized investment gains/losses |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(8,037 |
) |
|
|
— |
|
|
|
(8,037 |
) |
|
||||||
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,955 |
|
|
||||||
|
Conversion of $170 of subordinated debentures |
|
|
— |
|
|
|
21 |
|
|
|
139 |
|
|
|
— |
|
|
|
— |
|
|
|
160 |
|
|
||||||
|
Issuance of 19,500 shares of common stock |
|
|
— |
|
|
|
20 |
|
|
|
202 |
|
|
|
— |
|
|
|
— |
|
|
|
222 |
|
|
||||||
|
Issuance of 14,950,000 shares of common stock less issuance expenses of $9,896 |
|
|
— |
|
|
|
14,950 |
|
|
|
148,574 |
|
|
|
— |
|
|
|
— |
|
|
|
163,524 |
|
|
||||||
|
Exercise of 2,176,349 management subscription rights and stock options, including related income tax benefits |
|
|
— |
|
|
|
2,176 |
|
|
|
14,399 |
|
|
|
— |
|
|
|
— |
|
|
|
16,575 |
|
|
||||||
|
Dividends on common stock ($0.04 per share) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,621 |
) |
|
|
(1,621 |
) |
|
||||||
|
Balance at December 31, 2005 |
|
|
$ |
— |
|
|
|
$ |
55,527 |
|
|
|
$ |
379,107 |
|
|
|
$ |
(27,306 |
) |
|
|
$ |
112,030 |
|
|
|
$ |
519,358 |
|
|
See accompanying notes to consolidated financial statements.
F-7
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
|
|
|
||||||||
|
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
Operating activities |
|
|
|
|
|
|
|
|||
|
Net income |
|
$ |
42,992 |
|
$ |
29,323 |
|
$ |
25,440 |
|
|
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 |
|
306,608 |
|
305,762 |
|
248,075 |
|
|||
|
Annuity and single premium universal life product charges |
|
(25,686 |
) |
(22,462 |
) |
(20,452 |
) |
|||
|
Change in fair value of embedded derivatives |
|
31,087 |
|
(8,567 |
) |
66,801 |
|
|||
|
Increase in traditional life and accident and health insurance reserves |
|
13,734 |
|
17,576 |
|
11,408 |
|
|||
|
Policy acquisition costs deferred |
|
(325,424 |
) |
(188,248 |
) |
(104,408 |
) |
|||
|
Amortization of deferred policy acquisition costs |
|
68,109 |
|
67,867 |
|
47,450 |
|
|||
|
Provision for depreciation and other amortization |
|
2,002 |
|
1,434 |
|
1,277 |
|
|||
|
Amortization of discounts and premiums on fixed maturity securities |
|
(188,463 |
) |
(139,025 |
) |
(153,226 |
) |
|||
|
Realized losses (gains) on investments |
|
7,635 |
|
(943 |
) |
(6,946 |
) |
|||
|
Change in fair value of derivatives |
|
18,029 |
|
(28,696 |
) |
(52,525 |
) |
|||
|
Deferred income taxes |
|
(31,990 |
) |
820 |
|
(2,307 |
) |
|||
|
Net increase in cash from consolidation of variable interest entity |
|
— |
|
— |
|
2,776 |
|
|||
|
Changes in other operating assets and liabilities: |
|
|
|
|
|
|
|
|||
|
Accrued investment income |
|
(14,713 |
) |
(15,485 |
) |
7,330 |
|
|||
|
Receivables from related parties |
|
— |
|
— |
|
393 |
|
|||
|
Federal income taxes recoverable/payable |
|
(10,383 |
) |
10,291 |
|
(9,924 |
) |
|||
|
Other policy funds and contract claims |
|
31,977 |
|
33,415 |
|
25,351 |
|
|||
|
Other amounts due to related parties |
|
2,306 |
|
12,730 |
|
25,995 |
|
|||
|
Other liabilities |
|
57,311 |
|
26,208 |
|
7,604 |
|
|||
|
Other |
|
(2,728 |
) |
(51 |
) |
(953 |
) |
|||
|
Net cash provided by (used in) operating activities |
|
(17,597 |
) |
101,949 |
|
119,159 |
|
|||
|
Investing activities |
|
|
|
|
|
|
|
|||
|
Sales, maturities, or repayments of investments: |
|
|
|
|
|
|
|
|||
|
Fixed maturity securities—available for sale |
|
379,015 |
|
1,399,886 |
|
2,209,090 |
|
|||
|
Fixed maturity securities—held for investment |
|
1,332,689 |
|
1,157,382 |
|
869,205 |
|
|||
|
Equity securities, available for sale |
|
12,247 |
|
23,697 |
|
49,904 |
|
|||
|
Mortgage loans on real estate |
|
136,356 |
|
61,553 |
|
12,768 |
|
|||
|
Derivative instruments |
|
118,200 |
|
109,373 |
|
47,993 |
|
|||
|
Acquisitions of investments: |
|
|
|
|
|
|
|
|||
|
Fixed maturity securities—available for sale |
|
(1,851,905 |
) |
(1,381,314 |
) |
(2,035,255 |
) |
|||
|
Fixed maturity securities—held for investment |
|
(1,741,856 |
) |
(2,315,130 |
) |
(1,469,922 |
) |
|||
|
Equity securities, available for sale |
|
(60,707 |
) |
(38,645 |
) |
(49,170 |
) |
|||
|
Mortgage loans on real estate |
|
(498,214 |
) |
(412,283 |
) |
(287,144 |
) |
|||
|
Derivative instruments |
|
(180,440 |
) |
(111,689 |
) |
(66,062 |
) |
|||
|
Policy loans |
|
— |
|
(38 |
) |
(29 |
) |
|||
|
Purchases of property, furniture and equipment |
|
(5,010 |
) |
(2,901 |
) |
(829 |
) |
|||
|
Net cash used in investing activities |
|
(2,359,625 |
) |
(1,510,109 |
) |
(719,451 |
) |
|||
See accompanying notes to consolidated financial statements.
F-8
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
|
|
|
Year Ended December 31, |
|
|||||||
|
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
Financing activities |
|
|
|
|
|
|
|
|||
|
Receipts credited to annuity and single premium universal life policyholder account balances |
|
2,895,055 |
|
1,973,971 |
|
1,727,008 |
|
|||
|
Coinsurance deposits—related parties |
|
(4,688 |
) |
(202,064 |
) |
(649,434 |
) |
|||
|
Return of annuity and single premium universal life policyholder account balances |
|
(823,814 |
) |
(778,750 |
) |
(472,220 |
) |
|||
|
Financing fees incurred and deferred |
|
(2,042 |
) |
(9,598 |
) |
(610 |
) |
|||
|
Proceeds from notes payable |
|
— |
|
283,375 |
|
— |
|
|||
|
Repayments of notes payable |
|
(6,958 |
) |
(46,115 |
) |
(21,613 |
) |
|||
|
Increase (decrease) in amounts due under repurchase agreements |
|
131,822 |
|
156,085 |
|
(132,941 |
) |
|||
|
Amounts due to reinsurer |
|
— |
|
— |
|
(10,908 |
) |
|||
|
Proceeds from issuance of subordinated debentures |
|
55,000 |
|
57,500 |
|
12,000 |
|
|||
|
Net proceeds from issuance of common stock |
|
180,321 |
|
7,313 |
|
171,265 |
|
|||
|
Acquisitions of common stock |
|
— |
|
— |
|
(9,314 |
) |
|||
|
Dividends paid |
|
(1,621 |
) |
(767 |
) |
(352 |
) |
|||
|
Net cash provided by financing activities |
|
2,423,075 |
|
1,440,950 |
|
612,881 |
|
|||
|
Increase in cash and cash equivalents |
|
45,853 |
|
32,790 |
|
12,589 |
|
|||
|
Cash and cash equivalents at beginning of year |
|
66,542 |
|
33,752 |
|
21,163 |
|
|||
|
Cash and cash equivalents at end of year |
|
$ |
112,395 |
|
$ |
66,542 |
|
$ |
33,752 |
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|||
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|||
|
Interest on notes payable |
|
$ |
16,765 |
|
$ |
1,665 |
|
$ |
2,627 |
|
|
Interest on repurchase agreements |
|
11,280 |
|
3,148 |
|
1,278 |
|
|||
|
Interest on subordinated debentures |
|
13,074 |
|
8,518 |
|
7,139 |
|
|||
|
Income taxes |
|
62,993 |
|
29,500 |
|
25,735 |
|
|||
|
Non-cash financing and investing activities: |
|
|
|
|
|
|
|
|||
|
Premium and interest bonuses deferred as sales inducements |
|
163,646 |
|
75,162 |
|
31,249 |
|
|||
|
Issuance of 1,591,083 shares of common stock to NMO Deferred Compensation Trust |
|
— |
|
— |
|
9,997 |
|
|||
|
Conversion of subordinated debentures |
|
160 |
|
2,485 |
|
— |
|
|||
|
Subordinated debentures issued to subsidiary trusts for common equity securities of the subsidiary trust |
|
1,730 |
|
1,770 |
|
372 |
|
|||
See accompanying notes to consolidated financial statements.
F-9
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
1. Organization and Significant Accounting Policies
American Equity Investment Life Holding Company (the Company), through its wholly-owned subsidiaries, American Equity Investment Life Insurance Company and American Equity Investment Life Insurance Company of New York, is licensed to sell insurance products in 49 states and the District of Columbia at December 31, 2005. The Company offers a broad array of annuity and insurance products. The Company’s business consists primarily of the sale of index and fixed rate annuities. The Company operates solely in the life insurance business.
Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: American Equity Investment Life Insurance Company (“American Equity Life”), American Equity Investment Life Insurance Company of New York, American Equity Investment Capital, Inc., American Equity Investment Properties, L.C. and American Equity Investment Service Company (“Service Company”), which was acquired on September 2, 2005, see note 8. Prior to September 2, 2005, the consolidated financial statements included the accounts of the Service Company, a variable interest entity, as discussed below. All significant intercompany accounts and transactions have been eliminated.
The Company adopted the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (AcSEC) Statement of Position (SOP) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” on January 1, 2004. As it applies to the Company, SOP 03-1 established guidance for the accounting and presentation of costs related to sales inducements (first year premium and interest bonuses credited to policyholder account balances). There was no change to the Company’s method of accounting for sales inducements; however, the capitalized costs are now separately disclosed in the consolidated balance sheets and the related amortization expense is included in interest credited to account balances in the consolidated statements of income. Prior to 2004, the capitalized costs were included in deferred policy acquisition costs and the amortization expense was included in the amortization of deferred policy acquisition costs. The 2003 amounts have been reclassified to conform with the 2005 and 2004 presentation. The adoption of SOP 03-1 had no effect on consolidated net income or stockholders’ equity.
The Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51” on December 31, 2003, retroactive to January 1, 2003. Prior to the adoption of FIN 46, the Company’s subsidiary trusts, American Equity Capital Trust I and American Equity Capital Trust II were included in the Company’s consolidated financial statements. The subsidiary trusts are no longer consolidated upon adoption of FIN 46, and the effect of such deconsolidation is that the obligations of the trusts to the preferred security holders, previously reported as minority interests, have been replaced with the Company’s subordinated debt obligations to the trusts and the Company’s equity investments in the trusts. Interest payments on the subordinated debentures are no longer eliminated in consolidation but rather are reported as interest expense. The adoption of FIN 46 had no impact on consolidated net income, stockholders’ equity or previously reported quarterly net income for 2003.
F-10
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
In the first quarter of 2005, the FASB issued FASB Staff Position No. FIN 46(R)-5 (“FSP FIN 46(R)-5”), “Implicit Variable Interests under FIN 46”. Prior to the acquisition of the Service Company on September 2, 2005, the Company had an implicit variable interest in the Service Company and was required to consolidate the Service Company under FSP FIN 46(R)-5. The Company adopted FSP FIN 46(R)-5 in the first quarter of 2005 and as permitted by the FSP, applied it retroactively to January 1, 2003, the date of the Company’s original adoption of FIN 46. There was no cumulative effect on January 1, 2003 due to the adoption of FSP FIN 46(R)-5.
The adoption of FSP FIN 46(R)-5 and the consolidation of the Service Company had no impact on net income, stockholders’ equity or earnings per share for 2003. Net income, earnings per common share and earnings per common share—assuming dilution for the year ended December 31, 2004 decreased by $16.0 million, $0.42 and $0.37, respectively, due to the consolidation of the Service Company. Prior to January 1, 2004, the Service Company was taxed as a Subchapter S Corporation. Effective January 1, 2004, the Service Company revoked its Subchapter S election, which required the recognition of a deferred income tax liability on the basis of the differences that existed at that date, all of which is reflected in income tax expense for the year ended December 31, 2004. The increase in income tax expense for the year ended December 31, 2004 attributable to the change in the Service Company’s federal income tax status was approximately $16.3 million, and is the principal reconciling item between the amount computed at the applicable statutory federal income tax rate (35%) and the amount reported in the consolidated statements of income. Net income, earnings per common share, and earnings per common share—assuming dilution for the year ended December 31, 2005 decreased by $3.2 million, $0.08 and $0.07, respectively, due to the consolidation of the Service Company. A $2.5 million dividend distribution to the Company’s chairman by the Service Company preceding this acquisition is recorded in the consolidated statements of income on the minority interest line. For further information on the Service Company, see note 8.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are utilized in the calculation of deferred policy acquisition costs, deferred sales inducements, policyholder liabilities and accruals, valuation of embedded derivatives on index reserves and contingent convertible senior notes, other than temporary impairment of investments and valuation allowances on deferred tax assets and investments. It is reasonably possible that actual experience could differ from the estimates and assumptions utilized.
Certain items appearing in the 2004 and 2003 consolidated financial statements have been reclassified to conform with the current year presentation.
Fixed maturity securities (bonds and redeemable preferred stocks maturing more than one year after issuance) that may be sold prior to maturity are classified as available for sale. Available for sale securities are reported at estimated fair value and unrealized gains and losses, if any, on these securities are included directly in a separate component of stockholders’ equity, net of income taxes and certain adjustments, for
F-11
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements. Premiums and discounts are amortized/accrued using methods which result in a constant yield over the securities’ expected lives. Amortization/accrual of premiums and discounts on mortgage and asset-backed securities incorporate prepayment assumptions to estimate the securities’ expected lives. Interest income is recognized as earned.
Fixed maturity securities that the Company has the positive intent and ability to hold to maturity are classified as held for investment. Held for investment securities are reported at cost adjusted for amortization of premiums and discounts. Changes in the fair value of these securities, except for declines that are other than temporary, are not reflected in the Company’s financial statements. Premiums and discounts are amortized/accrued using methods which result in a constant yield over the securities’ expected lives.
Equity securities, comprised of common and non-redeemable preferred stocks, are classified as available for sale and are reported at fair value. Dividends are recognized when declared. Unrealized gains and losses are included directly in a separate component of stockholders’ equity, net of income taxes.
Mortgage loans on real estate are reported at cost, adjusted for amortization of premiums and accrual of discounts. If the Company determines that the value of any mortgage loan is impaired, the carrying amount of the mortgage loan will be reduced to its fair value, based upon the present value of expected future cash flows from the loan discounted at the loan’s effective interest rate, or the fair value of the underlying collateral.
Policy loans are reported at unpaid principal.
The carrying amounts of all the Company’s investments are reviewed on an ongoing basis for credit deterioration. If this review indicates a decline in fair value that is other than temporary, the Company’s carrying amount in the investment is reduced to its estimated fair value and a specific write down is taken. Such reductions in carrying amount are recognized as realized losses and charged to income. Realized gains and losses on sales are determined on the basis of specific identification of investments.
Fair values, as reported herein, of fixed maturity and equity securities are based on the latest quoted market prices, or for those fixed maturity securities not readily marketable, price matrices developed using yield data and other factors relating to instruments or securities with similar characteristics.
Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities, all derivative instruments (including certain derivative instruments embedded in other contracts) are recognized in the balance sheet at their fair values and changes in fair value are recognized immediately in earnings, unless the derivatives qualify as accounting hedges of future cash flows. For derivatives qualifying as hedges of future cash flows, the effective portion of the changes in fair value is recorded temporarily in equity, then recognized in earnings along with the related effects of the hedged items. Any “ineffective” portion of a hedge is reported in earnings as it occurs. The Company does not have any derivatives that qualify for hedge accounting.
The Company has index annuity products that guarantee the return of principal to the policyholder and credit interest based on a percentage of the gain in a specified market index. A portion of the premium
F-12
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
from each policyholder is invested in investment grade fixed income securities to cover the minimum guaranteed value due the policyholder at the end of the contract term. A portion of the premium is used to purchase derivatives consisting of call options on the applicable market indices to fund the index credits due to index annuity policyholders. Substantially all such call options are one year options purchased to match the funding requirements of the underlying policies. The call options are marked to market with the change in fair value included as a component of our revenues. On the respective anniversary dates of the index policies, the index used to compute the annual index credit is reset and the Company purchases new one-year call options to fund the next annual index credit. The Company manages the cost of these purchases through the terms of its index annuities, which permits the Company to change annual participation rates, caps, and/or asset fees, subject to guaranteed minimums. By reducing participation rates, caps or asset fees, the Company can limit option costs to budgeted amounts except in cases where the contractual features would prevent further modifications.
The Company’s strategy attempts to mitigate any potential risk of loss under these agreements through a regular monitoring process which evaluates the program’s effectiveness. The Company is exposed to risk of loss in the event of nonperformance by the counterparties and, accordingly, the Company purchases its option contracts from multiple counterparties and evaluates the creditworthiness of all counterparties prior to purchase of the contracts. At December 31, 2005, all of these options had been purchased from nationally recognized investment banking institutions with a Standard and Poor’s credit rating of A or higher.
Under SFAS No. 133, the future annual index credits on the Company’s index annuities are treated as a “series of embedded derivatives” over the expected life of the applicable contract. The Company does not purchase call options to fund the index liabilities which may arise after the next policy anniversary date. The Company must value both the call options and the related forward embedded options in the policies at fair value. The change in fair value for the call options is included in the change in fair value of derivatives and the change in fair value adjustment of the embedded options is included in the change in fair value of embedded derivatives in the consolidated statements of income.
Effective December 15, 2005, the conversion option embedded in the Company’s contingent convertible senior notes was bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. The net increase in the carrying amount of the contingent convertible notes was $4.6 million for the year ended December 31, 2005 and is included as a component of the change in fair value of embedded derivatives.
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
Deferred Policy Acquisition Costs and Deferred Sales Inducements
To the extent recoverable from future policy revenues and gross profits, certain costs of producing new business, principally commissions, first-year premium and interest bonuses credited to policyholder account balances and certain costs of policy issuance (including policy issue costs of $8.9 million, $6.3 million and $3.8 million for the years ended December 31, 2005, 2004 and 2003, respectively) have been deferred and capitalized as deferred policy acquisition costs or deferred sales inducements. For annuity
F-13
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
and single premium universal life products, these capitalized costs are being amortized generally in proportion to expected gross profits from surrender charges and investment, mortality, and expense margins. That amortization is adjusted retrospectively when estimates of future gross profits/margins (including the impact of realized investment gains and losses) to be realized from a group of products are revised. Deferred policy acquisition costs and deferred sales inducements are also adjusted for the change in amortization that would have occurred if available-for-sale fixed maturity securities had been sold at their aggregate fair value and the proceeds reinvested at current yields. The impact of this adjustment is included in accumulated other comprehensive income (loss) within consolidated stockholders’ equity.
For traditional life and accident and health insurance, deferred policy acquisition costs are being amortized over the premium-paying period of the related policies in proportion to premium revenues recognized, principally using the same assumptions for interest, mortality and withdrawals that are used for computing liabilities for future policy benefits subject to traditional “lock-in” concepts.
Future policy benefit reserves for annuity and single premium universal life products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances. Interest crediting rates (including first year interest bonuses capitalized as deferred sales inducements) for these products ranged from 3.1% to 11.5% in 2005 and 3.0% to 11.5% in 2004 and 2003. These rates include first-year interest bonuses capitalized as deferred sales inducements.
The liability for future policy benefits for traditional life insurance is based on net level premium reserves, including assumptions as to interest, mortality, and other assumptions underlying the guaranteed policy cash values. Reserve interest assumptions are level and range from 3.0% to 6.0%. The liabilities for future policy benefits for accident and health insurance are computed using a net level premium method, including assumptions as to morbidity and other assumptions based on the Company’s experience, modified as necessary to give effect to anticipated trends and to include provisions for possible unfavorable deviations. Policy benefit claims are charged to expense in the period that the claims are incurred.
Unpaid claims include amounts for losses and related adjustment expenses and are determined using individual claim evaluations and statistical analysis. Unpaid claims represent estimates of the ultimate net costs of all losses, reported and unreported, which remain unpaid at December 31 of each year. These estimates are necessarily subject to the impact of future changes in claim severity, frequency and other factors. In spite of the variability inherent in such situations, management believes that the unpaid claim amounts are adequate. The estimates are continuously reviewed and as adjustments to these amounts become necessary, such adjustments are reflected in current operations.
Certain group policies include provisions for annual experience refunds of premiums equal to net premiums received less a 16% administrative fee and less claims incurred. Such amounts (2005—$0.2 million; 2004—$0.0 million; and 2003—$0.1 million) are reported as a reduction of traditional life and accident and health insurance premiums in the consolidated statements of income.
F-14
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
Deferred income tax assets or liabilities are computed based on the temporary differences between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period. Deferred income tax assets are subject to ongoing evaluation of whether such assets will more likely than not be realized. The ultimate realization of deferred income tax assets depends on generating future taxable income during the periods in which temporary differences become deductible. If future income is not generated as expected, deferred income tax assets may need to be written off.
On December 9, 2003, the Company completed an initial public offering of 18,700,000 shares of its common stock at a price of $9.00 per share. Pursuant to the over-allotment option granted to the underwriters in this offering, the underwriters purchased an additional 2,000,000 shares on December 29, 2003 and an additional 805,000 shares on January 7, 2004. The proceeds from the initial public offering (including proceeds from shares issued pursuant to the over-allotment option), net of the underwriting discount and expenses, were approximately $178.0 million.
On December 20, 2005, the Company completed an offering of 13,000,000 shares of its common stock at a price of $11.60 per share. Pursuant to the over-allotment option granted to the underwriters in this offering, the underwriters purchased an additional 1,950,000 shares on December 30, 2005. The proceeds from this offering (including proceeds from shares issued pursuant to the over-allotment option), net of the underwriting discount and expenses, were approximately $163.5 million.
During 2004, 625,000 shares of 1998 Series A Participating Preferred Stock (aggregate liquidation preference of $10.0 million) converted into 1,875,000 shares of the Company’s common stock. Prior to conversion, these preferred shares had participating dividend rights with shares of the Company’s common stock, when and as such dividends were declared.
Recognition of Premium Revenues and Costs
Revenues for annuity and single premium universal life products include surrender charges and mortality and expense charges (single premium universal life products only) assessed against policyholder account balances during the period. Expenses related to these products include interest credited to policyholder account balances and benefit claims incurred in excess of policyholder account balances (single premium universal life products only).
Traditional life and accident and health insurance premiums are recognized as revenues over the premium-paying period. Future policy benefits are recognized as expenses over the life of the policy by means of the provision for future policy benefits.
All insurance-related revenues, benefits, losses and expenses are reported net of reinsurance ceded.
Premiums and Deposits by Product Type
The Company markets index annuities, fixed rate annuities, a variable annuity and life insurance. In connection with its reinsured group life business, the Company also collects renewal premiums on certain
F-15
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
accident and health insurance policies. Premiums and deposits (net of coinsurance), which are not included as revenues in the accompanying consolidated statements of income, collected in 2005, 2004 and 2003, by product category were as follows:
|
|
|
Year Ended December 31, |
|
|||||||||
|
Product Type |
|
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
|
(Dollars in thousands) |
|
|||||||||
|
Index Annuities: |
|
|
|
|
|
|
|
|||||
|
Index Strategies |
|
$ |
1,777,825 |
|
$ |
1,008,801 |
|
$ |
468,716 |
|
||
|
Fixed Strategy |
|
907,711 |
|
491,721 |
|
201,702 |
|
|||||
|
|
|
2,685,536 |
|
1,500,522 |
|
670,418 |
|
|||||
|
Fixed Rate Annuities |
|
204,831 |
|
271,385 |
|
407,156 |
|
|||||
|
Life Insurance |
|
13,077 |
|
14,566 |
|
13,001 |
|
|||||
|
Accident and Health |
|
501 |
|
549 |
|
685 |
|
|||||
|
Variable Annuities |
|
37 |
|
279 |
|
26 |
|
|||||
|
|
|
$ |
2,903,982 |
|
$ |
1,787,301 |
|
$ |
1,091,286 |
|
||
Two national marketing organizations through which the Company markets its products each accounted for more than 10% of the annuity deposits and insurance premium collections during 2005, 2004 and 2003 representing 15% and 11%, 18% and 11%, and 15% and 10%, of the annuity deposits and insurance premiums collected, respectively.
The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related Interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company’s employee stock options equals the fair value of the underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding consolidated net income is required by SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, and has been determined as if the Company had accounted for its employee stock options and subscription rights under the fair value method of these statements. The fair value for these options was estimated at the date of grant using a Black-Scholes option valuation model with the following weighted-average assumptions:
|
|
|
Year Ended December 31, |
|
||||
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
Risk-free interest rate |
|
4.84 |
% |
3.10 |
% |
1.46 |
% |
|
Dividend yield |
|
0 |
% |
0 |
% |
0 |
% |
|
Weighted-average expected life |
|
10 years |
|
10 years |
|
10 years |
|
|
Expected volatility |
|
23.4 |
% |
24.5 |
% |
3.2 |
% |
F-16
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma net earnings and earnings per common share were as follows:
|
|
|
Year ended December 31, |
|
|||||||
|
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
|
(Dollars in thousands, |
|
|||||||
|
Net income, as reported—numerator for earnings per common share |
|
$ |
42,992 |
|
$ |
29,323 |
|
$ |
25,440 |
|
|
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effect |
|
(888 |
) |
(1,125 |
) |
(242 |
) |
|||
|
Net income, pro forma—numerator for earnings per common share, pro forma |
|
42,104 |
|
28,198 |
|
25,198 |
|
|||
|
Interest related to convertible subordinated debentures (net of income tax benefit) |
|
1,202 |
|
1,255 |
|
1,347 |
|
|||
|
Numerator for earnings per common share—assuming dilution, pro forma |
|
$ |
43,306 |
|
$ |
29,453 |
|
$ |
26,545 |
|
|
Earnings per common share, as reported |
|
$ |
1.09 |
|
$ |
0.77 |
|
$ |
1.45 |
|
|
Earnings per common share, pro forma |
|
$ |
1.07 |
|
$ |
0.74 |
|
$ |
1.43 |
|
|
Earnings per common share—assuming dilution, as reported |
|
$ |
0.99 |
|
$ |
0.71 |
|
$ |
1.21 |
|
|
Earnings per common share—assuming dilution, pro forma |
|
$ |
0.97 |
|
$ |
0.68 |
|
$ |
1.20 |
|
Comprehensive income (loss) includes all changes in stockholders’ equity during a period except those resulting from investments by and distributions to stockholders. Other comprehensive income (loss) excludes net realized investment gains (losses) included in net income which merely represent transfers from unrealized to realized gains and losses. These amounts totaled $(7.6) million, $0.9 million and $6.9 million in 2005, 2004 and 2003, respectively. Such amounts, which have been measured through the date of sale, are net of adjustments to deferred policy acquisition costs, deferred sales inducements and income taxes totaling $(3.7) million in 2005, $0.5 million in 2004 and $3.6 million in 2003.
In March 2004, the FASB’s Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (EITF 03-1). EITF 03-1 provides guidance regarding the meaning of other-than-temporary impairment and its application to investments classified as either available for sale or held to maturity under FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and to equity securities accounted for under the cost method. Included in EITF 03-1 is guidance on how to account for impairments that are solely due to interest rate changes, including changes resulting from increases in sector credit spreads. This guidance was to become effective for reporting periods beginning after June 15, 2004. However, on September 30, 2004, the FASB issued a Staff Position that delayed the effective date for the recognition and measurement guidance of EITF 03-1 until additional clarifying guidance was issued. In June 2005, the FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment, but directed the staff to issue proposed EITF Issue No. 03-1 as final.
F-17
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
The final FSP (retitled FSP FAS 115-1) is effective for the Company beginning on January 1, 2006. The new standard is not expected to have a material impact on the Company’s financial statements.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”). This standard requires expensing stock options and other share-based payments and supersedes SFAS No. 123, which had allowed companies to choose between expensing stock options or showing proforma disclosure only. SFAS 123R is effective for the Company as of January 1, 2006 and will apply to all awards granted, modified, cancelled or purchased after that date as well as the unvested portion of prior awards. The Company will adopt SFAS 123R as of the effective date and does not believe it will have a material effect on the financial statements at the date of adoption as the unvested portion of prior awards is immaterial. The effect on future financial statements is undeterminable as the amount of future grants of stock awards is unknown.
In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections” (SFAS 154). The Statement replaces APB Opinion No. 20 and SFAS 3. SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle. However, if it is impracticable to determine the effects of such changes, then other rules apply. SFAS 154 is effective January 1, 2006. Currently, the Company is not aware of any circumstances that require the application of SFAS 154, and there is no anticipated impact on the financial statements.
In September 2005, the AcSEC issued Statement of Position 05-1 (“SOP 05-1”), “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts”. SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance contracts other than those specifically described in Statement of Financial Accounting Standards (SFAS) No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale on Investments”. SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights or coverages that occurs by exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 31, 2006. Retrospective application of SOP 05-1 to previously issued financial statements is not permitted. The Company is continuing to evaluate SOP 05-1 but does not believe that it will have a material impact on the financial statements.
2. Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating the fair values of financial instruments:
Fixed maturity securities: Quoted market prices, when available, or price matrices for securities which are not actively traded, developed using yield data and other factors relating to instruments or securities with similar characteristics.
Equity securities: Quoted market prices.
Mortgage loans on real estate: Discounted expected cash flows using interest rates currently being offered for similar loans.
F-18
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
Derivative instruments: Quoted market prices from related counterparties.
Policy loans: The Company has not attempted to determine the fair values associated with its policy loans, as management believes any differences between the Company’s carrying value and the fair values afforded these instruments are immaterial to the Company’s financial position and, accordingly, the cost to provide such disclosure is not worth the benefit to be derived.
Cash and cash equivalents: Amounts reported in the consolidated balance sheets for these instruments approximate their fair values.
Annuity and single premium universal life policy benefit reserves and coinsurance deposits - related party: Fair values of the Company’s liabilities under contracts not involving significant mortality or morbidity risks (principally deferred annuities), are stated at the cost the Company would incur to extinguish the liability (i.e., the cash surrender value) adjusted as required under SFAS No. 133. The coinsurance deposits related to the annuity benefit reserves have fair values determined in a similar fashion. The Company is not required to and has not estimated the fair value of its liabilities under other contracts.
Notes payable and amounts due under repurchase agreements: The fair value of the contingent convertible senior notes is based upon quoted market prices. Fair values for other notes payable with fixed interest rates are estimated by discounting expected cash flows using interest rates currently being offered for similar securities. The amounts reported in the consolidated balance sheets for short term indebtedness under repurchase agreements with variable interest rates approximate their fair values.
Subordinated debentures: The carrying amount of subordinated debentures with variable interest rates reported in the consolidated balance sheets approximates fair value. Fair values for subordinated debentures with fixed interest rates are estimated by discounting expected cash flows using interest rates currently being offered for similar securities.
F-19
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
The following sets forth a comparison of the fair values and carrying amounts of the Company’s financial instruments:
|
|
|
December 31, |
|
||||||||||
|
|
|
2005 |
|
2004 |
|
||||||||
|
|
|
Carrying |
|
Estimated |
|
Carrying |
|
Estimated |
|
||||
|
|
|
(Dollars in thousands) |
|
||||||||||
|
Assets |
|
|
|
|
|
|
|
|
|
||||
|
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
||||
|
Available for sale |
|
$ |
4,188,683 |
|
$ |
4,188,683 |
|
$ |
2,705,323 |
|
$ |
2,705,323 |
|
|
Held for investment |
|
4,711,427 |
|
4,598,615 |
|
4,098,493 |
|
4,005,775 |
|
||||
|
Equity securities, available for sale |
|
84,846 |
|
84,846 |
|
38,303 |
|
38,303 |
|
||||
|
Mortgage loans on real estate |
|
1,321,637 |
|
1,341,353 |
|
959,779 |
|
999,380 |
|
||||
|
Derivative instruments |
|
185,391 |
|
185,391 |
|
148,006 |
|
148,006 |
|
||||
|
Policy loans |
|
362 |
|
362 |
|
362 |
|
362 |
|
||||
|
Cash and cash equivalents |
|
112,395 |
|
112,395 |
|
66,542 |
|
66,542 |
|
||||
|
Coinsurance deposits - related party |
|
1,959,663 |
|
1,694,583 |
|
2,068,700 |
|
1,780,862 |
|
||||
|
Liabilities |
|
|
|
|
|
|
|
|
|
||||
|
Annuity and single premium universal life policy benefit reserves |
|
12,162,181 |
|
10,528,907 |
|
9,745,896 |
|
8,573,784 |
|
||||
|
Notes payable |
|
281,043 |
|
319,317 |
|
283,375 |
|
311,000 |
|
||||
|
Subordinated debentures |
|
230,658 |
|
205,575 |
|
173,576 |
|
148,833 |
|
||||
|
Amounts due under repurchase agreements |
|
396,697 |
|
396,697 |
|
264,875 |
|
264,875 |
|
||||
F-20
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
At December 31, 2005 and 2004, the amortized cost and estimated fair value of fixed maturity securities and equity securities were as follows:
|
December 31, 2005 |
|
|
|
Amortized |
|
Gross |
|
Gross |
|
Estimated |
|
||||||||
|
|
|
(Dollars in thousands) |
|
||||||||||||||||
|
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
United States Government full faith and credit |
|
$ |
2,734 |
|
|
$ |
64 |
|
|
|
$ |
(24 |
) |
|
$ |
2,774 |
|
||
|
United States Government sponsored agencies |
|
2,877,423 |
|
|
37 |
|
|
|
(67,471 |
) |
|
2,809,989 |
|
||||||
|
Public utilities |
|
133,489 |
|
|
1,163 |
|
|
|
(1,306 |
) |
|
133,346 |
|
||||||
|
Corporate securities |
|
603,746 |
|
|
7,138 |
|
|
|
(12,596 |
) |
|
598,288 |
|
||||||
|
Redeemable preferred stocks |
|
48,578 |
|
|
394 |
|
|
|
(2,076 |
) |
|
46,896 |
|
||||||
|
Mortgage and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
United States Government and agencies |
|
218,870 |
|
|
1,669 |
|
|
|
(160 |
) |
|
220,379 |
|
||||||
|
Non-government |
|
389,319 |
|
|
625 |
|
|
|
(12,933 |
) |
|
377,011 |
|
||||||
|
|
|
$ |
4,274,159 |
|
|
$ |
11,090 |
|
|
|
$ |
(96,566 |
) |
|
$ |
4,188,683 |
|
||
|
Held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
United States Government sponsored agencies |
|
$ |
4,635,485 |
|
|
$ |
478 |
|
|
|
$ |
(113,290 |
) |
|
$ |
4,522,673 |
|
||
|
Corporate securities |
|
75,942 |
|
|
— |
|
|
|
— |
|
|
75,942 |
|
||||||
|
|
|
$ |
4,711,427 |
|
|
$ |
478 |
|
|
|
$ |
(113,290 |
) |
|
$ |
4,598,615 |
|
||
|
Equity securities, available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Non-redeemable preferred stocks |
|
$ |
71,642 |
|
|
$ |
395 |
|
|
|
$ |
(2,075 |
) |
|
$ |
69,962 |
|
||
|
Common stocks |
|
16,418 |
|
|
— |
|
|
|
(1,534 |
) |
|
14,884 |
|
||||||
|
|
|
$ |
88,060 |
|
|
$ |
395 |
|
|
|
$ |
(3,609 |
) |
|
$ |
84,846 |
|
||
|
December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
United States Government full faith and credit |
|
$ |
2,337 |
|
|
$ |
79 |
|
|
|
$ |
(10 |
) |
|
$ |
2,406 |
|
||
|
United States Government sponsored agencies |
|
1,764,459 |
|
|
132 |
|
|
|
(58,749 |
) |
|
1,705,842 |
|
||||||
|
Public utilities |
|
43,297 |
|
|
1,552 |
|
|
|
— |
|
|
44,849 |
|
||||||
|
Corporate securities |
|
262,253 |
|
|
7,223 |
|
|
|
(6,916 |
) |
|
262,560 |
|
||||||
|
Redeemable preferred stocks |
|
34,848 |
|
|
1,105 |
|
|
|
(584 |
) |
|
35,369 |
|
||||||
|
Mortgage and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
United State Government and agencies |
|
254,640 |
|
|
2,436 |
|
|
|
(72 |
) |
|
257,004 |
|
||||||
|
Non-government |
|
407,970 |
|
|
4,602 |
|
|
|
(15,279 |
) |
|
397,293 |
|
||||||
|
|
|
$ |
2,769,804 |
|
|
$ |
17,129 |
|
|
|
$ |
(81,610 |
) |
|
$ |
2,705,323 |
|
||
|
Held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
United States Government sponsored agencies |
|
$ |
4,022,646 |
|
|
$ |
2,240 |
|
|
|
$ |
(94,958 |
) |
|
$ |
3,929,928 |
|
||
|
Corporate securities |
|
75,847 |
|
|
— |
|
|
|
— |
|
|
75,847 |
|
||||||
|
|
|
$ |
4,098,493 |
|
|
$ |
2,240 |
|
|
|
$ |
(94,958 |
) |
|
$ |
4,005,775 |
|
||
|
Equity securities, available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Non-redeemable preferred stocks |
|
$ |
30,472 |
|
|
$ |
331 |
|
|
|
$ |
(294 |
) |
|
$ |
30,509 |
|
||
|
Common stocks |
|
8,366 |
|
|
— |
|
|
|
(572 |
) |
|
7,794 |
|
||||||
|
|
|
$ |
38,838 |
|
|
$ |
331 |
|
|
|
$ |
(866 |
) |
|
$ |
38,303 |
|
||
F-21
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
The amortized cost and estimated fair value of fixed maturity securities at December 31, 2005, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. All of the Company’s mortgage-backed and asset-backed securities provide for periodic payments throughout their lives, and are shown below as a separate line.
