P O I S E D
T O S O A R
H I G H E R
A M E R I C A N E Q U I T Y I N V E S T M E N T L I F E H O L D I N G C O M PA N Y | 2 0 1 3 A N N U A L R E P O R T & F O R M 1 0 - K
American Equity Investment Life Holding Company
6000 Westown Parkway
West Des Moines, Iowa 50266
515-221-0002 | 888-221-1234
www.american-equity.com
AEL-AR-13
American Equity Investment Life
Holding Company Board of Directors
E X E C U T I V E C H A I R M A N ’ S L E T T E R
N O B L E
F R O M D AV I D J .
D.J. Noble
Executive Chairman
John M. Matovina
Chief Executive Officer
and President
Debra J. Richardson
Executive Vice President
and Corporate Secretary
Joyce A. Chapman
Retired Banking Executive
and Community Volunteer
Robert L. Howe
Consultant and Retired
Deputy Director
A pair of bald eagles will spend many, many years
Iowa Insurance Division
adding to their nest to ensure its strength and
stability. At American Equity, we see the wisdom
in the practice of these majestic birds. Our people
make up our nest. Without each one doing his or
her job, the nest would become unstable. All of
us see the value we add each day in serving our
policyholders and agents. It’s the strength of our
people that makes American Equity what it is
today . . . a stable, consistent company that
continues to gain momentum. A company poised
to soar even higher!
David S. Mulcahy
Chairman
Monarch Materials
Group, Inc.
Gerard D. Neugent
President and COO
Knapp Properties, Inc.
A.J. Strickland, III
Professor of Strategic
Our People Continue to Make a Difference
Management
The steady growth of American Equity is the direct
University of Alabama
result of the dedication of our people. Each of the
School of Business
more than 400 people who work in our offices brings
a high level of talent to what they do. Focusing on
our independent agents and our policyholders is our
way of life, and many of our people have more than
10 years of experience serving them. In addition,
most of our management team has been working
together for more than 15 years within American
Equity and our predecessor organizations.
Harley A. Whitfield, Sr.
Attorney, Of Counsel
Whitfield & Eddy, PLC
Robert L. Hilton
Director Emeritus
We’re so thankful for the more than 27,000
independent agents who believe in American
Equity and bring their clients the peace of mind
our products provide. The year 2013 saw 1,045 of
these agents rise to the rank of “Gold Eagle,” each
producing more than $1 million in sales of American
Equity annuity products in a single calendar year.
Alexander M. Clark
Senior Managing Director
Griffin Financial Group
“Our business philosophy
is simple: Through sound
financial management,
prudent investment and
development of innovative
products, we will position
ourselves as one of
the leaders within the
insurance industry.”
–D.J. Noble, Executive Chairman
James M. Gerlach
Retired Executive
Vice President
Shareholder
Information
Stock Listing
American Equity is listed on the
New York Stock Exchange under
the ticker symbol AEL.
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:
2013 Highlights
Julie L. LaFollette
Director of Investor Relations
6000 Westown Parkway
West Des Moines, IA 50266
In 2013, we marked great progress:
(515) 273-3602
• We experienced a record year measured
Fax (515) 221-9989
jlafollette@american-equity.com
by operating income and net income.
Website
American Equity’s website,
www.american-equity.com, is
continuously updated and includes
news releases, conference calls,
stock price information, quarterly
reports, SEC filings, management
presentations and more.
Annual Shareholders Meeting
Thursday, June 5, 2014,
3:30 p.m. CDT
AEL Headquarters
end of 2012.
• Our stock price rose 116 percent from the
Debra J. Richardson
Executive Vice President and Corporate
• The annual cash dividend of $0.18 per share to
Secretary
6000 Westown Parkway
owners of our common stock is a 20 percent
West Des Moines, IA 50266
increase from the $0.15 annual dividend paid in
(515) 273-3602
2012. This marks the 15th consecutive year a cash
Fax (515) 221-9989
dividend has been declared and the 10th year in a
drichardson@american-equity.com
row the company has increased its cash dividend.
Corporate Headquarters
American Equity Investment
Life Holding Company
6000 Westown Parkway
West Des Moines, IA 50266
(515) 221-0002
Toll-free (888) 221-1234
www.american-equity.com
Stock Transfer and Registrar
Computershare Trust Company, N.A.
