We lease commercial office space in one building in West Des Moines, Iowa, for our principal offices under an operating lease that expires on November 21, 2021. We also lease our office in Pell City, Alabama, pursuant to an operating lease that expires on December 31, 2010. We are fully utilizing these facilities and believe both locations to be sufficient to house our operations for the foreseeable future.
(a)In addition to net income, we have consistently utilized operating income, operating income per common share and operating income per common share-assuming dilution, non-GAAP financial measures commonly used in the life insurance industry, as economic measures to evaluate our financial performance. Operating income equals net income adjusted to eliminate the impact of net realized gains on investments, including net OTTI losses recognized in operations and related deferred tax asset valuation allowance, (gain) loss on retirement of debt, fair value changes in derivatives and embedded derivatives, the Lehman counterparty default on expired call options, minority interest of variable interest entity and income tax contingency. Because these items fluctuate from year to year in a manner unrelated to core operations, we believe measures excluding their impact are useful in analyzing operating trends. We believe the combined presentation and evaluation of operating income together with net income, provides information that may enhance an investor's understanding of our underlying results and profitability.
(b)Book value per share and book value per share excluding AOCL is calculated as total stockholders' equity and total stockholders' equity excluding AOCL divided by the total number of common stock outstanding. AOCL fluctuates from year to year due to unrealized changes in the fair value of available for sale investments. Shares outstanding include shares held by the NMO Deferred Compensation Trust and exclude unallocated shares held by our employee stock ownership plan-see note 11 to our audited consolidated financial statements.
•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, which could result in impairments and other than temporary impairments, and certain liabilities, and the lapse rate and profitability of policies;
Our fixed maturity securities (bonds and redeemable preferred stocks maturing more than one year after issuance) and equity securities (common and perpetual preferred stocks) classified as available for sale are reported at fair value. Unrealized gains and losses, if any, on these securities are
included directly in stockholders' equity as a component of Accumulated Other Comprehensive Loss, net of income taxes and certain adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements. Unrealized gains and losses represent the difference between the amortized cost or cost basis and the fair value of these investments. We use significant judgment within the process used to determine fair value of these investments.
The following table presents the fair value of fixed maturity and equity securities, available for sale, by pricing source and hierarchy level as of December 31, 2009 and 2008, respectively:
We review the prices received from the independent brokers to ensure that the prices represent a reasonable estimate of fair value. This process involves quantitative and qualitative analysis and is administered by our investment department. This review process includes, but is not limited to, initial and on-going review of methodologies used by the independent broker, review of pricing statistics and
trends, back testing recent trades, comparing prices to those obtained from other third party pricing services, reviewing cash flow activity in the subsequent period, monitoring credit rating upgrades and downgrades and monitoring of trading volumes. Most all of the information used by the pricing service and the independent broker can be corroborated by our procedures of investigating market data and tying that data to the facts utilized by the broker.
•our intent to sell and whether it is more likely than not we would be required to sell debt securities prior to recovery;
•our assessment, in the case of equity securities including perpetual preferred stocks with credit deterioration, that the security cannot recover to cost in a reasonable period of time;
•changes in estimated cash flows of and residential mortgage and asset backed securities.
If we do not intend to sell and it is not more likely than not we will be required to sell the debt security but also do not expect to recover the entire amortized cost basis of the security, an impairment loss would be recognized in operations in the amount of the expected credit loss. We determine the amount of expected credit loss by calculating the present value of the cash flows expected to be collected. The difference between the present value of expected future cash flows and the amortized cost basis of the security is the amount of credit loss recognized in operations. The remaining amount of the other than temporary impairment is recognized in other comprehensive income.
The cash flow modeling is performed on a security-by-security basis and incorporates actual cash flows on the residential mortgage backed securities through the current period, as well as the projection of remaining cash flows using a number of assumptions including default rates, prepayment rates and loss severity rates. The default curves we use are tailored to the Prime or Alt-A residential mortgage backed securities that we own, which assume lower default rates and loss severity for Prime securities versus Alt-A securities. These default curves are scaled higher or lower depending on factors such as current underlying mortgage loan performance, rating agency loss projections, loan to value ratios, geographic diversity, as well as other appropriate considerations. The default curves generally assume lower loss levels for older vintage securities versus more recent vintage securities, which reflects the decline in underwriting standards over the years.
significant component of gross profits. If estimated gross profits for all future years on business in force at December 31, 2009 were to increase by 10%, our combined balance for deferred policy acquisition costs and deferred sales inducements at December 31, 2009 would increase by $51.5 million recorded through operations as a decrease to amortization of deferred policy acquisition costs and deferred sales inducements. Correspondingly, a 10% decrease in estimated gross profits for all future years would result in a $57.7 million decrease in the combined December 31, 2009 balances recorded through operations as an increase to amortization of deferred policy acquisition costs and deferred sales inducements.