|
|
|
Available for sale |
|
Held for investment |
|
||||||||
|
|
|
Amortized |
|
Estimated |
|
Amortized |
|
Estimated |
|
||||
|
|
|
(Dollars in thousands) |
|
||||||||||
|
Due after one year through five years |
|
$ |
48,185 |
|
$ |
47,260 |
|
$ |
— |
|
$ |
— |
|
|
Due after five years through ten years |
|
444,124 |
|
430,243 |
|
— |
|
— |
|
||||
|
Due after ten years through twenty years |
|
1,940,143 |
|
1,904,453 |
|
347,612 |
|
343,806 |
|
||||
|
Due after twenty years |
|
1,233,518 |
|
1,209,337 |
|
4,363,815 |
|
4,254,809 |
|
||||
|
|
|
3,665,970 |
|
3,591,293 |
|
4,711,427 |
|
4,598,615 |
|
||||
|
Mortgage-backed and asset-backed securities |
|
608,189 |
|
597,390 |
|
— |
|
— |
|
||||
|
|
|
$ |
4,274,159 |
|
$ |
4,188,683 |
|
$ |
4,711,427 |
|
$ |
4,598,615 |
|
Net unrealized losses on available for sale fixed maturity securities and equity securities reported as a separate component of stockholders’ equity were comprised of the following at December 31, 2005 and 2004:
|
|
|
December 31, |
|
||||
|
|
|
2005 |
|
2004 |
|
||
|
|
|
(Dollars in thousands) |
|
||||
|
Net unrealized losses on available for sale fixed maturity securities and equity securities |
|
$ |
(88,690 |
) |
$ |
(65,016 |
) |
|
Adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements |
|
46,680 |
|
35,041 |
|
||
|
Net unrealized gain and amortization on fixed maturity securities transferred from available for sale to held for investment |
|
— |
|
330 |
|
||
|
Deferred income tax benefit |
|
14,704 |
|
10,376 |
|
||
|
Net unrealized losses reported as accumulated other comprehensive loss |
|
$ |
(27,306 |
) |
$ |
(19,269 |
) |
F-22
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
The following table shows our investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2005:
|
|
|
Less than 12 months |
|
12 months or more |
|
Total |
|
|||||||||||||||||||||||||
|
|
|
Estimated |
|
Unrealized |
|
Estimated |
|
Unrealized |
|
Estimated |
|
Unrealized |
|
|||||||||||||||||||
|
|
|
(Dollars in thousands) |
|
|||||||||||||||||||||||||||||
|
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
United States Government full faith and credit |
|
|
$ |
392 |
|
|
|
$ |
(8 |
) |
|
|
$ |
486 |
|
|
|
$ |
(16 |
) |
|
|
$ |
878 |
|
|
|
$ |
(24 |
) |
|
|
|
United States Government sponsored agencies |
|
|
1,347,792 |
|
|
|
(16,268 |
) |
|
|
1,407,053 |
|
|
|
(51,204 |
) |
|
|
2,754,845 |
|
|
|
(67,472 |
) |
|
|
||||||
|
Public utilities |
|
|
83,384 |
|
|
|
(1,306 |
) |
|
|
— |
|
|
|
— |
|
|
|
83,384 |
|
|
|
(1,306 |
) |
|
|
||||||
|
Corporate securities |
|
|
342,850 |
|
|
|
(11,079 |
) |
|
|
19,056 |
|
|
|
(1,516 |
) |
|
|
361,906 |
|
|
|
(12,595 |
) |
|
|
||||||
|
Redeemable preferred stocks |
|
|
13,501 |
|
|
|
(330 |
) |
|
|
19,437 |
|
|
|
(1,746 |
) |
|
|
32,938 |
|
|
|
(2,076 |
) |
|
|
||||||
|
Mortgage and asset-backed securities |
|
|
178,691 |
|
|
|
(6,859 |
) |
|
|
135,494 |
|
|
|
(6,234 |
) |
|
|
314,185 |
|
|
|
(13,093 |
) |
|
|
||||||
|
|
|
|
$ |
1,966,610 |
|
|
|
$ |
(35,850 |
) |
|
|
$ |
1,581,526 |
|
|
|
$ |
(60,716 |
) |
|
|
$ |
3,548,136 |
|
|
|
$ |
(96,566 |
) |
|
|
|
Held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
United States Government sponsored agencies |
|
|
$ |
4,428,624 |
|
|
|
$ |
(113,290 |
) |
|
|
$ |
— |
|
|
|
$ |
— |
|
|
|
$ |
4,428,624 |
|
|
|
$ |
(113,290 |
) |
|
|
|
|
|
|
$ |
4,428,624 |
|
|
|
$ |
(113,290 |
) |
|
|
$ |
— |
|
|
|
$ |
— |
|
|
|
$ |
4,428,624 |
|
|
|
$ |
(113,290 |
) |
|
|
|
Equity securities, available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Non-redeemable preferred stocks |
|
|
$ |
34,926 |
|
|
|
$ |
(1,138 |
) |
|
|
$ |
7,663 |
|
|
|
$ |
(937 |
) |
|
|
$ |
42,589 |
|
|
|
$ |
(2,075 |
) |
|
|
|
Common stocks |
|
|
6,990 |
|
|
|
(827 |
) |
|
|
293 |
|
|
|
(707 |
) |
|
|
7,283 |
|
|
|
(1,534 |
) |
|
|
||||||
|
|
|
|
$ |
41,916 |
|
|
|
$ |
(1,965 |
) |
|
|
$ |
7,956 |
|
|
|
$ |
(1,644 |
) |
|
|
$ |
49,872 |
|
|
|
$ |
(3,609 |
) |
|
|
Approximately 97% of the unrealized losses on fixed maturity securities shown in the above table are on securities that are rated investment grade. These unrealized losses are primarily from the Company’s investments in United States Government agencies and United States Government agency mortgage-backed securities. These securities are relatively long in duration and are callable, making the value of such securities very sensitive to changes in market interest rates. Approximately 3% of the unrealized losses on fixed maturity securities shown in the above table are on securities rated below investment grade. The Company reviews all investments on an ongoing basis for credit deterioration. Factors considered in evaluating whether a decline in value is other than temporary include:
· the length of time and the extent to which the fair value has been less than cost;
· the financial condition and near-term prospects of the issuer;
· whether the investment is rated investment grade;
· whether the issuer is current on all payments and all contractual payments have been made as agreed;
· the Company’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery;
· consideration of rating agency actions;
· changes in cash flows of asset-backed and mortgage-backed securities.
F-23
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
The securities in an unrealized loss position are current in respect to payments of interest and principal and the Company has the intent and ability to hold these securities until they recover in fair value.
Components of net investment income are as follows:
|
|
|
Year Ended December 31, |
|
|||||||
|
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
|
(Dollars in thousands) |
|
|||||||
|
Fixed maturity securities |
|
$ |
475,540 |
|
$ |
376,319 |
|
$ |
322,247 |
|
|
Equity securities |
|
3,402 |
|
1,668 |
|
1,951 |
|
|||
|
Mortgage loans on real estate |
|
77,518 |
|
52,697 |
|
33,241 |
|
|||
|
Policy loans |
|
26 |
|
26 |
|
25 |
|
|||
|
Cash and cash equivalents |
|
1,171 |
|
604 |
|
1,344 |
|
|||
|
Other |
|
64 |
|
622 |
|
1,178 |
|
|||
|
|
|
557,721 |
|
431,936 |
|
359,986 |
|
|||
|
Less investment expenses |
|
(3,603 |
) |
(3,551 |
) |
(2,691 |
) |
|||
|
Net investment income |
|
$ |
554,118 |
|
$ |
428,385 |
|
$ |
357,295 |
|
Proceeds from sales of available for sale fixed maturity securities for the years ended December 31, 2005, 2004 and 2003 were $155.4 million, $272.7 million and $507.3 million, respectively. Scheduled principal repayments, calls and tenders for available for sale fixed maturity securities for the years ended December 31, 2005, 2004 and 2003 were $0.3 billion, $1.1 billion and $1.7 billion, respectively. Calls of held for investment fixed maturity securities for the years ended December 31, 2005, 2004 and 2003 were $1.3 billion, $1.2 billion and $0.9 billion, respectively.
Net realized gains (losses) included in revenues for the years ended December 31, 2005, 2004 and 2003 are as follows:
|
|
|
Year Ended December 31, |
|
|||||||
|
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
|
(Dollars in thousands) |
|
|||||||
|
Available for sale fixed maturity securities: |
|
|
|
|
|
|
|
|||
|
Gross realized gains |
|
$ |
5,334 |
|
$ |
13,720 |
|
$ |
19,922 |
|
|
Gross realized losses |
|
(3,642 |
) |
(220 |
) |
(4,216 |
) |
|||
|
Writedowns (other than temporary impairments) |
|
(8,902 |
) |
(12,828 |
) |
(9,821 |
) |
|||
|
|
|
(7,210 |
) |
672 |
|
5,885 |
|
|||
|
Equity securities: |
|
|
|
|
|
|
|
|||
|
Gross realized gains |
|
135 |
|
272 |
|
1,358 |
|
|||
|
Gross realized losses |
|
— |
|
(1 |
) |
(297 |
) |
|||
|
Writedowns (other than temporary impairments) |
|
(560 |
) |
— |
|
— |
|
|||
|
|
|
(425 |
) |
271 |
|
1,061 |
|
|||
|
|
|
$ |
(7,635 |
) |
$ |
943 |
|
$ |
6,946 |
|
F-24
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
Changes in unrealized appreciation (depreciation) on investments for the years ended December 31, 2005, 2004 and 2003 are as follows:
|
|
|
Year Ended December 31, |
|
|||||||
|
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
|
(Dollars in thousands) |
|
|||||||
|
Fixed maturity securities held for investment carried at amortized cost |
|
$ |
(20,094 |
) |
$ |
17,347 |
|
$ |
(111,892 |
) |
|
Investments carried at estimated fair value: |
|
|
|
|
|
|
|
|||
|
Fixed maturity securities, available for sale |
|
$ |
(20,995 |
) |
$ |
21,250 |
|
$ |
(41,961 |
) |
|
Equity securities, available for sale |
|
(2,679 |
) |
(150 |
) |
660 |
|
|||
|
|
|
(23,674 |
) |
21,100 |
|
(41,301 |
) |
|||
|
Adjustment for effect on other balance sheet accounts: |
|
|
|
|
|
|
|
|||
|
Deferred policy acquisition costs and deferred sales |
|
11,639 |
|
(16,087 |
) |
25,541 |
|
|||
|
Deferred income tax asset |
|
4,328 |
|
(1,870 |
) |
5,815 |
|
|||
|
Net unrealized gain and amortization on fixed maturity securities transferred from available to sale to held for investment |
|
(330 |
) |
330 |
|
(853 |
) |
|||
|
|
|
15,637 |
|
(17,627 |
) |
30,503 |
|
|||
|
Change is unrealized appreciation (depreciation) on investments carried at estimated fair value |
|
$ |
(8,037 |
) |
$ |
3,473 |
|
$ |
(10,798 |
) |
The Company transferred fixed maturity securities at fair value of $1.2 billion during 2004 from available for sale to held for investment to match its investment objectives, which are to hold these investments to maturity. The unrealized gain on these securities on the date of transfer is included as a separate component of accumulated other comprehensive loss and is being amortized over the lives of the securities. The unrealized gains on the securities transferred during 2004 were $1.7 million at the date of transfer. All of the securities transferred during 2004 were called for redemption subsequent to the transfer.
F-25
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
The Company’s mortgage loan portfolio totaled $1.3 billion and $1.0 billion at December 31, 2005 and 2004, respectively, with commitments outstanding of $75.1 million at December 31, 2005. The portfolio consists of commercial mortgage loans diversified as to property type, location and loan size. The loans are collateralized by the related properties. The Company’s mortgage lending policies establish limits on the amount that can be loaned to one borrower and require diversification by geographic location and collateral type. As of December 31, 2005, there were no delinquencies or defaults in the Company’s mortgage loan portfolio. The commercial mortgage loan portfolio is diversified by geographic region and specific collateral property type as follows:
|
|
|
December 31, |
|
||||||||||||
|
|
|
2005 |
|
2004 |
|
||||||||||
|
|
|
Carrying |
|
|
|
Carrying |
|
|
|
||||||
|
|
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
||||||
|
|
|
(Dollars in thousands) |
|
||||||||||||
|
Geographic distribution |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
East |
|
$ |
283,085 |
|
|
21.4 |
% |
|
$ |
196,805 |
|
|
20.5 |
% |
|
|
Middle Atlantic |
|
93,579 |
|
|
7.1 |
% |
|
80,098 |
|
|
8.3 |
% |
|
||
|
Mountain |
|
198,476 |
|
|
15.0 |
% |
|
148,608 |
|
|
15.5 |
% |
|
||
|
New England |
|
47,839 |
|
|
3.6 |
% |
|
50,624 |
|
|
5.3 |
% |
|
||
|
Pacific |
|
117,977 |
|
|
8.9 |
% |
|
84,860 |
|
|
8.8 |
% |
|
||
|
South Atlantic |
|
213,423 |
|
|
16.1 |
% |
|
166,606 |
|
|
17.4 |
% |
|
||
|
West North Central |
|
258,181 |
|
|
19.6 |
% |
|
165,041 |
|
|
17.2 |
% |
|
||
|
West South Central |
|
109,077 |
|
|
8.3 |
% |
|
67,137 |
|
|
7.0 |
% |
|
||
|
Total |
|
$ |
1,321,637 |
|
|
100.0 |
% |
|
$ |
959,779 |
|
|
100.0 |
% |
|
|
Property type distribution |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Office |
|
$ |
384,606 |
|
|
29.1 |
% |
|
$ |
296,995 |
|
|
30.9 |
% |
|
|
Medical Office |
|
75,716 |
|
|
5.7 |
% |
|
65,396 |
|
|
6.8 |
% |
|
||
|
Retail |
|
285,715 |
|
|
21.6 |
% |
|
218,133 |
|
|
22.7 |
% |
|
||
|
Industrial/Warehouse |
|
346,461 |
|
|
26.2 |
% |
|
236,835 |
|
|
24.7 |
% |
|
||
|
Hotel |
|
52,274 |
|
|
4.0 |
% |
|
25,652 |
|
|
2.7 |
% |
|
||
|
Apartment |
|
68,795 |
|
|
5.2 |
% |
|
44,984 |
|
|
4.7 |
% |
|
||
|
Mixed use/other |
|
108,070 |
|
|
8.2 |
% |
|
71,784 |
|
|
7.5 |
% |
|
||
|
Total |
|
$ |
1,321,637 |
|
|
100.0 |
% |
|
$ |
959,779 |
|
|
100.0 |
% |
|
At December 31, 2005, fixed maturity securities and short-term investments with an amortized cost of $2.2 million were on deposit with state agencies to meet regulatory requirements. There are no restrictions on these assets.
F-26
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
At December 31, 2005, the only investment in any person or its affiliates (other than bonds issued by agencies of the United States Government) that exceeded 10% of stockholders’ equity was FBL Capital Trust I with an estimated fair value and amortized cost of $75.9 million.
4. Deferred Policy Acquisition Costs and Deferred Sales Inducements
An analysis of deferred policy acquisition costs is presented below for the years ended December 31, 2005 and 2004:
|
|
|
2005 |
|
2004 |
|
||
|
|
|
(Dollars in thousands) |
|
||||
|
Balance at beginning of year |
|
$ |
713,021 |
|
$ |
608,197 |
|
|
Costs deferred during the year |
|
325,424 |
|
188,248 |
|
||
|
Amortized to expense during the year |
|
(68,109 |
) |
(67,867 |
) |
||
|
Effect of net unrealized losses |
|
6,679 |
|
(15,557 |
) |
||
|
Balance at end of year |
|
$ |
977,015 |
|
$ |
713,021 |
|
An analysis of deferred sales inducements is presented below for the years ended December 31, 2005 and 2004:
|
|
|
2005 |
|
2004 |
|
||
|
|
|
(Dollars in thousands) |
|
||||
|
Balance at beginning of year |
|
$ |
159,467 |
|
$ |
95,467 |
|
|
Costs deferred during the year |
|
163,646 |
|
75,162 |
|
||
|
Amortized to expense during the year |
|
(12,225 |
) |
(10,635 |
) |
||
|
Effect of net unrealized losses |
|
4,960 |
|
(527 |
) |
||
|
Balance at end of year |
|
$ |
315,848 |
|
$ |
159,467 |
|
5. Reinsurance and Policy Provisions
Coinsurance
The Company has entered into two coinsurance agreements with EquiTrust Life Insurance Company (“EquiTrust”), an affiliate of Farm Bureau Life Insurance Company (“Farm Bureau”) covering 70% of certain of the Company’s fixed rate and index annuities issued from August 1, 2001 through December 31, 2001, 40% of those contracts issued during 2002 and 2003 and 20% of those contracts issued from January 1, 2004 to July 31, 2004, when the agreement was suspended by mutual consent of the parties. As a result of the suspension, new business will no longer be ceded to EquiTrust until the parties mutually agree to resume the coinsurance of new business. The business reinsured under these agreements is not eligible for recapture before the expiration of 10 years. As of December 31, 2005, Farm Bureau beneficially owned 9.9% of the Company’s common stock.
Total annuity deposits ceded were $4.7 million, $202.1 million and $649.4 million for the years ended December 31, 2005, 2004 and 2003, respectively. Expense allowances received were $2.0 million, $22.6 million and $65.6 million for the years ended December 31, 2005, 2004 and 2003, respectively. Coinsurance deposits (aggregate policy benefit reserves transferred to EquiTrust under these agreements) with EquiTrust were $2.0 billion and $2.1 billion at December 31, 2005 and 2004, respectively. The Company
F-27
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
remains liabile with respect to the policy liabilities ceded to EquiTrust should EquiTrust fail to meet the obligations it has assumed. None of the coinsurance deposits with EquiTrust are deemed by management to be uncollectible. The balance due under these agreements to EquiTrust was $27.7 million at December 31, 2005 and $32.0 million at December 31, 2004, and represents the fair value of the call options related to the ceded business held by the Company to fund the index credits and cash due to or from EquiTrust related to the transfer of annuity deposits.
The Company has also entered into a modified coinsurance agreement to cede 70% of its variable annuity business to EquiTrust. Under this agreement, the Company paid EquiTrust $0.2 million for each of the years ended December 31, 2005, 2004 and 2003. The modified coinsurance agreement will continue until termination by written notice at the election of either party. Any such termination will apply to the submission or acceptance of new policies, and business reinsured under the agreement prior to any such termination is not eligible for recapture before the expiration of 10 years. EquiTrust (or one of its affiliates) provides the administrative support necessary to manage this business.
Financial Reinsurance
The Company has entered into three reinsurance transactions with Hannover Life Reassurance Company of America (“Hannover”), which are treated as reinsurance under statutory accounting practices and as financial reinsurance under accounting principles generally accepted in the United States (“GAAP”). The statutory surplus benefits under these agreements are eliminated under GAAP and the associated charges are recorded as risk charges and are included in other operating costs and expenses in the consolidated statements of income. The first transaction became effective November 1, 2002 (the “2002 Hannover Transaction”), the second transaction became effective September 30, 2003 (the “2003 Hannover Transaction”) and the third transaction became effective October 1, 2005 (the “2005 Hannover Transaction”). The agreements for the 2002 and 2003 Hannover Transactions include a coinsurance segment and a yearly renewable term segment reinsuring a portion of death benefits payable on certain annuities issued from January 1, 2002 to December 31, 2002 and issued from January 1, 2003 to September 30, 2003. The coinsurance segments provide reinsurance to the extent of 6.88% (2002 Hannover Transaction) and 13.41% (2003 Hannover Transaction) of all risks associated with the Company’s annuity policies covered by these reinsurance agreements. The 2002 Hannover Transaction provided $29.8 million in net statutory surplus benefit during 2002 and the 2003 Hannover Transaction provided $29.7 million in net statutory surplus benefit during 2003. The statutory surplus benefits provided by the 2002 and 2003 Hannover Transactions were reduced by $13.4 million in 2005, $13.1 million in 2004 and $6.8 million in 2003. The remaining statutory surplus benefit under the 2002 and 2003 Hannover Transactions will be reduced in the following years as follows: 2006 - $12.4 million; 2007 - $13.2 million; 2008 - $6.4 million. The 2005 Hannover Transaction is a yearly renewable term reinsurance agreement on inforce business covering 40% of waived surrender charges related to penalty free withdrawals and deaths. The Company pays quarterly reinsurance premiums under this agreement with an experience refund calculated on a quarterly basis resulting in a risk charge equal to approximately 4.6% of the reserve credit. The reserve credit recorded on a statutory basis by American Equity Life at December 31, 2005 was $59.0 million. Risk charges attributable to the 2005, 2003 and 2002 Hannover Transactions of $2.5 million, $2.2 million and $1.6 million were incurred during 2005, 2004 and 2003, respectively.
The statutory surplus benefit provided by the 2003 Hannover Transaction replaced the statutory surplus benefit previously provided by a financial reinsurance agreement entered into during 2001 with a
F-28
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
subsidiary of Swiss Reinsurance Company (“Swiss Re”). The Company terminated this agreement and recaptured all reserves subject to this agreement effective September 30, 2003. The Swiss Re agreement was treated as reinsurance under statutory accounting requirements and as financial reinsurance under GAAP. This agreement provided an initial statutory surplus benefit of $35.0 million in 2001. The statutory surplus benefit remaining at January 1, 2003 was $30.9 million, all of which was eliminated upon termination of the agreement. Risk charges and interest expense incurred on the cash portion of the surplus benefit provided by the agreement were $0.2 million for the year ended December 31, 2003.
Indemnity Reinsurance
In the normal course of business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid under its life and accident and health insurance products by ceding reinsurance to other insurance enterprises or reinsurers. Reinsurance coverages for life insurance vary according to the age and risk classification of the insured. Reinsurance related to life and accident and health insurance that was ceded by the Company primarily to two reinsurers was immaterial. Reinsurance contracts do not relieve the Company of its obligations to its policyholders. To the extent that reinsuring companies are later unable to meet obligations under reinsurance agreements, the Company’s life insurance subsidiaries would be liable for these obligations, and payment of these obligations could result in losses to the Company. To limit the possibility of such losses, the Company evaluates the financial condition of its reinsurers, and monitors concentrations of credit risk. No allowance for uncollectible amounts has been established against the Company’s asset for amounts receivable from other insurance companies since none of the receivables are deemed by management to be uncollectible.
The Company files a consolidated federal income tax return with all its subsidiaries.
The Company’s income tax expense is as follows:
|
|
|
Year Ended December 31, |
|
|||||||
|
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
|
(Dollars in thousands) |
|
|||||||
|
Consolidated statements of income: |
|
|
|
|
|
|
|
|||
|
Current income taxes |
|
$ |
57,391 |
|
$ |
39,791 |
|
$ |
15,812 |
|
|
Deferred income taxes |
|
(31,989 |
) |
820 |
|
(2,307 |
) |
|||
|
Total income tax expense included in consolidated statements of income |
|
25,402 |
|
40,611 |
|
13,505 |
|
|||
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|||
|
Expense (benefit) relating to: |
|
|
|
|
|
|
|
|||
|
Change in net unrealized investment gains/losses |
|
(4,328 |
) |
1,870 |
|
(5,815 |
) |
|||
|
Stock-based compensation |
|
(4,781 |
) |
— |
|
— |
|
|||
|
Total income tax expense included in consolidated financial statements |
|
$ |
16,293 |
|
$ |
42,481 |
|
$ |
7,690 |
|
F-29
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
Income tax expense in the consolidated statements of income differed from the amount computed at the applicable statutory federal income tax rate (35%) as follows:
|
|
|
Year Ended December 31, |
|
|||||||
|
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
|
(Dollars in thousands) |
|
|||||||
|
Income before income taxes and minority interests |
|
$ |
70,894 |
|
$ |
69,481 |
|
$ |
39,308 |
|
|
Income tax expense on income before income taxes and minority interests |
|
$ |
24,813 |
|
$ |
24,318 |
|
$ |
13,758 |
|
|
Tax effect of: |
|
|
|
|
|
|
|
|||
|
Change in federal income tax status of variable interest entity (see note 1) |
|
— |
|
16,254 |
|
— |
|
|||
|
Other |
|
589 |
|
39 |
|
(253 |
) |
|||
|
Income tax expense |
|
$ |
25,402 |
|
$ |
40,611 |
|
$ |
13,505 |
|
|
Effective tax rate |
|
35.8 |
% |
58.4 |
% |
34.4 |
% |
|||
Deferred income tax assets or liabilities are established for temporary differences between the financial reporting amounts and tax bases of assets and liabilities that will result in deductible or taxable amounts, respectfully, in future years.
The tax effects of temporary differences that give rise to the deferred tax assets and liabilities at December 31, 2005 and 2004, is as follows:
|
|
|
December 31, |
|
||||
|
|
|
2005 |
|
2004 |
|
||
|
|
|
(Dollars in thousands) |
|
||||
|
Deferred income tax assets: |
|
|
|
|
|
||
|
Policy benefit reserves |
|
$ |
474,434 |
|
$ |
325,285 |
|
|
Unrealized depreciation on available for sale fixed maturity securities and equity securities |
|
14,704 |
|
10,376 |
|
||
|
Fixed maturity and equity securities |
|
9,324 |
|
13,666 |
|
||
|
Deferred compensation |
|
4,884 |
|
2,428 |
|
||
|
Net operating loss carryforwards |
|
8,707 |
|
4,919 |
|
||
|
Other |
|
3,069 |
|
194 |
|
||
|
|
|
515,122 |
|
356,868 |
|
||
|
Deferred income tax liabilities: |
|
|
|
|
|
||
|
Derivative instruments |
|
(3,338 |
) |
(21,085 |
) |
||
|
Deferred policy acquisition costs |
|
(407,972 |
) |
(273,723 |
) |
||
|
Amounts due to reinsurers |
|
(7,118 |
) |
(5,303 |
) |
||
|
Contingent interest on convertible senior notes |
|
(3,274 |
) |
— |
|
||
|
Other |
|
(961 |
) |
(615 |
) |
||
|
|
|
(422,663 |
) |
(300,726 |
) |
||
|
Net deferred income tax asset |
|
$ |
92,459 |
|
$ |
56,142 |
|
F-30
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
In the opinion of the Company’s management, realization of its deferred income tax assets is more likely than not based on expectations as to the Company’s future taxable income and considering all other available evidence, both positive and negative. Therefore, no valuation allowance against deferred tax assets has been established.
At December 31, 2005, the Company has non-life net operating loss carryforwards for federal tax purposes of $19.6 million which expire beginning in 2012 through 2025.
7. Notes Payable and Amounts Due Under Repurchase Agreements
In December 2004, the Company issued $260.0 million of contingent convertible senior notes due December 6, 2024. The notes are unsecured and bear interest at a fixed rate of 5.25% per annum. Interest is payable semi-annually in arrears on June 6 and December 6 of each year, beginning June 6, 2005. In addition to regular interest on the notes, beginning with the six-month interest period ending June 6, 2012, the Company will also pay contingent interest under certain conditions at a rate of 0.5% per annum based on the average trading price of the notes during a specified period. Effective December 15, 2005, the conversion option embedded in the Company’s contingent convertible senior notes was bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. The carrying value of the contingent convertible senior notes including the fair value of the conversion option at December 31, 2005 was $264.6 million. The fair value of the conversion option was $81.6 million and $85.6 million on December 15, 2005 and December 31, 2005, respectively.
The notes are convertible at the holders’ option prior to the maturity date into cash and shares of the Company’s common stock under the following conditions:
· during any fiscal quarter, if the closing sale price of the Company’s common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the fiscal quarter preceding the quarter in which the conversion occurs is more than 120% of the conversion price of the notes in effect on that 30th trading day;
· the Company has called the notes for redemption and the redemption has not yet occurred; or
· upon the occurrence of specified corporate transactions.
Holders may convert any outstanding notes into cash and shares of the Company’s common stock at a conversion price per share of $14.45. This represents a conversion rate of approximately 69.2 shares of common stock per $1,000 in principal amount of notes (the “Conversion Rate”). Subject to certain exceptions described in the indenture covering these notes, at the time the notes are tendered for conversion, the value (the “Conversion Value”) of the cash and shares of the Company’s common stock, if any, to be received by a holder converting $1,000 principal amount of the notes will be determined by multiplying the Conversion Rate by the “Ten Day Average Closing Stock Price”, which equals the average of the closing per share prices of the Company’s common stock on the New York Stock Exchange on the ten consecutive trading days beginning on the second trading day following the day the notes are submitted for conversion. The Company will deliver the Conversion Value to holders as follows: (1) an amount in cash (the “Principal Return”) equal to the lesser of (a) the aggregate Conversion Value of the notes to be converted and (b) the aggregate principal amount of the notes to be converted, and (2) if the aggregate Conversion Value of the notes to be converted is greater than the Principal Return, an amount in shares (the “Net Shares”) equal to such aggregate Conversion Value less the Principal Return (the “Net Share
F-31
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
Amount”) and (3) an amount in cash in lieu of fractional shares of common stock. The number of Net Shares to be paid will be determined by dividing the Net Share Amount by the Ten Day Average Closing Stock Price.
The Company may redeem some or all of the notes at any time on or after December 15, 2011. In addition, the holders may require the Company to repurchase all or a portion of their notes on December 15, 2011, 2014, and 2019 and upon a change in control, as defined in the indenture governing the notes, holders may require the Company to repurchase all or a portion of their notes for a period of time after the change in control. The redemption price or repurchase price shall be payable in cash and equal to 100% of the principal amount of the notes plus accrued and unpaid interest (contingent interest and liquidated damages, if any) up to but not including the date of redemption or repurchase.
The notes are senior unsecured obligations and rank equally in right of payment with all existing and future senior indebtedness and senior to any existing and future subordinated indebtedness. The notes effectively rank junior in right of payment to any existing and future secured indebtedness to the extent of the value of the assets securing such secured indebtedness. The notes are structurally subordinated to all liabilities of the Company’s subsidiaries.
Pursuant to EITF Issue No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings Per Share”, the Company will be required to include the dilutive effect of the contingent convertible senior notes in its diluted earnings per share calculation, regardless of whether the market price trigger has been met. Because the notes include a mandatory cash settlement feature for the principal amount, incremental dilutive shares will only exist when the average fair value of the Company’s common stock for a reporting period exceeds the conversion price per share of $14.45.
During, 2004, the Company entered into a $50 million revolving line of credit agreement with three banks. The revolving period of the facility will be three years followed by a two-year term out option. The applicable interest rate will be floating at LIBOR plus 1.75% or prime rate, as elected by the Company. There is no amount outstanding under the revolving line of credit at December 31, 2005. Under this agreement, without obtaining a waiver from the lenders, the Company is required to maintain a minimum risk-based capital ratio at American Equity Investment Life Insurance Company, a maximum ratio of senior debt to total capital, and is prohibited from paying dividends on its capital stock in excess of 33% of consolidated net income for the prior year.
As part of its investment strategy, the Company enters into securities repurchase agreements (short-term collateralized borrowings). These borrowings are collateralized by investment securities with fair values approximately equal to the amount due. Such borrowings averaged $318.8 million, $196.3 million, $84.6 million for the years ended December 31, 2005, 2004 and 2003, respectively. The weighted average interest rate on amounts due under repurchase agreements was 3.54%, 1.60% and 1.35% for the years ended December 31, 2005, 2004 and 2003, respectively.
The Company, through the Service Company, had $16.4 million and $20.4 million outstanding at December 31, 2005 and 2004 under a credit agreement with a third party. Quarterly payments in amounts ranging from $1.1 million to $1.5 million are payable over the next sixteen quarters with interest computed at a fixed rate of 11.2%. Cash and cash equivalents at December 31, 2005 and 2004 include $2.6 million and 2.5 million, respectively, of restricted cash under the terms of the credit agreement. At December 31, 2004, the Service Company had $3.0 million of notes payable outstanding with its sole shareholder.
F-32
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
Principal and interest on this note was due quarterly and bore interest at prime (5.25% at December 31, 2004).
8. American Equity Investment Service Company
The Company acquired all of the outstanding stock of the Service Company on September 2, 2005. Prior to the acquisition, the Company had an implicit variable interest in the Service Company and was required to include the Service Company in its consolidated financial statements in accordance with FSP FIN 46(R)-5 as described in note 1.
The Company has a General Agency Commission and Servicing Agreement (“Servicing Agreement”) with the Service Company, whereby the Service Company acts as a national supervisory agent with responsibility for paying commissions to agents of the Company. Under the terms of the Servicing Agreement, as amended, the Service Company has paid a portion (ranging from 13.5% to 100%) of the agents’ commissions for certain annuity policies issued during 1997 - 1999 and 2002 - 2004. In return, the Company has paid and agreed to pay quarterly renewal commissions to the Service Company ranging from .0975% to .375% based upon the account values of the applicable annuity policies issued during those years. No renewal commission is paid unless the underlying policy is in force on the date renewal commissions are calculated pursuant to the terms of the Servicing Agreement. For all years except 2004, renewal commissions are capped and interest expense computed at a 9% imputed interest rate. The effective interest rate based upon the estimated future renewal commissions for policies issued during 2004 is 15.1%. The payment of a portion of agents’ commissions and the payment of renewal commissions by the Company to the Service Company is eliminated in consolidation.
During the years ended December 31, 2004 and 2003, the Service Company paid $20.0 million and $14.4 million, respectively, to agents of the Company. Such amounts were deferred as policy acquisition costs in the consolidated balance sheets. The Company paid renewal commissions to the Service Company of $17.0 million, $28.1 million and $22.1 million in 2005, 2004 and 2003, respectively, which, as indicated above, are eliminated in consolidation.
F-33
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
The Company’s wholly-owned subsidiary trusts (not consolidated under FIN 46) have issued fixed rate and floating rate trust preferred securities and have used the proceeds from these offerings to purchase subordinated debentures from the Company. The Company also issued subordinated debentures to the trusts in exchange for all of the common securities of each trust. The sole assets of the trusts are the subordinated debentures and any interest accrued thereon. The interest payment dates on the subordinated debentures correspond to the distribution dates on the trust preferred securities issued by the trusts. The trust preferred securities mature simultaneously with the subordinated debentures. The Company’s obligations under the subordinated debentures and related agreements provide a full and unconditional guarantee of payments due under the trust preferred securities. Following is a summary of subordinated debt obligations to the trusts at December 31, 2005 and 2004:
|
|
|
December 31, |
|
Interest |
|
|
|
||||
|
|
|
2005 |
|
2004 |
|
Rate |
|
Due Date |
|
||
|
|
|
(Dollars in thousands) |
|
|
|
|
|
||||
|
American Equity Capital Trust I |
|
$ |
23,903 |
|
$ |
24,073 |
|
8% |
|
September 30, 2029 |
|
|
American Equity Capital Trust II |
|
78,383 |
|
77,861 |
|
5% |
|
June 1, 2047 |
|
||
|
American Equity Capital Trust III |
|
27,840 |
|
27,840 |
|
Floating |
|
April 29, 2034 |
|
||
|
American Equity Capital Trust IV |
|
12,372 |
|
12,372 |
|
Floating |
|
January 8, 2034 |
|
||
|
American Equity Capital Trust VII |
|
10,830 |
|
10,830 |
|
Floating |
|
September 14, 2034 |
|
||
|
American Equity Capital Trust VIII |
|
20,620 |
|
20,600 |
|
Floating |
|
December 22, 2034 |
|
||
|
American Equity Capital Trust IX |
|
15,470 |
|
— |
|
Floating |
|
June 15, 2035 |
|
||
|
American Equity Capital Trust X |
|
20,620 |
|
— |
|
Floating |
|
September 15, 2035 |
|
||
|
American Equity Capital Trust XI |
|
20,620 |
|
— |
|
8.595% |
|
December 15, 2035 |
|
||
|
|
|
$ |
230,658 |
|
$ |
173,576 |
|
|
|
|
|
The interest rate for the floating rate subordinated debentures are based upon the three month London Interbank Offered Rate plus 4.00% for Trust III and IV, 3.75% for Trust VII and VIII and 3.65% for Trust IX and X. The interest rate for Trust XI is fixed at 8.595% for 5 years and then is floating based upon the three month London Interbank Offered Rate plus 3.65%.