P.O. Box 30170
College Station, TX 77842-3170
(877) 282-1169
www.computershare.com
Independent Registered Public
Accounting Firm
KPMG LLP
2500 Ruan Center
Des Moines, IA 50309
Officer Certifications
American Equity submitted its
CEO Certification to the New York
Stock Exchange in 2013. Additionally,
American Equity filed as an exhibit to
its 2013 annual report on Form 10-K,
a CEO/CFO Certification with the
Securities and Exchange Commission
as required under Section 302 of the
Sarbanes-Oxley Act.
• We issued non-convertible senior debt securities
for the first time, broadening our range of capital
markets transactions.
• We retired almost one-half of our outstanding
convertible debt, reducing potential future dilution
from further increases in our stock price.
Industry Recognition
• Our S&P outlook rose from “stable” to “positive,”
a sign of more success to come.
Through all of this, two things have stayed the
same—and will never change—the way we operate
our company and the way we treat our policyholders
and agents. We’re in this for the long haul and will
continue our steady, conservative growth. And
just as important, we’ll continue our legacy of
person-to-person customer service. We’ll always
answer the phone!
American Equity’s commitment
to sound business principles has
Ten Years on the New York Stock Exchange
been recognized by A.M. Best,
On December 4, 2013, American Equity celebrated
a nationally recognized industry
our 10th year as a publicly traded company. Over
rating authority.
the years, we’ve experienced the steady growth
for which we strive, and celebrated years of record-
A.M. Best’s rating of “A-”
(Excellent) for American Equity is
breaking achievement.
an independent opinion of our
financial strength and ability to meet
our ongoing insurance policy
and contract obligations. It is based
on a comprehensive quantitative
and qualitative evaluation of our
balance sheet strength, operating
performance and business profile.
A.M. Best’s rating process includes
comparisons to peers and industry
standards as well as assessments
of operating plans, philosophy and
management.
D.J. Noble
Executive Chairman
Thank you to all who contributed to American
A.M. Best uses 16 rating categories
ranging from A++ to F.
Equity’s success in 2013.
Rating effective 08/02/06,
affirmed 01/10/14 An A- rating from
A.M. Best is its fourth highest rating.
2013 Highlights
In 2013, we marked great progress:
• We experienced a record year measured
by operating income and net income.
• Our stock price rose 116 percent from the
end of 2012.
• The annual cash dividend of $0.18 per share to
owners of our common stock is a 20 percent
increase from the $0.15 annual dividend paid in
2012. This marks the 15th consecutive year a cash
dividend has been declared and the 10th year in a
row the company has increased its cash dividend.
• We issued non-convertible senior debt securities
for the first time, broadening our range of capital
markets transactions.
• We retired almost one-half of our outstanding
convertible debt, reducing potential future dilution
from further increases in our stock price.
• Our S&P outlook rose from “stable” to “positive,”
a sign of more success to come.
Ten Years on the New York Stock Exchange
On December 4, 2013, American Equity celebrated
our 10th year as a publicly traded company. Over
the years, we’ve experienced the steady growth
for which we strive, and celebrated years of record-
breaking achievement.
Through all of this, two things have stayed the
same—and will never change—the way we operate
our company and the way we treat our policyholders
and agents. We’re in this for the long haul and will
continue our steady, conservative growth. And
just as important, we’ll continue our legacy of
person-to-person customer service. We’ll always
answer the phone!
Thank you to all who contributed to American
Equity’s success in 2013.
D.J. Noble
Executive Chairman
John M. Matovina
Chief Executive Officer
and President
More Growth and
Increased Stability
in 2013
While some competitors saw their sales contract in 2013, American
Equity continued to grow. Our company has experienced a number of
years of superior performance, and continues to enjoy an excellent
reputation in the fixed index annuity marketplace.
American Equity’s growth and stability have been enhanced by our
consistent presence in the marketplace, transparent product offerings
and strong defense of the fixed index annuity industry. An example is
our leadership role in the stand against the proposed SEC Rule 151A
three years ago. As a result of this effort, American Equity became a
founding member of the Indexed Annuity Leadership Council (IALC),
a consortium of life insurance companies formed in 2011. The IALC
is very active today, educating consumers, the media, regulators and
industry professionals about the use of indexed annuities as part
of any balanced long-term financial plan. Our involvement in this
organization illustrates our rising position of leadership in the indexed
annuity community.
