AMERICAN EQUITY succeeds by adhering to three guiding principles that distinguish us in the industry. Summed up in the words People, Service and Future, these principles serve as a constant reminder of why we’re here and how we work together in fulfilling our common goals. AMERICAN EQUITY TOGETHER WE SOAR P E O P L E People remain the most important asset we have. It’s our people who support the production force and serve the client. We could not grow and succeed without their belief in the vision, commitment to service and tireless efforts to achieve our business goals. S E R V I C E Good service is a tough attribute to define. You know it when you see it and even more when you receive it. At American Equity, we believe good service results from understanding that our customers and our agents have many options when choosing an annuity company. We want them to choose us, so we go the extra mile to respond to their questions and needs. We provide them with relevant products that accomplish their goals. And, above all, we treat them the way we want to be treated. It’s our culture. F U T U R E Our business is about the future—specifically helping our customers protect and preserve their assets for tomorrow. In focusing on the future, we prepare for a long journey that will undoubtedly bring challenges, test us with difficult decisions and reward our skill, commitment and determination. ANNUAL REPORT 2003 1 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA Year ended December 31, 2003 2002 2001 2000 1999 (Dollars in thousands, except per share data) Consolidated Statements of Income Data: Revenues Traditional life and accident and health insurance premiums . . . . . . . . . $13,686 $13,664 $13,141 $11,034 $10,294 Annuity and single premium universal life product charges . . . . . . . . . . 20,452 15,376 12,520 8,338 Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 358,529 308,548 209,086 100,060 Realized gains (losses) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in fair value of derivatives (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,946 52,525 (122) 787 (57,753) (55,158) (1,411) (3,406) 3,452 66,679 (87) (528) Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 452,138 279,713 180,376 114,615 79,810 Benefits and expenses Insurance policy benefits and change in future policy benefits . . . . . . . . 11,824 9,317 Interest credited to account balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242,543 177,633 Change in fair value of embedded derivatives (a) . . . . . . . . . . . . . . . . . . 66,801 (5,027) Interest expense on General Agency Commission and Servicing Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense on notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense on subordinated debentures (b) . . . . . . . . . . . . . . . . . . . Interest expense on amounts due under repurchase agreements . . . . . . . Other interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . Other operating costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 1,486 7,661 1,140 138 52,982 25,618 9,762 97,923 12,921 5,716 2,881 3,596 1,901 — — 734 1,043 39,930 21,635 1,123 381 23,040 17,176 8,728 56,529 7,232 41,727 — — 5,958 2,339 — 3,861 896 — 3,267 3,491 — — 8,574 14,602 7,063 12,445 Total benefits and expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 413,193 250,762 170,923 99,997 76,715 Income before income taxes, minority interests and cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before minority interests and cumulative effect of change in 38,945 13,505 28,951 7,299 9,453 333 14,618 2,385 3,095 (1,370) accounting principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,440 21,652 9,120 12,233 4,465 Minority interests in subsidiaries: Earnings attributable to company-obligated mandatorily redeemable preferred securities of subsidiary trusts (b) . . . . . . . . . . . . . . . . . . . . . . . — Income before cumulative effect of change in accounting principle . . . . . 25,440 Cumulative effect of change in accounting for derivatives (a) . . . . . . . . . . — 7,445 14,207 — 7,449 1,671 (799) 7,449 4,784 — 2,022 2,443 — Net income (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,440 $14,207 $872 $4,784 $2,443 Per Share Data: Earnings per common share: Income before cumulative effect of change in accounting principle . . . . $1.45 Cumulative effect of change in accounting for derivatives (a) . . . . . . . . — Earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.45 Earnings per common share – assuming dilution: Income before cumulative effect of change in accounting principle . . . . Cumulative effect of change in accounting for derivatives (a) . . . . . . . . Earnings per common share – assuming dilution . . . . . . . . . . . . . . . . . . . . Dividends declared per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.21 — $1.21 $0.01 $0.87 — $0.87 $0.76 — $0.76 $0.01 $0.10 (0.05) $0.05 $0.09 (0.04) $0.05 $0.01 $0.29 — $0.29 $0.26 — $0.26 $0.01 $0.15 — $0.15 $0.14 — $0.14 $0.01 2 AMERICAN EQUITY TOGETHER WE SOAR SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA Consolidated Balance Sheet Data: Total assets (g) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,989,177 $7,328,789 $4,819,220 $2,528,126 $1,717,619 2003 2002 December 31, 2001 2000 1999 (Dollars in thousands, except per share data) 8,315,874 6,737,888 4,420,720 2,099,915 1,358,876 Policy benefit reserves (g) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amounts due to related party under General Agency Commission and Servicing Agreement . . . . . . . . . . . . . . . . . . Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated debentures (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . Company-obligated mandatorily redeemable preferred securities issued by subsidiary trusts (b) . . . . . . . . . . . . . . . . 40,601 31,833 116,425 40,345 43,333 — 46,607 46,667 — — 100,486 100,155 Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263,716 77,478 42,567 76,028 44,000 — 99,503 58,652 62,119 20,600 — 98,982 34,324 Year ended December 31, 2003 2002 2001 2000 1999 (Dollars in thousands, except per share data) Other Data: Book value per share (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on equity (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7.19 28.30% 42,239 $4.67 23.70% 41,396 $2.24 1.70% 33,894 $3.35 10.30% 21,908 $1.72 4.90% 17,855 Life subsidiaries’ statutory capital and surplus . . . . . . . . . . . . . $374,587 $227,199 $177,868 $145,048 $139,855 Life subsidiaries’ statutory net gain (loss) from operations before income taxes and realized capital gains (losses) . . . . Life subsidiaries’ statutory net income (loss) (c)(f) . . . . . . . . . 45,822 25,404 53,535 26,010 (5,675) (17,187) 9,190 10,420 30,498 17,837 (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) Effective December 31, 2003, we adopted Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51. 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations.” (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 deter- mined based upon the total stockholders’ equity at the beginning and end of the year. The computation of average stockholders’ equity for 2003 has been modified to recognize the significant increase in stockholders’ equity that resulted from the receipt of the net pro- ceeds from our initial public offering in December 2003. (f) Our statutory net loss in 2001, was also affected by (i) an increase in reserves related to sales of certain multi-year rate guaranteed products, which have reserve requirements that are higher in earlier years and (ii) income tax expense of $6.0 million caused by a difference between statutory and tax basis reserves and other timing differences. (g) See note 1 to our audited consolidated financial statements for a discussion of a change in balance sheet presentation in 2003. ANNUAL REPORT 2003 3 2 0 0 3 H I G H L I G H T S (cid:41) (cid:41) Reported record net income of $25.4 million, up 79 percent. Completed IPO to raise $193.5 million in additional capital for growth. (cid:41) Listed on the New York Stock Exchange under the symbol “AEL.” (cid:41) Reached record numbers of producers with 42,239 agents selling American Equity products. (cid:41) Grew total assets to $9 billion. (cid:41) Refreshed product line with the release of the Integrity Gold Series. (cid:41) Earned top marks for service from producers in an independent survey of index annuity companies. 4 AMERICAN EQUITY TOGETHER WE SOAR To Our Shareholders Reflecting on the achievements and chal- lenges of 2003, American Equity’s success can be articulated in one simple sentence. We performed true to our word. In what could only be described as the most demanding, exciting and rewarding year in our history, we kept our promises and deliv- ered on our commitments. When we founded American Equity in 1995, we assured our stakeholders—investors, producers, policyholders and employees— that they could count on us to have the integrity to work hard, the insight to work smart and the fortitude to implement our business plan. Above all, they could count on us to help them to succeed…to help them soar. And soar we did, as we increased prof- itability, completed an initial public offering, improved distribution and experienced growth in assets. During 2003, we focused primarily on raising the capital essential for growth. We consid- ered several options, but early in the year, conditions in the equities market did not favor new equity offerings. Undaunted, we resolved to continue with our “hunker down” strategy, which called for building our capital base internally by restricting production, decreas- D.J. NOBLE Chairman, President and Chief Executive Officer ing costs and increasing profitability from our existing operations. The plan worked perfect- ly, with earnings trending nearly 79 percent ahead of the record profitability of 2002. CAPITAL FOR FUTURE GROWTH While we knew restricting production would augment our capital position, the strategy required time, patience and the buy-in of our production force, investors, employees and board of directors. We pledged that in tandem