American Equity Capital Trust I issued 865,671 shares of trust preferred securities, of which 2,000 shares are held by one of the Company’s subsidiaries. During 2005 and 2004, 5,667 and 88,000 shares of these trust preferred securities converted into 20,988 shares and 325,923 shares of the Company’s common stock, respectively. The remaining 770,004 shares of these trust preferred securities not held by a subsidiary are convertible into 2,851,806 shares of the Company’s common stock.
The principal amount of the subordinated debentures issued by the Company to American Equity Capital Trust II (“Trust II”) is $100.0 million. These debentures were assigned a fair value of $74.7 million at the date of issue (based upon an effective yield-to-maturity of 7%). The difference between the fair value at the date of issue and the principal amount is being accreted over the life of the debentures. The trust preferred securities issued by Trust II were issued to Iowa Farm Bureau Federation, which owns more than 50% of the voting capital stock of FBL Financial Group, Inc. (“FBL”), parent company of Farm Bureau. The consideration received by Trust II in connection with the issuance of its trust preferred securities consisted of fixed income securities of equal value which were issued by FBL.
F-34
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
On February 15, 2006, American Equity Capital Trust XII (“Trust XII”) issued $30 million of floating rate (three month London Interbank Offered Rate plus 3.50%) trust preferred securities. In connection with the issuance of these trust preferred securities and the related purchase by the Company of all of Trust XII’s common securities, the Company issued $30.9 million in principal amount of its floating rate subordinated debentures due April 7, 2036 to Trust XII.
10. Retirement and Stock Compensation Plans
The Company has adopted a contributory defined contribution plan which is qualified under Section 401(k) of the Internal Revenue Code. The plan covers substantially all full-time employees of the Company, subject to minimum eligibility requirements. Employees can contribute up to 15% of their annual salary (with a maximum contribution of $14,000 in 2005, $13,000 in 2004 and $12,000 in 2003) to the plan. The Company contributes an additional amount, subject to limitations, based on the voluntary contribution of the employee. Further, the plan provides for additional employer contributions based on the discretion of the Board of Directors. Plan contributions charged to expense were $0.2 million for each of the years ended December 31, 2005 and 2004 and $0.1 million for the year ended December 31, 2003.
The Company has entered into deferred compensation arrangements with certain officers, directors, and consultants, whereby these individuals agreed to take common stock of the Company at a future date in lieu of cash payments at the time of service. The common stock is to be issued in conjunction with a “trigger event”, as that term is defined in the individual agreements. At December 31, 2005 and 2004, these individuals have earned, and the Company has reserved for future issuance, 399,647 and 377,853 shares of common stock, respectively, pursuant to these arrangements. The Company has accrued liabilities of $2.2 million and $1.9 million at December 31, 2005 and 2004, respectively, representing the value associated with the shares earned.
During 1997, the Company established the American Equity Investment NMO Deferred Compensation Plan (“NMO Deferred Compensation Plan”) whereby agents can earn common stock in addition to their normal commissions. Awards are calculated using formulas determined annually by the Company’s Board of Directors and are generally based upon new annuity deposits. For the years ended December 31, 2005, 2004 and 2003, agents earned the right to receive 364,030 shares, 414,117 shares, and 325,370 shares, respectively. These shares will be distributed at the end of the vesting and deferral period of 9 years. A portion of the awards may be subject to forfeiture if certain production levels are not met over the remaining vesting period. The Company recognizes commission expense as the awards vest. For the years ended December 31, 2005, 2004 and 2003, agents vested in 437,098 shares, 449,869 shares and 405,796 shares of common stock, respectively, and the Company recorded commission expense (capitalized as deferred policy acquisition costs) of $7.0 million, $4.9 million and $2.6 million, respectively, under these plans. Amounts accrued are reported as other liabilities until the shares have been issued. At December 31, 2005, the Company has reserved 1,516,293 shares for future issuance under the plans.
During 2003, the Company created a Rabbi Trust, the NMO Deferred Compensation Trust (the “Trust”) and issued 1,591,083 shares of its common stock to the Trust to fund the vested share liability established under the NMO Deferred Compensation Plan. In accordance with FASB’s Emerging Issues Task Force Issue No. 97-14, “Accounting for Deferred Compensation Arrangements where Amounts Earned are Held in a Rabbi Trust and Invested”, the stock held in the Trust is included as part of common stock issued and outstanding. The common shares held in the Rabbi Trust and the related Trust obligation
F-35
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
funded by such shares are included in common stock and additional paid-in-capital as a respective deduction and addition, with no impact on the reported amount of total stockholders’ equity, as the Plan does not permit diversification and must be settled by the delivery of a fixed number of shares of the Company’s stock.
The Company has a Stock Option and Warrant Agreement with Mr. Noble (owner of 5% of its outstanding common stock at December 31, 2005) which allows the purchase of 1,200,000 shares of the Company’s common stock. Included in this amount were warrants to purchase 240,000 shares of common stock at $3.33 per share that were exercised in 2000 and options expiring in 2007 to purchase 600,000 shares of common stock at $3.33 per share and 360,000 shares of common stock at $7.33 per share.
During 2000, as a separate deferred compensation agreement, the Company loaned Mr. Noble $0.8 million pursuant to a forgivable loan agreement. The forgivable loan agreement is with full recourse, and although the proceeds of the loan were used for the exercise of warrants described in the preceding paragraph, the loan is not collateralized by the shares issued in connection with the exercise of these warrants. This loan is repayable in five equal annual installments of principal and interest, each of which may be forgiven if Mr. Noble remains continuously employed by the Company in his present capacity, subject to specified exceptions.
The Company’s 1996 Stock Option Plan authorized grants of options to officers, directors and employees for up to 1,200,000 shares of the Company’s common stock. In 2000, the Company adopted the 2000 Employee Stock Option Plan which authorizes grants of options to officers and employees on up to 1,800,000 shares of the Company’s common stock and the Company adopted the 2000 Directors Stock Option Plan which authorizes grants of options to directors on up to 225,000 shares. All options granted under the 2000 plans have 10 year terms and a six month vesting period after which they become fully exercisable immediately. All options granted under the 1996 plan have 10 year terms and are vested and exercisable.
F-36
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
Changes in the number of stock options outstanding during the years ended December 31, 2005, 2004 and 2003 are as follows:
|
|
|
Number of |
|
Weighted- |
|
Total |
|
||||
|
|
|
(Dollars in thousands, |
|
||||||||
|
Outstanding at January 1, 2003 |
|
2,629,302 |
|
|
$ |
5.64 |
|
|
$ |
14,828 |
|
|
Granted |
|
300,000 |
|
|
9.00 |
|
|
2,700 |
|
||
|
Cancelled |
|
(21,640 |
) |
|
6.70 |
|
|
(145 |
) |
||
|
Exercised |
|
— |
|
|
— |
|
|
— |
|
||
|
Outstanding at December 31, 2003 |
|
2,907,662 |
|
|
5.98 |
|
|
17,383 |
|
||
|
Granted |
|
576,000 |
|
|
10.79 |
|
|
6,213 |
|
||
|
Cancelled |
|
(17,500 |
) |
|
9.71 |
|
|
(170 |
) |
||
|
Exercised |
|
— |
|
|
— |
|
|
— |
|
||
|
Outstanding at December 31, 2004 |
|
3,466,162 |
|
|
6.76 |
|
|
23,426 |
|
||
|
Granted |
|
31,000 |
|
|
12.19 |
|
|
378 |
|
||
|
Cancelled |
|
(1,000 |
) |
|
10.00 |
|
|
(10 |
) |
||
|
Exercised |
|
(37,250 |
) |
|
5.75 |
|
|
(214 |
) |
||
|
Outstanding at December 31, 2005 |
|
3,458,912 |
|
|
6.82 |
|
|
$ |
23,580 |
|
|
F-37
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
Stock options outstanding at December 31, 2005 (all of which are currently exercisable except for options on 9,000 shares granted in September 2005 and options on 7,000 shares granted in December 2005) are as follows:
|
|
|
Number of |
|
Weighted- |
|
||
|
Exercise price: |
|
|
|
|
|
|
|
|
$3.33 |
|
1,039,500 |
|
|
1.19 |
|
|
|
$4.00 |
|
346,350 |
|
|
1.56 |
|
|
|
$5.33 |
|
111,000 |
|
|
2.63 |
|
|
|
$7.33 |
|
568,770 |
|
|
2.16 |
|
|
|
$8.67 |
|
18,000 |
|
|
3.92 |
|
|
|
$9.00 |
|
292,800 |
|
|
7.94 |
|
|
|
$9.16 |
|
22,500 |
|
|
8.67 |
|
|
|
$9.49 |
|
4,500 |
|
|
8.75 |
|
|
|
$9.67 |
|
487,542 |
|
|
5.13 |
|
|
|
$9.95 |
|
3,000 |
|
|
8.50 |
|
|
|
$10.77 |
|
286,950 |
|
|
9.00 |
|
|
|
$11.00 |
|
244,500 |
|
|
8.44 |
|
|
|
$11.35 |
|
9,000 |
|
|
9.75 |
|
|
|
$11.88 |
|
7,500 |
|
|
9.50 |
|
|
|
$12.08 |
|
1,000 |
|
|
9.28 |
|
|
|
$12.79 |
|
6,500 |
|
|
9.25 |
|
|
|
$12.85 |
|
2,500 |
|
|
8.25 |
|
|
|
$13.05 |
|
7,000 |
|
|
10.00 |
|
|
|
|
|
3,458,912 |
|
|
|
|
|
At December 31, 2005, the Company had no shares of common stock available for future grant under the 1996 Stock Option Plan, 582,208 shares of common stock available for future grant under the 2000 Employee Stock Option Plan, and 207,000 shares of common stock available for future grant under the 2000 Directors Stock Option Plan.
On December 1, 1997, in connection with a rights offering of shares of the Company’s common stock, the Company issued subscription rights to purchase an aggregate of 2,157,375 shares of the Company’s common stock to certain officers and directors. The subscription rights had an exercise price of $5.33 per share and were exercisable immediately through December 1, 2005. Subscription rights with respect to 2,151,375 and 6,000 shares of the Company’s common stock were exercised during 2005 and 2004, respectively.
11. Life Insurance Subsidiaries
Prior approval of regulatory authorities is required for the payment of dividends to the Company by its life insurance subsidiaries which exceed an annual limitation. During 2006, American Equity Life could pay dividends to its parent of $68.7 million, without prior approval from regulatory authorities.
F-38
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
Statutory accounting practices prescribed or permitted by regulatory authorities for the Company’s life insurance subsidiaries differ from U.S. generally accepted accounting principles. Combined net income for the Company’s life insurance subsidiaries as determined in accordance with statutory accounting practices was $40.5 million, $47.7 million and $25.4 million in 2005, 2004 and 2003, respectively, and total statutory capital and surplus of the Company’s life insurance subsidiaries was $686.8 million and $608.9 million at December 31, 2005 and 2004, respectively. Calculations using the National Association of Insurance Commissioners formula at December 31, 2005, indicate that the ratio of total adjusted capital to risk based capital for the Company exceeded the highest level at which regulatory action might be initiated by approximately 2.3 times.
12. Commitments and Contingencies
The Company leases its home office space and certain equipment under operating leases which expire through September 2010. Rent expense totaled $1.2 million for the year ended December 31, 2005 and $1.0 million for each of the years ended December 31, 2004 and 2003. At December 31, 2005, minimum rental payments due under all noncancellable operating leases with initial terms of one year or more are (dollars in thousands):
|
Year Ending December 31: |
|
|
|
|
|
2006 |
|
$ |
1,290 |
|
|
2007 |
|
1,246 |
|
|
|
2008 |
|
1,132 |
|
|
|
2009 |
|
380 |
|
|
|
2010 |
|
11 |
|
|
|
|
|
$ |
4,059 |
|
Assessments are, from time to time, levied on the Company by life and health guaranty associations in most states in which the Company is licensed to cover losses to policyholders of insolvent or rehabilitated companies. The Company has a liability established for future assessments related to the insolvency of London Pacific Life and Annuity Company of $0.9 million and $1.2 million at December 31, 2005 and 2004, respectively. The Company believes the liability for guaranty fund assessments is sufficient to provide for future assessments based upon known insolvencies.
In recent years, companies in the life insurance and annuity business have faced litigation, including class action lawsuits alleging improper product design, improper sales practices and similar claims. The Company is currently a defendant in several purported class action lawsuits alleging improper sales practices. In these lawsuits, the plaintiffs are seeking returns of premiums and other compensatory and punitive damages. The Company has reached a settlement in one of these cases, which is pending appeal. The impact of the settlement is deemed to be immaterial. No class has been certified in any of the other pending cases as this time. Although the Company has denied all allegations in these lawsuits and intends to vigorously defend against them, the lawsuits are in the early stages of litigation and neither their outcomes nor a range of possible outcomes can be determined at this time. However, the Company does not believe that these lawsuits will have a material adverse effect on its business, financial condition or results of operations.
In addition, the Company is from time to time subject to other legal proceedings and claims in the ordinary course of business, none of which management believe are likely to have a material adverse effect on our financial position, results of operations or cash flows. There can be no assurance that such litigation, or any future litigation, will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
F-39
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
The following table sets forth the computation of earnings per common share and earnings per common share—assuming dilution:
|
|
|
Year Ended December 31, |
|
|||||||
|
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
|
(Dollars in thousands, except per share data) |
|
|||||||
|
Numerator: |
|
|
|
|
|
|
|
|||
|
Net income—numerator for earnings per common share |
|
$ |
42,992 |
|
$ |
29,323 |
|
$ |
25,440 |
|
|
Interest on convertible subordinated debentures (net of income tax benefit) |
|
1,202 |
|
1,255 |
|
1,347 |
|
|||
|
Numerator for earnings per common share—assuming dilution |
|
$ |
44,194 |
|
$ |
30,578 |
|
$ |
26,787 |
|
|
Denominator: |
|
|
|
|
|
|
|
|||
|
Weighted average common shares outstanding |
|
39,332,980 |
|
37,518,141 |
|
15,684,932 |
|
|||
|
Participating preferred stock |
|
— |
|
640,369 |
|
1,875,000 |
|
|||
|
Denominator for earnings per common share |
|
39,332,980 |
|
38,158,510 |
|
17,559,932 |
|
|||
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|||
|
Convertible subordinated debentures |
|
2,854,678 |
|
3,005,902 |
|
3,198,717 |
|
|||
|
Stock options and management subscription rights |
|
1,480,392 |
|
1,500,158 |
|
683,548 |
|
|||
|
Deferred compensation agreements |
|
844,766 |
|
431,575 |
|
727,653 |
|
|||
|
Denominator for earnings per common share—assuming dilution |
|
44,512,816 |
|
43,096,145 |
|
22,169,850 |
|
|||
|
Earnings per common share |
|
$ |
1.09 |
|
$ |
0.77 |
|
$ |
1.45 |
|
|
Earnings per common share—assuming dilution |
|
$ |
0.99 |
|
$ |
0.71 |
|
$ |
1.21 |
|
F-40
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
14. Quarterly Financial Information (Unaudited)
Unaudited quarterly results of operations are summarized below.
|
Quarter ended |
|
|
|
March 31 |
|
June 30 |
|
September 30 |
|
December 31 |
|
||||||||
|
|
|
(Dollars in thousands, except per share data) |
|
||||||||||||||||
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Premiums and product charges |
|
$ |
10,018 |
|
$ |
10,287 |
|
|
$ |
9,644 |
|
|
|
$ |
9,315 |
|
|
||
|
Net investment income |
|
124,834 |
|
133,227 |
|
|
142,350 |
|
|
|
153,707 |
|
|
||||||
|
Realized gains (losses) on investments |
|
232 |
|
220 |
|
|
(7,057 |
) |
|
|
(1,030 |
) |
|
||||||
|
Change in fair value of derivatives |
|
(35,990 |
) |
(1,972 |
) |
|
16,038 |
|
|
|
3,895 |
|
|
||||||
|
Total revenues |
|
99,094 |
|
141,762 |
|
|
160,975 |
|
|
|
165,887 |
|
|
||||||
|
Net income |
|
12,528 |
|
12,232 |
|
|
7,163 |
|
|
|
11,068 |
|
|
||||||
|
Earnings per common share |
|
$ |
0.33 |
|
$ |
0.32 |
|
|
$ |
0.19 |
|
|
|
$ |
0.26 |
|
|
||
|
Earnings per common share—assuming dilution |
|
$ |
0.29 |
|
$ |
0.29 |
|
|
$ |
0.17 |
|
|
|
$ |
0.24 |
|
|
||
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Premiums and product charges |
|
$ |
9,357 |
|
$ |
9,058 |
|
|
$ |
8,936 |
|
|
|
$ |
10,226 |
|
|
||
|
Net investment income |
|
98,589 |
|
106,197 |
|
|
109,434 |
|
|
|
114,165 |
|
|
||||||
|
Realized gains on investments |
|
379 |
|
10 |
|
|
422 |
|
|
|
132 |
|
|
||||||
|
Change in fair value of derivatives |
|
5,815 |
|
(4,934 |
) |
|
(19,696 |
) |
|
|
47,511 |
|
|
||||||
|
Total revenues |
|
114,140 |
|
110,331 |
|
|
99,096 |
|
|
|
172,034 |
|
|
||||||
|
Net income (loss) |
|
(5,714 |
) |
10,387 |
|
|
10,711 |
|
|
|
13,939 |
|
|
||||||
|
Earnings (loss) per common share |
|
$ |
(0.15 |
) |
$ |
0.27 |
|
|
$ |
0.28 |
|
|
|
$ |
0.36 |
|
|
||
|
Earnings (loss) per common share—assuming dilution |
|
$ |
(0.15 |
) |
$ |
0.25 |
|
|
$ |
0.26 |
|
|
|
$ |
0.33 |
|
|
||
The differences between the change in fair value of derivatives by quarter primarily corresponds to the performance of the indices upon which the Company’s call options are based. Earnings (loss) per common share for each quarter is computed independently of earnings per common share for the year. As a result, the sum of the quarterly earnings (loss) per common share amounts may not equal the earnings per common share for the year.
The adoption of FSP FIN 46(R)-5 and the consolidation of the Service Company as discussed in note 1 reduced net income, earnings per common share and earnings per common share—assuming dilution for the quarter ended March 31, 2004 by $16.1 million, $0.43 and $0.40, respectively.
F-41
Schedule I—Summary of Investments—Other
Than Investments in Related Parties
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
December 31, 2005
|
Column A |
|
Column B |
|
Column C |
|
Column D |
|
|||||
|
Type of Investment |
|
Amortized |
|
Fair |
|
Amount at which |
|
|||||
|
|
|
(Dollars in thousands) |
|
|||||||||
|
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
|||
|
Available for sale |
|
|
|
|
|
|
|
|
|
|||
|
United States Government full faith and credit |
|
$ |
2,734 |
|
$ |
2,774 |
|
|
$ |
2,774 |
|
|
|
United States Government sponsored agencies |
|
2,877,423 |
|
2,809,989 |
|
|
2,809,989 |
|
|
|||
|
Public utilities |
|
133,489 |
|
133,346 |
|
|
133,346 |
|
|
|||
|
Corporate securities |
|
603,746 |
|
598,288 |
|
|
598,288 |
|
|
|||
|
Redeemable preferred stocks |
|
48,578 |
|
46,896 |
|
|
46,896 |
|
|
|||
|
Mortgage and asset-backed securities |
|
608,189 |
|
597,390 |
|
|
597,390 |
|
|
|||
|
|
|
4,274,159 |
|
4,188,683 |
|
|
4,188,683 |
|
|
|||
|
Held for investment |
|
|
|
|
|
|
|
|
|
|||
|
United States Government sponsored agencies |
|
4,635,485 |
|
4,522,673 |
|
|
4,635,485 |
|
|
|||
|
Corporate securities |
|
75,942 |
|
75,942 |
|
|
75,942 |
|
|
|||
|
|
|
4,711,427 |
|
4,598,615 |
|
|
4,711,427 |
|
|
|||
|
Total fixed maturity securities |
|
8,985,586 |
|
$ |
8,787,298 |
|
|
8,900,110 |
|
|
||
|
Equity securities, available for sale: |
|
|
|
|
|
|
|
|
|
|||
|
Non-redeemable preferred stocks |
|
71,642 |
|
$ |
69,962 |
|
|
69,962 |
|
|
||
|
Common stocks |
|
16,418 |
|
14,884 |
|
|
14,884 |
|
|
|||
|
Total equity securities |
|
88,060 |
|
$ |
84,846 |
|
|
84,846 |
|
|
||
|
Mortgage loans on real estate |
|
1,321,637 |
|
|
|
|
1,321,637 |
|
|
|||
|
Derivative instruments |
|
185,391 |
|
|
|
|
185,391 |
|
|
|||
|
Policy loans |
|
362 |
|
|
|
|
362 |
|
|
|||
|
Total investments |
|
$ |
10,581,036 |
|
|
|
|
$ |
10,492,346 |
|
|
|
(1) On the basis of cost adjusted for repayments and amortization of premiums and accrual of discounts for fixed maturity securities, derivative instruments and short-term investments, and unpaid principal balance for mortgage loans.
(2) Derivative instruments are carried at estimated fair value.
See accompanying Report of Independent Registered Public Accounting Firm.
F-42
Schedule
II—Condensed Financial Information of Registrant
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
Condensed Balance Sheets
(Dollars in thousands)
|
|
|
December 31, |
|
||||
|
|
|
2005 |
|
2004 |
|
||
|
Assets |
|
|
|
|
|
||
|
Cash and cash equivalents |
|
$ |
61,100 |
|
$ |
49,366 |
|
|
Fixed maturity securities, available for sale, at market (amortized cost: 2005—$220,105; 2004—$100,000) |
|
218,374 |
|
99,617 |
|
||
|
Equity securities of subsidiary trusts (not eliminated in consolidation) |
|
6,967 |
|
5,220 |
|
||
|
Receivable from subsidiary (eliminated in consolidation) |
|
406 |
|
345 |
|
||
|
Receivables from related party (eliminated in consolidation) |
|
— |
|
16,468 |
|
||
|
Federal income tax recoverable |
|
6,008 |
|
1,319 |
|
||
|
Deferred income tax asset |
|
7,943 |
|
5,404 |
|
||
|
Other assets |
|
14,101 |
|
12,372 |
|
||
|
|
|
314,899 |
|
190,111 |
|
||
|
Investment in and advances to subsidiaries |
|
714,129 |
|
552,808 |
|
||
|
Total assets |
|
$ |
1,029,028 |
|
$ |
742,919 |
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
||
|
Liabilities: |
|
|
|
|
|
||
|
Notes payable |
|
$ |
264,626 |
|
$ |
260,000 |
|
|
Subordinated debentures payable to subsidiary trusts |
|
230,718 |
|
173,636 |
|
||
|
Other liabilities |
|
14,326 |
|
3,740 |
|
||
|
Total liabilities |
|
509,670 |
|
437,376 |
|
||
|
Stockholders’ equity: |
|
|
|
|
|
||
|
Common stock |
|
55,527 |
|
38,360 |
|
||
|
Additional paid-in capital |
|
379,107 |
|
215,793 |
|
||
|
Accumulated other comprehensive loss |
|
(27,306 |
) |
(19,269 |
) |
||
|
Retained earnings |
|
112,030 |
|
70,659 |
|
||
|
Total stockholders’ equity |
|
519,358 |
|
305,543 |
|
||
|
Total liabilities and stockholders’ equity |
|
$ |
1,029,028 |
|
$ |
742,919 |
|
See accompanying note to condensed financial statements.
See accompanying Report of Independent Registered Public Accounting Firm.
F-43
Schedule
II—Condensed Financial Information of Registrant (Continued)
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
Condensed Statements of Income
(Dollars in thousands)
|
|
|
Year Ended December 31, |
|
|||||||
|
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
Revenues: |
|
|
|
|
|
|
|
|||
|
Net investment income |
|
$ |
8,521 |
|
$ |
2,198 |
|
$ |
31 |
|
|
Dividends from subsidiary (eliminated in consolidation) |
|
— |
|
— |
|
4,000 |
|
|||
|
Dividends from subsidiary trusts |
|
429 |
|
307 |
|
214 |
|
|||
|
Investment advisory fees (eliminated in consolidation) |
|
13,131 |
|
10,096 |
|
5,246 |
|
|||
|
Surplus note interest from subsidiary (eliminated in consolidation) |
|
4,080 |
|
4,080 |
|
4,080 |
|
|||
|
Interest on notes receivable from related party (eliminated in consolidation) |
|
839 |
|
1,597 |
|
1,291 |
|
|||
|
Change in fair value of derivatives |
|
(60 |
) |
60 |
|
— |
|
|||
|
Total revenues |
|
26,940 |
|
18,338 |
|
14,862 |
|
|||
|
Expenses: |
|
|
|
|
|
|
|
|||
|
Interest expense on notes payable |
|
14,100 |
|
1,749 |
|
1,486 |
|
|||
|
Interest expense on subordinated debentures issued to subsidiary trusts |
|
14,145 |
|
9,609 |
|
7,661 |
|
|||
|
Change in fair value of embedded derivative |
|
4,626 |
|
— |
|
— |
|
|||
|
Other operating costs and expenses |
|
5,038 |
|
4,504 |
|
3,013 |
|
|||
|
Total expenses |
|
37,909 |
|
15,862 |
|
12,160 |
|
|||
|
Income (loss) before income taxes, equity in undistributed income os subsidiaries and minority interests |
|
(10,969 |
) |
2,476 |
|
2,702 |
|
|||
|
Income tax expense (benefit) |
|
(5,241 |
) |
615 |
|
(703 |
) |
|||
|
Income (loss) before equity in undistributed income of subsidiaries and minority interests |
|
(5,728 |
) |
1,861 |
|
3,405 |
|
|||
|
Equity in undistributed income of subsidiaries (eliminated in consolidation) |
|
51,220 |
|
27,009 |
|
22,398 |
|
|||
|
Income before minority interests in subsidiaries |
|
45,492 |
|
28,870 |
|
25,803 |
|
|||
|
Minority interest |
|
2,500 |
|
(453 |
) |
363 |
|
|||
|
Net income |
|
$ |
42,992 |
|
$ |
29,323 |
|
$ |
25,440 |
|
See accompanying note to condensed financial statements.
See accompanying Report of Independent Registered Public Accounting Firm.
F-44
Schedule
II—Condensed Financial Information of Registrant (Continued)
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
Condensed Statements of Cash Flows
(Dollars in thousands)
|
|
|
Year Ended December 31, |
|
|||||||
|
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
Operating activities |
|
|
|
|
|
|
|
|||
|
Net income |
|
$ |
42,992 |
|
$ |
29,323 |
|
$ |
25,440 |
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|||
|
Provision for depreciation and amortization |
|
790 |
|
247 |
|
285 |
|
|||
|
Accrual of discount on equity security |
|
(17 |
) |
(33 |
) |
— |
|
|||
|
Equity in undistributed income of subsidiaries |
|
(51,220 |
) |
(27,009 |
) |
(22,398 |
) |
|||
|
Change in fair value of embedded derivative |
|
4,626 |
|
— |
|
— |
|
|||
|
Minority interest |
|
2,500 |
|
(453 |
) |
363 |
|
|||
|
Accrual of discount on debenture issued to subsidiary trust |
|
522 |
|
522 |
|
522 |
|
|||
|
Deferred income tax benefit |
|
(2,066 |
) |
912 |
|
(241 |
) |
|||
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|||
|
Receivable from subsidiary |
|
219 |
|
1,075 |
|
(940 |
) |
|||
|
Receivable from related party |
|
4,217 |
|
11,453 |
|
(7,459 |
) |
|||
|
Federal income tax recoverable |
|
(3,174 |
) |
(299 |
) |
(462 |
) |
|||
|
Other assets |
|
(104 |
) |
(28 |
) |
(433 |
) |
|||
|
Amounts due to related parties |
|
151 |
|
(21 |
) |
(73 |
) |
|||
|
Other liabilities |
|
381 |
|
1,240 |
|
793 |
|
|||
|
Net cash provided by (used in) operating activities |
|
(183 |
) |
16,929 |
|
(4,603 |
) |
|||
|
Investing activities |
|
|
|
|
|
|
|
|||
|
Capital contributions to subsidiaries |
|
(89,525 |
) |
(152,125 |
) |
(125,025 |
) |
|||
|
Acquisition of fixed maturity securities—available for sale |
|
(154,923 |
) |
(100,000 |
) |
(40,000 |
) |
|||
|
Maturities or repayments of fixed maturity securities—available for sale |
|
29,873 |
|
— |
|
— |
|
|||
|
Purchases of property, plant and equipment |
|
(407 |
) |
— |
|
(19 |
) |
|||
|
Net cash used in investing activities |
|
(214,982 |
) |
(252,125 |
) |
(165,044 |
) |
|||
See accompanying note to condensed financial statements.
See accompanying Report of Independent Registered Public Accounting Firm.
F-45
Schedule
II—Condensed Financial Information of Registrant (Continued)
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
Condensed Statements of Cash Flows (Continued)
(Dollars in thousands)
|
|
|
Year Ended December 31, |
|
|||||||
|
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
Financing activities |
|
|
|
|
|
|
|
|||
|
Financing fees incurred and deferred |
|
$ |
(2,018 |
) |
$ |
(9,598 |
) |
$ |
(610 |
) |
|
Proceeds from notes payable |
|
— |
|
260,000 |
|
— |
|
|||
|
Repayments of notes payable |
|
— |
|
(31,833 |
) |
(11,500 |
) |
|||
|
Proceeds from issuance of subordinated debentures |
|
55,000 |
|
57,500 |
|
12,000 |
|
|||
|
Net proceeds from issuance of common stock |
|
175,539 |
|
7,313 |
|
171,265 |
|
|||
|
Dividends paid |
|
(1,621 |
) |
(767 |
) |
(352 |
) |
|||
|
Net cash provided by financing activities |
|
226,900 |
|
282,615 |
|
170,803 |
|
|||
|
Increase in cash and cash equivalents |
|
11,734 |
|
47,419 |
|
1,156 |
|
|||
|
Cash and cash equivalents at beginning of year |
|
49,366 |
|
1,947 |
|
791 |
|
|||
|
Cash and cash equivalents at end of year |
|
$ |
61,100 |
|
$ |
49,366 |
|
$ |
1,947 |
|
|
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
|
|||
|
Cash paid during the year for interest: |
|
|
|
|
|
|
|
|||
|
Notes payable |
|
$ |
13,650 |
|
$ |
6,922 |
|
$ |
2,629 |
|
|
Subordinated debentures |
|
13,074 |
|
8,518 |
|
7,139 |
|
|||
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|||
|
Fixed maturity security contributed to subsidiary |
|
15,000 |
|
39,562 |
|
— |
|
|||
|
Subordinated debentures issued to subsidiary trust for common equity securities of the subsidiary trust |
|
1,730 |
|
1,770 |
|
372 |
|
|||
See accompanying note to condensed financial statements.
See accompanying Report of Independent Registered Public Accounting Firm.
F-46
Schedule II—Condensed Financial Information of Registrant (Continued)
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
Note to Condensed Financial Statements
December 31, 2005
The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of American Equity Investment Life Holding Company.
In the parent company financial statements, the Company’s investment in and advances to subsidiaries (which includes surplus notes issued by American Equity Life) are stated at cost plus equity in undistributed income (losses) of subsidiaries since the date of acquisition and net unrealized gains/losses on the subsidiaries’ fixed maturity securities classified as “available for sale” and equity securities in accordance with SFAS 115, Accounting for Certain Investments in Debt and Equity Securities.
See note 7 to the consolidated financial statements for a description of the parent company’s notes payable.
F-47
Schedule
III—Supplementary Insurance Information
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
|
Column A |
|
Column B |
|
Column C |
|
Column D |
|
Column E |
|
|
|
||||||||||
|
|
|
Deferred |
|
Future policy |
|
Unearned |
|
Other policy |
|
|
|
||||||||||
|
|
|
(Dollars in thousands) |
|
|
|
||||||||||||||||
|
As of December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Life insurance |
|
|
$ |
977,015 |
|
|
$ |
12,237,988 |
|
$ |
— |
|
|
$ |
126,387 |
|
|
|
|
|
|
|
As of December 31, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Life insurance |
|
|
$ |
713,021 |
|
|
$ |
9,807,969 |
|
$ |
— |
|
|
$ |
94,410 |
|
|
|
|
|
|
|
As of December 31, 2003: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Life insurance |
|
|
$ |
608,197 |
|
|
$ |
8,315,874 |
|
$ |
— |
|
|
$ |
60,995 |
|
|
|
|
|
|
|
Column A |
|
Column F |
|
Column G |
|
Column H |
|
Column I |
|
Column J |
|
|||||||||||
|
|
|
Premium |
|
Net |
|
Benefits, |
|
Amortization |
|
Other |
|
|||||||||||
|
|
|
(Dollars in thousands) |
|
|||||||||||||||||||
|
Year ended December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Life insurance |
|
|
$ |
39,264 |
|
|
$ |
554,118 |
|
$ |
351,070 |
|
|
$ |
68,109 |
|
|
|
$ |
77,645 |
|
|
|
Year ended December 31, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Life insurance |
|
|
$ |
37,577 |
|
|
$ |
428,385 |
|
$ |
310,618 |
|
|
$ |
67,867 |
|
|
|
$ |
47,635 |
|
|
|
Year ended December 31, 2003: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Life insurance |
|
|
$ |
34,138 |
|
|
$ |
357,295 |
|
$ |
326,700 |
|
|
$ |
47,450 |
|
|
|
$ |
37,446 |
|
|
See accompanying Report of Independent Registered Public Accounting Firm.
F-48
Schedule IV—Reinsurance
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
|
|
Column B |
|
Column C |
|
Column D |
|
Column E |
|
Column F |
|
|||||||||||||
|
|
|
|
|
|
|
Assumed from |
|
|
|
Percent of |
|
||||||||||||
|
|
|
|
|
Ceded to other |
|
other |
|
|
|
amount |
|
||||||||||||
|
|
|
Gross amount |
|
companies |
|
companies |
|
Net amount |
|
assumed to net |
|
||||||||||||
|
|
|
(Dollars in thousands) |
|
||||||||||||||||||||
|
Year ended December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Life insurance in force, at end of year |
|
|
$ |
2,722,017 |
|
|
|
$ |
1,327 |
|
|
|
$ |
109,289 |
|
|
$ |
2,829,979 |
|
|
3.86 |
% |
|
|
Insurance premiums and other considerations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Annuity and single premium universal life product charges |
|
|
$ |
35,126 |
|
|
|
$ |
9,440 |
|
|
|
$ |
— |
|
|
$ |
25,686 |
|
|
— |
% |
|
|
Traditional life and accident and health insurance premiums |
|
|
12,301 |
|
|
|
155 |
|
|
|
1,432 |
|
|
13,578 |
|
|
10.55 |
% |
|
||||
|
|
|
|
$ |
47,427 |
|
|
|
$ |
9,595 |
|
|
|
$ |
1,432 |
|
|
$ |
39,264 |
|
|
3.65 |
% |
|
|
Year ended December 31, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Life insurance in force, at end of year |
|
|
$ |
2,500,878 |
|
|
|
$ |
1,258 |
|
|
|
$ |
125,443 |
|
|
$ |
2,625,063 |
|
|
4.78 |
% |
|
|
Insurance premiums and other considerations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Annuity and single premium universal life product charges |
|
|
$ |
29,929 |
|
|
|
$ |
7,467 |
|
|
|
$ |
— |
|
|
$ |
22,462 |
|
|
— |
% |
|
|
Traditional life and accident and health insurance premiums |
|
|
13,399 |
|
|
|
52 |
|
|
|
1,768 |
|
|
15,115 |
|
|
11.70 |
% |
|
||||
|
|
|
|
$ |
43,328 |
|
|
|
$ |
7,519 |
|
|
|
$ |
1,768 |
|
|
$ |
37,577 |
|
|
4.71 |
% |
|
|
Year ended December 31, 2003: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Life insurance in force, at end of year |
|
|
$ |
2,580,812 |
|
|
|
$ |
1,034 |
|
|
|
$ |
141,817 |
|
|
$ |
2,721,595 |
|
|
5.21 |
% |
|
|
Insurance premiums and other considerations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Annuity and single premium universal life product charges |
|
|
$ |
26,025 |
|
|
|
$ |
5,573 |
|
|
|
$ |
— |
|
|
$ |
20,452 |
|
|
— |
% |
|
|
Traditional life and accident and health insurance premiums |
|
|
11,941 |
|
|
|
156 |
|
|
|
1,901 |
|
|
13,686 |
|
|
13.89 |
% |
|
||||
|
|
|
|
$ |
37,966 |
|
|
|
$ |
5,729 |
|
|
|
$ |
1,901 |
|
|
$ |
34,138 |
|
|
5.57 |
% |
|
See accompanying Report of Independent Registered Public Accounting Firm.