Results of Operations for the Three Years Ended December 31, 2009
Net income increased 330% to $68.5 million in 2009 and decreased 39% to $15.9 million in 2008 from $26.2 million in 2007. Net income for 2009 includes the impact of applying the FASB guidance for recognition and presentation of other than temporary impairments that was released in April 2009 as discussed below. Net income for 2008 includes the impact of the adoption of fair value measurement accounting standards as discussed below.
The comparability of the amounts is significantly impacted by net realized gains on investments and net impairment losses on investments recognized in operations, gain (loss) on retirement of debt, the impact of fair value accounting for fixed index annuity derivatives and embedded derivatives and the impact of a counterparty default on expired derivatives contracts. We estimate that these items increased (decreased) net income as follows:
risk-free interest rates adjusted for our nonperformance risk. These rates decreased materially during the year ended December 31, 2009 resulting in decreases in net income for the year. Prior to the adoption of the fair value measurements accounting standards, the discount rates used were risk-free interest rates without adjustment for our nonperformance risk. The change to discount rates including our nonperformance risk resulted in a decrease in policy benefit reserves on January 1, 2008 of $150.6 million. The net income impact of this decrease in reserves net of the related adjustments to amortization of deferred sales inducements and deferred policy acquisition costs and income taxes was $40.7 million.
Annuity product charges (surrender charges assessed against policy withdrawals and fees deducted from policyholder account balances for living income benefit riders) increased 20% to $63.4 million in 2009 and 15% to $52.7 million in 2008 from $45.8 million in 2007. Product charges for the year ended December 31, 2009 include $4.5 million of fees deducted from policyholder account balances for living income benefit riders. Surrender charges fluctuate from year to year based upon policyholder behavior and have generally increased during 2009 and 2008 consistent with growth in the volume of business in force.
Net investment income increased 13% to $932.2 million in 2009 and 14% to $822.1 million in 2008 from $719.9 million in 2007. These increases were principally attributable to the growth in our annuity business and corresponding increases in our invested assets and the average yield earned on investments. Average invested assets (on an amortized cost basis) excluding derivative instruments increased 12% to $14.8 billion at December 31, 2009 and 6% to $13.2 billion at December 31, 2008 compared to $12.5 billion at December 31, 2007. The average yield earned on average invested assets was 6.30%, 6.20% and 6.11% for 2009, 2008 and 2007, respectively. The increase in the yield earned on average invested assets for 2009 and 2008 was attributable to higher yields on investments purchased subsequent to 2007.
Actual amounts credited to policyholder account balances may be less than the index appreciation due to contractual features in the fixed index annuity policies (caps, participation rates, 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 costs of options purchased. The aggregate cost of options has increased primarily due to an increased amount of fixed index annuities in force. The aggregate cost of options is also influenced by the amount of policyholder funds allocated to the various indices and market volatility which affects option pricing. Costs for options purchased during the year ended December 31, 2009 and 2008 decreased compared to prior years due to adjustments to caps, participation rates, and asset fees.
Gross realized gains have increased in 2009 due to tax planning strategies to generate taxable capital gains that will permit deduction of capital losses for income tax purposes. Gross realized losses in 2009 primarily relate to three securities that experienced credit events during 2009 resulting in the decision to sell the securities at a loss. See Financial Condition-Investments for additional discussion of impairment losses recognized on mortgage loans on real estate.
Net OTTI losses recognized in operations decreased to $86.8 million in 2009 and increased to $192.6 million in 2008 from $4.4 million in 2007. See Financial Condition-Investments for additional discussion of write downs of securities for other than temporary impairments.