with this plan, we would continue to examine other possibilities for raising capital. In September 2003, after detecting signs of life in the IPO markets, we filed a registration statement with the Securities and Exchange ANNUAL REPORT 2003 5 Commission (SEC) to proceed with an initial public offering. We completed the offering on December 9, 2003, and were listed on the New York Stock Exchange (NYSE) under the symbol “AEL.” Driven in part by the help of our key con- stituents, the offering yielded $193.5 million in new equity capital. In addition, we com- pleted a private placement of approximately $12.0 million in 30-year floating rate trust preferred securities in December 2003. With this added financial strength and capital, American Equity is well positioned for future growth. FINANCIAL RESULTS Even as we reined in production in 2003, American Equity realized growth in assets, reporting $9.0 billion at year end, compared with $7.3 billion at the end of 2002. By con- trolling expenses, net income totaled $25.4 million for 2003 compared with $14.2 million for 2002. Earnings per common share increased to $1.45 compared with $0.87 per share for 2002. PRODUCTION $1.7 billion, down from $2.4 billion in 2002. Now, with a strong capital base in place, we will return to our original plan calling for aggressive, well-managed growth. MARKETING CULTURE American Equity remains dedicated to distri- bution. We built this company on distribution and production, and that remains our strong focus for future growth. Just as we planned, we did not increase our annual production in 2003. As a result, total production before reinsurance amounted to From day one, our strategy centered on build- ing an agent force by leveraging the power of 1996 1999 2000 Commences first year of operation with four employees and a business plan for building a premier life insurance and annu- ity company. American Equity becomes the first company to develop and market an index annuity tied to the Dow. The company receives a six-month exclusive on the product. The production force breaks the 20,000 mark for agents selling American Equity products. National Marketing Organizations (NMOs). In 2003, we continued to review our agent With approximately 60 NMOs representing base to ensure that we work with the best of more than 42,000 agents, we keep our sales the best, and that our producers understand force motivated and engaged with relation- our products and market them with the ship-driven service. The most productive of utmost integrity and honesty. As of year-end these firms have an ownership stake in our 2003, our selling force numbered 42,239 company through our deferred stock com- agents, up from 41,396 in 2002. During the pensation program and the outright purchase next year, we will work to increase distribu- of American Equity stock. In order to vest in tion and expand our production force to the stock ownership program, NMOs must more than 50,000 agents. achieve certain sales targets for four out of five years. As a result, we can count on In 2003, we also expanded geographically by strong, sustained production from our sales adding Vermont as one of our licensed states. force. We now sell our products in 47 states and the District of Columbia. UNDERSTANDING OUR CUSTOMERS Simply put, we sell “sleep insurance” to a target market consisting of people 65 years and older. Our typical policyholder is 67 years old with an average fund value of approximately $46,000. American Equity reaches out to this growing market segment by offering a conservative, tax-deferred vehicle for preserving principal and securing a predictable return. While we sell the com- plete range of annuity products, we specialize in index annuities, which allow policyholders to receive annual income credits based on the performance of an index without risking principal. 2001 2002 2003 Production reaches $2.4 billion, increasing an unprecedented 189 percent in one year. The Company prepares for an IPO, but plans are scrapped after terrorist attacks throw markets into disarray. Assets reach $7 billion; the Company announces a plan to increase capital through internal operations by restricting production and increasing profitability. The best year to date with record earnings, asset growth to $9 billion, agent numbers top 42,000, and the crowning achievement of completing an IPO and listing on the NYSE as “AEL”. In December, we unveiled the Integrity Series Gold Edition. The Gold Edition enhances our existing product line with improved results for every- one—our producers, our cus- tomers and our company. Producers are finding attrac- tive changes to commissions, and customers benefit from enhanced crediting rates. As the production force With the IPO completed, American Equity returns its focus to growth through increased production. Pictured here (l to r) are James M. Gerlach, Executive Vice President; Debra J. Richardson, Senior Vice President; David J. Noble, Chairman and CEO; and Kevin Wingert, President of the Life Company. In this arena, American Equity has proven