F-49
Item 15. Exhibits and Financial Statement Schedules.
|
Exhibit No. |
|
Description |
|
3.1 |
|
Articles of Incorporation, including Articles of Amendment**†† |
|
3.2 |
|
Articles of Amendment to Articles of Incorporation filed on September 23, 2003# |
|
3.3 |
|
Amended and Restated Bylaws† |
|
4.4 |
|
Amended and Restated Declaration of Trust of American Equity Capital Trust I dated September 7, 1999† |
|
4.5 |
|
Indenture dated September 7, 1999 between American Equity Investment Life Holding Company and West Des Moines State Bank, as trustee# |
|
4.6 |
|
Trust Preferred Securities Guarantee Agreement dated September 7, 1999 between American Equity Investment Life Holding Company and West Des Moines State Bank, as trustee# |
|
4.7 |
|
Trust Common Securities Guarantee Agreement dated September 7, 1999 between American Equity Investment Life Holding Company and West Des Moines State Bank, as trustee# |
|
4.8 |
|
Indenture dated October 29, 1999 between American Equity Investment Life Holding Company and West Des Moines State Bank, as trustee)# |
|
4.9 |
|
Trust Preferred Securities Guarantee Agreement dated October 29, 1999 between American Equity Investment Life Holding Company and West Des Moines, State Bank, as trustee# |
|
4.10 |
|
Trust Common Securities Guarantee Agreement dated October 29, 1999 between American Equity Investment Life Holding Company and West Des Moines State Bank, as trustee# |
|
4.11 |
|
Indenture dated December 16, 2003, between American Equity Investment Life Holding Company and Wilmington Trust Company, as trustee†††††††† |
|
4.12 |
|
Guarantee Agreement dated December 16, 2003, between American Equity Investment Life Holding Company and Wilmington Trust Company, as trustee†††††††† |
|
4.13 |
|
Indenture dated April 29, 2004, between American Equity Investment Life Holding Company and JP Morgan Chase Bank, as trustee†††††††††† |
|
4.14 |
|
Guarantee Agreement dated April 29, 2004, between American Equity Investment Life Holding Company and JP Morgan Chase Bank, as trustee†††††††††† |
|
4.15 |
|
Indenture dated September 14, 2004, between American Equity Investment Life Holding Company and JP Morgan Chase Bank, as trustee†††††††††† |
|
4.16 |
|
Guarantee Agreement dated September 14, 2004, between American Equity Investment Life Holding Company and JP Morgan chase Bank, as trustee†††††††††† |
|
4.17 |
|
Indenture dated December 22, 2004, between American Equity Investment Life Holding Company and JP M organ Chase Bank, as trustee## |
|
4.18 |
|
Guarantee Agreement dated December 22, 2004, between American Equity Investment Life Holding Company and JP M organ Chase Bank, as trustee## |
|
4.19 |
|
Indenture dated December 6, 2004 between American Equity Investment Life Holding Company and US Bank, as trustee## |
|
4.20 |
|
Registration Rights Agreement dated as of December 6, 2004 by and among American Equity Investment Life Holding Company, Deutsche Bank Securities Inc., Raymond James & Associates, Inc., and Advest, Inc.## |
|
4.21 |
|
First Supplemental Indenture dated December 30, 2004 between American Equity Investment Life Holding Company and US Bank, as trustee## |
|
4.22 |
|
Registration Rights Agreement dated as of December 30, 2004 between American Equity Investment Life Holding Company and Deutsche Bank Securities Inc.## |
|
4.23 |
|
Indenture dated June 15, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank, as trustee††††††††††† |
|
4.24 |
|
Guarantee Agreement dated June 15, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank, as trustee††††††††††† |
|
4.25 |
|
Indenture dated August 4, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank, as trustee†††††††††††† |
|
4.26 |
|
Guarantee Agreement dated August 4, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank, as trustee†††††††††††† |
|
4.27 |
|
Indenture dated December 15, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank, as trustee |
|
4.28 |
|
Guarantee Agreement dated December 31, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank, as trustee |
|
9 |
|
Voting Trust Agreement dated December 30, 1997 among Farm Bureau Life Insurance Company, American Equity Investment Life Holding Company and David J. Noble, David S. Mulcahy and Debra J. Richardson (Voting Trustees)* |
|
10.1 |
|
Restated and Amended General Agency Commission and Servicing Agreement dated June 30, 1997 between American Equity Investment Life Insurance Company and American Equity Investment Service Company* |
|
10.1-A |
|
1999 General Agency Commission and Servicing Agreement dated as of June 30, 1999 between American Equity Investment Life Insurance Company and American Equity Investment Service Company† |
|
10.1-B |
|
Second Restated and Amended General Agency Commission and Servicing Agreement dated as of October 1, 2002 between American Equity Investment Life Insurance Company and American Equity Investment Service Company†††††† |
|
10.1-C |
|
First Amendment to the 1999 General Agency Commission and Servicing Agreement effective July 1, 2003 between American Equity Investment Life Insurance Company and American Equity Investment Service Company†††††††† |
|
10.1-D |
|
First Amendment to Second Restated and Amended General Agency Commission and Servicing Agreement effective December 29, 2004 between American Equity Investment Life Insurance Company and American Equity Investment Service Company## |
|
10.2 |
|
1996 Stock Option Plan* |
|
10.3 |
|
Restated and Amended Stock Option and Warrant Agreement dated April 30, 1997 between American Equity Investment Life Holding Company and D.J. Noble* |
|
10.5 |
|
Deferred Compensation Agreements between American Equity Investment Life Holding Company and |
|
|
|
(a) James M. Gerlach dated June 6, 1996* |
|
|
(b) Terry A. Reimer dated November 11, 1996* |
|
|
|
|
(c) David S. Mulcahy dated December 31, 1997* |
|
10.6 |
|
Forgivable Loan Agreement dated April 30, 2000 between American Equity Investment Life Holding Company and D.J. Noble†† |
|
10.7 |
|
2000 Employee Stock Option Plan†† |
|
10.8 |
|
2000 Director Stock Option Plan†† |
|
10.9 |
|
Coinsurance and Yearly Renewable Term Reinsurance Agreement dated January 1, 2001 between American Equity Investment Life Holding Company and Atlantic International Reinsurance Company LTD.†††† |
|
10.10 |
|
Coinsurance Agreement dated December 19, 2001 between American Equity Investment Life Holding Company and EquiTrust Life Insurance Company††††† |
|
10.10-A |
|
Coinsurance Agreement dated December 29, 2003 between American Equity Investment Life Holding Company and EquiTrust Life Insurance Company†††††††† |
|
10.10-B |
|
First Amendment to Coinsurance Agreement dated December 29, 2003 between American Equity Investment Life Holding Company and EquiTrust Life Insurance Company††††††††† |
|
10.11 |
|
Amended and Restated Credit Agreement dated December 30, 2002 among American Equity Investment Life Holding Company, West Des Moines State Bank, as co-agent, Fleet National Bank, as documentation agent and U.S. Bank National Association, as agent†††††† |
|
10.12 |
|
2002 Coinsurance and Yearly Renewable Term Reinsurance Agreement dated November 1, 2002 between American Equity Investment Life Holding Company and Hannover Life Reassurance Company of America††††††† |
|
10.13 |
|
2003 Coinsurance and yearly Renewable Term Reinsurance Agreement dated September 30, 2003 between American Equity Investment Life Holding Company and Hannover Life Reassurance Company of America# |
|
10.13-A |
|
First Amendment to 2003 Coinsurance and yearly Renewable Term Reinsurance Agreement dated September 30, 2003 between American Equity Investment Life Holding Company and Hannover Life Reassurance Company of America†††††††† |
|
10.14 |
|
Form of Change in Control Agreement between American Equity Investment Life Holding Company and each of John M. Matovina, Kevin R. Wingert, Debra J. Richardson and Wendy L. Carlson# |
|
10.15 |
|
Form of Change in Control Agreement between American Equity Investment Life Holding Company and each James M. Gerlach and Terry A. Reimer# |
|
10.16 |
|
First Amendment dated August 14, 2003 to Amended and Restated Credit Agreement dated December 30, 2002 among American Equity Investment Life Holding Company, West Des Moines State Bank, as co-agent, Fleet National Bank, documentation agent and U.S. National Association, as agent# |
|
10.17 |
|
Second Amendment dated October 24, 2003 to Amended and Restated Credit Agreement dated December 30, 2002 among American Equity Investment Life Holding Company, West Des Moines State Bank, as co-agent, Fleet National Bank, as documentation agent and U.S. Bank National Association, as agent# |
|
10.18 |
|
Third Amendment dated December 31, 2003, to Amended and Restated Credit Agreement dated December 30, 2002 among American Equity Investment Life Holding Company, West Des Moines State Bank, as co-agent, Fleet National Bank, as documentation agent and U.S. Bank National Association, as agent†††††††† |
|
10.19 |
|
Fourth Amendment dated June 30, 2004 to Amended and Restated Credit Agreement dated December 30, 2002 among American Equity Investment Life Holding Company, West Des Moines State Bank, as co-agent, Fleet National Bank, as documentation agent and U.S. Bank National Association, as agent††††††††† |
|
10.20 |
|
Amended and Restated Credit Agreement dated September 22, 2004 among American Equity Investment Life Holding Company, West Des Moines State Bank, LaSalle Bank and U.S. Bank National Association†††††††††† |
|
10.21 |
|
Stock Sale/Purchase Agreement dated September 2, 2005 between American Equity Investment Life Holding Company and D.J. Noble†††††††††††† |
|
12.1 |
|
Ratio of Earnings to Fixed Charges |
|
21.1 |
|
Subsidiaries of American Equity Investment Life Holding Company†††††††† |
|
23.1 |
|
Consent of Independent Registered Public Accounting Firm |
|
23.2 |
|
Consent of Independent Registered Public Accounting Firm |
|
31.1 |
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
31.2 |
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
32.1 |
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
32.2 |
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* Incorporated by reference to American Equity Investment Life Holding Company’s Registration Statement on Form 10 dated April 29,1999
** Incorporated by reference to the Registration Statement on Form 10 dated April 29, 1999 and Post-Effective Amendment No. 1 to the Registration Statement on Form 10 dated July 20, 1999
† Incorporated by reference to Form 10-K for the period ended December 31, 1999
†† Incorporated by reference to Form 10-Q for the period ended June 30, 2000
††† Incorporated by reference to Form 10-K for the period ended December 31, 2000
†††† Incorporated by reference to Form 10-Q for the period ended September 30, 2001
††††† Incorporated by reference to Form 10-K for the period ended December 31, 2001
†††††† Incorporated by reference to Form 10-K for the period ended December 31, 2002
††††††† Incorporated by reference to Form 10-Q for the period ended June 30, 2003
†††††††† Incorporated by reference to Form 10-K for the period ended December 31, 2003
††††††††† Incorporated by reference to Form 10-Q for the period ended June 30, 2004
†††††††††† Incorporated by reference to Form 10-Q for the period ended September 30, 2004
††††††††††† Incorporated by reference to Form 10-Q for the period ended June 30, 2005
†††††††††††† Incorporated by reference to Form 10-Q for the period ended September 30, 2005
# Incorporated by reference to the Registration Statement on Form S-1 dated September 15, 2003, including all pre-effective amendments thereto
## Previously filed with the original Form 10-K for the period ended December 31, 2004
Exhibit 4.27
Execution Copy
JUNIOR SUBORDINATED INDENTURE
Between
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
And
JPMORGAN CHASE BANK, National Association,
as Trustee
Dated as of December 15, 2005
TABLE OF CONTENTS
|
ARTICLE I |
|
|||
|
|
Definitions and Other Provisions of General Application |
|
||
|
Section 1.1. |
Definitions |
1 |
||
|
Section 1.2. |
Compliance Certificate and Opinions |
10 |
||
|
Section 1.3. |
Forms of Documents Delivered to Trustee |
10 |
||
|
Section 1.4. |
Acts of Holders |
11 |
||
|
Section 1.5. |
Notices, Etc. to Trustee and Company |
13 |
||
|
Section 1.6. |
Notice to Holders; Waiver |
13 |
||
|
Section 1.7. |
Effect of Headings and Table of Contents |
13 |
||
|
Section 1.8. |
Successors and Assigns |
13 |
||
|
Section 1.9. |
Separability Clause |
14 |
||
|
Section 1.10. |
Benefits of Indenture |
14 |
||
|
Section 1.11. |
Governing Law |
14 |
||
|
Section 1.12. |
Submission to Jurisdiction |
14 |
||
|
Section 1.13. |
Non-Business Days |
14 |
||
|
ARTICLE II |
|
|||
|
Security Forms |
|
|||
|
Section 2.1. |
Form of Security |
15 |
||
|
Section 2.2. |
Restricted Legend |
20 |
||
|
Section 2.3. |
Form of Trustee’s Certificate of Authentication |
22 |
||
|
Section 2.4. |
Temporary Securities |
22 |
||
|
Section 2.5. |
Definitive Securities |
23 |
||
|
ARTICLE III |
|
|||
|
The Securities |
|
|||
|
Section 3.1. |
Payment of Principal and Interest |
23 |
||
|
Section 3.2. |
Denominations |
25 |
||
|
Section 3.3. |
Execution, Authentication, Delivery and Dating |
25 |
||
|
Section 3.4. |
Global Securities |
26 |
||
|
Section 3.5. |
Registration, Transfer and Exchange Generally |
28 |
||
|
Section 3.6. |
Mutilated, Destroyed, Lost and Stolen Securities |
29 |
||
|
Section 3.7. |
Persons Deemed Owners |
30 |
||
-i-
|
Section 3.8. |
Cancellation |
30 |
||
|
Section 3.9. |
Deferrals of Interest Payment Dates |
30 |
||
|
Section 3.10. |
Right of Set-Off |
31 |
||
|
Section 3.11. |
Agreed Tax Treatment |
31 |
||
|
Section 3.12. |
CUSIP Numbers |
31 |
||
|
ARTICLE IV |
|
|||
|
Satisfaction and Discharge |
|
|||
|
Section 4.1. |
Satisfaction and Discharge of Indenture |
32 |
||
|
Section 4.2. |
Application of Trust Money |
33 |
||
|
ARTICLE V |
|
|||
|
Remedies |
|
|||
|
Section 5.1. |
Events of Default |
33 |
||
|
Section 5.2. |
Acceleration of Maturity; Rescission and Annulment |
34 |
||
|
Section 5.3. |
Collection of Indebtedness and Suits for Enforcement by Trustee. |
35 |
||
|
Section 5.4. |
Trustee May File Proofs of Claim |
36 |
||
|
Section 5.5. |
Trustee May Enforce Claim Without Possession of Securities |
36 |
||
|
Section 5.6. |
Application of Money Collected |
36 |
||
|
Section 5.7. |
Limitation on Suits |
37 |
||
|
Section 5.8. |
Unconditional Right of Holders to Receive Principal, Premium, if any, and Interest; Direct Action by Holders of Preferred Securities |
37 |
||
|
Section 5.9. |
Restoration of Rights and Remedies |
38 |
||
|
Section 5.10. |
Rights and Remedies Cumulative |
38 |
||
|
Section 5.11. |
Delay or Omission Not Waiver |
38 |
||
|
Section 5.12. |
Control by Holders |
38 |
||
|
Section 5.13. |
Waiver of Past Defaults |
39 |
||
|
Section 5.14. |
Undertaking for Costs |
39 |
||
|
Section 5.15. |
Waiver of Usury, Stay or Extension Laws |
40 |
||
|
ARTICLE VI |
|
|||
|
The Trustee |
|
|||
|
Section 6.1. |
Corporate Trustee Required |
40 |
||
|
Section 6.2. |
Certain Duties and Responsibilities |
40 |
||
-ii-
|
Section 6.3. |
Notice of Defaults |
42 |
||
|
Section 6.4. |
Certain Rights of Trustee |
42 |
||
|
Section 6.5. |
May Hold Securities |
44 |
||
|
Section 6.6. |
Compensation; Reimbursement; Indemnity |
44 |
||
|
Section 6.7. |
Resignation and Removal; Appointment of Successor |
45 |
||
|
Section 6.8. |
Acceptance of Appointment by Successor |
46 |
||
|
Section 6.9. |
Merger, Conversion, Consolidation or Succession to Business |
46 |
||
|
Section 6.10. |
Not Responsible for Recitals or Issuance of Securities |
47 |
||
|
Section 6.11. |
Appointment of Authenticating Agent |
47 |
||
|
ARTICLE VII |
|
|||
|
Holder’s Lists and Reports by Company |
|
|||
|
Section 7.1. |
Company to Furnish Trustee Names and Addresses of Holders |
48 |
||
|
Section 7.2. |
Preservation of Information, Communications to Holders |
49 |
||
|
Section 7.3. |
Reports by Company |
49 |
||
|
ARTICLE VIII |
|
|||
|
Consolidation, Merger, Conveyance, Transfer or Lease |
|
|||
|
Section 8.1. |
Company May Consolidate, Etc., Only on Certain Terms |
50 |
||
|
Section 8.2. |
Successor Company Substituted |
51 |
||
|
ARTICLE IX |
|
|||
|
Supplemental Indentures |
|
|||
|
Section 9.1. |
Supplemental Indentures without Consent of Holders |
51 |
||
|
Section 9.2. |
Supplemental Indentures with Consent of Holders |
52 |
||
|
Section 9.3. |
Execution of Supplemental Indentures |
53 |
||
|
Section 9.4. |
Effect of Supplemental Indentures |
53 |
||
|
Section 9.5. |
Reference in Securities to Supplemental Indentures |
53 |
||
|
ARTICLE X |
|
|||
|
Covenants |
|
|||
|
Section 10.1. |
Payment of Principal, Premium, if any, and Interest |
53 |
||
|
Section 10.2. |
Money for Security Payments to be Held in Trust |
54 |
||
|
Section 10.3. |
Statement as to Compliance |
55 |
||
|
Section 10.4. |
Calculation Agent |
55 |
||
-iii-
|
Section 10.5. |
Additional Tax Sums |
56 |
||
|
Section 10.6. |
Additional Covenants |
56 |
||
|
Section 10.7. |
Waiver of Covenants |
57 |
||
|
Section 10.8. |
Treatment of Securities |
57 |
||
|
ARTICLE XI |
|
|||
|
Redemption of Securities |
|
|||
|
Section 11.1. |
Optional Redemption |
57 |
||
|
Section 11.2. |
Special Event Redemption |
58 |
||
|
Section 11.3. |
Election to Redeem; Notice to Trustee |
58 |
||
|
Section 11.4. |
Selection of Securities to be Redeemed |
58 |
||
|
Section 11.5. |
Notice of Redemption |
59 |
||
|
Section 11.6. |
Deposit of Redemption Price |
59 |
||
|
Section 11.7. |
Payment of Securities Called for Redemption |
60 |
||
|
ARTICLE XII |
|
|||
|
Subordination of Securities |
|
|||
|
Section 12.1. |
Securities Subordinate to Senior Debt |
60 |
||
|
Section 12.2. |
No Payment When Senior Debt in Default; Payment Over of Proceeds Upon Dissolution, Etc. |
60 |
||
|
Section 12.3. |
Payment Permitted If No Default |
62 |
||
|
Section 12.4. |
Subrogation to Rights of Holders of Senior Debt |
62 |
||
|
Section 12.5. |
Provisions Solely to Define Relative Rights |
62 |
||
|
Section 12.6. |
Trustee to Effectuate Subordination |
63 |
||
|
Section 12.7. |
No Waiver of Subordination Provisions |
63 |
||
|
Section 12.8. |
Notice to Trustee |
63 |
||
|
Section 12.9. |
Reliance on Judicial Order or Certificate of Liquidating Agent |
64 |
||
|
Section 12.10. |
Trustee Not Fiduciary for Holders of Senior Debt |
64 |
||
|
Section 12.11. |
Rights of Trustee as Holder of Senior Debt; Preservation of Trustee’s Rights |
65 |
||
|
Section 12.12. |
Article Applicable to Paying Agents |
65 |
||
-iv-
SCHEDULES
|
Schedule A |
|
– |
|
Determination of LIBOR |
|
Exhibit A |
|
- |
|
Form of Officer’s Financial Certificate |
i
Junior Subordinated Indenture, dated as of December 15, 2005, between American Equity Investment Life Holding Company, an Iowa corporation (the “Company”), and JPMorgan Chase Bank, National Association, a national banking association, as Trustee (in such capacity, the “Trustee”).
Recitals of the Company
Whereas, the Company has duly authorized the execution and delivery of this Indenture to provide for the issuance of its unsecured junior subordinated deferrable interest notes (the “Securities”) issued to evidence loans made to the Company of the proceeds from the issuance by American Equity Capital Trust XI, a Delaware statutory trust (the “Trust”), of undivided preferred beneficial interests in the assets of the Trust (the “Preferred Securities”) and undivided common beneficial interests in the assets of the Trust (the “Common Securities” and, collectively with the Preferred Securities, the “Trust Securities”), and to provide the terms and conditions upon which the Securities are to be authenticated, issued and delivered; and
Whereas, all things necessary to make this Indenture a valid agreement of the Company, in accordance with its terms, have been done.
Now, therefore, this Indenture Witnesseth:
For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities, as follows:
ARTICLE I
Definitions and Other Provisions of General Application
SECTION 1.1. Definitions.
For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article I have the meanings assigned to them in this Article I;
(b) the words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”;
(c) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP;
(d) unless the context otherwise requires, any reference to an “Article” or a “Section” refers to an Article or a Section, as the case may be, of this Indenture;
(e) the words “hereby”, “herein”, “hereof” and “hereunder” and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision;
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(f) a reference to the singular includes the plural and vice versa; and
(g) the masculine, feminine or neuter genders used herein shall include the masculine, feminine and neuter genders.
“Act” when used with respect to any Holder, has the meaning specified in Section 1.4.
“Administrative Trustee” means, with respect to the Trust, each Person identified as an “Administrative Trustee” in the Trust Agreement, solely in its capacity as Administrative Trustee of the Trust under the Trust Agreement and not in its individual capacity, or its successor in interest in such capacity, or any successor Administrative Trustee appointed as therein provided.
“Additional Interest” means the interest, if any, that shall accrue on any amounts payable on the Securities, the payment of which has not been made on the applicable Interest Payment Date and which shall accrue at the rate per annum specified or determined as specified in such Security, in each case to the extent legally enforceable.
“Additional Tax Sums” has the meaning specified in Section 10.5.
“Additional Taxes” means taxes, duties or other governmental charges imposed on the Trust as a result of a Tax Event (which, for the sake of clarity, does not include amounts required to be deducted or withheld by the Trust from payments made by the Trust to or for the benefit of the Holder of, or any Person that acquires a beneficial interest in, the Securities).
“Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, “control,” when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.
“Applicable Accounting Principles” means accounting practices prescribed or permitted by the National Association of Insurance Commissioners and, with respect to the Company’s subsidiary insurance companies, the applicable insurance department of the state of domicile of such insurance subsidiary, and in each case, applied consistently throughout the periods involved.
“Applicable Depository Procedures” means, with respect to any transfer or transaction involving a Global Security or beneficial interest therein, the rules and procedures of the Depositary for such Security, in each case to the extent applicable to such transaction and as in effect from time to time.
“Applicable Insurance Regulatory Authority” means the Iowa Insurance Division or, if at any time after the execution of this Indenture any such entity is not existing and performing the duties now assigned to it, any successor body performing similar duties or functions.
“Authenticating Agent” means any Person authorized by the Trustee pursuant to Section 6.11 to act on behalf of the Trustee to authenticate the Securities.
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“Bankruptcy Code” means Title 11 of the United States Code or any successor statute(s) thereto, or any similar federal or state law for the relief of debtors, in each case as amended from time to time.
“Board of Directors” means the board of directors of the Company or any duly authorized committee of that board.
“Board Resolution” means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification.
“Business Day” means any day other than (i) a Saturday or Sunday, (ii) a day on which banking institutions in the City of New York are authorized or required by law or executive order to remain closed or (iii) a day on which the Corporate Trust Office of the Trustee is closed for business.
“Calculation Agent” has the meaning specified in Section 10.4.
“Common Securities” has the meaning specified in the first recital of this Indenture.
“Common Stock” means the common stock, par value $1.00 per share, of the Company.
“Company” means the Person named as the “Company” in the first paragraph of this Indenture until a successor corporation shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “Company” shall mean such successor corporation.
“Company Request” and “Company Order” mean, respectively, the written request or order signed in the name of the Company by its Chairman of the Board of Directors, its Vice Chairman of the Board of Directors, its Chief Executive Officer, President or a Vice President, and by its Chief Financial Officer, its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, and delivered to the Trustee.
“Corporate Trust Office” means the principal office of the Trustee at which at any particular time its corporate trust business shall be administered, which office at the date of this Indenture is located at 600 Travis, 50th Floor, Houston, Texas 77002, Attn: Worldwide Securities Services, American Equity Capital Trust XI.
“Debt” means, with respect to any Person, whether recourse is to all or a portion of the assets of such Person, whether currently existing or hereafter incurred and whether or not contingent and without duplication, (i) every obligation of such Person for money borrowed; (ii) every obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, including obligations incurred in connection with the acquisition of property, assets or businesses; (iii) every reimbursement obligation of such Person with respect to letters of credit, bankers’ acceptances or similar facilities issued for the account of such Person; (iv) every obligation of such Person issued or assumed as the deferred purchase price of property or services (but excluding trade accounts payable or other accrued liabilities arising in the ordinary course of business); (v) every capital lease obligation of such Person; (vi) all indebtedness of such Person, whether incurred on or prior to the date of this Indenture or thereafter incurred, for claims in respect of derivative products, including interest rate, foreign exchange rate and
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commodity forward contracts, options and swaps and similar arrangements; (vii) every obligation of the type referred to in clauses (i) through (vi) of another Person and all dividends of another Person the payment of which, in either case, such Person has guaranteed or is responsible or liable for, directly or indirectly, as obligor or otherwise; and (viii) any renewals, extensions, refundings, amendments or modifications of any obligation of the type referred to in clauses (i) through (vii).
“Defaulted Interest” has the meaning specified in Section 3.1.
“Delaware Trustee” means, with respect to the Trust, the Person identified as the “Delaware Trustee” in the Trust Agreement, solely in its capacity as Delaware Trustee of the Trust under the Trust Agreement and not in its individual capacity, or its successor in interest in such capacity, or any successor Delaware Trustee appointed as therein provided.
“Depositary” means an organization registered as a clearing agency under the Exchange Act that is designated as Depositary by the Company or any successor thereto.
“Depositary Participant” means a broker, dealer, bank, other financial institution or other Person for whom from time to time a Depositary effects book-entry transfers and pledges of securities deposited with the Depositary.
“Distributions” means amounts payable in respect of the Trust Securities as provided in the Trust Agreement and referred to therein as “Distributions.”
“Dollar” or “$” means the currency of the United States of America that, as at the time of payment, is legal tender for the payment of public and private debts.
“DTC” means The Depository Trust Company, a New York corporation, or any successor thereto.
“Event of Default” has the meaning specified in Section 5.1.
“Exchange Act” means the Securities Exchange Act of 1934 or any statute successor thereto, in each case as amended from time to time.
“Expiration Date” has the meaning specified in Section 1.4.
“Extension Period” has the meaning specified in Section 3.9.
“GAAP” means United States generally accepted accounting principles, consistently applied, from time to time in effect.
“Global Security” means a Security that evidences all or part of the Securities, the ownership and transfers of which shall be made through book entries by a Depositary.
“Government Obligation” means (a) any security that is (i) a direct obligation of the United States of America of which the full faith and credit of the United States of America is pledged or (ii) an obligation of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America or the payment of which is unconditionally
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guaranteed as a full faith and credit obligation by the United States of America, which, in either case (i) or (ii), is not callable or redeemable at the option of the issuer thereof, and (b) any depositary receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as custodian with respect to any Government Obligation that is specified in clause (a) above and held by such bank for the account of the holder of such depositary receipt, or with respect to any specific payment of principal of or interest on any Government Obligation that is so specified and held, provided, that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depositary receipt from any amount received by the custodian in respect of the Government Obligation or the specific payment of principal or interest evidenced by such depositary receipt.
“Guarantee Agreement” means the Guarantee Agreement executed by the Company and JPMorgan Chase Bank, National Association, as Guarantee Trustee, contemporaneously with the execution and delivery of this Indenture, for the benefit of the holders of the Preferred Securities, as modified, amended or supplemented from time to time.
“Holder” means a Person in whose name a Security is registered in the Securities Register.
“Indenture” means this instrument as originally executed or as it may from time to time be amended or supplemented by one or more amendments or indentures supplemental hereto entered into pursuant to the applicable provisions hereof.
“Interest Payment Date” means March 15, June 15, September 15, and December 15 of each year, commencing on March 15, 2006, during the term of this Indenture.
“Investment Company Act” means the Investment Company Act of 1940 or any successor statute thereto, in each case as amended from time to time.
“Investment Company Event” means the receipt by the Company of an Opinion of Counsel experienced in such matters to the effect that, as a result of the occurrence of a change in law or regulation (including any announced prospective change) or a written change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority, there is more than an insubstantial risk that the Trust is or, within ninety (90) days of the date of such opinion will be, considered an “investment company” that is required to be registered under the Investment Company Act, which change or prospective change becomes effective or would become effective, as the case may be, on or after the date of the issuance of the Securities.
“LIBOR” has the meaning specified in Schedule A.
“LIBOR Business Day” has the meaning specified in Schedule A.
“LIBOR Determination Date” has the meaning specified in Schedule A.
“Liquidation Amount” has the meaning specified in the Trust Agreement.
“Maturity,” when used with respect to any Security, means the date on which the principal of such Security or any installment of principal becomes due and payable as therein or
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herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise.
“Notice of Default” means a written notice of the kind specified in Section 5.1(c).
“Officers’ Certificate” means a certificate signed by the Chairman of the Board, a Vice Chairman of the Board, the Chief Executive Officer, the President or a Vice President, and by the Chief Financial Officer, the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary, of the Company and delivered to the Trustee.
“Operative Documents” means the Trust Agreement, the Indenture, the Purchase Agreement, the Guarantee Agreement and the Securities.
“Opinion of Counsel” means a written opinion of counsel, who may be counsel for or an employee of the Company or any Affiliate of the Company.
“Optional Redemption Price” has the meaning set forth in Section 11.1.
“Original Issue Date” means the date of original issuance of each Security.
“Outstanding” means, when used in reference to any Securities, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except:
(i) Securities theretofore canceled by the Trustee or delivered to the Trustee for cancellation;
(ii) Securities for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities; provided, that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; and
(iii) Securities that have been paid or in substitution for or in lieu of which other Securities have been authenticated and delivered pursuant to the provisions of this Indenture, unless proof satisfactory to the Trustee is presented that any such Securities are held by Holders in whose hands such Securities are valid, binding and legal obligations of the Company;
provided, that, in determining whether the Holders of the requisite principal amount of Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities that a Responsible Officer of the Trustee actually knows to be so owned shall be so disregarded. Securities so owned that have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee’s right so to act with respect to
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such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor. Notwithstanding anything herein to the contrary, Securities initially issued to the Trust that are owned by the Trust shall be deemed to be Outstanding notwithstanding the ownership by the Company or an Affiliate of any beneficial interest in the Trust.
“Paying Agent” means the Trustee or any Person authorized by the Company to pay the principal of or any premium or interest on, or other amounts in respect of, any Securities on behalf of the Company.
“Person” means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, government or any agency or political subdivision thereof, or any other entity of whatever nature.
“Place of Payment” means, with respect to the Securities, the Corporate Trust Office of the Trustee.
“Preferred Securities” has the meaning specified in the first recital of this Indenture.
“Predecessor Security” of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security. For the purposes of this definition, any security authenticated and delivered under Section 3.6 in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security.
“Proceeding” has the meaning specified in Section 12.2.
“Property Trustee” means the Person identified as the “Property Trustee” in the Trust Agreement, solely in its capacity as Property Trustee of the Trust under the Trust Agreement and not in its individual capacity, or its successor in interest in such capacity, or any successor Property Trustee appointed as therein provided.
“Purchase Agreement” means the agreement, dated as of the date hereof, between the Company and the Trust and ALESCO Preferred Funding IX, Ltd.
“Redemption Date” means, when used with respect to any Security to be redeemed, the date fixed for such redemption by or pursuant to this Indenture.
“Redemption Price” means, when used with respect to any Security to be redeemed, in whole or in part, the Special Redemption Price or the Optional Redemption Price, as applicable, at which such Security or portion thereof is to be redeemed as fixed by or pursuant to this Indenture.
“Reference Banks” has the meaning specified in Schedule A.
“Regular Record Date” for the interest payable on any Interest Payment Date with respect to the Securities means the date that is fifteen (15) days preceding such Interest Payment Date (whether or not a Business Day).
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“Responsible Officer” means, when used with respect to the Trustee, the officer in the Worldwide Securities Services department of the Trustee having direct responsibility for the administration of this Indenture.
“Rights Plan” means a plan of the Company providing for the issuance by the Company to all holders of its Common Stock of rights entitling the holders thereof to subscribe for or purchase shares of any class or series of capital stock of the Company which rights (i) are deemed to be transferred with such shares of such Common Stock and (ii) are also issued in respect of future issuances of such Common Stock, in each case until the occurrence of a specified event or events.
“Securities” or “Security means any debt securities or debt security, as the case may be, authenticated and delivered under this Indenture.
“Securities Act” means the Securities Act of 1933 or any successor statute thereto, in each case as amended from time to time.
“Securities Register” and “Securities Registrar” have the respective meanings specified in Section 3.5.
“Senior Debt” means the principal of and any premium and interest on (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company, whether or not such claim for post-petition interest is allowed in such proceeding) all Debt of the Company, whether incurred on or prior to the date of this Indenture or thereafter incurred, unless it is provided in the instrument creating or evidencing the same or pursuant to which the same is outstanding, that such obligations are not superior in right of payment to the Securities issued under this Indenture; provided, however, that if the Company is subject to the regulation and supervision of any Applicable Insurance Regulatory Authority, the Company shall have received the approval of each appropriate Applicable Insurance Regulatory Authority prior to issuing any such obligation if then required; and provided, further, that Senior Debt shall not be deemed to include any other debt securities and guarantees in respect of such debt securities issued to any trust other than the Trust (or a trustee of any such trust), partnership or other entity affiliated with the Company that is a financing vehicle of the Company (a “financing entity”) in connection with the issuance by such financing entity of equity securities or other securities that are treated as equity capital for regulatory capital purposes guaranteed by the Company pursuant to an instrument that ranks pari passu with or junior in right of payment to this Indenture, including, without limitation, securities issued by American Equity Capital Trust I, American Equity Capital Trust II, American Equity Capital Trust III, American Equity Capital Trust IV, American Equity Capital Trust V, American Equity Capital Trust VI, American Equity Capital Trust VII, American Equity Capital Trust VIII, American Equity Capital Trust IX and American Equity Capital Trust X.
“Special Event” means the occurrence of an Investment Company Event or a Tax Event.
“Special Record Date” for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 3.1.
“Special Redemption Price” has the meaning set forth in Section 11.2.
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“Stated Maturity” means December 15, 2035.
“Statutory Financial Statements” means all financial statements of the Company’s subsidiary insurance companies for each relevant period, each prepared in accordance with Applicable Accounting Principles.
“Subsidiary” means a Person more than fifty percent (50%) of the outstanding voting stock or other voting interests of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For purposes of this definition, “voting stock” means stock that ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency.
“Tax Event” means the receipt by the Company of an Opinion of Counsel experienced in such matters to the effect that, as a result of (a) any amendment to or change (including any announced prospective change) in the laws or any regulations thereunder of the United States or any political subdivision or taxing authority thereof or therein or (b) any judicial decision or any official administrative pronouncement (including any private letter ruling, technical advice memorandum or field service advice) or regulatory procedure, including any notice or announcement of intent to adopt any such pronouncement or procedure (an “Administrative Action”), regardless of whether such judicial decision or Administrative Action is issued to or in connection with a proceeding involving the Company or the Trust and whether or not subject to review or appeal, which amendment, change, judicial decision or Administrative Action is enacted, promulgated or announced, in each case, on or after the date of issuance of the Securities, there is more than an insubstantial risk that (i) the Trust is, or will be within ninety (90) days of the date of such opinion, subject to United States federal income tax with respect to income received or accrued on the Securities, (ii) interest payable by the Company on the Securities is not, or within ninety (90) days of the date of such opinion, will not be, deductible by the Company, in whole or in part, for United States federal income tax purposes, or (iii) the Trust is, or will be within ninety (90) days of the date of such opinion, subject to more than a de minimis amount of other taxes, duties or other governmental charges.
“Trust” has the meaning specified in the first recital of this Indenture.
“Trust Agreement” means the Amended and Restated Trust Agreement executed and delivered by the Company, the Property Trustee, Chase Manhattan Bank USA, National Association, as Delaware Trustee and the Administrative Trustees named therein, contemporaneously with the execution and delivery of this Indenture, for the benefit of the holders of the Trust Securities, as amended or supplemented from time to time.
“Trustee” means the Person named as the “Trustee” in the first paragraph of this instrument, solely in its capacity as such and not in its individual capacity, until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and, thereafter, “Trustee” shall mean or include each Person who is then a Trustee hereunder.