Gain (loss) on retirement of debt for 2009 includes a $3.1 million gain on an exchange of five million shares of our common stock for $37.2 million principal amount of our 5.25% contingent convertible senior notes due in December 2024 (the "2024 notes") and a $3.8 million loss on an exchange of $63.6 million principal amount of our 5.25% contingent convertible senior notes due in December 2029 for the same principal amount of the 2024 notes. The fair value of the common stock issued was $31.3 million and the 2024 notes retired in the common stock for debt exchange carried unamortized debt discount and debt issue costs totaling $2.8 million. The 2024 notes retired in the debt for debt exchange carried unamortized debt discount and debt issue costs totaling $3.8 million. The $9.7 million gain on retirement of debt in 2008 resulted from the purchase of $78.1 million principal amount of the 2024 notes for $61.4 million in cash, of which $0.4 million was assigned to the reacquisition of the equity component of the 2024 notes. The 2024 notes retired in 2008 carried unamortized debt discount and debt issue costs totaling $7.4 million.
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. Total proceeds received upon expiration of the call options purchased to fund the annual index credits were $70.6 million, $26.2 million and $392.1 million for the years ended December 31, 2009, 2008 and 2007, respectively. Proceeds for 2009 were adversely affected by the Lehman defaults as discussed above. The increases in interest credited for 2009 and 2008 was due to an increase in the average amount of annuity liabilities outstanding receiving a fixed rate of interest and an increase in minimum guaranteed interest for fixed index annuities. The increase in minimum guaranteed interest for fixed index annuities is directly attributable to the weak equity market performance during prior periods which resulted in smaller index credits. The increase in interest credited for 2008 included an immaterial correction to single premium annuity reserves in the fourth quarter of 2008 which reduced interest credited by $2.2 million. The average amount of annuity liabilities outstanding (net of annuity liabilities ceded under coinsurance agreements) increased 14% to $15.4 billion in 2009 and 13% to $13.5 billion in 2008 from $11.9 billion in 2007.
unlocking discussed above. In general, amortization of deferred sales inducements has been increasing each year due to growth in our annuity business and the deferral of sales inducements incurred with respect to sales of premium bonus annuity products. Bonus products represented 94%, 93% and 86% of our total annuity deposits during 2009, 2008 and 2007, respectively. The anticipated increase in amortization from these factors has been affected by amortization associated with fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business and amortization associated with the net realized gains on investments and net OTTI losses recognized in operations.
Fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business creates differences in the recognition of revenues and expenses from derivative instruments including the embedded derivative liabilities in our fixed index annuity contracts. The change in fair value of the embedded derivatives will not correspond to the change in fair value of the derivatives (purchased call options) because the purchased call 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 exceeds ten years. The gross profit adjustments resulting from fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business decreased amortization by $29.2 million, increased amortization by $13.9 million, and decreased amortization by $23.4 million in 2009, 2008 and 2007, respectively. The gross profit adjustments from net realized gains on investments and net OTTI losses recognized in operations decreased amortization by $6.8 million, $35.6 million and $0.3 million in 2009, 2008 and 2007, respectively. Excluding the amortization amounts attributable to fair value accounting for derivatives and embedded derivatives and realized gains on investments and net OTTI losses recognized in operations, amortization would have been $76.0 million, $52.4 million and $35.4 million for 2009, 2008 and 2007, respectively. See Critical Accounting Policies-Deferred Policy Acquisition Costs and Deferred Sales Inducements.
Change in fair value of embedded derivatives was an increase of $529.5 million during 2009 compared to decreases of $210.8 million in 2008 and $67.9 million in 2007. These changes resulted from (i) changes in the expected index credits on the next policy anniversary dates, which are related to the change in fair value of the call options acquired to fund these index credits discussed above in change in fair value of derivatives; (ii) changes in discount rates used in estimating our liability for policy growth; (iii) changes in estimates of expected costs of annual call options that will be purchased in the future to fund index credits beyond the next policy anniversary; and (iv) the growth in the host component of the policy liability. See Critical Accounting Policies-Policy Liabilities for Fixed Index Annuities. The primary reasons for the significant increases in the fair values of embedded derivatives for 2009 were decreases in the discount rates used in estimating our liability for policy growth and increases in the expected index credits on the next policy anniversary dates which correlated with the change in fair value of derivatives discussed above. The primary reasons for the significant decrease in the fair value of the embedded derivatives for 2008 were increases in the discount rates used in estimating our liability for policy growth and a decrease in our estimate of the expected future cost of annual call options. The increase in the discount rates to reflect our nonperformance risk upon the adoption of the fair value measurements accounting requirements on January 1, 2008 as discussed above decreased the fair value of embedded derivatives by $150.6 million and the decrease in the estimate of future option costs decreased the fair value of the embedded derivatives for 2008 by $51.6 million.