Our company’s growth and accomplishments in 2013 add to American
Equity’s track record of success, and opportunities for continued
growth are plentiful. For 2014, we are particularly excited about the
emergence of our Eagle Life subsidiary, which is selling fixed index
annuities through broker dealers, registered investment advisors and
banks. This represents a new distribution channel for us and one
that we think has great potential. While American Equity has been
very successful since its founding in 1995, I think our best years are
still ahead of us. We’ll continue to nurture an environment where
our people like to come to work, and enjoy serving our agents and
policyholders. The need for retirement savings and retirement income
products will continue to grow, and we’ll grow with it . . . and I’m
confident that we’ll continue to be a leading company in the fixed
index annuity marketplace.
What sets American Equity apart from our competition? Mr. Noble said it from the very beginning. . . we will have competitive products and rates, but our difference-maker is going to be offering excellent customer service. The formula is actually quite simple: We have the best people, who have positive attitudes about American Equity and want to make a difference for our agents and policyholders.One of the best examples of excellent customer service—and yet so simple—is that we answer our telephones with a live voice. We recognize that times are changing. Our customers are becoming more and more technologically savvy, and the ways in which we communicate are evolving. Even as we plan to improve our technology and online presence, human interaction will remain at the core of our business.When it comes to our product offerings, American Equity is rather contrarian. We believe our products should be easy to understand, straightforward and transparent. Our industry is highly competitive and prone to marketing gimmicks that attempt to embellish the benefits of fixed annuities. That’s not the American Equity way. Our policyholders have entrusted us with their retirement money. We are going to meet their expectations by focusing on what’s important . . . principal protection, guaranteed interest and guaranteed income. We sell “Sleep Insurance.”Ronald J. Grensteiner, President American Equity Investment Life Insurance Company Striking the Balance for Unmatched Customer Service0250_AmEq_BDY.indd 33/25/14 1:35 PM Client Appreciation
Events Give
Face-to-Face Time
with Policyholders
and Agents
By early 2014, American Equity will have hosted our
75th customer appreciation luncheon since our inaugural event in
2010. Our people look forward to spending face-to-face time with our
policyholders and their Gold Eagle agents. Meeting the people for whom
we’re working is so inspiring. We love the opportunity to thank our
policyholders in person for letting us protect their money.
Each event begins with a meeting over coffee with our Gold Eagle
agents. Then our policyholders and their Gold Eagle agents join us for
lunch. Over lunch, our executives give a presentation covering American
Equity’s core business principles, a high-level view of the company’s
financials and a reconfirmation of the ABCs of fixed index annuities.
The rapport we build with our Gold Eagle agents and policyholders has
become an integral part of our business, and we plan to continue the
Client Appreciation series into the foreseeable future.
“Mr. Noble is doing it right.
You don’t go from $0 to
$40 billion if you’re not.”
–Ronald Grensteiner, President
American Equity investment Life Insurance Company
Comments from
Policyholders
“The fiscally conservative
principles which American Equity
employs have obviously served all
involved very well—employees,
policyholders and stockholders.”
–Patricia M.
“It was my great pleasure to
attend the Client Appreciation
Luncheon and hear you reaffirm
my confidence in American
Equity. I can say I SWAN every
night (Sleep Well At Night).”
–Rita H.
“On our way home, in discussing
the event, we felt that it was
one of the best of that type
of meeting that we have ever
attended. We feel very secure
that we made the right decision
in making our investment with
your company.”
–LeRoy and DeeAnn S.
“Thank you for sticking with your
idea of good, strong investing
and not trying to show off (at our
expense) with ducks, entertaining
lizards, Flo, etc.”
–Carolyn S.
F I N A N C I A L
H I G H L I G H T S
2013
2012
2011
2010
2009
(dollars in thousands, except for per share data)
Total assets
$39,621,499
$35,133,478
$30,874,719
$26,426,763
$21,312,004
Total stockholders’ equity
$1,384,687
$1,720,237
$1,408,679
$938,047
$754,623
Total annuity deposits
$4,212,488
$3,946,932
$5,090,114
$4,668,719
$3,677,558
Net income
Operating income(a)
$253,283
$163,420
$57,798
$86,248
$42,933
$68,530
$110,187
$133,653
$108,947
$101,778
Per Share Data
Earnings per common share—
assuming dilution
Operating income(a) per common
share—assuming dilution
Book value per share
$3.38
$2.18
$19.40
$0.89
$1.37
$0.68
$1.69
$2.12
$1.70
$1.18
$1.75
$27.46
$23.82
$16.07
$13.08
Comparison of Cumulative
Five-Year Total Return
$400
$350
$300
$250
$200
$150
$100
$50
$0
4
1
.