“Trust Indenture Act” means the Trust Indenture Act of 1939, as amended and as in effect on the date as of this Indenture.
“Trust Securities” has the meaning specified in the first recital of this Indenture.
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SECTION 1.2. Compliance Certificate and Opinions.
(a) Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall, if requested by the Trustee, furnish to the Trustee an Officers’ Certificate stating that all conditions precedent (including covenants compliance with which constitutes a condition precedent), if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent (including covenants compliance with which constitutes a condition precedent), if any, have been complied with.
(b) Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than the certificate provided pursuant to Section 10.3) shall include:
(i) a statement by each individual signing such certificate or opinion that such individual has read such covenant or condition and the definitions herein relating thereto;
(ii) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions of such individual contained in such certificate or opinion are based;
(iii) a statement that, in the opinion of such individual, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been complied with; and
(iv) a statement as to whether, in the opinion of such individual, such condition or covenant has been complied with.
SECTION 1.3. Forms of Documents Delivered to Trustee.
(a) In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents.
(b) Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or after reasonable inquiry should know, that the certificate or opinion or representations with respect to matters upon which his or her certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or after reasonable inquiry should know, that the certificate or opinion or representations with respect to such matters are erroneous.
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(c) Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument.
(d) Whenever, subsequent to the receipt by the Trustee of any Board Resolution, Officers’ Certificate, Opinion of Counsel or other document or instrument, a clerical, typographical or other inadvertent or unintentional error or omission shall be discovered therein, a new document or instrument may be substituted therefor in corrected form with the same force and effect as if originally received in the corrected form and, irrespective of the date or dates of the actual execution and/or delivery thereof, such substitute document or instrument shall be deemed to have been executed and/or delivered as of the date or dates required with respect to the document or instrument for which it is substituted. Without limiting the generality of the foregoing, any Securities issued under the authority of such defective document or instrument shall nevertheless be the valid obligations of the Company entitled to the benefits of this Indenture equally and ratably with all other Outstanding Securities.
SECTION 1.4. Acts of Holders.
(a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given to or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent thereof duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments (including any appointment of an agent) is or are delivered to the Trustee, and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the “Act” of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section 1.4.
(b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by the certificate of any notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him or her the execution thereof. Where such execution is by a Person acting in other than his or her individual capacity, such certificate or affidavit shall also constitute sufficient proof of his or her authority. The fact and date of the execution by any Person of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner that the Trustee deems sufficient and in accordance with such reasonable rules as the Trustee may determine.
(c) The ownership of Securities shall be proved by the Securities Register.
(d) Any request, demand, authorization, direction, notice, consent, waiver or other action by the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security.
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(e) Without limiting the foregoing, a Holder entitled to take any action hereunder with regard to any particular Security may do so with regard to all or any part of the principal amount of such Security or by one or more duly appointed agents each of which may do so pursuant to such appointment with regard to all or any part of such principal amount.
(f) Except as set forth in paragraph (g) of this Section 1.4, the Company may set any day as a record date for the purpose of determining the Holders of Outstanding Securities entitled to give, make or take any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Indenture to be given, made or taken by Holders of Securities. If any record date is set pursuant to this paragraph, the Holders of Outstanding Securities on such record date, and no other Holders, shall be entitled to take the relevant action, whether or not such Holders remain Holders after such record date; provided, that no such action shall be effective hereunder unless taken on or prior to the applicable Expiration Date (as defined in Section 1.4(h)) by Holders of the requisite principal amount of Outstanding Securities on such record date. Nothing in this paragraph shall be construed to prevent the Company from setting a new record date for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be canceled and of no effect). Promptly after any record date is set pursuant to this paragraph, the Company, at its own expense, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Trustee in writing and to each Holder of Securities in the manner set forth in Section 1.6.
(g) The Trustee may set any day as a record date for the purpose of determining the Holders of Outstanding Securities entitled to join in the giving or making of (i) any Notice of Default, (ii) any declaration of acceleration or rescission or annulment thereof referred to in Section 5.2, (iii) any request to institute proceedings referred to in Section 5.7(b) or (iv) any direction referred to in Section 5.12. If any record date is set pursuant to this paragraph, the Holders of Outstanding Securities on such record date, and no other Holders, shall be entitled to join in such notice, declaration, request or direction, whether or not such Holders remain Holders after such record date; provided, that no such action shall be effective hereunder unless taken on or prior to the applicable Expiration Date by Holders of the requisite principal amount of Outstanding Securities on such record date. Nothing in this paragraph shall be construed to prevent the Trustee from setting a new record date for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be canceled and of no effect). Promptly after any record date is set pursuant to this paragraph, the Trustee, at the Company’s expense, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Company in writing and to each Holder of Securities in the manner set forth in Section 1.6.
(h) With respect to any record date set pursuant to paragraph (f) or (g) of this Section 1.4, the party hereto that sets such record date may designate any day as the “Expiration Date” and from time to time may change the Expiration Date to any earlier or later day; provided, that no such change shall be effective unless notice of the proposed new Expiration Date is given to the other party hereto in writing, and to each Holder of Securities in the manner set forth in Section 1.6, on or prior to the existing Expiration Date. If an Expiration Date is not designated with respect to any record date set pursuant to this Section 1.4, the party hereto that set such record date shall be deemed to have initially designated the ninetieth (90th) day after such record
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date as the Expiration Date with respect thereto, subject to its right to change the Expiration Date as provided in this paragraph. Notwithstanding the foregoing, no Expiration Date shall be later than the one hundred eightieth (180th) day after the applicable record date.
SECTION 1.5. Notices, Etc. to Trustee and Company.
Any request, demand, authorization, direction, notice, consent, waiver, Act of Holders, or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with:
(a) the Trustee by any Holder, any holder of Preferred Securities or the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with and received by the Trustee at its Corporate Trust Office, or
(b) the Company by the Trustee, any Holder or any holder of Preferred Securities shall be sufficient for every purpose hereunder if in writing and mailed, first class, postage prepaid, to the Company addressed to it at American Equity Investment Life Holding Company, 5000 Westown Parkway, Suite 440, West Des Moines, IA 50266, Attention: Wendy Carlson, Chief Financial Officer or at any other address previously furnished in writing to the Trustee by the Company.
SECTION 1.6. Notice to Holders; Waiver.
Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first class, postage prepaid, to each Holder affected by such event to the address of such Holder as it appears in the Securities Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. If, by reason of the suspension of or irregularities in regular mail service or for any other reason, it shall be impossible or impracticable to mail notice of any event to Holders when said notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as shall be satisfactory to the Trustee shall be deemed to be a sufficient giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver.
SECTION 1.7. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction of this Indenture.
SECTION 1.8. Successors and Assigns.
This Indenture shall be binding upon and shall inure to the benefit of any successor to the Company and the Trustee, including any successor by operation of law. Except in connection
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with a transaction involving the Company that is permitted under Article VIII and pursuant to which the assignee agrees in writing to perform the Company’s obligations hereunder, the Company shall not assign its obligations hereunder.
SECTION 1.9. Separability Clause.
If any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby, and there shall be deemed substituted for the provision at issue a valid, legal and enforceable provision as similar as possible to the provision at issue.
SECTION 1.10. Benefits of Indenture.
Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their successors and assigns, the holders of Senior Debt, the Holders of the Securities and, to the extent expressly provided in Sections 5.2, 5.8, 5.9, 5.11, 5.13, 9.2 and 10.7, the holders of Preferred Securities, any benefit or any legal or equitable right, remedy or claim under this Indenture.
SECTION 1.11. Governing Law.
This Indenture and the rights and obligations of each of the Holders, the Company and the Trustee shall be construed and enforced in accordance with and governed by the laws of the State of New York without reference to its conflict of laws provisions (other than Section 5-1401 of the General Obligations Law).
SECTION 1.12. Submission to Jurisdiction.
ANY LEGAL ACTION OR PROCEEDING BY OR AGAINST ANY PARTY HERETO OR WITH RESPECT TO OR ARISING OUT OF THIS INDENTURE MAY BE BROUGHT IN OR REMOVED TO THE COURTS OF THE STATE OF NEW YORK, IN AND FOR THE COUNTY OF NEW YORK, OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK (IN EACH CASE SITTING IN THE BOROUGH OF MANHATTAN). BY EXECUTION AND DELIVERY OF THIS INDENTURE, EACH PARTY ACCEPTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS (AND COURTS OF APPEALS THEREFROM) FOR LEGAL PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS INDENTURE.
SECTION 1.13. Non-Business Days.
If any Interest Payment Date, Redemption Date or Stated Maturity of any Security shall not be a Business Day, then (notwithstanding any other provision of this Indenture or the Securities) payment of interest, premium, if any, or principal or other amounts in respect of such Security shall not be made on such date, but shall be made on the next succeeding Business Day (and no interest shall accrue in respect of the amounts whose payment is so delayed for the period from and after such Interest Payment Date, Redemption Date or Stated Maturity, as the case may be, until such next succeeding Business Day) except that, if such Business Day falls in the next succeeding calendar year, such payment shall be made on the immediately preceding
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Business Day, in each case with the same force and effect as if made on the Interest Payment Date or Redemption Date or at the Stated Maturity.
ARTICLE II
Security Forms
SECTION 2.1. Form of Security.
Any Security issued hereunder shall be in substantially the following form:
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
Floating Rate Junior Subordinated Note due 2035
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American Equity Investment Life Holding Company, a corporation organized and existing under the laws of Iowa (hereinafter called the “Company,” which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to , or registered assigns, the principal sum of Twenty Million Six Hundred Twenty Thousand Dollars ($20,620,000) or such other principal amount represented hereby as may be set forth in the records of the Securities Registrar hereinafter referred to in accordance with the Indenture on December 15, 2035. The Company further promises to pay interest on said principal sum from December 15, 2005, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, quarterly (subject to deferral as set forth herein) in arrears on March 15, June 15, September 15, and December 15 of each year, commencing March 15, 2006, or if any such day is not a Business Day, on the next succeeding Business Day (and no interest shall accrue in respect of the amounts whose payment is so delayed for the period from and after such Interest Payment Date until such next succeeding Business Day), except that, if such Business Day falls in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case, with the same force and effect as if made on the Interest Payment Date, at a fixed rate of 8.595% per annum through the interest payment date in December 15, 2010 and a variable rate equal to LIBOR plus 3.65% per annum thereafter, together with Additional Tax Sums, if any, as provided in Section 10.5 of the Indenture, until the principal hereof is paid or duly provided for or made available for payment; provided, further, that any overdue principal, premium, if any, or Additional Tax Sums and any overdue installment of interest shall bear Additional Interest at a fixed rate of 8.595% per annum through the interest payment date in December 15, 2010 and a variable rate equal to LIBOR plus 3.65% per annum thereafter (to the extent that the payment of such interest shall be legally enforceable), compounded quarterly, from the dates such amounts are due until they are paid or made available for payment, and such interest shall be payable on demand.
The amount of interest payable shall be computed on the basis of a 360-day year and the actual number of days elapsed in the relevant interest period. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date shall, as provided in the Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest installment. Any such interest not so punctually paid or duly provided for shall forthwith cease
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to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities not less than ten (10) days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture.
So long as no Event of Default has occurred and is continuing, the Company shall have the right, at any time and from time to time during the term of this Security, to defer the payment of interest on this Security for a period of up to twenty (20) consecutive quarterly interest payment periods (each such period, an “Extension Period”), during which Extension Period(s), no interest shall be due and payable (except any Additional Tax Sums that may be due and payable). No Extension Period shall end on a date other than an Interest Payment Date, and no Extension Period shall extend beyond the Stated Maturity of the principal of this Security. No interest shall be due and payable during an Extension Period (except any Additional Tax Sums that may be due and payable), except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Additional Interest (to the extent payment of such interest would be legally enforceable) at a fixed rate of 8.595% per annum through the interest payment date in December 15, 2010 and a variable rate equal to LIBOR plus 3.65% per annum thereafter, compounded quarterly, from the dates on which amounts would have otherwise been due and payable until paid or made available for payment. At the end of any such Extension Period, the Company shall pay all interest then accrued and unpaid on this Security, together with such Additional Interest. Prior to the termination of any such Extension Period, the Company may further defer the payment of interest; provided, that (i) all such previous and further extensions comprising such Extension Period do not exceed twenty (20) quarterly interest payment periods, (ii) no Extension Period shall end on a date other than an Interest Payment Date and (iii) no Extension Period shall extend beyond the Stated Maturity of the principal of this Security. Upon the termination of any such Extension Period and upon the payment of all accrued and unpaid interest and any Additional Interest then due on any Interest Payment Date, the Company may elect to begin a new Extension Period; provided, that (i) such Extension Period does not exceed twenty (20) quarterly interest payment periods, (ii) no Extension Period shall end on a date other than an Interest Payment Date and (iii) no Extension Period shall extend beyond the Stated Maturity of the principal of this Security. The Company shall give the Holder of this Security and the Trustee written notice of its election to begin any such Extension Period at least one Business Day prior to the next succeeding Interest Payment Date on which interest on this Security would be payable but for such deferral or, so long as this Security is held by the Trust, at least one Business Day prior to the earlier of (i) the next succeeding date on which Distributions on the Preferred Securities of American Equity Capital Trust XI would be payable but for such deferral and (ii) the date on which the Property Trustee of such Trust is required to give notice to any securities exchange or other applicable self-regulatory organization or to holders of such Preferred Securities of the record date for the payment of such Distributions.
During any such Extension Period, the Company shall not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire or make a liquidation payment with respect to, any of the Company’s capital stock or (ii) make any payment of principal of or any interest or premium, if any, on or repay, repurchase or redeem any debt securities of the
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Company that rank pari passu in all respects with or junior in interest to this Security (other than (a) repurchases, redemptions or other acquisitions of shares of capital stock of the Company in connection with (1) any employment contract, benefit plan or other similar arrangement with or for the benefit of any one or more employees, officers, directors or consultants, (2) a dividend reinvestment or stockholder stock purchase plan and (3) the issuance of capital stock of the Company (or securities convertible into or exercisable for such capital stock) as consideration in an acquisition transaction entered into prior to the applicable Extension Period, (b) as a result of an exchange or conversion of any class or series of the Company’s capital stock (or any capital stock of a Subsidiary of the Company) for any class or series of the Company’s capital stock or of any class or series of the Company’s indebtedness for any class or series of the Company’s capital stock, (c) the purchase of fractional interests in shares of the Company’s capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (d) any declaration of a dividend in connection with any Rights Plan, the issuance of rights, stock or other property under any Rights Plan, or the redemption or repurchase of rights pursuant thereto or (e) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock).
Payment of principal of, premium, if any, and interest on this Security shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. Payments of principal, premium, if any, and interest due at the Maturity of this Security shall be made at the Place of Payment upon surrender of such Securities to the Paying Agent, and payments of interest shall be made, subject to such surrender where applicable, by wire transfer at such place and to such account at a banking institution in the United States as may be designated in writing to the Paying Agent at least ten (10) Business Days prior to the date for payment by the Person entitled thereto unless proper written transfer instructions have not been received by the relevant record date, in which case such payments shall be made by check mailed to the address of such Person as such address shall appear in the Security Register. Notwithstanding the foregoing, so long as the Holder of this Security is the Property Trustee, the payment of the principal of (and premium, if any) and interest (including any overdue installment of interest and Additional Tax Sums, if any) on this Security will be made at such place and to such account as may be designated by the Property Trustee.
The indebtedness evidenced by this Security is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Debt, and this Security is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his or her behalf to take such actions as may be necessary or appropriate to effectuate the subordination so provided and (c) appoints the Trustee his or her attorney-in-fact for any and all such purposes. Each Holder hereof, by his or her acceptance hereof, waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Debt, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions.
Unless the certificate of authentication hereon has been executed by the Trustee by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.
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[FORM OF REVERSE OF SECURITY]
This Security is one of a duly authorized issue of securities of the Company (the “Securities”) issued under the Junior Subordinated Indenture, dated as of December 15, 2005 (the “Indenture”), between the Company and JPMorgan Chase Bank, National Association, as Trustee (in such capacity, the “Trustee,” which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee, the holders of Senior Debt, the Holders of the Securities and the holders of the Preferred Securities, and of the terms upon which the Securities are, and are to be, authenticated and delivered.
All terms used in this Security that are defined in the Indenture or in the Amended and Restated Trust Agreement, dated as of December 15, 2005 (as modified, amended or supplemented from time to time, the “Trust Agreement”), relating to the American Equity Capital Trust XI (the “Trust”) among the Company, as Depositor, the Trustees named therein and the Holders from time to time of the Trust Securities issued pursuant thereto, shall have the meanings assigned to them in the Indenture or the Trust Agreement, as the case may be.
The Company may, on any Interest Payment Date, at its option, upon not less than thirty (30) days’ nor more than sixty (60) days’ written notice to the Holders of the Securities (unless a shorter notice period shall be satisfactory to the Trustee) on or after December 15, 2010 and subject to the terms and conditions of Article XI of the Indenture, redeem this Security in whole at any time or in part from time to time at a Redemption Price equal to one hundred percent (100%) of the principal amount hereof, together, in the case of any such redemption, with accrued interest, including any Additional Interest, through but excluding the date fixed as the Redemption Date; provided, that the Company shall have received the prior approval of any Applicable Insurance Regulatory Authority then required.
In addition, upon the occurrence and during the continuation of a Special Event, the Company may, at its option, upon not less than thirty (30) days’ nor more than sixty (60) days’ written notice to the Holders of the Securities (unless a shorter notice period shall be satisfactory to the Trustee), redeem this Security, in whole but not in part, subject to the terms and conditions of Article XI of the Indenture at a Redemption Price equal to one hundred seven and one half percent (107.5%) of the principal amount hereof, together, in the case of any such redemption, with accrued interest, including any Additional Interest, through but excluding the date fixed as the Redemption Date; provided, that the Company shall have received the prior approval of any Applicable Insurance Regulatory Authority then required.
In the event of redemption of this Security in part only, a new Security or Securities for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. If less than all the Securities are to be redeemed, the particular Securities to be redeemed shall be selected not more than sixty (60) days prior to the Redemption Date by the Trustee from the Outstanding Securities not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of a portion of the principal amount of any Security.
The Indenture permits, with certain exceptions as therein provided, the Company and the Trustee at any time to enter into a supplemental indenture or indentures for the purpose of
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modifying in any manner the rights and obligations of the Company and of the Holders of the Securities, with the consent of the Holders of not less than a majority in principal amount of the Outstanding Securities. The Indenture also contains provisions permitting Holders of specified percentages in principal amount of the Securities, on behalf of the Holders of all Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security.
No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium, if any, and interest, including any Additional Interest, on this Security at the times, place and rate, and in the coin or currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Securities Register, upon surrender of this Security for registration of transfer at the office or agency of the Company maintained for such purpose, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Securities Registrar and duly executed by, the Holder hereof or such Holder’s attorney duly authorized in writing, and thereupon one or more new Securities, of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees.
The Securities are issuable only in registered form without coupons in minimum denominations of $100,000 and any integral multiple of $1,000 in excess thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities are exchangeable for a like aggregate principal amount of Securities and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same.
No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.
The Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary.
The Company and, by its acceptance of this Security or a beneficial interest therein, the Holder of, and any Person that acquires a beneficial interest in, this Security agree that, for United States federal, state and local tax purposes, it is intended that this Security constitute indebtedness.
This Security shall be construed and enforced in accordance with and governed by the laws of the State of New York, without reference to its conflict of laws provisions (other than Section 5-1401 of the General Obligations Law).
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IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed on this day of , 20 .
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American Equity Investment Life Holding Company |
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Title: |
SECTION 2.2. Restricted Legend.
(a) Any Security issued hereunder shall bear a legend in substantially the following form:
“[IF THE SECURITY IS A GLOBAL SECURITY INSERT: THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE DEPOSITORY TRUST COMPANY (“DTC”) OR A NOMINEE OF DTC. THIS SECURITY IS EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN DTC OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY DTC TO A NOMINEE OF DTC OR BY A NOMINEE OF DTC TO DTC OR ANOTHER NOMINEE OF DTC) MAY BE REGISTERED EXCEPT IN LIMITED CIRCUMSTANCES.
UNLESS THIS SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF DTC TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY SECURITY ISSUED IS REGISTERED IN THE NAME OF SIGLER & CO. OR IN SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO SIGLER & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, SIGLER & CO., HAS AN INTEREST HEREIN.]
THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND SUCH SECURITIES, AND ANY INTEREST THEREIN, MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF ANY SECURITIES IS HEREBY NOTIFIED THAT THE SELLER OF THE SECURITIES MAY BE RELYING ON THE EXEMPTION FROM THE
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PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A UNDER THE SECURITIES ACT.
THE HOLDER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITIES MAY BE OFFERED, RESOLD OR OTHERWISE TRANSFERRED ONLY (I) TO THE COMPANY, (II) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A “QUALIFIED INSTITUTIONAL BUYER” (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (III) TO AN INSTITUTIONAL “ACCREDITED INVESTOR” WITHIN THE MEANING OF SUBPARAGRAPH (a) (1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF AN “ACCREDITED INVESTOR,” FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, (IV) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR (V) PURSUANT TO AN EXEMPTION FROM THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND, IN THE CASE OF (III) OR (V), SUBJECT TO THE RIGHT OF THE COMPANY TO REQUIRE AN OPINION OF COUNSEL AND OTHER INFORMATION SATISFACTORY TO IT AND (B) THE HOLDER WILL NOTIFY ANY PURCHASER OF ANY SECURITIES FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE.
THE SECURITIES WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING AN AGGREGATE PRINCIPAL AMOUNT OF NOT LESS THAN $100,000. TO THE FULLEST EXTENT PERMITTED BY LAW, ANY ATTEMPTED TRANSFER OF SECURITIES, OR ANY INTEREST THEREIN, IN A BLOCK HAVING AN AGGREGATE PRINCIPAL AMOUNT OF LESS THAN $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. TO THE FULLEST EXTENT PERMITTED BY LAW, ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF SUCH SECURITIES FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF PRINCIPAL OF OR INTEREST ON SUCH SECURITIES, OR ANY INTEREST THEREIN, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN SUCH SECURITIES.
THE HOLDER OF THIS SECURITY, OR ANY INTEREST THEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED (“ERISA”), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE “CODE”) (EACH A “PLAN”), OR AN
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ENTITY WHOSE UNDERLYING ASSETS INCLUDE “PLAN ASSETS” BY REASON OF ANY PLAN’S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING “PLAN ASSETS” OF ANY PLAN MAY ACQUIRE OR HOLD THIS SECURITY OR ANY INTEREST THEREIN. ANY PURCHASER OR HOLDER OF THE SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE.”
(b) The above legends shall not be removed from any Security unless there is delivered to the Company satisfactory evidence, which may include an Opinion of Counsel, as may be reasonably required to ensure that any future transfers thereof may be made without restriction under or violation of the provisions of the Securities Act and other applicable law. Upon provision of such satisfactory evidence, the Company shall execute and deliver to the Trustee, and the Trustee shall deliver, upon receipt of a Company Order directing it to do so, a Security that does not bear the legend.
SECTION 2.3. Form of Trustee’s Certificate of Authentication.
The Trustee’s certificate of authentication shall be in substantially the following form:
This is one of the Securities referred to in the within-mentioned Indenture.
Dated:
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JPMorgan Chase Bank, National Association,
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Authorized signatory |
SECTION 2.4. Temporary Securities.
(a) Pending the preparation of definitive Securities, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities that are printed, lithographed, typewritten, mimeographed or otherwise produced, in any denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities.
(b) If temporary Securities are issued, the Company will cause definitive Securities to be prepared without unreasonable delay. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the
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temporary Securities at the office or agency of the Company designated for that purpose without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor one or more definitive Securities of any authorized denominations having the same Original Issue Date and Stated Maturity and having the same terms as such temporary Securities. Until so exchanged, the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities.
SECTION 2.5. Definitive Securities.
The Securities issued on the Original Issue Date shall be in definitive form. The definitive Securities shall be printed, lithographed or engraved, or produced by any combination of these methods, if required by any securities exchange on which the Securities may be listed, on a steel engraved border or steel engraved borders or may be produced in any other manner permitted by the rules of any securities exchange on which the Securities may be listed, all as determined by the officers executing such Securities, as evidenced by their execution of such Securities.
ARTICLE III
The Securities
SECTION 3.1. Payment of Principal and Interest.
(a) The unpaid principal amount of the Securities shall bear interest at a fixed rate of 8.595% per annum through the interest payment date in December 15, 2010 and a variable rate of LIBOR plus 3.65% per annum thereafter until paid or duly provided for, such interest to accrue from the Original Issue Date or from the most recent Interest Payment Date to which interest has been paid or duly provided for, and any overdue principal, premium, if any, or Additional Tax Sums and any overdue installment of interest shall bear Additional Interest at the rate equal to a fixed rate of 8.595% per annum through the interest payment date in December 15, 2010 and a variable rate of LIBOR plus 3.65% per annum thereafter, compounded quarterly from the dates such amounts are due until they are paid or funds for the payment thereof are made available for payment.
(b) Interest and Additional Interest on any Security that is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, except that interest and any Additional Interest payable on the Stated Maturity (or any date of principal repayment upon early maturity) of the principal of a Security or on a Redemption Date shall be paid to the Person to whom principal is paid. The initial payment of interest on any Security that is issued between a Regular Record Date and the related Interest Payment Date shall be payable as provided in such Security.
(c) Any interest on any Security that is due and payable, but is not timely paid or duly provided for, on any Interest Payment Date for Securities (herein called “Defaulted Interest”) shall forthwith cease to be payable to the registered Holder on the relevant Regular Record Date
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by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in paragraph (i) or (ii) below:
(i) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest (a “Special Record Date”), which shall be fixed in the following manner. At least thirty (30) days prior to the date of the proposed payment, the Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest, which shall be not more than fifteen (15) days and not less than ten (10) days prior to the date of the proposed payment and not less than ten (10) days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first class, postage prepaid, to each Holder of a Security at the address of such Holder as it appears in the Securities Register not less than ten (10) days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered on such Special Record Date; or
(ii) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed and, upon such notice as may be required by such exchange (or by the Trustee if the Securities are not listed), if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such payment shall be deemed practicable by the Trustee.
(d) Payments of interest on the Securities shall include interest accrued to but excluding the respective Interest Payment Dates. Interest payments for the Securities shall be computed and paid on the basis of a 360-day year and the actual number of days elapsed in the relevant interest period.
(e) Payment of principal of, premium, if any, and interest on the Securities shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. Payments of principal, premium, if any, and interest due at the Maturity of such Securities shall be made at the Place of Payment upon surrender of such Securities to the Paying Agent and payments of interest shall be made subject to such surrender where applicable, by wire transfer at such place and to such account at a banking institution in the United States as may be designated in writing to the Paying Agent at least ten (10) Business Days prior to the date for payment by the Person entitled thereto unless
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proper written transfer instructions have not been received by the relevant record date, in which case such payments shall be made by check mailed to the address of such Person as such address shall appear in the Security Register. Notwithstanding the foregoing, so long as the holder of this Security is the Property Trustee, the payment of the principal of (and premium, if any) and interest (including any overdue installment of interest and Additional Tax Sums, if any) on this Security will be made at such place and to such account as may be designated by the Property Trustee.
(f) Subject to the foregoing provisions of this Section 3.1, each Security delivered under this Indenture upon transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, that were carried by such other Security.
SECTION 3.2. Denominations.
The Securities shall be in registered form without coupons and shall be issuable in minimum denominations of $100,000 and any integral multiple of $1,000 in excess thereof.
SECTION 3.3. Execution, Authentication, Delivery and Dating.
(a) At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities in an aggregate principal amount (including all then Outstanding Securities) not in excess of Twenty Million Six Hundred Twenty Thousand Dollars ($20,620,000) executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities, and the Trustee in accordance with the Company Order shall authenticate and deliver such Securities. In authenticating such Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive, and shall be fully protected in relying upon:
(i) a copy of any Board Resolution relating thereto; and
(ii) an Opinion of Counsel stating that: (1) such Securities, when authenticated and delivered by the Trustee and issued by the Company in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute, and the Indenture constitutes, valid and legally binding obligations of the Company, each enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equity principles; (2) the Securities have been duly authorized and executed by the Company and have been delivered to the Trustee for authentication in accordance with this Indenture; (3) the Securities are not required to be registered under the Securities Act; and (4) the Indenture is not required to be qualified under the Trust Indenture Act.
(b) The Securities shall be executed on behalf of the Company by its Chairman of the Board, its Vice Chairman of the Board, its Chief Executive Officer, its President or one of its Vice Presidents. The signature of any of these officers on the Securities may be manual or facsimile. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such
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individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities.
(c) No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose, unless there appears on such Security a certificate of authentication substantially in the form provided for herein executed by the Trustee by the manual signature of one of its authorized signatories, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder. Notwithstanding the foregoing, if any Security shall have been authenticated and delivered hereunder but never issued and sold by the Company, and the Company shall deliver such Security to the Trustee for cancellation as provided in Section 3.8, for all purposes of this Indenture such Security shall be deemed never to have been authenticated and delivered hereunder and shall never be entitled to the benefits of this Indenture.
(d) Each Security shall be dated the date of its authentication.
SECTION 3.4. Global Securities.
(a) Upon the election of the Holder after the Original Issue Date, which election need not be in writing, the Securities owned by such Holder shall be issued in the form of one or more Global Securities registered in the name of the Depositary or its nominee. Each Global Security issued under this Indenture shall be registered in the name of the Depositary designated by the Company for such Global Security or a nominee thereof and delivered to such Depositary or a nominee thereof or custodian therefor, and each such Global Security shall constitute a single Security for all purposes of this Indenture.
(b) Notwithstanding any other provision in this Indenture, no Global Security may be exchanged in whole or in part for Securities registered, and no transfer of a Global Security in whole or in part may be registered, in the name of any Person other than the Depositary for such Global Security or a nominee thereof unless (i) such Depositary advises the Trustee and the Company in writing that such Depositary is no longer willing or able to properly discharge its responsibilities as Depositary with respect to such Global Security, and no qualified successor is appointed by the Company within ninety (90) days of receipt by the Company of such notice, (ii) such Depositary ceases to be a clearing agency registered under the Exchange Act and no successor is appointed by the Company within ninety (90) days after obtaining knowledge of such event, (iii) the Company executes and delivers to the Trustee a Company Order stating that the Company elects to terminate the book-entry system through the Depositary or (iv) an Event of Default shall have occurred and be continuing. Upon the occurrence of any event specified in clause (i), (ii), (iii) or (iv) above, the Trustee shall notify the Depositary and instruct the Depositary to notify all owners of beneficial interests in such Global Security of the occurrence of such event and of the availability of Securities to such owners of beneficial interests requesting the same. The Trustee may conclusively rely, and be protected in relying, upon the written identification of the owners of beneficial interests furnished by the Depositary, and shall not be liable for any delay resulting from a delay by the Depositary. Upon the issuance of such Securities and the registration in the Securities Register of such Securities in the names of the Holders of the beneficial interests therein, the Trustees shall recognize such holders of beneficial interests as Holders.
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(c) If any Global Security is to be exchanged for other Securities or canceled in part, or if another Security is to be exchanged in whole or in part for a beneficial interest in any Global Security, then either (i) such Global Security shall be so surrendered for exchange or cancellation as provided in this Article III or (ii) the principal amount thereof shall be reduced or increased by an amount equal to the portion thereof to be so exchanged or canceled, or equal to the principal amount of such other Security to be so exchanged for a beneficial interest therein, as the case may be, by means of an appropriate adjustment made on the records of the Securities Registrar, whereupon the Trustee, in accordance with the Applicable Depository Procedures, shall instruct the Depositary or its authorized representative to make a corresponding adjustment to its records. Upon any such surrender or adjustment of a Global Security by the Depositary, accompanied by registration instructions, the Company shall execute and the Trustee shall authenticate and deliver any Securities issuable in exchange for such Global Security (or any portion thereof) in accordance with the instructions of the Depositary. The Trustee shall not be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be fully protected in relying on, such instructions.
(d) Every Security authenticated and delivered upon registration of transfer of, or in exchange for or in lieu of, a Global Security or any portion thereof shall be authenticated and delivered in the form of, and shall be, a Global Security, unless such Security is registered in the name of a Person other than the Depositary for such Global Security or a nominee thereof.
(e) Securities distributed to holders of Book-Entry Preferred Securities (as defined in the applicable Trust Agreement) upon the dissolution of the Trust shall be distributed in the form of one or more Global Securities registered in the name of a Depositary or its nominee, and deposited with the Securities Registrar, as custodian for such Depositary, or with such Depositary, for credit by the Depositary to the respective accounts of the beneficial owners of the Securities represented thereby (or such other accounts as they may direct). Securities distributed to holders of Preferred Securities other than Book-Entry Preferred Securities upon the dissolution of the Trust shall not be issued in the form of a Global Security or any other form intended to facilitate book-entry trading in beneficial interests in such Securities.
(f) The Depositary or its nominee, as the registered owner of a Global Security, shall be the Holder of such Global Security for all purposes under this Indenture and the Securities, and owners of beneficial interests in a Global Security shall hold such interests pursuant to the Applicable Depository Procedures. Accordingly, any such owner’s beneficial interest in a Global Security shall be shown only on, and the transfer of such interest shall be effected only through, records maintained by the Depositary or its nominee or its Depositary Participants. The Securities Registrar and the Trustee shall be entitled to deal with the Depositary for all purposes of this Indenture relating to a Global Security (including the payment of principal and interest thereon and the giving of instructions or directions by owners of beneficial interests therein and the giving of notices) as the sole Holder of the Security and shall have no obligations to the owners of beneficial interests therein. Neither the Trustee nor the Securities Registrar shall have any liability in respect of any transfers effected by the Depositary.
(g) The rights of owners of beneficial interests in a Global Security shall be exercised only through the Depositary and shall be limited to those established by law and agreements between such owners and the Depositary and/or its Depositary Participants.
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(h) No holder of any beneficial interest in any Global Security held on its behalf by a Depositary shall have any rights under this Indenture with respect to such Global Security, and such Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the owner of such Global Security for all purposes whatsoever. None of the Company, the Trustee nor any agent of the Company or the Trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of a Global Security or maintaining, supervising or reviewing any records relating to such beneficial ownership interests. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by a Depositary or impair, as between a Depositary and such holders of beneficial interests, the operation of customary practices governing the exercise of the rights of the Depositary (or its nominee) as Holder of any Security.
SECTION 3.5. Registration, Transfer and Exchange Generally.
(a) The Trustee shall cause to be kept at the Corporate Trust Office a register (the “Securities Register”) in which the registrar and transfer agent with respect to the Securities (the “Securities Registrar”), subject to such reasonable regulations as it may prescribe, shall provide for the registration of Securities and of transfers and exchanges of Securities. The Trustee shall at all times also be the Securities Registrar. The provisions of Article VI shall apply to the Trustee in its role as Securities Registrar.
(b) Subject to compliance with Section 2.2(b), upon surrender for registration of transfer of any Security at the offices or agencies of the Company designated for that purpose the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of any authorized denominations of like tenor and aggregate principal amount.
(c) At the option of the Holder, Securities may be exchanged for other Securities of any authorized denominations, of like tenor and aggregate principal amount, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities that the Holder making the exchange is entitled to receive.
(d) All Securities issued upon any transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such transfer or exchange.
(e) Every Security presented or surrendered for transfer or exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Securities Registrar, duly executed by the Holder thereof or such Holder’s attorney duly authorized in writing.
(f) No service charge shall be made to a Holder for any transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any transfer or exchange of Securities.
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(g) Neither the Company nor the Trustee shall be required pursuant to the provisions of this Section 3.5 (g): (i) to issue, register the transfer of or exchange any Security during a period beginning at the opening of business fifteen (15) days before the day of selection for redemption of Securities pursuant to Article XI and ending at the close of business on the day of mailing of the notice of redemption or (ii) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except, in the case of any such Security to be redeemed in part, any portion thereof not to be redeemed.
(h) The Company shall designate an office or offices or agency or agencies where Securities may be surrendered for registration or transfer or exchange. The Company initially designates the Corporate Trust Office as its office and agency for such purposes. The Company shall give prompt written notice to the Trustee and to the Holders of any change in the location of any such office or agency.
SECTION 3.6. Mutilated, Destroyed, Lost and Stolen Securities.
(a) If any mutilated Security is surrendered to the Trustee together with such security or indemnity as may be required by the Trustee to save the Company and the Trustee harmless, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of like tenor and aggregate principal amount and bearing a number not contemporaneously outstanding.
(b) If there shall be delivered to the Trustee (i) evidence to its satisfaction of the destruction, loss or theft of any Security and (ii) such security or indemnity as may be required by it to save each of the Company and the Trustee harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and upon its written request the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of like tenor and aggregate principal amount as such destroyed, lost or stolen Security, and bearing a number not contemporaneously outstanding.
(c) If any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security.
(d) Upon the issuance of any new Security under this Section 3.6, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith.
(e) Every new Security issued pursuant to this Section 3.6 in lieu of any mutilated, destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the mutilated, destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder.
(f) The provisions of this Section 3.6 are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities.
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SECTION 3.7. Persons Deemed Owners.