Amortization of deferred policy acquisition costs decreased 31% to $88.0 million in 2009 and increased 125% to $126.7 million in 2008 from $56.3 million in 2007. The 2008 increase includes the $14.6 million impact of unlocking discussed above. In general, amortization of deferred policy acquisition costs has been increasing each year due to the growth in our annuity business and the deferral of policy acquisition costs incurred with respect to sales of annuity products. The anticipated increase in amortization from these factors has been affected by amortization associated with fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business and amortization associated with net realized gains on investments and net OTTI losses recognized in operations.
Our fixed maturity portfolio is managed to minimize risks such as interest rate changes and defaults or impairments while earning a sufficient return on our investments. We have over 36% of our fixed maturities invested in U.S. federal government sponsored agency securities (Federal Home Loan Mortgage Corporation and Federal National Mortgage Association make up the majority), which are an excellent source of dependable income and are of high credit quality. Since 2007 we have built a portfolio of residential mortgage backed securities ("RMBS") that provide our portfolio a source of regular cash flow and higher yielding assets than our agency securities. The remainder of our fixed maturity portfolio is mostly made up of publicly traded and privately placed bonds and redeemable preferred stocks.
In November 2009, the NAIC membership approved a process to assess non-agency RMBS for the 2009 filing year that does not rely on NRSRO ratings. The NAIC retained the services of PIMCO Advisory to model each non-agency RMBS owned by U.S. insurers at year-end 2009. PIMCO Advisory has provided 5 prices for each security for life insurance companies to utilize in determining the NAIC designation for each RMBS based on each insurer's statutory book value price. This process results in a more appropriate level of RBC requirements for non-agency RMBS.
A summary of our RMBS by collateral type and split by NAIC designation, as well as a separate summary of securities for which we have recognized OTTI and those which we have not yet recognized any OTTI is as follows as of December 31, 2009:
$83.9 million due to the cumulative adjustment to reclassify the noncredit portion of OTTI recognized at December 31, 2008, by adopting the FASB's guidance issued in April 2009 for bifurcating credit and noncredit portions of OTTI between earnings and other comprehensive income/(loss). We have decreased unrealized losses by $86.8 million by recognizing OTTI losses on equity securities totaling $21.2 million and by recognizing $65.6 million of credit OTTI losses on debt securities for the year ended December 31, 2009. The remaining decrease in unrealized losses was due to improving market conditions resulting in higher fair values of many of our corporate securities; however, continued uncertainty in the RMBS market has increased the unrealized loss position of those assets over the year. The decline in fair value of these RMBS is due to imbalances in supply and demand for RMBS, increased foreclosures and bankruptcies and projections of potential future losses.
The following is a description of the factors causing the unrealized losses by investment category as of December 31, 2009:
Equity securities: The unrealized loss on equity securities, which are primarily investment grade perpetual preferred stocks with exposure to REITS, investment banks and finance companies, are due to the ongoing concerns relating to capital, asset quality and earnings stability due to the financial crisis. All of the equity securities in an unrealized loss position for 12 months or more are investment grade perpetual preferred stocks that are absent credit deterioration. A prolonged recession due to tight credit markets and a continued difficult housing market have raised concerns in regard to earnings and dividend stability in many companies which directly affect the values of these securities.
with or without call or prepayment penalties. All of our residential mortgage and asset backed securities provide for periodic payments throughout their lives, and are shown below as a separate line.
At each balance sheet date, we identify invested assets which have characteristics (i.e. significant unrealized losses compared to amortized cost and industry trends) creating uncertainty as to our future assessment of an other than temporary impairment. As part of this assessment we review not only a change in current price relative to its amortized cost but the issuer's current credit rating and the probability of full recovery of principal based upon the issuer's financial strength. Specifically for corporate issues we evaluate the financial stability and quality of asset coverage for the securities relative to the term to maturity for the issues we own. A security which has a 25% or greater change in market price relative to its amortized cost and a possibility of a loss of principal will be included 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 as we do not intend to sell these securities and it is more likely than not we will not have to sell these securities before a recovery is realized. In addition, we exclude our RMBS as we monitor all of our RMBS on a quarterly basis for changes in default rates, loss severities and expected cash flows for the purpose of assessing potential other than
Our analysis of these securities that we have determined are temporarily impaired and their credit performance at December 31, 2009 is as follows:
Finance and Insurance: The decline in value of these corporate bonds and preferred stocks is due to the continued wide spreads as a result of the ongoing concerns relating to capital, asset quality and earnings stability due to the financial crisis. While these issuers have had their financial position and profitability weakened by the credit and liquidity crisis, we have determined that these securities were not other than temporarily impaired due to our evaluation of the operating performance and the credit worthiness of each individual issuer.
