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 32,120 square feet at an annual rental of $480,588. The leases expire on June 30, 2004 and have a renewal option of an additional five year term at a rental rate equal to the prevailing fair market value. We also lease space for our office in Pell City, Alabama, pursuant to a written lease dated January 3, 2000, for approximately 3,380 square feet at an annual rental of $43,095. This lease expires on December 31, 2004.
On June 30, 2000, the Company effected a three-for-one stock split. All of the above amounts have been adjusted to reflect the split on a retroactive basis.
o the risk factors or uncertainties listed from time to time in our private placement memorandums or filings with the Securities and Exchange Commission
TRADITIONAL LIFE AND ACCIDENT AND HEALTH INSURANCE PREMIUMS increased 7% to $11,034,000 in 2000 and decreased 2% to $10,294,000 in 1999 from $10,528,000 in 1998. The majority of our traditional life and accident and health insurance premiums consist of group policies sold to a limited market. Because our primary focus is the sale of annuities, we have made no effort to expand sales of these products to other markets.
NET INVESTMENT INCOME increased 38% to $89,477,000 in 2000 and 145% to $64,610,000 in 1999 from $26,357,000 in 1998. These increases are principally attributable to the growth in our annuity business and correspondingly, increases in our invested assets. Invested assets (amortized cost basis) increased 33% to $1,995,062,000 at December 31, 2000 and 147% to $1,499,729,000 at December 31, 1999 compared to $607,764,000 at December 31, 1998, while the effective yield earned on average invested assets was 7.64%, 7.34% and 7.46% for 2000, 1999, and 1998, respectively.
TRADITIONAL LIFE AND ACCIDENT AND HEALTH INSURANCE BENEFITS increased 21% to $8,728,000 in 2000 and 19% to $7,232,000 in 1999 compared to $6,085,000 in 1998. These increases are attributable to an increase in death benefits and surrenders.
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS AND VALUE OF INSURANCE IN FORCE ACQUIRED increased 19% to $8,806,000 in 2000 and 222% to $7,379,000 in 1999 from $2,294,000 in 1998. These increases are primarily due to the growth in our annuity business as discussed above.
OTHER OPERATING COSTS AND EXPENSES increased 18% to $14,370,000 in 2000 and 38% to $12,129,000 in 1999 from $8,763,000 in 1998. These increases are principally attributable to increases in marketing expenses, employees and related salaries and costs of employment.
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES includes amounts for distributions and the accretion of the issue discount on company-obligated mandatorily redeemable preferred stocks of subsidiary trusts issued in 1999. Tax benefits attributable to these amounts are reported as a reduction of income tax expense. See Note 9 of the Notes to the Audited Consolidated Financial Statements included elsewhere in this report.
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. We also have approximately 2% of our invested assets at December 31, 2000 in derivative instruments (equity market index call options) purchased in connection with the issuance of equity-index annuities.
Insurance statutes regulate the type of investments that our life subsidiary is 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 and 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.
(1) issued to the placement agent in payment of a portion of the compensation due to the placement agent (2) exercised during 1998 (3) exercised during 1999 (4) issued to the placement agent as part of placement agent compensation; 170,625 exercised in 2000, and the remaining 4,125 expire on April 30, 2002.
The 8% Trust Preferred Securities, which have a liquidation value of $30 per share plus accrued and unpaid distributions, mature simultaneously with the 8% Debentures. As of December 31, 1999, 865,671.33 shares of 8% Trust Preferred Securities were outstanding, all of which are unconditionally guaranteed by us to the extent of the assets of Trust I.
The transfer of funds by our life subsidiary is also restricted by certain covenants in our loan agreement which, among other things, requires the life subsidiary to maintain statutory capital and surplus (including the asset valuation and interest maintenance reserves) of $140,000,000 plus 25% of statutory net income for periods subsequent to December 31, 2000. Under the most restrictive of these limitations, $605,000 of earned surplus at December 31, 2000 would be available for distribution by our life subsidiary to the parent company in the form of dividends or other distributions.
Statutory accounting practices prescribed or permitted for our life subsidiary differ in many respects from those governing the preparation of financial statements under accounting principles generally accepted in the United States ("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 subsidiary as of December 31, 2000 and 1999 and for the years ended December 31, 2000, 1999 and 1998 is included in Note 11 of the Notes to Audited Consolidated Financial Statements included elsewhere in this report.
Our life subsidiary has entered into a general agency commission and servicing agreement with American Equity Investment Service Company, an affiliated company wholly-owned by the Company's chairman and president, whereby the affiliate acts as a national supervisory agent with responsibility for paying commissions to the Company's agents. This agreement initially benefits the life subsidiary's statutory surplus by extending the payment of a portion of the first year commissions on new annuity business written by the life subsidiary over a Page 19 of 24
longer period of time, and thereby enabling the life subsidiary to conduct a comparatively greater volume of business. In subsequent periods, the life subsidiary's statutory surplus is reduced through the payment of renewal commissions to the affiliate on this business based upon the account balances of the annuities remaining in force for a period of five years (see Note 8 of the Notes to the Audited Consolidated Financial Statements included elsewhere in this report).
During the years ended December 31, 2000, 1999 and 1998, the Service Company paid $28,400,000, $37,723,000, and $19,933,000, respectively, to agents of the Company. The Company paid renewal commissions to the Service Company of $20,449,000, $7,001,000, and $5,328,000, respectively.
Future payments by the life subsidiary on business in force at December 31, 2000 are dependent upon the account balances of the annuities remaining in force on each remaining quarterly renewal commission payment date. Estimated future renewal commission payments by the life subsidiary would be: $31,229,000 for 2001; $22,229,000 for 2002; $20,651,000 for 2003; and $14,451,000 for 2004.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." Statement No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Accounting for gains or losses resulting from changes in the values of those derivatives is dependent on the use of the derivative and whether it qualifies for hedge accounting. The Company issues equity-indexed annuity products, whose product characteristics include embedded derivatives. The Company also purchases options on the equity market indexes applicable to these products to fund the liabilities classified as embedded derivatives. These items will be affected by SFAS No. 133. The Statement is effective for the Company for all financial statements filed subsequent to December 31, 2000. Because various insurance-related issues were not decided by the FASB and the Derivative Implementations Group until late 2000, the Company has not yet determined the ultimate impact that this new Statement will have on its operations or financial position.
The financial statements are included as a part of this report on Form 10-K on pages through.