The Company, the Trustee and any agent of the Company or the Trustee shall treat the Person in whose name any Security is registered as the owner of such Security for the purpose of receiving payment of principal of and any interest on such Security and for all other purposes whatsoever, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary.
SECTION 3.8. Cancellation.
All Securities surrendered for payment, redemption, transfer or exchange shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee, and any such Securities and Securities surrendered directly to the Trustee for any such purpose shall be promptly canceled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder that the Company may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly canceled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities canceled as provided in this Section 3.8, except as expressly permitted by this Indenture. All canceled Securities shall be retained by the Trustee in accordance with its customary practices.
SECTION 3.9. Deferrals of Interest Payment Dates.
(a) So long as no Event of Default has occurred and is continuing, the Company shall have the right, at any time and from time to time during the term of the Security, to defer the payment of interest on the Securities for a period of up to twenty (20) consecutive quarterly interest payment periods (each such period, an “Extension Period”), during which Extension Period(s), the Company shall have the right to make no payments or partial payments of interest on any Interest Payment Date (except any Additional Tax Sums that otherwise may be due and payable). No Extension Period shall end on a date other than an Interest Payment Date and no Extension Period shall extend beyond the Stated Maturity of the principal of the Securities. No interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Additional Interest (to the extent payment of such interest would be legally enforceable) at the rate equal to a fixed rate of 8.595% per annum through the interest payment date in December 15, 2010 and a variable rate equal to LIBOR plus 3.65% per annum thereafter, compounded quarterly, from the dates on which amounts would have otherwise been due and payable until paid or until funds for the payment thereof have been made available for payment. At the end of any such Extension Period, the Company shall pay all interest then accrued and unpaid on the Securities together with such Additional Interest. Prior to the termination of any such Extension Period, the Company may extend such Extension Period and further defer the payment of interest; provided, that (i) all such previous and further extensions comprising such Extension Period do not exceed twenty (20) quarterly interest payment periods, (ii) no Extension Period shall end on a date other than an Interest Payment Date and (iii) no Extension Period shall extend beyond the Stated Maturity of the principal of the Securities. Upon the termination of any such Extension Period and upon the payment of all accrued and unpaid interest and any Additional Interest then due on any Interest Payment Date, the Company may elect to begin a new Extension Period; provided, that (i) such Extension Period does not exceed twenty (20) quarterly interest payment periods, (ii) no Extension Period shall end on a date other than an
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Interest Payment Date and (iii) no Extension Period shall extend beyond the Stated Maturity of the principal of the Securities. The Company shall give the Holders of the Securities and the Trustee written notice of its election to begin any such Extension Period at least one Business Day prior to the next succeeding Interest Payment Date on which interest on the Securities would be payable but for such deferral or, so long as any Securities are held by the Trust, at least one Business Day prior to the earlier of (i) the next succeeding date on which Distributions on the Preferred Securities of such Trust would be payable but for such deferral and (ii) the date on which the Property Trustee of such Trust is required to give notice to any securities exchange or other applicable self-regulatory organization or to holders of such Preferred Securities of the record date for the payment of such Distributions.
(b) In connection with any such Extension Period, the Company shall be subject to the restrictions set forth in Section 10.6(a).
SECTION 3.10. Right of Set-Off.
Notwithstanding anything to the contrary herein, the Company shall have the right to set off any payment it is otherwise required to make in respect of any Security to the extent the Company has theretofore made, or is concurrently on the date of such payment making, a payment under the Guarantee Agreement relating to such Security or to a holder of Preferred Securities pursuant to an action undertaken under Section 5.8 of this Indenture.
SECTION 3.11. Agreed Tax Treatment.
Each Security issued hereunder shall provide that the Company and, by its acceptance or acquisition of a Security or a beneficial interest therein, the Holder of, and any Person that acquires a direct or indirect beneficial interest in, such Security, intend and agree to treat such Security as indebtedness of the Company for United States Federal, state and local tax purposes and to treat the Preferred Securities (including but not limited to all payments and proceeds with respect to the Preferred Securities) as an undivided beneficial ownership interest in the Securities (and any other Trust property) (and payments and proceeds therefrom, respectively) for United States Federal, state and local tax purposes. The provisions of this Indenture shall be interpreted to further this intention and agreement of the parties.
SECTION 3.12. CUSIP Numbers.
The Company in issuing the Securities may use “CUSIP” numbers (if then generally in use), and, if so, the Trustee shall use “CUSIP” numbers in notices of redemption and other similar or related materials as a convenience to Holders; provided, that any such notice or other materials may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of redemption or other materials and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers.
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ARTICLE IV
Satisfaction and Discharge
SECTION 4.1. Satisfaction and Discharge of Indenture.
This Indenture shall, upon Company Request, cease to be of further effect (except as to any surviving rights of registration of transfer or exchange of Securities herein expressly provided for and as otherwise provided in this Section 4.1) and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when
(a) either
(i) all Securities theretofore authenticated and delivered (other than (A) Securities that have been mutilated, destroyed, lost or stolen and that have been replaced or paid as provided in Section 3.6 and (B) Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust as provided in Section 10.2) have been delivered to the Trustee for cancellation; or
(ii) all such Securities not theretofore delivered to the Trustee for cancellation
(A) have become due and payable, or
(B) will become due and payable at their Stated Maturity within one year of the date of deposit, or
(C) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company,
and the Company, in the case of subclause (ii)(A), (B) or (C) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for such purpose (x) an amount in the currency or currencies in which the Securities are payable, (y) Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than the due date of any payment, money in an amount or (z) a combination thereof, in each case sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal and any premium and interest (including any Additional Interest) to the date of such deposit (in the case of Securities that have become due and payable) or to the Stated Maturity (or any date of principal repayment upon early maturity) or Redemption Date, as the case may be;
(b) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and
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(c) the Company has delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 6.6, the obligations of the Company to any Authenticating Agent under Section 6.11 and, if money shall have been deposited with the Trustee pursuant to subclause (a)(ii) of this Section 4.1, the obligations of the Trustee under Section 4.2 and Section 10.2(e) shall survive.
SECTION 4.2. Application of Trust Money.
Subject to the provisions of Section 10.2(e), all money deposited with the Trustee pursuant to Section 4.1 shall be held in trust and applied by the Trustee, in accordance with the provisions of the Securities and this Indenture, to the payment in accordance with Section 3.1, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal and any premium and interest (including any Additional Interest) for the payment of which such money or obligations have been deposited with or received by the Trustee. Moneys held by the Trustee under this Section 4.2 shall not be subject to the claims of holders of Senior Debt under Article XII.
ARTICLE V
Remedies
SECTION 5.1. Events of Default.
“Event of Default” means, wherever used herein with respect to the Securities, any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body):
(a) default in the payment of any interest upon any Security, including any Additional Interest in respect thereof, when it becomes due and payable, and continuance of such default for a period of thirty (30) days (subject to the deferral of any due date in the case of an Extension Period); or
(b) default in the payment of the principal of or any premium on any Security at its Maturity; or
(c) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture and continuance of such default or breach for a period of thirty (30) days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least twenty five percent (25%) in aggregate principal amount of the Outstanding Securities a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a “Notice of Default” hereunder;
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(d) the entry by a court having jurisdiction in the premises of a decree or order adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of sixty (60) consecutive days;
(e) the institution by the Company of proceedings to be adjudicated a bankrupt or insolvent, or the consent by the Company to the institution of bankruptcy or insolvency proceedings against it, or the filing by the Company of a petition or answer or consent seeking reorganization or relief under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due and its willingness to be adjudicated a bankrupt or insolvent, or the taking of corporate action by the Company in furtherance of any such action; or
(f) the Trust shall have voluntarily or involuntarily liquidated, dissolved, wound-up its business or otherwise terminated its existence, except in connection with (1) the distribution of the Securities to holders of the Preferred Securities in liquidation of their interests in the Trust, (2) the redemption of all of the outstanding Preferred Securities or (3) certain mergers, consolidations or amalgamations, each as and to the extent permitted by the Trust Agreement.
SECTION 5.2. Acceleration of Maturity; Rescission and Annulment.
(a) If an Event of Default occurs and is continuing, then and in every such case the Trustee or the Holders of not less than twenty five percent (25%) in aggregate principal amount of the Outstanding Securities may declare the principal amount of all the Securities to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), provided, that if, upon an Event of Default, the Trustee or the Holders of not less than twenty five percent (25%) in principal amount of the Outstanding Securities fail to declare the principal of all the Outstanding Securities to be immediately due and payable, the holders of at least twenty five percent (25%) in aggregate Liquidation Amount of the Preferred Securities then outstanding shall have the right to make such declaration by a notice in writing to the Property Trustee, the Company and the Trustee; and upon any such declaration the principal amount of and the accrued interest (including any Additional Interest) on all the Securities shall become immediately due and payable.
(b) At any time after such a declaration of acceleration with respect to Securities has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter provided in this Article V, the Holders of a majority in aggregate principal amount of the Outstanding Securities, by written
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notice to the Indenture Trustee, or the holders of a majority in aggregate Liquidation Amount of the Preferred Securities, by written notice to the Property Trustee, the Company and the Trustee, may rescind and annul such declaration and its consequences if:
(i) the Company has paid or deposited with the Trustee a sum sufficient to pay:
(A) all overdue installments of interest on all Securities,
(B) any accrued Additional Interest on all Securities,
(C) the principal of and any premium on any Securities that have become due otherwise than by such declaration of acceleration and interest (including any Additional Interest) thereon at the rate borne by the Securities, and
(D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, the Property Trustee and their agents and counsel; and
(ii) all Events of Default with respect to Securities, other than the non-payment of the principal of Securities that has become due solely by such acceleration, have been cured or waived as provided in Section 5.13;
provided, that if the Holders of such Securities fail to annul such declaration and waive such default, the holders of not less than a majority in aggregate Liquidation Amount of the Preferred Securities then outstanding shall also have the right to rescind and annul such declaration and its consequences by written notice to the Property Trustee, the Company and the Trustee, subject to the satisfaction of the conditions set forth in paragraph (b) of this Section 5.2. No such rescission shall affect any subsequent default or impair any right consequent thereon.
SECTION 5.3. Collection of Indebtedness and Suits for Enforcement by Trustee.
(a) The Company covenants that if:
(i) default is made in the payment of any installment of interest (including any Additional Interest) on any Security when such interest becomes due and payable and such default continues for a period of thirty (30) days, or
(ii) default is made in the payment of the principal of and any premium on any Security at the Maturity thereof,
the Company will, upon demand of the Trustee, pay to the Trustee, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal and any premium and interest (including any Additional Interest) and, in addition thereto, all amounts owing the Trustee under Section 6.6.
(b) If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, and may prosecute such proceeding to judgment or final decree, and may enforce the same against the Company or any other obligor upon such Securities and collect the moneys adjudged or decreed to be payable in the manner provided by
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law out of the property of the Company or any other obligor upon the Securities, wherever situated.
(c) If an Event of Default with respect to Securities occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Securities by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy.
SECTION 5.4. Trustee May File Proofs of Claim.
In case of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or similar judicial proceeding relative to the Company (or any other obligor upon the Securities), its property or its creditors, the Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise, to take any and all actions authorized hereunder in order to have claims of the Holders and the Trustee allowed in any such proceeding. In particular, the Trustee shall be authorized to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to first pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts owing the Trustee, any predecessor Trustee and other Persons under Section 6.6.
SECTION 5.5. Trustee May Enforce Claim Without Possession of Securities.
All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, subject to Article XII and after provision for the payment of all the amounts owing the Trustee, any predecessor Trustee and other Persons under Section 6.6, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered.
SECTION 5.6. Application of Money Collected.
Any money or property collected or to be applied by the Trustee with respect to the Securities pursuant to this Article V shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money or property on account of principal or any premium or interest (including any Additional Interest), upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee, any predecessor Trustee and other Persons under Section 6.6;
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SECOND: To the payment of all Senior Debt of the Company if and to the extent required by Article XII;
THIRD: Subject to Article XII, to the payment of the amounts then due and unpaid upon the Securities for principal and any premium and interest (including any Additional Interest) in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal and any premium and interest (including any Additional Interest), respectively; and
FOURTH: The balance, if any, to the Person or Persons entitled thereto.
SECTION 5.7. Limitation on Suits.
Subject to Section 5.8, no Holder of any Securities shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture or for the appointment of a custodian, receiver, assignee, trustee, liquidator, sequestrator (or other similar official) or for any other remedy hereunder, unless:
(a) such Holder has previously given written notice to the Trustee of a continuing Event of Default with respect to the Securities;
(b) the Holders of not less than a majority in aggregate principal amount of the Outstanding Securities shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder;
(c) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request;
(d) the Trustee after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding for sixty (60) days; and
(e) no direction inconsistent with such written request has been given to the Trustee during such sixty (60)-day period by the Holders of a majority in aggregate principal amount of the Outstanding Securities;
it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing itself of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders of Securities, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all such Holders.
SECTION 5.8. Unconditional Right of Holders to Receive Principal, Premium, if any, and Interest; Direct Action by Holders of Preferred Securities.
Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of and any premium on such Security at its Maturity and payment of interest (including any Additional Interest) on such Security when due and payable and to institute suit for the enforcement of any such payment, and such right shall not be impaired without the consent of such Holder. Any
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registered holder of the Preferred Securities shall have the right, upon the occurrence of an Event of Default described in Section 5.1(a) or Section 5.1(b), to institute a suit directly against the Company for enforcement of payment to such holder of principal of and any premium and interest (including any Additional Interest) on the Securities having a principal amount equal to the aggregate Liquidation Amount of the Preferred Securities held by such holder.
SECTION 5.9. Restoration of Rights and Remedies.
If the Trustee, any Holder or any holder of Preferred Securities has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee, such Holder or such holder of Preferred Securities, then and in every such case the Company, the Trustee, such Holders and such holder of Preferred Securities shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Trustee, such Holder and such holder of Preferred Securities shall continue as though no such proceeding had been instituted.
SECTION 5.10. Rights and Remedies Cumulative.
Except as otherwise provided in Section 3.6(f), no right or remedy herein conferred upon or reserved to the Trustee or the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy.
SECTION 5.11. Delay or Omission Not Waiver.
No delay or omission of the Trustee, any Holder of any Securities or any holder of any Preferred Security to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article V or by law to the Trustee or to the Holders and the right and remedy given to the holders of Preferred Securities by Section 5.8 may be exercised from time to time, and as often as may be deemed expedient, by the Trustee, the Holders or the holders of Preferred Securities, as the case may be.
SECTION 5.12. Control by Holders.
The Holders of not less than a majority in aggregate principal amount of the Outstanding Securities (or, as the case may be, the holders of a majority in aggregate Liquidation Amount of Preferred Securities) shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee; provided, that:
(a) such direction shall not be in conflict with any rule of law or with this Indenture,
(b) the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction, and
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(c) subject to the provisions of Section 6.2, the Trustee shall have the right to decline to follow such direction if a Responsible Officer or Officers of the Trustee shall, in good faith, reasonably determine that the proceeding so directed would be unjustly prejudicial to the Holders not joining in any such direction or would involve the Trustee in personal liability.
SECTION 5.13. Waiver of Past Defaults.
(a) The Holders of not less than a majority in aggregate principal amount of the Outstanding Securities or the holders of not less than a majority in aggregate Liquidation Amount of the Preferred Securities may waive any past Event of Default hereunder and its consequences except an Event of Default:
(i) in the payment of the principal of or any premium or interest (including any Additional Interest) on any Security (unless such Event of Default has been cured and the Company has paid to or deposited with the Trustee a sum sufficient to pay all installments of interest (including any Additional Interest) due and past due and all principal of and any premium on all Securities due otherwise than by acceleration), or
(ii) in respect of a covenant or provision hereof that under Article IX cannot be modified or amended without the consent of each Holder of any Outstanding Security.
(b) Any such waiver shall be deemed to be on behalf of the Holders of all the Securities or, in the case of a waiver by holders of Preferred Securities issued by such Trust, by all holders of Preferred Securities.
(c) Upon any such waiver, such Event of Default shall cease to exist and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Event of Default or impair any right consequent thereon.
SECTION 5.14. Undertaking for Costs.
All parties to this Indenture agree, and each Holder of any Security by his or her acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys’ fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section 5.14 shall not apply to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than ten percent (10%) in aggregate principal amount of the Outstanding Securities, or to any suit instituted by any Holder for the enforcement of the payment of the principal of or any premium on the Security after the Stated Maturity or any interest (including any Additional Interest) on any Security after it is due and payable.
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SECTION 5.15. Waiver of Usury, Stay or Extension Laws.
The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any usury, stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted.
ARTICLE VI
The Trustee
SECTION 6.1. Corporate Trustee Required.
There shall at all times be a Trustee hereunder with respect to the Securities. The Trustee shall be a corporation organized and doing business under the laws of the United States or of any state thereof, authorized to exercise corporate trust powers, having a combined capital and surplus of at least $50,000,000, subject to supervision or examination by Federal or state authority and having an office within the United States. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of such supervising or examining authority, then, for the purposes of this Section 6.1, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 6.1, it shall resign immediately in the manner and with the effect hereinafter specified in this Article VI.
SECTION 6.2. Certain Duties and Responsibilities.
Except during the continuance of an Event of Default:
(i) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and
(ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; provided, that in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they substantially conform on their face to the requirements of this Indenture.
(b) If an Event of Default known to the Trustee has occurred and is continuing, the Trustee shall, prior to the receipt of directions, if any, from the Holders of at least a majority in aggregate principal amount of the Outstanding Securities (or, if applicable, from the holders of at least a majority in aggregate Liquidation Amount of Preferred Securities), exercise such of the
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rights and powers vested in it by this Indenture, and use the same degree of care and skill in its exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person’s own affairs.
(c) Notwithstanding the foregoing, no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section 6.2. To the extent that, at law or in equity, the Trustee has duties and liabilities relating to the Holders, the Trustee shall not be liable to any Holder or any holder of Preferred Securities for the Trustee’s good faith reliance on the provisions of this Indenture. The provisions of this Indenture, to the extent that they restrict the duties and liabilities of the Trustee otherwise existing at law or in equity, are agreed by the Company and the Holders and the holders of Preferred Securities to replace such other duties and liabilities of the Trustee.
(d) No provisions of this Indenture shall be construed to relieve the Trustee from liability with respect to matters that are within the authority of the Trustee under this Indenture for its own negligent action, negligent failure to act or willful misconduct, except that:
(i) the Trustee shall not be liable for any error or judgment made in good faith by an authorized officer of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts;
(ii) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of at least a majority in aggregate principal amount of the Outstanding Securities (or, as the case may be, the holders of a majority in aggregate Liquidation Amount of Preferred Securities) relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee under this Indenture; and
(iii) the Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company and money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law.
(e) If at any time the Trustee hereunder is not the same Person as the Property Trustee under the Trust Agreement:
(i) whenever a reference is made herein to the dissolution, termination or liquidation of the Trust, the Trustee shall be entitled to assume that no such dissolution, termination, or liquidation has occurred so long as the Securities are or continue to be registered in the name of such Property Trustee, and the Trustee shall be charged with notice or knowledge of such dissolution, termination or liquidation only upon written notice thereof given to the Trustee by the Depositor under the Trust Agreement; and
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(ii) the Trustee shall not be charged with notice or knowledge that any Person is a holder of Preferred Securities or Common Securities issued by the Trust or whether any group of holders of Preferred Securities constitutes any specified percentage of all outstanding Preferred Securities for any purpose under this Indenture, unless and until the Trustee is furnished with a list of holders by such Property Trustee and the aggregate Liquidation Amount of the Preferred Securities then outstanding. The Trustee may conclusively rely and shall be protected in relying on such list.
(f) Notwithstanding Section 1.10, the Trustee shall not, and shall not be deemed to, owe any fiduciary duty to the holders of any of the Trust Securities issued by the Trust and shall not be liable to any such holder (other than for the willful misconduct or negligence of the Trustee) if the Trustee in good faith (i) pays over or distributes to a registered Holder of the Securities or to the Company or to any other Person, cash, property or securities to which such holders of such Trust Securities shall be entitled or (ii) takes any action or omits to take any action at the request of the Holder of such Securities. Nothing in this paragraph shall affect the obligation of any other such Person to hold such payment for the benefit of, and to pay such amount over to, such holders of Preferred Securities or Common Securities or their representatives.
SECTION 6.3. Notice of Defaults.
Within ninety (90) days after the occurrence of any default actually known to the Trustee, the Trustee shall give the Holders notice of such default unless such default shall have been cured or waived; provided, that in the case of any default of the character specified in Section 5.1(c), no such notice to Holders shall be given until at least thirty (30) days after the occurrence thereof. For the purpose of this Section 6.3, the term “default” means any event which is, or after notice or lapse of time or both would become, an Event of Default.
SECTION 6.4. Certain Rights of Trustee.
Subject to the provisions of Section 6.2:
(a) the Trustee may conclusively rely and shall be fully protected in acting or refraining from acting in good faith and in accordance with the terms hereof upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties;
(b) if (i) in performing its duties under this Indenture the Trustee is required to decide between alternative courses of action, (ii) in construing any of the provisions of this Indenture the Trustee finds ambiguous or inconsistent with any other provisions contained herein or (iii) the Trustee is unsure of the application of any provision of this Indenture, then, except as to any matter as to which the Holders are entitled to decide under the terms of this Indenture, the Trustee shall deliver a notice to the Company requesting the Company’s written instruction as to the course of action to be taken and the Trustee shall take such action, or refrain from taking such action, as the Trustee shall be instructed in writing to take, or to refrain from taking, by the Company; provided, that if the Trustee does not receive such instructions from the Company within ten Business Days after it has delivered such notice or such reasonably shorter period of
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time set forth in such notice the Trustee may, but shall be under no duty to, take such action, or refrain from taking such action, as the Trustee shall deem advisable and in the best interests of the Holders, in which event the Trustee shall have no liability except for its own negligence, bad faith or willful misconduct;
(c) any request or direction of the Company shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution;
(d) the Trustee may consult with counsel (which counsel may be counsel to the Trustee, the Company or any of its Affiliates, and may include any of its employees) and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders or any holder of Preferred Securities pursuant to this Indenture, unless such Holders (or such holders of Preferred Securities) shall have offered to the Trustee security or indemnity reasonably satisfactory to it against the costs, expenses (including reasonable attorneys’ fees and expenses) and liabilities that might be incurred by it in compliance with such request or direction, including reasonable advances as may be requested by the Trustee;
(f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, indenture, note or other paper or document, but the Trustee in its discretion may make such inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney;
(g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, attorneys, custodians or nominees and the Trustee shall not be responsible for any misconduct or negligence on the part of any such agent, attorney, custodian or nominee appointed with due care by it hereunder;
(h) whenever in the administration of this Indenture the Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action with respect to enforcing any remedy or right hereunder, the Trustees (i) may request instructions from the Holders (which instructions may only be given by the Holders of the same aggregate principal amount of Outstanding Securities as would be entitled to direct the Trustee under this Indenture in respect of such remedy, right or action), (ii) may refrain from enforcing such remedy or right or taking such action until such instructions are received and (iii) shall be protected in acting in accordance with such instructions;
(i) except as otherwise expressly provided by this Indenture, the Trustee shall not be under any obligation to take any action that is discretionary under the provisions of this Indenture;
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(j) without prejudice to any other rights available to the Trustee under applicable law, when the Trustee incurs expenses or renders services in connection with any bankruptcy, insolvency or other proceeding referred to in clauses (d) or (e) of the definition of Event of Default, such expenses (including legal fees and expenses of its agents and counsel) and the compensation for such services are intended to constitute expenses of administration under any bankruptcy laws or law relating to creditors rights generally;
(k) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, conclusively rely upon an Officers’ Certificate addressing such matter, which, upon receipt of such request, shall be promptly delivered by the Company;
(l) the Trustee shall not be charged with knowledge of any Event of Default unless either (i) a Responsible Officer of the Trustee shall have actual knowledge or (ii) the Trustee shall have received written notice thereof from the Company or a Holder; and
(m) in the event that the Trustee is also acting as Paying Agent, Authenticating Agent or Securities Registrar hereunder, the rights and protections afforded to the Trustee pursuant to this Article VI shall also be afforded such Paying Agent, Authenticating Agent, or Securities Registrar.
SECTION 6.5. May Hold Securities.
The Trustee, any Authenticating Agent, any Paying Agent, any Securities Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with the Company with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, Securities Registrar or such other agent.
SECTION 6.6. Compensation; Reimbursement; Indemnity.
(a) The Company agrees
(i) to pay to the Trustee from time to time reasonable compensation for all services rendered by it hereunder in such amounts as the Company and the Trustee shall agree from time to time (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust);
(ii) to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence, bad faith or willful misconduct; and
(iii) to the fullest extent permitted by applicable law, to indemnify the Trustee and its Affiliates, and their officers, directors, shareholders, agents, representatives and employees for, and to hold them harmless against, any loss, damage, liability, tax (other than income, franchise or other taxes imposed on amounts paid pursuant to (i) or (ii)
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hereof), penalty, expense or claim of any kind or nature whatsoever incurred without negligence, bad faith or willful misconduct on its part arising out of or in connection with the acceptance or administration of this trust or the performance of the Trustee’s duties hereunder, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder.
(b) To secure the Company’s payment obligations in this Section 6.6, the Company hereby grants and pledges to the Trustee and the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee, other than money or property held in trust to pay principal and interest on particular Securities. Such lien shall survive the satisfaction and discharge of this Indenture or the resignation or removal of the Trustee.
(c) The obligations of the Company under this Section 6.6 shall survive the satisfaction and discharge of this Indenture and the earlier resignation or removal of the Trustee.
(d) In no event shall the Trustee be liable for any indirect, special, punitive or consequential loss or damage of any kind whatsoever, including, but not limited to, lost profits, even if the Trustee has been advised of the likelihood of such loss or damage and regardless of the form of action.
(e) In no event shall the Trustee be liable for any failure or delay in the performance of its obligations hereunder because of circumstances beyond its control, including, but not limited to, acts of God, flood, war (whether declared or undeclared), terrorism, fire, riot, embargo, government action, including any laws, ordinances, regulations, governmental action or the like which delay, restrict or prohibit the providing of the services contemplated by this Indenture.
SECTION 6.7. Resignation and Removal; Appointment of Successor.
(a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article VI shall become effective until the acceptance of appointment by the successor Trustee under Section 6.8.
(b) The Trustee may resign at any time by giving written notice thereof to the Company.
(c) Unless an Event of Default shall have occurred and be continuing, the Trustee may be removed at any time by the Company by a Board Resolution. If an Event of Default shall have occurred and be continuing, the Trustee may be removed by Act of the Holders of a majority in aggregate principal amount of the Outstanding Securities, delivered to the Trustee and to the Company.
(d) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any reason, at a time when no Event of Default shall have occurred and be continuing, the Company, by a Board Resolution, shall promptly appoint a successor Trustee, and such successor Trustee and the retiring Trustee shall comply with the applicable requirements of Section 6.8. If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any reason, at
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a time when an Event of Default shall have occurred and be continuing, the Holders, by Act of the Holders of a majority in aggregate principal amount of the Outstanding Securities, shall promptly appoint a successor Trustee, and such successor Trustee and the retiring Trustee shall comply with the applicable requirements of Section 6.8. If no successor Trustee shall have been so appointed by the Company or the Holders and accepted appointment within sixty (60) days after the giving of a notice of resignation by the Trustee or the removal of the Trustee in the manner required by Section 6.8, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of such Holder and all others similarly situated, and any resigning Trustee may, at the expense of the Company, petition any court of competent jurisdiction for the appointment of a successor Trustee.
(e) The Company shall give notice to all Holders in the manner provided in Section 1.6 of each resignation and each removal of the Trustee and each appointment of a successor Trustee. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office.
SECTION 6.8. Acceptance of Appointment by Successor.
(a) In case of the appointment hereunder of a successor Trustee, each successor Trustee so appointed shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder.
(b) Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all rights, powers and trusts referred to in paragraph (a) of this Section 6.8.
(c) No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article VI.
SECTION 6.9. Merger, Conversion, Consolidation or Succession to Business.
Any Person into which the Trustee may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any Person succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided, that such Person shall be otherwise qualified and eligible under this Article VI. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation or as otherwise provided above in this Section 6.9 to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated, and in case any Securities shall not have been authenticated, any successor to the Trustee may
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authenticate such Securities either in the name of any predecessor Trustee or in the name of such successor Trustee, and in all cases the certificate of authentication shall have the full force which it is provided anywhere in the Securities or in this Indenture that the certificate of the Trustee shall have.
SECTION 6.10. Not Responsible for Recitals or Issuance of Securities.
The recitals contained herein and in the Securities, except the Trustee’s certificates of authentication, shall be taken as the statements of the Company, and neither the Trustee nor any Authenticating Agent assumes any responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities. Neither the Trustee nor any Authenticating Agent shall be accountable for the use or application by the Company of the Securities or the proceeds thereof.
SECTION 6.11. Appointment of Authenticating Agent.
(a) The Trustee may appoint an Authenticating Agent or Agents with respect to the Securities, which shall be authorized to act on behalf of the Trustee to authenticate Securities issued upon original issue and upon exchange, registration of transfer or partial redemption thereof or pursuant to Section 3.6, and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustee’s certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a corporation organized and doing business under the laws of the United States of America, or of any State or Territory thereof or the District of Columbia, authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than $50,000,000 and subject to supervision or examination by Federal or state authority. If such Authenticating Agent publishes reports of condition at least annually pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section 6.11 the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section 6.11, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section 6.11.
(b) Any Person into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any Person succeeding to all or substantially all of the corporate trust business of an Authenticating Agent shall be the successor Authenticating Agent hereunder, provided such Person shall be otherwise eligible under this Section 6.11, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent.
(c) An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the
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Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section 6.11, the Trustee may appoint a successor Authenticating Agent eligible under the provisions of this Section 6.11, which shall be acceptable to the Company, and shall give notice of such appointment to all Holders. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent.
(d) The Company agrees to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section 6.11 in such amounts as the Company and the Authenticating Agent shall agree from time to time.
(e) If an appointment of an Authenticating Agent is made pursuant to this Section 6.11, the Securities may have endorsed thereon, in addition to the Trustee’s certificate of authentication, an alternative certificate of authentication in the following form:
This is one of the Securities referred to in the within mentioned Indenture.
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ARTICLE VII
Holder’s Lists and Reports by Company
SECTION 7.1. Company to Furnish Trustee Names and Addresses of Holders.
The Company will furnish or cause to be furnished to the Trustee:
(a) semiannually, on or before June 30 and December 31 of each year, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of a date not more than fifteen (15) days prior to the delivery thereof, and
(b) at such other times as the Trustee may request in writing, within thirty (30) days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than fifteen (15) days prior to the time such list is furnished,
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in each case to the extent such information is in the possession or control of the Company and has not otherwise been received by the Trustee in its capacity as Securities Registrar.
SECTION 7.2. Preservation of Information, Communications to Holders.
(a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 7.1 and the names and addresses of Holders received by the Trustee in its capacity as Securities Registrar. The Trustee may destroy any list furnished to it as provided in Section 7.1 upon receipt of a new list so furnished.
(b) The rights of Holders to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and privileges of the Trustee, shall be as provided in the Trust Indenture Act.
(c) Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of the disclosure of information as to the names and addresses of the Holders made pursuant to the Trust Indenture Act.
SECTION 7.3. Reports by Company.
(a) The Company shall furnish to the Holders and to prospective purchasers of Securities, upon their request, the information required to be furnished pursuant to Rule 144A(d)(4) under the Securities Act. The Company shall furnish to the Trustee and, so long as the Property Trustee holds any of the Securities, the Company shall furnish to the Property Trustee, Statutory Financial Statements promptly following their filing with the Applicable Insurance Regulatory Authority. The delivery requirement set forth in the preceding sentence may be satisfied by compliance with Section 7.3(b) hereof.
(b) The Company shall furnish to each of (i) the Trustee, (ii) the Holders and to subsequent holders of Securities, (iii) Cohen Bros. Financial Management LLC, 1818 Market Street, 28th Street, Philadelphia, Pennsylvania 13103), or such other address as designated by Cohen Bros. Financial Management LLC) and (iv) any beneficial owner of the Securities reasonably identified to the Company (which identification may be made either by such beneficial owner or by Cohen Bros. Financial Management LLC), a duly completed and executed certificate substantially and substantively in the form attached hereto as Exhibit A, including the financial statements referenced in such Exhibit, which certificate and financial statements shall be so furnished by the Company not later than forty-five (45) days after the end of each of the first three fiscal quarters of each fiscal year of the Company and not later than ninety (90) days after the end of each fiscal year of the Company. The delivery requirements under this Section 7.3(b) may be satisfied by compliance with Section 8.16(b) of the Trust Agreement.
(c) If the Company intends to file its annual and quarterly information with the Securities and Exchange Commission (the “Commission”) in electronic form pursuant to Regulation S-T of the Commission using the Commission’s Electronic Data Gathering, Analysis and Retrieval (“EDGAR”) system, the Company shall notify the Trustee in the manner prescribed herein of each such annual and quarterly filing. The Trustee is hereby authorized and directed to
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access the EDGAR system for purposes of retrieving the financial information so filed. Compliance with the foregoing shall constitute delivery by the Company of its financial statements to the Trustee in compliance with the provisions of Section 314(a) of the Trust Indenture Act, if applicable. The Trustee shall have no duty to search for or obtain any electronic or other filings that the Company makes with the Commission, regardless of whether such filings are periodic, supplemental or otherwise. Delivery of reports, information and documents to the Trustee pursuant to this Section 7.3(c) shall be solely for purposes of compliance with this Section 7.3(c) and, if applicable, with Section 314(a) of the Trust Indenture Act. The Trustee’s receipt of such reports, information and documents shall not constitute notice to it of the content thereof or any matter determinable from the content thereof, including the Company’s compliance with any of its covenants hereunder, as to which the Trustee is entitled to rely upon Officers’ Certificates.
ARTICLE VIII
Consolidation, Merger, Conveyance, Transfer or Lease
SECTION 8.1. Company May Consolidate, Etc., Only on Certain Terms.
The Company shall not consolidate with or merge into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, and no Person shall consolidate with or merge into the Company or convey, transfer or lease its properties and assets substantially as an entirety to the Company, unless:
(a) if the Company shall consolidate with or merge into another Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, the entity formed by such consolidation or into which the Company is merged or the Person that acquires by conveyance or transfer, or that leases, the properties and assets of the Company substantially as an entirety shall be an entity organized and existing under the laws of the United States of America or any State or Territory thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form reasonably satisfactory to the Trustee, the due and punctual payment of the principal of and any premium and interest (including any Additional Interest) on all the Securities and the performance of every covenant of this Indenture on the part of the Company to be performed or observed;
(b) immediately after giving effect to such transaction, no Event of Default, and no event that, after notice or lapse of time, or both, would constitute an Event of Default, shall have happened and be continuing; and
(c) the Company has delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, any such supplemental indenture comply with this Article VIII and that all conditions precedent herein provided for relating to such transaction have been complied with; and the Trustee may rely upon such Officers’ Certificate and Opinion of Counsel as conclusive evidence that such transaction complies with this Section 8.1.
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SECTION 8.2. Successor Company Substituted.
(a) Upon any consolidation or merger by the Company with or into any other Person, or any conveyance, transfer or lease by the Company of its properties and assets substantially as an entirety to any Person in accordance with Section 8.1 and the execution and delivery to the Trustee of the supplemental indenture described in Section 8.1(a), the successor entity formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein; and in the event of any such conveyance or transfer, following the execution and delivery of such supplemental indenture, the Company shall be discharged from all obligations and covenants under the Indenture and the Securities.
(b) Such successor Person may cause to be executed, and may issue either in its own name or in the name of the Company, any or all of the Securities issuable hereunder that theretofore shall not have been signed by the Company and delivered to the Trustee; and, upon the order of such successor Person instead of the Company and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee shall authenticate and shall deliver any Securities that previously shall have been signed and delivered by the officers of the Company to the Trustee for authentication, and any Securities that such successor Person thereafter shall cause to be executed and delivered to the Trustee on its behalf. All the Securities so issued shall in all respects have the same legal rank and benefit under this Indenture as the Securities theretofore or thereafter issued in accordance with the terms of this Indenture.
(c) In case of any such consolidation, merger, sale, conveyance or lease, such changes in phraseology and form may be made in the Securities thereafter to be issued as may be appropriate to reflect such occurrence.
ARTICLE IX
Supplemental Indentures
SECTION 9.1. Supplemental Indentures without Consent of Holders.
Without the consent of any Holders, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form reasonably satisfactory to the Trustee, for any of the following purposes:
(a) to evidence the succession of another Person to the Company, and the assumption by any such successor of the covenants of the Company herein and in the Securities; or
(b) to cure any ambiguity, to correct or supplement any provision herein that may be defective or inconsistent with any other provision herein, or to make or amend any other provisions with respect to matters or questions arising under this Indenture, which shall not be inconsistent with the other provisions of this Indenture, provided, that such action pursuant to this clause (b) shall not adversely affect in any material respect the interests of any Holders or the holders of the Preferred Securities; or
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(c) to add to the covenants, restrictions or obligations of the Company or to add to the Events of Default, provided, that such action pursuant to this clause (c) shall not adversely affect in any material respect the interests of any Holders or the holders of the Preferred Securities; or
(d) to modify, eliminate or add to any provisions of the Indenture or the Securities to such extent as shall be necessary to ensure that the Securities are treated as indebtedness of the Company for United States Federal income tax purposes, provided, that such action pursuant to this clause (d) shall not adversely affect in any material respect the interests of any Holders or the holders of the Preferred Securities.