Deterioration of the issuers' credit worthiness and liquidity profile were major factors in leading us to make the determination that other than temporary impairments were present in our corporate bonds and common and preferred stocks. Our analysis demonstrated that we could not expect a recovery of our cost basis within our expected holding period for debt securities or within a reasonable period of time for equity securities.
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.
In the normal course of business, we commit to fund commercial mortgage loans up to 90 days in advance. At December 31, 2009, we had commitments to fund commercial mortgage loans totaling $18.8 million, with fixed interest rates ranging from 6.50% to 7.00%.
We evaluate our mortgage loan portfolio for the establishment of a loan loss reserve by specific identification of impaired loans and the measurement of an estimated loss for each individual loan identified and an analysis of the mortgage loan portfolio for the need for a general loan allowance for probable losses on all other loans. If we determine that the value of any specific 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. The amount of the general loan allowance is based upon management's evaluation of the collectability of the loan portfolio, historical loss experience, delinquencies, credit concentrations, underwriting standards and national and local economic conditions. Based upon this process and analysis, no general loan loss allowance, was necessary at December 31, 2009 and 2008, respectively. A mortgage loan is impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. We recorded impairment losses of $6.5 million for the year ended December 31, 2009 on specific mortgage loans with a total outstanding balance of $18.4 million for which principal amounts outstanding exceed the fair value of the real estate collateral less projected costs to sell the properties. A summary of impaired commercial mortgage loans as of December 31, 2009 and 2008 is as follows:
We recognize all derivative instruments as assets or liabilities in the consolidated balance sheets at fair value. None of our derivatives qualify for hedge accounting, thus, any change in the fair value of the derivatives is recognized immediately in the consolidated statements of operations.
The change in fair value of derivatives included in the consolidated statements of operations are as follows:
We have fixed 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. When fixed index annuity premiums are received, 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 fixed 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 fair value with the change in fair value included as a component of revenues. The change in fair value of derivatives includes the gains or losses recognized at the expiration of the option term or upon early termination and the changes in fair value for open positions. On the respective anniversary dates of the index policies, the index used to compute the annual index credit is reset and we purchase new one-year call options to fund the next annual index credit. We manage the cost of these purchases through the terms of our fixed index annuities, which permit us to change caps, participation rates, and/or asset fees, subject to guaranteed minimums on each policy's anniversary date. By adjusting caps, participation rates, or asset fees, we can generally manage option costs except in cases where the contractual features would prevent further modifications.
The notional amount and maximum amount of loss due to credit risk that we would incur if parties to the call options failed completely to perform according to the terms of the contracts are as follows:
As of December 31, 2009 we are holding $346.5 million of cash and cash equivalents received from counterparties for derivative collateral.
In May 2009, we issued five million shares of our common stock with a fair value of $31.3 million in exchange for $37.2 million of the 2024 notes and recognized a gain of $3.1 million.
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 of the 2024 notes is $14.24, which represents a conversion rate of 70.2 shares of our common stock per $1,000 in principal amount of notes. The conversion price per share of the 2029 notes is $9.69, which represents a conversion rate of 103.2 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 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 9 to the audited 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.
Following is a summary of subordinated debt obligations to the trusts at December 31, 2009 and 2008:
American Equity Capital Trust I issued 865,671 shares of 8% trust preferred securities, of which 2,000 shares are held by one of our subsidiaries, and we issued $26.8 million of our 8% subordinated debentures. There were no conversions during 2009. During 2008 and 2007, 8,333 shares and 9,333 shares of these trust preferred securities converted into 30,862 shares and 34,567 shares, respectively, of our common stock. The remaining 738,338 shares of these trust preferred securities not held by a subsidiary are convertible into 2,734,528 shares of our common stock.
Our insuance subsidiaries' primary sources of cash flow are annuity deposits, investment income, and proceeds from the sale, maturity and calls of investments. The primary uses of funds are investment purchases, payments to policyholders in connection with surrenders and withdrawals, policy acquisition costs and other operating expenses.