embraces the refinements made in the Gold to be bold and innovative. We were the first Edition, we expect to see production increase. company to design and sell a Dow-index annuity. We also led the way with develop- EARNING THE TOP GRADE FOR SERVICE ment of multi-strategy index annuities, which While most companies in our business talk provide policyholders with the ability to about service, American Equity “walks the allocate funds among several different income talk.” In September 2003, the Advantage crediting strategies, including several linked Group, an independent research firm, to participation in the equity and bond mar- released its Report Card for companies selling kets. index annuities. PRODUCT ENHANCEMENTS — THE GOLD EDITION As a matter of practice, we frequently query our customers and agents about our products. What do they like? What would they change? This exercise keeps our product line fresh and further underscores our belief that if our agents and customers are to succeed, we must provide them with a diversified line of com- petitive, relevant products. The Advantage Group, which neither markets nor endorses any financial product, surveyed annuity producers and asked them to grade the top 10 index annuity carriers. American Equity finished at the top of the class in every category in a field that included the biggest names in the business. The categories were: (cid:132) Providing accurate information (cid:132) Ease of doing business with (cid:132) Resolving problems (cid:132) Handling 1035 exchanges/transfers 8 AMERICAN EQUITY TOGETHER WE SOAR (cid:132) Marketing materials (cid:132) Returning phone calls (cid:132) Overall grade average investment yield on average invested assets of 6.43 percent. Although the equity markets started rebound- The Report Card provided us with tremen- ing in mid-2003, record low interest rates per- dous validation for our employees and our sisted. The cost of minimum guarantees on producers. We played no role in commission- indexed and traditional fixed annuities must ing the study, selecting the companies or now be considered more than ever before in choosing participating producers. But we love all rate-setting, and asset-liability and liability the results. And this level of service absolutely could not have been achieved without the tenacity of our people. They are the ones who make sure our agents are paid promptly; that we respond in a timely manner to requests and questions; and that The American Equity Executive Team participated in the NYSE s ceremonial Closing Bell on January 13, 2004. management activi- ties. We continue to closely monitor the immediate impact of rates on new money, as well as the delayed impact of renewal rate changes on future policy anniversary dates. To ensure results, we have added actuarial and we take care of our customers. investment staff to analyze and manage prod- INVESTMENT OPERATIONS uct spread opportunities. Keeping true to our business plan, more than 98 percent of our Our business plan calls for us to manage our fixed-maturity securities are investment traditional fixed and indexed annuity portfo- grade. Approximately 73 percent of our total lios (excluding multi-year guaranteed-interest invested assets were in United States products) to a target gross spread of 2.5 per- Government and agency fixed-maturity secu- cent. During 2003, our cost of funds ranged rities at December 31, 2003. Corporate secu- from 3.05 percent to 7.0 percent for both new rities represented only 7 percent of our money and renewals on our policies that reprice and reset annually. These costs total invested assets, and we have no signifi- cant concentrations in the total portfolio by compared quite favorably with a weighted type of security or industry. ANNUAL REPORT 2003 9 size. The weighted average yield is approxi- mately 6.82 percent, and the average term was 11.5 years at year-end 2003. We strategically target our program to the middle market—loans in the $1 million to $5 million range—and our average outstand- ing individual loan balance is approximately $2.83 million. FIXED-MATURITY SECURITIES relationships drive our success in commercial As in other aspects of our business, our NAIC Designation 1 2 3 4 5 6 Rating Agency Equivalent Aaa/Aa/A Baa Ba B Caa and lower In or near default Percent 95.3% 3.2% 0.9% 0.4% 0.2% – COMMERCIAL MORTGAGE OPERATION GROWS With an eye on diversifying the investment portfolio, American Equity launched a com- mercial mortgage loan program in mid-2001. We entered this market only after identifying proven management talent in this area. As a result of continued consolidation in the insur- ance industry, the right mix of individuals became available. Staffed with a well-respect- ed and experienced team with contacts throughout the nation, the mortgage opera- tion now holds $608.7 million in loans, up from $334.3 million in 2002, an increase of 82 percent. In managing risk, we diversify the portfolio by property type, location and loan mortgage lending. We work with 23 corre- spondent lenders across