SECTION 9.2. Supplemental Indentures with Consent of Holders.
(a) With the consent of the Holders of not less than a majority in aggregate principal amount of the Outstanding Securities, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders of Securities under this Indenture; provided, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security,
(i) change the Stated Maturity of the principal or any premium of any Security or change the date of payment of any installment of interest (including any Additional Interest) on any Security, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof or change the place of payment where, or the coin or currency in which, any Security or interest thereon is payable, or restrict or impair the right to institute suit for the enforcement of any such payment on or after such date, or
(ii) reduce the percentage in aggregate principal amount of the Outstanding Securities, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver of compliance with any provision of this Indenture or of defaults hereunder and their consequences provided for in this Indenture, or
(iii) modify any of the provisions of this Section 9.2, Section 5.13 or Section 10.7, except to increase any percentage in aggregate principal amount of the Outstanding Securities, the consent of whose Holders is required for any reason, or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Security;
provided, further, that, so long as any Preferred Securities remain outstanding, no amendment under this Section 9.2 shall be effective until the holders of a majority in Liquidation Amount of the Preferred Securities shall have consented to such amendment; provided, further, that if the consent of the Holder of each Outstanding Security is required for any amendment under this Indenture, such amendment shall not be effective until the holder of each Outstanding Preferred Security shall have consented to such amendment.
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(b) It shall not be necessary for any Act of Holders under this Section 9.2 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof.
SECTION 9.3. Execution of Supplemental Indentures.
In executing or accepting the additional trusts created by any supplemental indenture permitted by this Article IX or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and shall be fully protected in conclusively relying upon, an Officers’ Certificate and an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture, and that all conditions precedent herein provided for relating to such action have been complied with. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture that affects the Trustee’s own rights, duties, indemnities or immunities under this Indenture or otherwise. Copies of the final form of each supplemental indenture shall be delivered by the Trustee at the expense of the Company to each Holder, and, if the Trustee is the Property Trustee, to each holder of Preferred Securities, promptly after the execution thereof.
SECTION 9.4. Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this Article IX, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities and every holder of Preferred Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby.
SECTION 9.5. Reference in Securities to Supplemental Indentures.
Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article IX may, and shall if required by the Company, bear a notation in form approved by the Company as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities so modified as to conform, in the opinion of the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities.
ARTICLE X
Covenants
SECTION 10.1. Payment of Principal, Premium, if any, and Interest.
The Company covenants and agrees for the benefit of the Holders of the Securities that it will duly and punctually pay the principal of and any premium and interest (including any Additional Interest) on the Securities in accordance with the terms of the Securities and this Indenture. As of the date of this Indenture, the Company represents that it has no present intention to exercise its right under Section 2.11 to defer payments of interest on the Securities.
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SECTION 10.2. Money for Security Payments to be Held in Trust.
(a) If the Company shall at any time act as its own Paying Agent with respect to the Securities, it will, on or before each due date of the principal of and any premium or interest (including any Additional Interest) on the Securities, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal and any premium or interest (including Additional Interest) so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided, and will promptly notify the Trustee in writing of its failure so to act.
(b) Whenever the Company shall have one or more Paying Agents, it will, prior to 10:00 a.m., New York City time, on each due date of the principal of or any premium or interest (including any Additional Interest) on any Securities, deposit with a Paying Agent a sum sufficient to pay such amount, such sum to be held as provided in the Trust Indenture Act and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its failure so to act.
(c) The Company will cause each Paying Agent for the Securities other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section 10.2, that such Paying Agent will (i) comply with the provisions of this Indenture and the Trust Indenture Act applicable to it as a Paying Agent and (ii) during the continuance of any default by the Company (or any other obligor upon the Securities) in the making of any payment in respect of the Securities, upon the written request of the Trustee, forthwith pay to the Trustee all sums held in trust by such Paying Agent for payment in respect of the Securities.
(d) The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money.
(e) Any money deposited with the Trustee or any Paying Agent, or then held by the Company in trust for the payment of the principal of and any premium or interest (including any Additional Interest) on any Security and remaining unclaimed for two years after such principal and any premium or interest has become due and payable shall (unless otherwise required by mandatory provision of applicable escheat or abandoned or unclaimed property law) be paid on Company Request to the Company, or (if then held by the Company) shall (unless otherwise required by mandatory provision of applicable escheat or abandoned or unclaimed property law) be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the Borough of Manhattan, The City of New York, notice that
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such money remains unclaimed and that, after a date specified therein, which shall not be less than thirty (30) days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company.
SECTION 10.3. Statement as to Compliance.
The Company shall deliver to the Trustee, within one hundred and twenty (120) days after the end of each fiscal year of the Company ending after the date hereof, an Officers’ Certificate covering the preceding calendar year, stating whether or not to the knowledge of the signers thereof the Company is in default in the performance or observance of any of the terms, provisions and conditions of this Indenture (without regard to any period of grace or requirement of notice provided hereunder), and if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge. The delivery requirements of this Section 10.3 may be satisfied by compliance with Section 8.16(a) of the Trust Agreement.
SECTION 10.4. Calculation Agent.
(a) The Company hereby agrees that for so long as any of the Securities remain Outstanding, there will at all times be an agent appointed to calculate LIBOR in respect of each Interest Payment Date in accordance with the terms of Schedule A (the “Calculation Agent”). The Company has initially appointed the Property Trustee as Calculation Agent for purposes of determining LIBOR for each Interest Payment Date. The Calculation Agent may be removed by the Company at any time. So long as the Property Trustee holds any of the Securities, the Calculation Agent shall be the Property Trustee, except as described in the immediately preceding sentence. If the Calculation Agent is unable or unwilling to act as such or is removed by the Company, the Company will promptly appoint as a replacement Calculation Agent the London office of a leading bank which is engaged in transactions in Eurodollar deposits in the international Eurodollar market and which does not control or is not controlled by or under common control with the Company or its Affiliates. The Calculation Agent may not resign its duties without a successor having been duly appointed.
(b) The Calculation Agent shall be required to agree that, as soon as possible after 11:00 a.m. (London time) on each LIBOR Determination Date (as defined in Schedule A), but in no event later than 11:00 a.m. (London time) on the Business Day immediately following each LIBOR Determination Date, the Calculation Agent will calculate the interest rate (the Interest Payment shall be rounded to the nearest cent, with half a cent being rounded upwards) for the related Interest Payment Date, and will communicate such rate and amount to the Company, the Trustee, each Paying Agent and the Depositary. The Calculation Agent will also specify to the Company the quotations upon which the foregoing rates and amounts are based and, in any event, the Calculation Agent shall notify the Company before 5:00 p.m. (London time) on each LIBOR Determination Date that either: (i) it has determined or is in the process of determining the foregoing rates and amounts or (ii) it has not determined and is not in the process of determining the foregoing rates and amounts, together with its reasons therefor. The Calculation Agent’s determination of the foregoing rates and amounts for any Interest Payment Date will (in the absence of manifest error) be final and binding upon all parties. For the sole purpose of calculating the interest rate for the Securities, “Business Day” shall be defined as any day on which dealings in deposits in Dollars are transacted in the London interbank market.
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SECTION 10.5. Additional Tax Sums.
So long as no Event of Default has occurred and is continuing, if (a) the Trust is the Holder of all of the Outstanding Securities and (b) a Tax Event described in clause (i) or (iii) in the definition of Tax Event in Section 1.1 hereof has occurred and is continuing, the Company shall pay to the Trust (and its permitted successors or assigns under the related Trust Agreement) for so long as the Trust (or its permitted successor or assignee) is the registered holder of the Outstanding Securities, such amounts as may be necessary in order that the amount of Distributions (including any Additional Interest Amount (as defined in the Trust Agreement)) then due and payable by the Trust on the Preferred Securities and Common Securities that at any time remain outstanding in accordance with the terms thereof shall not be reduced as a result of any Additional Taxes arising from such Tax Event (additional such amounts payable by the Company to the Trust, the “Additional Tax Sums”). Whenever in this Indenture or the Securities there is a reference in any context to the payment of principal of or interest on the Securities, such mention shall be deemed to include mention of the payments of the Additional Tax Sums provided for in this Section 10.5 to the extent that, in such context, Additional Tax Sums are, were or would be payable in respect thereof pursuant to the provisions of this Section 10.5 and express mention of the payment of Additional Tax Sums (if applicable) in any provisions hereof shall not be construed as excluding Additional Tax Sums in those provisions hereof where such express mention is not made; provided, that the deferral of the payment of interest pursuant to Section 3.9 on the Securities shall not defer the payment of any Additional Tax Sums that may be due and payable.
SECTION 10.6. Additional Covenants.
(a) The Company covenants and agrees with each Holder of Securities that if an Event of Default shall have occurred and be continuing or the Company shall have given notice of its election to begin an Extension Period with respect to the Securities or such Extension Period, or any extension thereof, shall be continuing, it shall not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire or make a liquidation payment with respect to, any shares of the Company’s capital stock, or (ii) make any payment of principal of or any interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company that rank pari passu in all respects with or junior in interest to the Securities (other than (A) repurchases, redemptions or other acquisitions of shares of capital stock of the Company in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of any one or more employees, officers, directors or consultants, in connection with a dividend reinvestment or stockholder stock purchase plan or in connection with the issuance of capital stock of the Company (or securities convertible into or exercisable for such capital stock) as consideration in an acquisition transaction entered into prior to the applicable Extension Period, (B) as a result of an exchange or conversion of any class or series of the Company’s capital stock (or any capital stock of a Subsidiary of the Company) for any class or series of the Company’s capital stock or of any class or series of the Company’s indebtedness for any class or series of the Company’s capital stock, (C) the purchase of fractional interests in shares of the Company’s capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (D) any declaration of a dividend in connection with any Rights Plan, the issuance of rights, stock or other property under any Rights Plan or the redemption or repurchase of rights pursuant thereto or (E) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon
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exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock).
(b) The Company also covenants with each Holder of Securities (i) to hold, directly or indirectly, one hundred percent (100%) of the Common Securities of the Trust, provided, that any permitted successor of the Company hereunder may succeed to the Company’s ownership of such Common Securities, (ii) as holder of such Common Securities, not to voluntarily dissolve, wind-up or liquidate the Trust other than (A) in connection with a distribution of the Securities to the holders of the Preferred Securities in liquidation of the Trust or (B) in connection with certain mergers, consolidations or amalgamations permitted by the Trust Agreement and (iii) to use its reasonable commercial efforts, consistent with the terms and provisions of the Trust Agreement, to cause the Trust to continue to be taxable as a grantor trust and not as a corporation for United States Federal income tax purposes.
SECTION 10.7. Waiver of Covenants.
The Company may omit in any particular instance to comply with any covenant or condition contained in Section 10.6 if, before or after the time for such compliance, the Holders of at least a majority in aggregate principal amount of the Outstanding Securities shall, by Act of such Holders, and at least a majority of the aggregate Liquidation Amount of the Preferred Securities then outstanding, by consent of such holders, either waive such compliance in such instance or generally waive compliance with such covenant or condition, but no such waiver shall extend to or affect such covenant or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company in respect of any such covenant or condition shall remain in full force and effect.
SECTION 10.8. Treatment of Securities.
The Company will treat the Securities as indebtedness, and the amounts, other than payments of principal, payable in respect of the principal amount of such Securities as interest, for all U.S. federal income tax purposes. All payments in respect of the Securities will be made free and clear of U.S. withholding tax to any beneficial owner thereof that has provided an Internal Revenue Service Form W-9 or W-8BEN (or any substitute or successor form) establishing its U.S. or non-U.S. status for U.S. federal income tax purposes, or any other applicable form establishing a complete exemption from U.S. withholding tax.
ARTICLE XI
Redemption of Securities
SECTION 11.1. Optional Redemption.
The Company may, at its option, on any Interest Payment Date, on or after December 15, 2010, redeem the Securities in whole at any time or in part from time to time, at a Redemption Price equal to one hundred percent (100%) of the principal amount thereof (or of the redeemed portion thereof, as applicable), together, in the case of any such redemption, with accrued interest, including any Additional Interest, through but excluding the date fixed as the Redemption Date (the “Optional Redemption Price”); provided, that the Company shall have
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received the prior approval of any Applicable Insurance Regulatory Authorities with respect to such redemption if then required.
SECTION 11.2. Special Event Redemption.
Prior to December 15, 2010, upon the occurrence and during the continuation of a Special Event, the Company may, at its option, redeem the Securities, in whole but not in part, at a Redemption Price equal to one hundred seven and one half percent (107.5%) of the principal amount thereof, together, in the case of any such redemption, with accrued interest, including any Additional Interest, through but excluding the date fixed as the Redemption Date (the “Special Redemption Price”), provided, that the Company shall have received the prior approval of any Applicable Insurance Regulatory Authority with respect to such redemption if then required.
SECTION 11.3. Election to Redeem; Notice to Trustee.
The election of the Company to redeem any Securities, in whole or in part, shall be evidenced by or pursuant to a Board Resolution. In case of any redemption at the election of the Company, the Company shall, not less than forty-five (45) days and not more than seventy-five (75) days prior to the Redemption Date (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee and the Property Trustee under the Trust Agreement in writing of such date and of the principal amount of the Securities to be redeemed and provide the additional information required to be included in the notice or notices contemplated by Section 11.5. In the case of any redemption of Securities, in whole or in part, (a) prior to the expiration of any restriction on such redemption provided in this Indenture or the Securities or (b) pursuant to an election of the Company which is subject to a condition specified in this Indenture or the Securities, the Company shall furnish the Trustee with an Officers’ Certificate and an Opinion of Counsel evidencing compliance with such restriction or condition.
SECTION 11.4. Selection of Securities to be Redeemed.
(a) If less than all the Securities are to be redeemed, the particular Securities to be redeemed shall be selected and redeemed on a pro rata basis not more than sixty (60) days prior to the Redemption Date by the Trustee from the Outstanding Securities not previously called for redemption, provided, that the unredeemed portion of the principal amount of any Security shall be in an authorized denomination (which shall not be less than the minimum authorized denomination) for such Security.
(b) The Trustee shall promptly notify the Company in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Security redeemed or to be redeemed only in part, to the portion of the principal amount of such Security that has been or is to be redeemed.
(c) The provisions of paragraphs (a) and (b) of this Section 11.4 shall not apply with respect to any redemption affecting only a single Security, whether such Security is to be redeemed in whole or in part. In the case of any such redemption in part, the unredeemed portion
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of the principal amount of the Security shall be in an authorized denomination (which shall not be less than the minimum authorized denomination) for such Security.
SECTION 11.5. Notice of Redemption.
(a) Notice of redemption shall be given not later than the thirtieth (30th) day, and not earlier than the sixtieth (60th) day, prior to the Redemption Date to each Holder of Securities to be redeemed, in whole or in part, (unless a shorter notice shall be satisfactory to the Property Trustee under the related Trust Agreement).
(b) With respect to Securities to be redeemed, in whole or in part, each notice of redemption shall state:
(i) the Redemption Date;
(ii) the Redemption Price or, if the Redemption Price cannot be calculated prior to the time the notice is required to be sent, the estimate of the Redemption Price, as calculated by the Company, together with a statement that it is an estimate and that the actual Redemption Price will be calculated on the fifth Business Day prior to the Redemption Date (and if an estimate is provided, a further notice shall be sent of the actual Redemption Price on the date that such Redemption Price is calculated);
(iii) if less than all Outstanding Securities are to be redeemed, the identification (and, in the case of partial redemption, the respective principal amounts) of the particular Securities to be redeemed;
(iv) that on the Redemption Date, the Redemption Price will become due and payable upon each such Security or portion thereof, and that any interest (including any Additional Interest) on such Security or such portion, as the case may be, shall cease to accrue on and after said date; and
(v) the place or places where such Securities are to be surrendered for payment of the Redemption Price.
(c) Notice of redemption of Securities to be redeemed, in whole or in part, at the election of the Company shall be given by the Company or, at the Company’s request, by the Trustee in the name and at the expense of the Company and shall be irrevocable. The notice if mailed in the manner provided above shall be conclusively presumed to have been duly given, whether or not the Holder receives such notice. In any case, a failure to give such notice by mail or any defect in the notice to the Holder of any Security designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Security.
SECTION 11.6. Deposit of Redemption Price.
Prior to 10:00 a.m., New York City time, on the Redemption Date specified in the notice of redemption given as provided in Section 11.5, the Company will deposit with the Trustee or with one or more Paying Agents (or if the Company is acting as its own Paying Agent, the Company will segregate and hold in trust as provided in Section 10.2) an amount of money
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sufficient to pay the Redemption Price of, and any accrued interest (including any Additional Interest) on, all the Securities (or portions thereof) that are to be redeemed on that date.
SECTION 11.7. Payment of Securities Called for Redemption.
(a) If any notice of redemption has been given as provided in Section 11.5, the Securities or portion of Securities with respect to which such notice has been given shall become due and payable on the date and at the place or places stated in such notice at the applicable Redemption Price, together with accrued interest (including any Additional Interest) to the Redemption Date. On presentation and surrender of such Securities at a Place of Payment specified in such notice, the Securities or the specified portions thereof shall be paid and redeemed by the Company at the applicable Redemption Price, together with accrued interest (including any Additional Interest) to the Redemption Date.
(b) Upon presentation of any Security redeemed in part only, the Company shall execute and the Trustee shall authenticate and deliver to the Holder thereof, at the expense of the Company, a new Security or Securities, of authorized denominations, in aggregate principal amount equal to the unredeemed portion of the Security so presented and having the same Original Issue Date, Stated Maturity and terms.
(c) If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal of and any premium on such Security shall, until paid, bear interest from the Redemption Date at the rate prescribed therefor in the Security.
ARTICLE XII
Subordination of Securities
SECTION 12.1. Securities Subordinate to Senior Debt.
The Company covenants and agrees, and each Holder of a Security, by its acceptance thereof, likewise covenants and agrees, that, to the extent and in the manner hereinafter set forth in this Article XII, the payment of the principal of and any premium and interest (including any Additional Interest) on each and all of the Securities are hereby expressly made subordinate and subject in right of payment to the prior payment in full of all Senior Debt.
SECTION 12.2. No Payment When Senior Debt in Default; Payment Over of Proceeds Upon Dissolution, Etc.
(a) In the event and during the continuation of any default by the Company in the payment of any principal of or any premium or interest on any Senior Debt (following any grace period, if applicable) when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration of acceleration or otherwise, then, upon written notice of such default to the Company by the holders of such Senior Debt or any trustee therefor, unless and until such default shall have been cured or waived or shall have ceased to exist, no direct or indirect payment (in cash, property, securities, by set-off or otherwise) shall be made or agreed to be made on account of the principal of or any premium or interest (including any Additional Interest) on any of the Securities, or in respect of any redemption, repayment, retirement, purchase or other acquisition of any of the Securities.
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(b) In the event of a bankruptcy, insolvency or other proceeding described in clause (d) or (e) of the definition of Event of Default (each such event, if any, herein sometimes referred to as a “Proceeding”), all Senior Debt (including any interest thereon accruing after the commencement of any such proceedings) shall first be paid in full before any payment or distribution, whether in cash, securities or other property, shall be made to any Holder of any of the Securities on account thereof. Any payment or distribution, whether in cash, securities or other property (other than securities of the Company or any other entity provided for by a plan of reorganization or readjustment the payment of which is subordinate, at least to the extent provided in these subordination provisions with respect to the indebtedness evidenced by the Securities, to the payment of all Senior Debt at the time outstanding and to any securities issued in respect thereof under any such plan of reorganization or readjustment), which would otherwise (but for these subordination provisions) be payable or deliverable in respect of the Securities shall be paid or delivered directly to the holders of Senior Debt in accordance with the priorities then existing among such holders until all Senior Debt (including any interest thereon accruing after the commencement of any Proceeding) shall have been paid in full.
(c) In the event of any Proceeding, after payment in full of all sums owing with respect to Senior Debt, the Holders of the Securities, together with the holders of any obligations of the Company ranking on a parity with the Securities, shall be entitled to be paid from the remaining assets of the Company the amounts at the time due and owing on account of unpaid principal of and any premium and interest (including any Additional Interest) on the Securities and such other obligations before any payment or other distribution, whether in cash, property or otherwise, shall be made on account of any capital stock or any obligations of the Company ranking junior to the Securities and such other obligations. If, notwithstanding the foregoing, any payment or distribution of any character or any security, whether in cash, securities or other property (other than securities of the Company or any other entity provided for by a plan of reorganization or readjustment the payment of which is subordinate, at least to the extent provided in these subordination provisions with respect to the indebtedness evidenced by the Securities, to the payment of all Senior Debt at the time outstanding and to any securities issued in respect thereof under any such plan of reorganization or readjustment) shall be received by the Trustee or any Holder in contravention of any of the terms hereof and before all Senior Debt shall have been paid in full, such payment or distribution or security shall be received in trust for the benefit of, and shall be paid over or delivered and transferred to, the holders of the Senior Debt at the time outstanding in accordance with the priorities then existing among such holders for application to the payment of all Senior Debt remaining unpaid, to the extent necessary to pay all such Senior Debt (including any interest thereon accruing after the commencement of any Proceeding) in full. In the event of the failure of the Trustee or any Holder to endorse or assign any such payment, distribution or security, each holder of Senior Debt is hereby irrevocably authorized to endorse or assign the same.
(d) The Trustee and the Holders, at the expense of the Company, shall take such reasonable action (including the delivery of this Indenture to an agent for any holders of Senior Debt or consent to the filing of a financing statement with respect hereto) as may, in the opinion of counsel designated by the holders of a majority in principal amount of the Senior Debt at the time outstanding, be necessary or appropriate to assure the effectiveness of the subordination effected by these provisions.
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(e) The provisions of this Section 12.2 shall not impair any rights, interests, remedies or powers of any secured creditor of the Company in respect of any security interest the creation of which is not prohibited by the provisions of this Indenture.
(f) The securing of any obligations of the Company, otherwise ranking on a parity with the Securities or ranking junior to the Securities, shall not be deemed to prevent such obligations from constituting, respectively, obligations ranking on a parity with the Securities or ranking junior to the Securities.
SECTION 12.3. Payment Permitted If No Default.
Nothing contained in this Article XII or elsewhere in this Indenture or in any of the Securities shall prevent (a) the Company, at any time, except during the pendency of the conditions described in paragraph (a) of Section 12.2 or of any Proceeding referred to in Section 12.2, from making payments at any time of principal of and any premium or interest (including any Additional Interest) on the Securities or (b) the application by the Trustee of any moneys deposited with it hereunder to the payment of or on account of the principal of and any premium or interest (including any Additional Interest) on the Securities or the retention of such payment by the Holders, if, at the time of such application by the Trustee, it did not have knowledge (in accordance with Section 12.8) that such payment would have been prohibited by the provisions of this Article XII, except as provided in Section 12.8.
SECTION 12.4. Subrogation to Rights of Holders of Senior Debt.
Subject to the payment in full of all amounts due or to become due on all Senior Debt, or the provision for such payment in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Senior Debt, the Holders of the Securities shall be subrogated to the extent of the payments or distributions made to the holders of such Senior Debt pursuant to the provisions of this Article XII (equally and ratably with the holders of all indebtedness of the Company that by its express terms is subordinated to Senior Debt of the Company to substantially the same extent as the Securities are subordinated to the Senior Debt and is entitled to like rights of subrogation by reason of any payments or distributions made to holders of such Senior Debt) to the rights of the holders of such Senior Debt to receive payments and distributions of cash, property and securities applicable to the Senior Debt until the principal of and any premium and interest (including any Additional Interest) on the Securities shall be paid in full. For purposes of such subrogation, no payments or distributions to the holders of the Senior Debt of any cash, property or securities to which the Holders of the Securities or the Trustee would be entitled except for the provisions of this Article XII, and no payments made pursuant to the provisions of this Article XII to the holders of Senior Debt by Holders of the Securities or the Trustee, shall, as among the Company, its creditors other than holders of Senior Debt, and the Holders of the Securities, be deemed to be a payment or distribution by the Company to or on account of the Senior Debt.
SECTION 12.5. Provisions Solely to Define Relative Rights.
The provisions of this Article XII are and are intended solely for the purpose of defining the relative rights of the Holders of the Securities on the one hand and the holders of Senior Debt on the other hand. Nothing contained in this Article XII or elsewhere in this Indenture or in the
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Securities is intended to or shall (a) impair, as between the Company and the Holders of the Securities, the obligations of the Company, which are absolute and unconditional, to pay to the Holders of the Securities the principal of and any premium and interest (including any Additional Interest) on the Securities as and when the same shall become due and payable in accordance with their terms, (b) affect the relative rights against the Company of the Holders of the Securities and creditors of the Company other than their rights in relation to the holders of Senior Debt or (c) prevent the Trustee or the Holder of any Security (or to the extent expressly provided herein, the holder of any Preferred Security) from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, including filing and voting claims in any Proceeding, subject to the rights, if any, under this Article XII of the holders of Senior Debt to receive cash, property and securities otherwise payable or deliverable to the Trustee or such Holder.
SECTION 12.6. Trustee to Effectuate Subordination.
Each Holder of a Security by his or her acceptance thereof authorizes and directs the Trustee on his or her behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination provided in this Article XII and appoints the Trustee his or her attorney-in-fact for any and all such purposes.
SECTION 12.7. No Waiver of Subordination Provisions.
(a) No right of any present or future holder of any Senior Debt to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof that any such holder may have or be otherwise charged with.
(b) Without in any way limiting the generality of paragraph (a) of this Section 12.7, the holders of Senior Debt may, at any time and from to time, without the consent of or notice to the Trustee or the Holders of the Securities, without incurring responsibility to such Holders of the Securities and without impairing or releasing the subordination provided in this Article XII or the obligations hereunder of such Holders of the Securities to the holders of Senior Debt, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Senior Debt, or otherwise amend or supplement in any manner Senior Debt or any instrument evidencing the same or any agreement under which Senior Debt is outstanding, (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Debt, (iii) release any Person liable in any manner for the payment of Senior Debt and (iv) exercise or refrain from exercising any rights against the Company and any other Person.
SECTION 12.8. Notice to Trustee.
(a) The Company shall give prompt written notice to a Responsible Officer of the Trustee of any fact known to the Company that would prohibit the making of any payment to or by the Trustee in respect of the Securities. Notwithstanding the provisions of this Article XII or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the
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existence of any facts that would prohibit the making of any payment to or by the Trustee in respect of the Securities, unless and until a Responsible Officer of the Trustee shall have received written notice thereof from the Company or a holder of Senior Debt or from any trustee, agent or representative therefor; provided, that if the Trustee shall not have received the notice provided for in this Section 12.8 at least two Business Days prior to the date upon which by the terms hereof any monies may become payable for any purpose (including, the payment of the principal of and any premium on or interest (including any Additional Interest) on any Security), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such monies and to apply the same to the purpose for which they were received and shall not be affected by any notice to the contrary that may be received by it within two Business Days prior to such date.
(b) The Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing himself or herself to be a holder of Senior Debt (or a trustee, agent, representative or attorney-in-fact therefor) to establish that such notice has been given by a holder of Senior Debt (or a trustee, agent, representative or attorney-in-fact therefor). In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Debt to participate in any payment or distribution pursuant to this Article XII, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Debt held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article XII, and if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment.
SECTION 12.9. Reliance on Judicial Order or Certificate of Liquidating Agent.
Upon any payment or distribution of assets of the Company referred to in this Article XII, the Trustee and the Holders of the Securities shall be entitled to conclusively rely upon any order or decree entered by any court of competent jurisdiction in which such Proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other Person making such payment or distribution, delivered to the Trustee or to the Holders of Securities, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of the Senior Debt and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XII.
SECTION 12.10. Trustee Not Fiduciary for Holders of Senior Debt.
The Trustee, in its capacity as trustee under this Indenture, shall not be deemed to owe any fiduciary duty to the holders of Senior Debt and shall not be liable to any such holders if it shall in good faith mistakenly pay over or distribute to Holders of Securities or to the Company or to any other Person cash, property or securities to which any holders of Senior Debt shall be entitled by virtue of this Article XII or otherwise.
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SECTION 12.11. Rights of Trustee as Holder of Senior Debt; Preservation of Trustee’s Rights.
The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article XII with respect to any Senior Debt that may at any time be held by it, to the same extent as any other holder of Senior Debt, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder.
SECTION 12.12. Article Applicable to Paying Agents.
If at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term “Trustee” as used in this Article XII shall in such case (unless the context otherwise requires) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article XII in addition to or in place of the Trustee; provided, that Sections 12.8 and 12.11 shall not apply to the Company or any Affiliate of the Company if the Company or such Affiliate acts as Paying Agent.
* * * *
This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.
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N WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the day and year first above written.
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American Equity Investment Life Holding Company |
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By: |
/s/ Debra J. Richardson |
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Name: Debra Richardson |
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Title: Secretary and Senior Vice President |
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JPMorgan Chase Bank, National Association, as Trustee |
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By: |
/s/ Shelly A. Sterling |
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Name: Shelly A. Sterling |
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Title: Vice President |
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DETERMINATION OF LIBOR
With respect to the Securities, the London interbank offered rate (“LIBOR”) shall be determined by the Calculation Agent in accordance with the following provisions (in each case rounded to the nearest ..000001%):
(1) On the second LIBOR Business Day (as defined below) prior to an Interest Payment Date (except with respect to the first interest payment period, such date shall be December 13, 2005 (each such day, a “LIBOR Determination Date”), LIBOR for any given security shall for the following interest payment period equal the rate, as obtained by the Calculation Agent from Bloomberg Financial Markets Commodities News, for three-month Eurodollar deposits that appears on Dow Jones Telerate Page 3750 (as defined in the International Swaps and Derivatives Association, Inc. 1991 Interest Rate and Currency Exchange Definitions), or such other page as may replace such Page 3750, as of 11:00 a.m. (London time) on such LIBOR Determination Date.
(2) If, on any LIBOR Determination Date, such rate does not appear on Dow Jones Telerate Page 3750 or such other page as may replace such Page 3750, the Calculation Agent shall determine the arithmetic mean of the offered quotations of the Reference Banks (as defined below) to leading banks in the London interbank market for three-month Eurodollar deposits in an amount determined by the Calculation Agent by reference to requests for quotations as of approximately 11:00 a.m. (London time) on the LIBOR Determination Date made by the Calculation Agent to the Reference Banks. If, on any LIBOR Determination Date, at least two of the Reference Banks provide such quotations, LIBOR shall equal such arithmetic mean of such quotations. If, on any LIBOR Determination Date, only one or none of the Reference Banks provide such quotations, LIBOR shall be deemed to be the arithmetic mean of the offered quotations that leading banks in the City of New York selected by the Calculation Agent are quoting on the relevant LIBOR Determination Date for three-month Eurodollar deposits in an amount determined by the Calculation Agent by reference to the principal London offices of leading banks in the London interbank market; provided that, if the Calculation Agent is required but is unable to determine a rate in accordance with at least one of the procedures provided above, LIBOR shall be LIBOR as determined on the previous LIBOR Determination Date.
(3) As used herein: “Reference Banks” means four major banks in the London interbank market selected by the Calculation Agent; and “LIBOR Business Day” means a day on which commercial banks are open for business (including dealings in foreign exchange and foreign currency deposits) in London.
Exhibit 4.28
Execution Copy
GUARANTEE AGREEMENT
between
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY,
as
Guarantor,
and
JPMORGAN CHASE BANK, NATIONAL
ASSOCIATION,
as Guarantee Trustee
Dated
as of December 15, 2005
AMERICAN EQUITY CAPITAL TRUST XI
TABLE OF CONTENTS
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ARTICLE I |
Interpretation and Definitions |
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2 |
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Section 1.1. |
Interpretation |
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2 |
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Section 1.2. |
Definitions |
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2 |
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ARTICLE II |
Reports |
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6 |
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Section 2.1. |
List of Holders |
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6 |
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Section 2.2. |
Periodic Reports to the Guarantee Trustee |
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6 |
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Section 2.3. |
Event of Default; Waiver |
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6 |
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Section 2.4. |
Event of Default; Notice |
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6 |
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ARTICLE III |
Powers, Duties and Rights of the Guarantee Trustee |
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7 |
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Section 3.1. |
Powers and Duties of the Guarantee Trustee |
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Section 3.2. |
Certain Rights of the Guarantee Trustee |
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8 |
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Section 3.3. |
Compensation |
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Section 3.4. |
Indemnity |
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10 |
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Section 3.5. |
Securities |
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10 |
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ARTICLE IV |
Guarantee Trustee |
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10 |
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Section 4.1. |
Guarantee Trustee; Eligibility |
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10 |
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Section 4.2. |
Appointment, Removal and Resignation of the Guarantee Trustee |
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ARTICLE V |
Guarantee |
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Section 5.1. |
Guarantee |
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Section 5.2. |
Waiver of Notice and Demand |
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12 |
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Section 5.3. |
Obligations Not Affected |
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12 |
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Section 5.4. |
Rights of Holders |
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13 |
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Section 5.5. |
Guarantee of Payment |
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13 |
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Section 5.6. |
Subrogation |
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13 |
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Section 5.7. |
Independent Obligations |
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13 |
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Section 5.8. |
Enforcement |
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14 |
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ARTICLE VI |
Covenants and Subordination |
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14 |
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Section 6.1. |
Dividends, Distributions and Payments |
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14 |
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Section 6.2. |
Subordination |
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14 |
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Section 6.3. |
Pari Passu Guarantees |
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15 |
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ARTICLE VII |
Termination |
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15 |
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Section 7.1. |
Termination |
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ARTICLE VIII |
Miscellaneous |
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15 |
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Section 8.1. |
Successors and Assigns |
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15 |
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Section 8.2. |
Amendments |
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16 |
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Section 8.3. |
Notices |
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Section 8.4. |
Benefit |
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17 |
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Section 8.5. |
Governing Law |
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17 |
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Section 8.6. |
Submission to Jurisdiction |
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Section 8.7. |
Counterparts |
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Section 8.8. |
Severability |
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ii
Guarantee Agreement, dated as of December 15, 2005, executed and delivered by American Equity Investment Life Holding Company, an Iowa corporation (the “Guarantor”), having its principal office at 5000 Westown Parkway, Suite 440, West Des Moines, IA 50266, and JPMorgan Chase Bank, National Association, a national banking association, as trustee (in such capacity, the “Guarantee Trustee”), for the benefit of the Holders (as defined herein) from time to time of the Preferred Securities (as defined herein) of American Equity Capital Trust XI, a Delaware statutory trust (the “Issuer”).
W i t n e s s e t h :
Whereas, pursuant to an Amended and Restated Trust Agreement, dated as of the date hereof (the “Trust Agreement”), among the Guarantor, as Depositor, the Property Trustee, the Delaware Trustee and the Administrative Trustees named therein and the holders from time to time of the Preferred Securities (as hereinafter defined), the Issuer is issuing Twenty Million Dollars ($20,000,000) aggregate Liquidation Amount (as defined in the Trust Agreement) of its Floating Rate Preferred Securities (Liquidation Amount $1,000 per preferred security) (the “Preferred Securities”) representing preferred undivided beneficial interests in the assets of the Issuer and having the terms set forth in the Trust Agreement;
Whereas, the Preferred Securities will be issued by the Issuer and the proceeds thereof, together with the proceeds from the issuance of the Issuer’s Common Securities (as defined below), will be used to purchase the Notes (as defined in the Trust Agreement) of the Guarantor; and
Whereas, as incentive for the Holders to purchase Preferred Securities the Guarantor desires irrevocably and unconditionally to agree, to the extent set forth herein, to pay to the Holders of the Preferred Securities the Guarantee Payments (as defined herein) and to make certain other payments on the terms and conditions set forth herein.
Now, Therefore, in consideration of the purchase by each Holder of Preferred Securities, which purchase the Guarantor hereby agrees shall benefit the Guarantor, the Guarantor executes and delivers this Guarantee Agreement to provide as follows for the benefit of the Holders from time to time of the Preferred Securities:
ARTICLE I
Interpretation and Definitions
SECTION 1.1. Interpretation.
In this Guarantee Agreement, unless the context otherwise requires:
(a) capitalized terms used in this Guarantee Agreement but not defined in the preamble hereto have the respective meanings assigned to them in Section 1.2;
(b) the words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”;
(c) all references to “the Guarantee Agreement” or “this Guarantee Agreement” are to this Guarantee Agreement as modified, supplemented or amended from time to time;
(d) all references in this Guarantee Agreement to Articles and Sections are to Articles and Sections of this Guarantee Agreement unless otherwise specified;
(e) the words “hereby”, “herein”, “hereof” and “hereunder” and other words of similar import refer to this Guarantee Agreement as a whole and not to any particular Article, Section or other subdivision;
(f) a reference to the singular includes the plural and vice versa; and
(g) the masculine, feminine or neuter genders used herein shall include the masculine, feminine and neuter genders.