Liquidity requirements are met primarily by funds provided from operations. Our life subsidiaries generally receive adequate cash flow from annuity deposits and investment income to meet their obligations. Annuity and life insurance liabilities are generally long-term in nature. However, a primary liquidity concern is the risk of an extraordinary level of early policyholder withdrawals. We include provisions within our annuity policies, such as surrender charges, that help limit and discourage early
Our insurance subsidiaries continue to have adequate cash flows from annuity deposits and investment income to meet their policyholder and other obligations. Net cash flows from annuity deposits and funds returned to policyholders as surrenders, withdrawals and death claims were $1.4 billion for the year ended December 31, 2009 compared to $1.3 billion for the year ended December 31, 2008 with the increase primarily attributable to the $0.6 billion increase in net annuity deposits collected reported above under Overview. We continue to invest the net proceeds from policyholder transactions and investment activities in high quality fixed maturity securities and fixed rate commercial mortgage loans. As reported above under Financial Condition-Investments, during the year ended December 31, 2009 we experienced a significant amount of calls of United States Government sponsored agency securities. We have been reinvesting the proceeds from the called securities in investment grade fixed maturity securities and residential mortgage backed securities with yields that meet our investment spread objectives. Our ability to continue to reinvest the proceeds from called securities in assets with acceptable credit quality and yield characteristics similar to the called securities will be dependent on future market conditions.
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) income tax sharing payments from subsidiaries. These sources provide adequate cash flow to us to meet our current and reasonably foreseeable future obligations and we expect they will be adequate to fund our parent company cash flow requirements in 2010. We do not have any significant debt maturities until the fourth quarter of 2011 and have no material commitments for capital expenditures.
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. In addition, we manage the statutory capital and surplus in American Equity Life to maintain American Equity Life's current A.M. Best rating. As of December 31, 2009, we estimate American Equity Life has sufficient
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 337% at December 31, 2009.
During the second quarter of 2009, we retired $37.2 million of the 2024 notes by issuing five million shares of our common stock to the holder of these notes. This transaction increased our equity by $33.1 million and reduced our liabilities by $32.7 million. During the fourth quarter of 2009, we issued $115.8 million of the 2029 notes with $52.2 million issued for cash and the remaining $63.6 million issued in exchange for the same amount of our 2024 notes. All of the proceeds from issuing the 2029 notes are being used for working capital and general corporate purposes.
On August 20, 2009, we entered into distribution agreements with Fox-Pitt Kelton Cochran Caronia Waller (USA) LLC ("FPK") and Sandler O'Neill & Partners, L.P. On December 3, 2009, Macquarie Capital (USA) Inc. assumed all of FPK's rights and obligations under our distribution agreement with FPK. Under the distribution agreements, we can offer and sell shares of our common stock up to an aggregate offering price of $50.0 million. From August 20, 2009 through September 30, 2009, we sold 132,300 shares of our common stock at an average price of $8.26 per share, resulting in gross proceeds to us of $1.1 million. The aggregate net proceeds from such sales were $1.0 million after deducting related expenses, including $0.04 million in gross sales commissions paid to FPK.
were removed and disclosure requirements were added. This standard must be applied as of the beginning of our first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. We are currently assessing the impact of this standard.
In June 2009, the FASB issued amendments to the accounting standards for consolidation of variable interest entities. The new standard replaces the quantitative-based risks and rewards calculation of existing standards for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with a primarily qualitative approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impacts the entity's economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. This amendment also clarifies the characteristics of a variable interest entity and increases the frequency of required reassessments to determine whether the reporting entity is the primary beneficiary of a variable interest entity. This amendment is effective as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. In December 2009, the FASB agreed to issue an amendment to this guidance which will provide an indefinite deferral of consolidation requirements for reporting entities that have interest in variable interest entities that have the characteristics of investment companies and regulated money market funds. We are currently assessing the impact of these accounting standards updates.
In August 2009, the FASB issued an accounting standards update that amends the fair value measurement of liabilities. The update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using the quoted price of the identical liability when traded as an asset, quoted prices for similar liabilities or similar liabilities when traded as assets, or another valuation technique that is consistent with the principles of fair value. This guidance was effective on October 1, 2009 and the application did not have a material impact on our consolidated financial statements.