the United States, and we’ve gained their loyalty by providing them a high level of service and prompt response. A BRIGHT OUTLOOK During the past three years, American Equity avoided the credit losses suffered by other insurers with an investment strategy based on investment-grade fixed-maturity securities. We possess two salient advantages over many of our peers: First, 99 percent of our annuity portfolio is in the surrender charge period, which protects the company from disinterme- diation risks should interest rates jump sharply. Second, we do not have large amounts of high-interest contracts on the books, squeezing our rates. These advantages bode well as we look to the future. Clearly, the economy showed signs of 10 AMERICAN EQUITY TOGETHER WE SOAR revival by the end of 2003, even though inter- other companies because we don’t just talk est rates remain at their lowest levels in more about it, we do it. And the future is our focus. than 40 years. In this environment, American Equity is positioned to compete and perform. Whether you are a new investor in American We lead the way in the development and mar- Equity or an old friend, we thank you for keting of index annuities. Our products reach joining us on the journey, and we look for- out to a fast-growing market, and we have the ward to working with you in the future. production force to increase sales. Cordially, Ultimately, the successful execution of American Equity’s business plan reflects three guiding themes—People, Service and Future. Our people working together get results. The service they provide distinguishes us from David J. Noble Chairman, President and CEO ANNUAL REPORT 2003 11 ourL E A D E R S H I P H O L D I N G C O M P A N Y D I R E C T O R S L I F E C O M P A N Y D I R E C T O R S D. J. Noble, 72, Chairman of the Board, President and Treasurer. More than 50 years of experience in the insurance industry. D. J. Noble, 72, Chairman of the Board and Chief Executive Officer. More than 50 years of experience in the insurance industry. John C. Anderson, 40, Doctor of Chiropractic Medicine. James M. Gerlach, 61, Executive Vice President. More than 40 years of financial and manage- ment experience. Robert L. Hilton, 75, Insurance Consultant. John M. Matovina, 49, Vice Chairman. More than 25 years of experience in the accounting and insurance industries. Ben T. Morris, 57, CEO and Director of Sanders Morris Harris, Inc. Jack W. Schroeder, 78, Vice Chairman. More than 50 years of experience in the insurance industry. William J. Oddy, 59, Chief Executive Officer, Farm Bureau Life Insurance Company. More than 35 years of experience in the insurance industry. James M. Gerlach, 61, Executive Vice President. More than 40 years of financial and manage- ment experience. Debra J. Richardson, 47, Senior Vice President and Corporate Secretary. More than 25 years of experience in the insurance industry. David S. Mulcahy, 51, Private Investor and Chairman and Owner, Monarch Holdings, Inc. More than 30 years of experience in accounting and financial business. Terry A. Reimer, 58, Executive Vice President, Treasurer and Chief Operating Officer. More than 35 years of accounting and management experi- ence. A.J. Strickland, III, 61, Professor of Strategic Management at the University of Alabama. Harley A. Whitfield, Sr., 73, Of Counsel, Whitfield & Eddy, P.L.C. Kevin R. Wingert, 46, President of Life Company. More than 20 years of life insurance marketing experience. David S. Mulcahy, 51, Private Investor and Chairman and Owner, Monarch Holdings, Inc. More than 30 years experience in accounting and finance. Kevin R. Wingert, 46, President. More than 20 years of life insurance marketing experience. 10 AMERICAN EQUITY TOGETHER WE SOAR Shareholder Information To learn more about American Equity Investment Life Holding Company you can request news releases, annual reports, financial supplements and Forms 10-K and 10-Q by contacting: Debra J. Richardson, Sr. Vice President and Secretary American Equity Investment Life Holding Company 5000 Westown Parkway, Suite 440 West Des Moines, IA 50266 (515) 273-3551, Fax (515) 221-9989 email: drichardson@american-equity.com Web Site American Equity’s web site, www.american-equity.com, is continuously updated and includes news releases, conference calls, stock price information, quarterly reports, SEC filings, management presentations and more. Corporate Headquarters American Equity Investment Life Holding Company 5000 Westown Parkway, Suite 440 West Des Moines, IA 50266 (515) 221-0002 www.american-equity.com Annual Meeting of Shareholders Thursday, June 10, 2004 3:30 p.m. Central Time American Equity Investment Life Holding Company Headquarters Stock Transfer and Registrar EquiServe Trust Company, N.A. PO Box 43010 Providence, RI 02940-3010 Telephone: (877) 282-1169 www.equiserve.com Independent Auditors Ernst & Young LLP 801 Grand Avenue, Suite 3400 Des Moines, IA 50309 ANNUAL REPORT 2003 5000 WESTOWN PARKWAY, SUITE 440 WEST DES MOINES, IOWA 50266 515.221.0002 (cid:132) 888.221.1234 www.american-equity.com 3658-AR-04