SECTION 1.2. Definitions.
As used in this Guarantee Agreement, the terms set forth below shall, unless the context otherwise requires, have the following meanings:
“Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person; provided, that the Issuer shall not be deemed to be an Affiliate of the Guarantor. For the purposes of this definition, “control” when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.
“Beneficiaries” means any Person to whom the Issuer is or hereafter becomes indebted or liable.
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“Board of Directors” means either the board of directors of the Guarantor or any duly authorized committee of that board.
“Common Securities” means the securities representing common undivided beneficial interests in the assets of the Issuer.
“Debt” means with respect to any Person, whether recourse is to all or a portion of the assets of such Person, whether currently existing or hereafter incurred, and whether or not contingent and without duplication, (i) every obligation of such Person for money borrowed; (ii) every obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, including obligations incurred in connection with the acquisition of property, assets or businesses; (iii) every reimbursement obligation of such Person with respect to letters of credit, bankers’ acceptances or similar facilities issued for the account of such Person; (iv) every obligation of such Person issued or assumed as the deferred purchase price of property or services (but excluding trade accounts payable arising in the ordinary course of business); (v) every capital lease obligation of such Person; (vi) all indebtedness of such Person, whether incurred on or prior to the date of this Guarantee Agreement or thereafter incurred, for claims in respect of derivative products, including interest rate, foreign exchange rate and commodity forward contracts, options, swaps and similar arrangements; (vii) every obligation of the type referred to in clauses (i) through (vi) of another Person and all dividends of another Person the payment of which, in either case, such Person has guaranteed or is responsible or liable for, directly or indirectly, as obligor or otherwise; and (viii) any renewals, extensions, refundings, amendments or modifications of any obligation of the type referred to in clauses (i) through (vii).
“Event of Default” means a default by the Guarantor on any of its payment or other obligations under this Guarantee Agreement; provided, that except with respect to a default in payment of any Guarantee Payments, the Guarantor shall have received notice of default from the Guarantee Trustee and shall not have cured such default within thirty (30) days after receipt of such notice.
“Guarantee Payments” means the following payments or distributions, without duplication, with respect to the Preferred Securities, to the extent not paid or made by or on behalf of the Issuer: (i) any accumulated and unpaid Distributions (as defined in the Trust Agreement) required to be paid on the Preferred Securities, to the extent the Issuer shall have funds on hand available therefor at such time, (ii) the Redemption Price with respect to any Preferred Securities to the extent the Issuer shall have funds on hand available therefor at such time, and (iii) upon a voluntary or involuntary termination, winding up or liquidation of the Issuer, unless Notes are distributed to the Holders, the lesser of (a) the aggregate of the Liquidation Amount of $1,000 per Preferred Security plus accumulated and unpaid Distributions on the Preferred Securities to the date of payment, to the extent that the Issuer shall have funds available therefor at such time and (b) the amount of assets of the Issuer remaining available for distribution to Holders in liquidation of the Issuer after satisfaction of liabilities to creditors of the Issuer in accordance with applicable law (in either case, the “Liquidation Distribution”).
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“Guarantee Trustee” means JPMorgan Chase Bank, National Association, until a Successor Guarantee Trustee, as defined below, has been appointed and has accepted such appointment pursuant to the terms of this Guarantee Agreement, and thereafter means each such Successor Guarantee Trustee.
“Guarantor” means American Equity Investment Life Insurance Company and each of its successors and assigns.
“Issuer” has the meaning set forth herein above.
“Holder” means any holder, as registered on the books and records of the Issuer, of any Preferred Securities; provided, that, in determining whether the holders of the requisite percentage of Preferred Securities have given any request, notice, consent or waiver hereunder, “Holder” shall not include the Guarantor, the Guarantee Trustee or any Affiliate of the Guarantor or the Guarantee Trustee.
“Indenture” means the Junior Subordinated Indenture, dated as of the date hereof, as supplemented and amended, between the Guarantor and JPMorgan Chase Bank, National Association, as trustee.
“List of Holders” has the meaning specified in Section 2.1.
“Majority in Liquidation Amount of the Preferred Securities” means a vote by the Holder(s), voting separately as a class, of more than fifty percent (50%) of the aggregate Liquidation Amount of all then outstanding Preferred Securities issued by the Issuer.
“Obligations” means any costs, expenses or liabilities (but not including liabilities related to taxes) of the Issuer, other than obligations of the Issuer to pay to holders of any Trust Securities the amounts due such holders pursuant to the terms of the Trust Securities.
“Officers’ Certificate” means, with respect to any Person, a certificate signed by the Chief Executive Officer, Chief Financial Officer, President or a Vice President of such Person, and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of such Person, and delivered to the Guarantee Trustee. Any Officers’ Certificate delivered with respect to compliance with a condition or covenant provided for in this Guarantee Agreement (other than the certificate provided pursuant to Section 2.2) shall include:
(a) a statement that each officer signing the Officers’ Certificate has read the covenant or condition and the definitions relating thereto;
(b) a brief statement of the nature and scope of the examination or investigation undertaken by each officer in rendering the Officers’ Certificate;
(c) a statement that each officer has made such examination or investigation as, in such officer’s opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and
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(d) a statement as to whether, in the opinion of each officer, such condition or covenant has been complied with.
“Person” means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, government or any agency or political subdivision thereof or any other entity of whatever nature.
“Preferred Securities” has the meaning set forth in the first recital hereof.
“Responsible Officer” means, with respect to the Guarantee Trustee, the officer in the Worldwide Securities Services department of the Trustee having direct responsibility for the administration of this Guarantee Agreement.
“Senior Debt” means the principal of and any premium, if any, and interest on (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Guarantor whether or not such claim for post-petition interest is allowed in such proceeding) all Debt of the Guarantor, whether incurred on or prior to the date of the Indenture or thereafter incurred, unless it is provided in the instrument creating or evidencing the same or pursuant to which the same is outstanding, that such obligations are not superior in right of payment to the Preferred Securities; provided, that if the Guarantor is subject to the regulation and supervision of an insurance regulatory authority, the Guarantor shall have received the approval of such appropriate insurance regulatory authority prior to issuing any such obligation; and provided, further, that Senior Debt shall not include any other debt securities and guarantees in respect of such debt securities issued to any trust other than the Trust (or a trustee of any such trust), partnership or other entity affiliated with the Guarantor that is a financing vehicle of the Guarantor (a “financing entity”) in connection with the issuance by such financing entity of equity securities or other securities that are treated as equity capital for regulatory capital purposes guaranteed by the Guarantor pursuant to an instrument that ranks pari passu with or junior in right of payment to the Indenture, including, without limitation, securities issued by American Equity Capital Trust I, American Equity Capital Trust II, American Equity Capital Trust III, American Equity Capital Trust IV, American Equity Capital Trust V, American Equity Capital Trust VI, American Equity Capital Trust VII, American Equity Capital Trust VIII, American Equity Capital Trust IX and American Equity Capital Trust X.
“Trust Indenture Act” means the Trust Indenture Act of 1939, as amended and as in effect on the date of this Guarantee Agreement.
“Successor Guarantee Trustee” means a successor Guarantee Trustee possessing the qualifications to act as Guarantee Trustee under Section 4.1.
Capitalized or otherwise defined terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Trust Agreement as in effect on the date hereof.
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ARTICLE II
Reports
SECTION 2.1. List of Holders.
The Guarantor shall furnish or cause to be furnished to the Guarantee Trustee at such times as the Guarantee Trustee may request in writing, within thirty (30) days after the receipt by the Guarantor of any such request, a list, in such form as the Guarantee Trustee may reasonably require, of the names and addresses of the Holders (the “List of Holders”) as of a date not more than fifteen (15) days prior to the time such list is furnished, in each case to the extent such information is in the possession or control of the Guarantor and is not identical to a previously supplied list of Holders or has not otherwise been received by the Guarantee Trustee in its capacity as such. The Guarantee Trustee may destroy any List of Holders previously given to it on receipt of a new List of Holders.
SECTION 2.2. Periodic Reports to the Guarantee Trustee.
The Guarantor shall deliver to the Guarantee Trustee, within one hundred and twenty (120) days after the end of each fiscal year of the Guarantor ending after the date of this Guarantee Agreement, an Officers’ Certificate covering the preceding fiscal year, stating whether or not to the knowledge of the signers thereof the Guarantor is in default in the performance or observance of any of the terms or provisions or any of the conditions of this Guarantee Agreement (without regard to any period of grace or requirement of notice provided hereunder) and, if the Guarantor shall be in default thereof, specifying all such defaults and the nature and status thereof of which they have knowledge. The delivery requirements of this Section 2.2 may be satisfied by compliance with Section 8.16(a) of the Trust Agreement.
SECTION 2.3. Event of Default; Waiver.
The Holders of a Majority in Liquidation Amount of the Preferred Securities may, on behalf of the Holders, waive any past Event of Default and its consequences. Upon such waiver, any such Event of Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Guarantee Agreement, but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent therefrom.
SECTION 2.4. Event of Default; Notice.
(a) The Guarantee Trustee shall, within ninety (90) days after the occurrence of a default, transmit to the Holders notices of all defaults actually known to the Guarantee Trustee, unless such defaults have been cured or waived before the giving of such notice. For the purpose of this Section 2.4, the term “default” means any event that is, or after notice or lapse of time or both would become, an Event of Default.
(b) The Guarantee Trustee shall not be deemed to have knowledge of any Event of Default unless the Guarantee Trustee shall have received written notice, or a Responsible Officer
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charged with the administration of this Guarantee Agreement shall have obtained written notice, of such Event of Default from the Guarantor or a Holder.
ARTICLE III
Powers, Duties and Rights of the Guarantee Trustee
SECTION 3.1. Powers and Duties of the Guarantee Trustee.
(a) This Guarantee Agreement shall be held by the Guarantee Trustee for the benefit of the Holders, and the Guarantee Trustee shall not transfer this Guarantee Agreement to any Person except a Holder exercising its rights pursuant to Section 5.4(d) or to a Successor Guarantee Trustee upon acceptance by such Successor Guarantee Trustee of its appointment to act as Successor Guarantee Trustee. The right, title and interest of the Guarantee Trustee shall automatically vest in any Successor Guarantee Trustee, upon acceptance by such Successor Guarantee Trustee of its appointment hereunder, and such vesting and succession of title shall be effective whether or not conveyancing documents have been executed and delivered pursuant to the appointment of such Successor Guarantee Trustee.
(b) The rights, immunities, duties and responsibilities of the Guarantee Trustee shall be as provided by this Guarantee Agreement and there shall be no other duties or obligations, express or implied, of the Guarantee Trustee. Notwithstanding the foregoing, no provisions of this Guarantee Agreement shall require the Guarantee Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Whether or not herein expressly so provided, every provision of this Guarantee Agreement relating to the conduct or affecting the liability of or affording protection to the Guarantee Trustee shall be subject to the provisions of this Section 3.1. To the extent that, at law or in equity, the Guarantee Trustee has duties and liabilities relating to the Guarantor or the Holders, the Guarantee Trustee shall not be liable to any Holder for the Guarantee Trustee’s good faith reliance on the provisions of this Guarantee Agreement. The provisions of this Guarantee Agreement, to the extent that they restrict the duties and liabilities of the Guarantee Trustee otherwise existing at law or in equity, are agreed by the Guarantor and the Holders to replace such other duties and liabilities of the Guarantee Trustee.
(c) No provision of this Guarantee Agreement shall be construed to relieve the Guarantee Trustee from liability for its own negligent action, negligent failure to act or own willful misconduct, except that:
(i) the Guarantee Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Guarantee Trustee, unless it shall be proved that the Guarantee Trustee was negligent in ascertaining the pertinent facts upon which such judgment was made; and
(ii) the Guarantee Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders
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of not less than a Majority in Liquidation Amount of the Preferred Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee, or exercising any trust or power conferred upon the Guarantee Trustee under this Guarantee Agreement.
SECTION 3.2. Certain Rights of the Guarantee Trustee.
(a) Subject to the provisions of Section 3.1:
(i) the Guarantee Trustee may conclusively rely and shall be fully protected in acting or refraining from acting in good faith and in accordance with the terms hereof upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document reasonably believed by it to be genuine and to have been signed, sent or presented by the proper party or parties;
(ii) any direction or act of the Guarantor contemplated by this Guarantee Agreement shall be sufficiently evidenced by an Officers’ Certificate unless otherwise prescribed herein;
(iii) the Guarantee Trustee may consult with counsel, and the advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted to be taken by it hereunder in good faith and in reliance thereon and in accordance with such advice. Such counsel may be counsel to the Guarantee Trustee, the Guarantor or any of its Affiliates and may be one of its employees. The Guarantee Trustee shall have the right at any time to seek instructions concerning the administration of this Guarantee Agreement from any court of competent jurisdiction;
(iv) the Guarantee Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Guarantee Agreement at the request or direction of any Holder, unless such Holder shall have provided to the Guarantee Trustee reasonable security or indemnity against the costs, expenses (including reasonable attorneys’ fees and expenses) and liabilities that might be incurred by it in complying with such request or direction, including such reasonable advances as may be requested by the Guarantee Trustee; provided, that, nothing contained in this Section 3.2(a)(iv) shall be taken to relieve the Guarantee Trustee, upon the occurrence of an Event of Default, of its obligation to exercise the rights and powers vested in it by this Guarantee Agreement; provided, further, that nothing contained in this Section 3.2(a)(iv) shall prevent the Guarantee Trustee from exercising its rights under Section 4.2 hereof.;
(v) the Guarantee Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Guarantee Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and if the Guarantee Trustee shall determine to make such inquiry or investigation, it
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shall be entitled to examine the books, records and premises of the Guarantor, personally or by agent or attorney;
(vi) the Guarantee Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through its agents, attorneys, custodians or nominees and the Guarantee Trustee shall not be responsible for any misconduct or negligence on the part of any such agent, attorney, custodian or nominee appointed with due care by it hereunder;
(vii) whenever in the administration of this Guarantee Agreement the Guarantee Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right hereunder, the Guarantee Trustee (A) may request instructions from the Holders of a Majority in Liquidation Amount of the Preferred Securities, (B) may refrain from enforcing such remedy or right or taking such other action until such instructions are received and (C) shall be protected in acting in accordance with such instructions;
(viii) except as otherwise expressly provided by this Guarantee Agreement, the Guarantee Trustee shall not be under any obligation to take any action that is discretionary under the provisions of this Guarantee Agreement; and
(ix) whenever, in the administration of this Guarantee Agreement, the Guarantee Trustee shall deem it desirable that a matter be proved or established before taking, suffering or omitting to take any action hereunder, the Guarantee Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and rely upon an Officers’ Certificate which, upon receipt of such request from the Guarantee Trustee, shall be promptly delivered by the Guarantor.
(b) No provision of this Guarantee Agreement shall be deemed to impose any duty or obligation on the Guarantee Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it in any jurisdiction in which it shall be illegal, or in which the Guarantee Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Guarantee Trustee shall be construed to be a duty to act in accordance with such power and authority.
SECTION 3.3. Compensation.
The Guarantor agrees to pay to the Guarantee Trustee from time to time reasonable compensation for all services rendered by it hereunder (which compensation shall not be limited by any provisions of law in regard to the compensation of a trustee of an express trust) and to reimburse the Guarantee Trustee upon request for all reasonable expenses, disbursements and advances (including the reasonable fees and expenses of its attorneys and agents) incurred or made by the Guarantee Trustee in accordance with any provisions of this Guarantee Agreement.
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SECTION 3.4. Indemnity.
The Guarantor agrees to indemnify and hold harmless the Guarantee Trustee and any of its Affiliates and any of their officers, directors, shareholders, employees, representatives or agents from and against any loss, damage, liability, tax (other than income, franchise or other taxes imposed on amounts paid pursuant to Section 3.3), penalty, expense or claim of any kind or nature whatsoever incurred without negligence, bad faith or willful misconduct on its part, arising out of or in connection with the acceptance or administration of this Guarantee Agreement, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The Guarantee Trustee will not claim or exact any lien or charge on any Guarantee Payments as a result of any amount due to it under this Guarantee Agreement. This indemnity shall survive the termination of this Agreement or the resignation or removal of the Guarantee Trustee.
In no event shall the Guarantee Trustee be liable for any indirect, special, punitive or consequential loss or damage of any kind whatsoever, including, but not limited to, lost profits, even if the Guarantee Trustee has been advised of the likelihood of such loss or damage and regardless of the form of action.
In no event shall the Guarantee Trustee be liable for any failure or delay in the performance of its obligations hereunder because of circumstances beyond its control, including, but not limited to, acts of God, flood, war (declared or undeclared), terrorism, fire, riot, embargo, government action, including any laws, ordinances, regulations, governmental action or the like which delay, restrict or prohibit the providing of the services contemplated by this Guarantee Agreement.
SECTION 3.5. Securities.
The Guarantee Trustee or any other agent of the Guarantee Trustee, in its individual or any other capacity, may become the owner or pledgee of Common or Preferred Securities.
ARTICLE IV
Guarantee Trustee
SECTION 4.1. Guarantee Trustee; Eligibility.
(a) There shall at all times be a Guarantee Trustee which shall:
(i) not be an Affiliate of the Guarantor; and
(ii) be a corporation organized and doing business under the laws of the United States or of any State thereof, authorized to exercise corporate trust powers, having a combined capital and surplus of at least fifty million dollars ($50,000,000), subject to supervision or examination by Federal or State authority and having an office within the United States. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of such supervising or examining authority, then, for the purposes of this Section 4.1, the combined capital and surplus of
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such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published.
(b) If at any time the Guarantee Trustee shall cease to be eligible to so act under Section 4.1(a), the Guarantee Trustee shall immediately resign in the manner and with the effect set out in Section 4.2(c).
(c) If the Guarantee Trustee has or shall acquire any “conflicting interest” within the meaning of Section 310(b) of the Trust Indenture Act, the Guarantee Trustee shall either eliminate such interest or resign in the manner and with the effect set out in Section 4.2(c).
SECTION 4.2. Appointment, Removal and Resignation of the Guarantee Trustee.
(a) Subject to Section 4.2(b), the Guarantee Trustee may be appointed or removed without cause at any time by the Guarantor, except during an Event of Default.
(b) The Guarantee Trustee shall not be removed until a Successor Guarantee Trustee has been appointed and has accepted such appointment by written instrument executed by such Successor Guarantee Trustee and delivered to the Guarantor.
(c) The Guarantee Trustee appointed hereunder shall hold office until a Successor Guarantee Trustee shall have been appointed or until its removal or resignation. The Guarantee Trustee may resign from office (without need for prior or subsequent accounting) by an instrument in writing executed by the Guarantee Trustee and delivered to the Guarantor, which resignation shall not take effect until a Successor Guarantee Trustee has been appointed and has accepted such appointment by instrument in writing executed by such Successor Guarantee Trustee and delivered to the Guarantor and the resigning Guarantee Trustee.
(d) If no Successor Guarantee Trustee shall have been appointed and accepted appointment as provided in this Section 4.2 within thirty (30) days after delivery to the Guarantor of an instrument of resignation, the resigning Guarantee Trustee may petition, at the expense of the Guarantor, any court of competent jurisdiction for appointment of a Successor Guarantee Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Successor Guarantee Trustee.
ARTICLE V
Guarantee
SECTION 5.1. Guarantee.
(a) The Guarantor irrevocably and unconditionally agrees to pay in full to the Holders the Guarantee Payments (without duplication of amounts theretofore paid by or on behalf of the Issuer), as and when due, regardless of any defense (except for the defense of payment by the Issuer), right of set-off or counterclaim which the Issuer may have or assert. The Guarantor’s obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by the Guarantor to the Holders or by causing the Issuer to pay such amounts to the
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Holders. The Guarantor shall give prompt written notice to the Guarantee Trustee in the event it makes any direct payment to the Holders hereunder.
(b) The Guarantor hereby also agrees to assume any and all Obligations of the Issuer, and, in the event any such Obligation is not so assumed, subject to the terms and conditions hereof, the Guarantor hereby irrevocably and unconditionally guarantees to each Beneficiary the full payment, when and as due, of any and all Obligations to such Beneficiaries. This Guarantee is intended to be for the Beneficiaries who have received notice hereof.
SECTION 5.2. Waiver of Notice and Demand.
The Guarantor hereby waives notice of acceptance of the Guarantee Agreement and of any liability to which it applies or may apply, presentment, demand for payment, any right to require a proceeding first against the Guarantee Trustee, Issuer or any other Person before proceeding against the Guarantor, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands.
SECTION 5.3. Obligations Not Affected.
The obligations, covenants, agreements and duties of the Guarantor under this Guarantee Agreement shall in no way be affected or impaired by reason of the happening from time to time of any of the following:
(a) the release or waiver, by operation of law or otherwise, of the performance or observance by the Issuer of any express or implied agreement, covenant, term or condition relating to the Preferred Securities to be performed or observed by the Issuer;
(b) the extension of time for the payment by the Issuer of all or any portion of the Distributions (other than an extension of time for payment of Distributions that results from the extension of any interest payment period on the Notes as provided in the Indenture), Redemption Price, Liquidation Distribution or any other sums payable under the terms of the Preferred Securities or the extension of time for the performance of any other obligation under, arising out of, or in connection with, the Preferred Securities;
(c) any failure, omission, delay or lack of diligence on the part of the Holders to enforce, assert or exercise any right, privilege, power or remedy conferred on the Holders pursuant to the terms of the Preferred Securities, or any action on the part of the Issuer granting indulgence or extension of any kind;
(d) the voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Issuer or any of the assets of the Issuer;
(e) any invalidity of, or defect or deficiency in, the Preferred Securities;
(f) the settlement or compromise of any obligation guaranteed hereby or hereby incurred; or
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(g) any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a guarantor, it being the intent of this Section 5.3 that the obligations of the Guarantor hereunder shall be absolute and unconditional under any and all circumstances.
There shall be no obligation of the Holders to give notice to, or obtain the consent of, the Guarantor with respect to the happening of any of the foregoing.
SECTION 5.4. Rights of Holders.
The Guarantor expressly acknowledges that: (a) this Guarantee Agreement will be deposited with the Guarantee Trustee to be held for the benefit of the Holders; (b) the Guarantee Trustee has the right to enforce this Guarantee Agreement on behalf of the Holders; (c) the Holders of a Majority in Liquidation Amount of the Preferred Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee in respect of this Guarantee Agreement or exercising any trust or power conferred upon the Guarantee Trustee under this Guarantee Agreement; and (d) any Holder may institute a legal proceeding directly against the Guarantor to enforce its rights under this Guarantee Agreement, without first instituting a legal proceeding against the Guarantee Trustee, the Issuer or any other Person.
SECTION 5.5. Guarantee of Payment.
This Guarantee Agreement creates a guarantee of payment and not of collection. This Guarantee Agreement will not be discharged except by payment of the Guarantee Payments in full (without duplication of amounts theretofore paid by the Issuer) or upon distribution of Notes to Holders as provided in the Trust Agreement.
SECTION 5.6. Subrogation.
The Guarantor shall be subrogated to all (if any) rights of the Holders against the Issuer in respect of any amounts paid to the Holders by the Guarantor under this Guarantee Agreement and shall have the right to waive payment by the Issuer pursuant to Section 5.1; provided, that, the Guarantor shall not (except to the extent required by mandatory provisions of law) be entitled to enforce or exercise any rights it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of payment under this Guarantee Agreement, if, at the time of any such payment, any amounts are due and unpaid under this Guarantee Agreement. If any amount shall be paid to the Guarantor in violation of the preceding sentence, the Guarantor agrees to hold such amount in trust for the Holders and to pay over such amount to the Holders.
SECTION 5.7. Independent Obligations.
The Guarantor acknowledges that its obligations hereunder are independent of the obligations of the Issuer with respect to the Preferred Securities and that the Guarantor shall be liable as principal and as debtor hereunder to make Guarantee Payments pursuant to the terms of this Guarantee Agreement notwithstanding the occurrence of any event referred to in subsections (a) through (g), inclusive, of Section 5.3.
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SECTION 5.8. Enforcement.
A Beneficiary may enforce the Obligations of the Guarantor contained in Section 5.1(b) directly against the Guarantor, and the Guarantor waives any right or remedy to require that any action be brought against the Issuer or any other person or entity before proceeding against the Guarantor.
ARTICLE VI
Covenants and Subordination
SECTION 6.1. Dividends, Distributions and Payments.
So long as any Preferred Securities remain outstanding, if there shall have occurred and be continuing an Event of Default or the Guarantor shall have entered into an Extension Period as provided for in the Indenture and such period, or any extension thereof, shall have commenced and be continuing, then the Guarantor may not (a) declare or pay any dividends or distributions on, or redeem, purchase, acquire or make liquidation payment with respect to, any of the Guarantor’s capital stock or (b) make any payment of principal of or any interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Guarantor that rank pari passu in all respects with or junior in interest to the Notes (other than (i) repurchases, redemptions or other acquisitions of shares of capital stock of the Guarantor in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of any one of more employees, officers, directors or consultants, in connection with a dividend reinvestment or stockholder stock purchase plan or in connection with the issuance of capital stock of the Guarantor (or securities convertible into or exercisable for such capital stock) as consideration in an acquisition transaction entered into prior to the occurrence of such Event of Default or the applicable Extension Period, (ii) as a result of an exchange or conversion of any class or series of the Guarantor’s capital stock (or any capital stock of a subsidiary of the Guarantor) for any class or series of the Guarantor’s capital stock or any class of series of the Guarantor’s indebtedness for any class or series of the Guarantor’s capital stock, (iii) the purchase of fractional interests in shares of the Guarantor’s capital stock pursuant to the conversions or exchange provisions of such capital stock or the security being converted or exchanged, (iv) any declaration of a dividend in connection with any rights plan, the issuance of rights, stock or other property under any rights plan or the redemption or repurchase of rights pursuant thereto, or (v) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock).
SECTION 6.2. Subordination.
The obligations of the Guarantor under this Guarantee Agreement will constitute unsecured obligations of the Guarantor and will rank subordinate and junior in right of payment to all Senior Debt of the Guarantor.
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SECTION 6.3. Pari Passu Guarantees.
(a) The obligations of the Guarantor under this Guarantee Agreement shall rank pari passu with the obligations of the Guarantor under any similar guarantee agreements issued by the Guarantor with respect to preferred securities (if any) similar to the Preferred Securities, issued by trusts other than the Issuer established or to be established by the Guarantor (if any), in each case similar to the Issuer American Equity Capital Trust I, American Equity Capital Trust II, American Equity Capital Trust III , American Equity Capital Trust IV, American Equity Capital Trust V, American Equity Capital Trust VI, American Equity Capital Trust VII, American Equity Capital Trust VIII, American Equity Capital Trust IX and American Equity Capital Trust X.
(b) The right of the Guarantor to participate in any distribution of assets of any of its subsidiaries upon any such subsidiary’s liquidation or reorganization or otherwise is subject to the prior claims of creditors of that subsidiary, except to the extent the Guarantor may itself be recognized as a creditor of that subsidiary. Accordingly, the Guarantor’s obligations under this Guarantee will be effectively subordinated to all existing and future liabilities of the Guarantor’s subsidiaries, and claimants should look only to the assets of the Guarantor for payments thereunder. This Guarantee does not limit the incurrence or issuance of other secured or unsecured debt of the Guarantor, including Senior Debt of the Guarantor, under any indenture or agreement that the Guarantor may enter into in the future or otherwise.
ARTICLE VII
Termination
SECTION 7.1. Termination.
This Guarantee Agreement shall terminate and be of no further force and effect upon (a) full payment of the Redemption Price of all Preferred Securities, (b) the distribution of Notes to the Holders in exchange for all of the Preferred Securities or (c) full payment of the amounts payable in accordance with the Trust Agreement upon liquidation of the Issuer. Notwithstanding the foregoing, this Guarantee Agreement will continue to be effective or will be reinstated, as the case may be, if at any time any Holder must restore payment of any sums paid with respect to Preferred Securities or this Guarantee Agreement. The obligations of the Guarantor under Sections 3.3 and 3.4 shall survive any such termination or the resignation and removal of the Guarantee Trustee.
ARTICLE VIII
Miscellaneous
SECTION 8.1. Successors and Assigns.
All guarantees and agreements contained in this Guarantee Agreement shall bind the successors, assigns, receivers, trustees and representatives of the Guarantor and shall inure to the
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benefit of the Holders of the Preferred Securities then outstanding. Except in connection with a consolidation, merger or sale involving the Guarantor that is permitted under Article VIII of the Indenture and pursuant to which the successor or assignee agrees in writing to perform the Guarantor’s obligations hereunder, the Guarantor shall not assign its rights or delegate its obligations hereunder without the prior approval of the Holders of a Majority in Liquidation Amount of the Preferred Securities.
SECTION 8.2. Amendments.
Except with respect to any changes that do not adversely affect the rights of the Holders in any material respect (in which case no consent of the Holders will be required), this Guarantee Agreement may only be amended with the prior approval of the Guarantor, the Guarantee Trustee and the Holders of not less than a Majority in Liquidation Amount of the Preferred Securities. The provisions of Article VI of the Trust Agreement concerning meetings or consents of the Holders shall apply to the giving of such approval.
SECTION 8.3. Notices.
Any notice, request or other communication required or permitted to be given hereunder shall be in writing, duly signed by the party giving such notice, and delivered, telecopied or mailed by first class mail as follows:
(a) if given to the Guarantor, to the address or facsimile number set forth below or such other address, facsimile number or to the attention of such other Person as the Guarantor may give notice to the Guarantee Trustee and the Holders:
American
Equity Investment Life Insurance Company
5000 Westown Parkway, Suite 440
West Des
Moines, IA 50266
Facsimile No.: (515) 221-0744
Attention: Wendy Carlson
(b) if given to the Issuer, at the Issuer’s address or facsimile number set forth below or such other address, facsimile number or to the attention of such other Person as the Issuer may give notice to the Guarantee Trustee and the Holders:
American
Equity Capital Trust XI
5000 Westown Parkway, Suite 440
West Des Moines, IA 50266
Facsimile No.: (515) 221-0744
Attention: Wendy Carlson
(c) if given to the Guarantee Trustee, at the address or facsimile number set forth below or such other address, facsimile number or to the attention of such other Person as the Guarantee Trustee may give notice to the Guarantor and the Holders:
16
JPMorgan Chase
Bank, National Association
600 Travis, 50th Floor
Houston, Texas 77002
Facsimile No.: 713-216-2101
Attention: International Trust Services -
American Equity Capital Trust XI
(d) if given to any Holder, at the address set forth on the books and records of the Issuer.
All notices hereunder shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid, except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver.
SECTION 8.4. Benefit.
This Guarantee Agreement is solely for the benefit of the Holders and is not separately transferable from the Preferred Securities.
SECTION 8.5. Governing Law.
This Guarantee Agreement and the rights and obligations of each party hereto, shall be construed and enforced in accordance with and governed by the laws of the State of New York without reference to its conflict of laws provisions (other than Section 5-1401 of the General Obligations Law).
SECTION 8.6. Submission to Jurisdiction.
ANY LEGAL ACTION OR PROCEEDING BY OR AGAINST ANY PARTY HERETO OR WITH RESPECT TO OR ARISING OUT OF THIS GUARANTEE AGREEMENT MAY BE BROUGHT IN OR REMOVED TO THE COURTS OF THE STATE OF NEW YORK, IN AND FOR THE COUNTY OF NEW YORK, OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK (IN EACH CASE SITTING IN THE BOROUGH OF MANHATTAN). BY EXECUTION AND DELIVERY OF THIS GUARANTEE AGREEMENT, EACH PARTY ACCEPTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS (AND COURTS OF APPEALS THEREFROM) FOR LEGAL PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS GUARANTEE AGREEMENT.
SECTION 8.7. Counterparts.
This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.
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SECTION 8.8. Severability.
In the event that one or more of the provisions contained in this Guarantee Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Guarantee, but this Guarantee shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein.
[Signature pages follow.]
18
In Witness Whereof, the undersigned have executed this Guarantee Agreement as of the date first above written.
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American Equity Investment Life Holding Company |
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By: |
/s/ Debra J. Richardson |
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Name: Debra J. Richardson |
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Title: Secretary & Senior Vice President |
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JPMorgan Chase Bank, National Association, |
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By: |
/s/ Shelly A. Sterling |
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Name: Shelly A. Sterling |
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Title: Vice President |
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Ratio of Earnings to Fixed Charges
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Year Ended December 31, |
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2005 |
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2004 |
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2003 |
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2002 |
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2001 |
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Consolidated income before income taxes, minority interest in earnings of subsidiaries and cumulative effect adjustment(a) |
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$ |
70,894 |
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$ |
69,481 |
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$ |
39,308 |
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$ |
28,951 |
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$ |
9,453 |
|
|
Interest credited to account balances |
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306,608 |
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305,762 |
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248,075 |
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183,503 |
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100,125 |
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Interest expense on General Agency |
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|
|
|
|
|
|
|
|
|
|
|||||
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Commission and Servicing Agreement(a) |
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— |
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— |
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— |
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3,596 |
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5,716 |
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Interest expense on notes payable(a) |
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16,324 |
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2,358 |
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2,713 |
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1,901 |
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2,881 |
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Interest expense on subordinated debentures(a) |
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14,145 |
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9,609 |
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7,661 |
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— |
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— |
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Interest expense on amounts due under repurchase agreements and other interest expense |
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11,280 |
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3,148 |
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1,278 |
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1,777 |
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1,504 |
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Interest portion of rental expense |
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388 |
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344 |
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314 |
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267 |
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171 |
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Consolidated earnings |
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$ |
419,639 |
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$ |
390,702 |
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$ |
299,349 |
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$ |
219,995 |
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$ |
119,850 |
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Interest credited to account balances |
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306,608 |
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305,762 |
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248,075 |
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183,503 |
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100,125 |
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Interest expense on General Agency |
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Commission and Servicing Agreement(a) |
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— |
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— |
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— |
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3,596 |
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5,716 |
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Interest expense on notes payable(a) |
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16,324 |
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2,358 |
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2,713 |
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1,901 |
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2,881 |
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Interest expense on subordinated debentures(a) |
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14,145 |
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9,609 |
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7,661 |
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— |
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— |
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Interest expense on amounts due under repurchase agreements and other interest expense |
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11,280 |
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3,148 |
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1,278 |
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1,777 |
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1,504 |
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Interest portion of rental expense |
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388 |
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344 |
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314 |
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267 |
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171 |
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Combined fixed charges |
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$ |
348,745 |
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$ |
321,221 |
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$ |
260,041 |
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$ |
191,044 |
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$ |
110,397 |
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Ratio of consolidated earnings to fixed charges |
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1.2 |
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1.2 |
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1.2 |
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1.2 |
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1.1 |
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Ratio of consolidated earnings to fixed charges excluding interest credited to account balances |
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2.7 |
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5.5 |
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4.3 |
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4.8 |
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1.9 |
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a) On December 31, 2003, retroactive to January 1, 2003, we adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51. During the first quarter of 2005, retroactive to January 1, 2003, we adopted FASB Staff Position No. FIN 46(R)-5, Implicit Variable Interests under FIN 46. See notes 1 and 2 to our audited consolidated financial statements as of December 31, 2004.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements (Form S-3 No. 333-113630, Form S-3 No. 333-123862 and Form S-8 No. 333-127001) of American Equity Investment Life Holding Company and in the related Prospectuses of our reports dated March 13, 2006, with respect to the consolidated balance sheet of American Equity Investment Life Holding Company and Subsidiaries as of December 31, 2005, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the year ended December 31, 2005, and all related financial statement schedules, management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 and the effectiveness of internal control over financial reporting as of December 31, 2005, included herein.
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/s/ KPMG |
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Des Moines, Iowa |
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Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements (Form S-3 No. 333-113630, Form S-3 No. 333-123862 and Form S-8 No. 333-127001) of American Equity Investment Life Holding Company and in the related Prospectuses of our report dated March 11, 2005, except for the fifth paragraph of Note 1, as to which the date is November 11, 2005, with respect to the consolidated financial statements and schedules of American Equity Investment Life Holding Company as of December 31, 2004 and for each of the two years in the period ended December 31, 2004 included in this Annual Report (Form 10-K) for the year ended December 31, 2005.
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/s/ ERNST & YOUNG LLP |
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Des Moines, Iowa |
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CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, David J. Noble, certify that:
1. I have reviewed this annual report on Form 10-K of American Equity Investment Life Holding Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
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Date: March 14, 2006 |
By: |
/s/ DAVID J. NOBLE |
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David J. Noble, Chief Executive Officer |
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Wendy L. Carlson, certify that:
1. I have reviewed this annual report on Form 10-K of American Equity Investment Life Holding Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
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Date: March 14, 2006 |
By: |
/s/ WENDY L. CARLSON |
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Wendy L. Carlson, Chief Financial
Officer |
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of American Equity Investment Life Holding Company (the “Company”) on Form 10-K for the fiscal year ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David J. Noble, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 14, 2006
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By: |
/s/ DAVID J. NOBLE |
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D.J. Noble, Chief Executive Officer |
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of American Equity Investment Life Holding Company (the “Company”) on Form 10-K for the fiscal year ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Wendy L. Carlson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 14, 2006
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By: |
/s/ WENDY L. CARLSON |
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Wendy L. Carlson, Chief
Financial Officer |