6
9
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1
JUN
30/09
DEC
31/09
JUN
30/10
DEC
31/10
JUN
30/11
DEC
31/11
JUN
30/12
DEC
31/12
JUN
30/13
DEC
31/13
S&P 500 Financials Index
S&P 500 Index
American Equity Investment Life Holding Co.
Change in fair value of derivatives and embedded derivatives—index annuities, net of offsetsChange in fair value of derivatives and embedded derivatives—debt, net of income taxesReconciliation of net income to operating incomeNet incomeLitigation reserve, net of offsetsEffect of counterparty default, net of offsetsOperating incomeExtinguishment of debt, net of income taxesNet realized gains (losses) and net OTTI losses on investments, net of offsetsNon-GAAP Financial Measure(a)(dollars in thousands) $57,798 $86,248 $42,933 $68,530 8,648 18,354 379 (1,339) 31,246 30,086 38,114 29,961 2,915 (1,035) 53 (9) — — 171 687 — — — 3,948 9,580 — 27,297 — $110,187 $133,653 $108,947 $101,77820102011201220092013$253,283(11,702)(98,704)(1,192)21,716—19$163,420(a) In addition to net income, we have consistently utilized operating income 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 and losses on investments, including net OTTI losses recognized in operations, fair value changes in derivatives and embedded derivatives, loss on extinguishment of convertible debt, the counterparty default on expired call options, and the net charge to recognize litigation reserves. 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.NAIC 1 62.0%NAIC 2 36.0%NAIC 3 1.8%NAIC 4 0.2%NAIC 5 —%NAIC 6 —%Credit Quality of Fixed Maturity SecuritiesBillions of Dollars20092010201120122013Total Assets2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 37 38 39 40 $35.1$39.6$30.9$21.320092010201120122013Billions of Dollars1 2 3 4 5 6Total Annuity Deposits$3.9$4.2$4.7$3.7$5.1$26.40250_AmEq_BDY.indd 73/25/14 1:35 PM American Equity Investment Life
Holding Company Board of Directors
D.J. Noble
Executive Chairman
John M. Matovina
Chief Executive Officer
and President
Debra J. Richardson
Executive Vice President
and Corporate Secretary
Joyce A. Chapman
Retired Banking Executive
and Community Volunteer
Robert L. Howe
Consultant and Retired
Deputy Director
Iowa Insurance Division
David S. Mulcahy
Chairman
Monarch Materials
Group, Inc.
Gerard D. Neugent
President and COO
Knapp Properties, Inc.
A.J. Strickland, III
Professor of Strategic
Management
University of Alabama
School of Business
Alexander M. Clark
Senior Managing Director
Griffin Financial Group
Harley A. Whitfield, Sr.
Attorney, Of Counsel
Whitfield & Eddy, PLC
James M. Gerlach
Retired Executive
Vice President
Robert L. Hilton
Director Emeritus
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(cid:2) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
or
(cid:3) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File Number: 001-31911
American Equity Investment Life Holding Company
(Exact name of registrant as specified in its charter)
Iowa
(State or other jurisdiction of Incorporation)
6000 Westown Parkway
West Des Moines, Iowa
(Address of principal executive offices)
42-1447959
(I.R.S. Employer Identification No.)
50266
(Zip Code)
Registrant’s telephone number, including area code: (515) 221-0002
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common stock, par value $1
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes (cid:2) No (cid:3)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Act. Yes (cid:3) No (cid:2)
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 (cid:2) No (cid:3)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files). Yes (cid:2) No (cid:3)
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 Form 10-K. (cid:3)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a
smaller reporting company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer’’ and ‘‘smaller reporting company’’
in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:2)
Smaller reporting company (cid:3)
Accelerated filer (cid:3)
Non-accelerated filer (cid:3)
(Do not check if a
smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes (cid:3) No (cid:2)
Aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was
$967,404,076 based on the closing price of $15.70 per share, the closing price of the common stock on the New York Stock
Exchange on June 28, 2013.
Shares of common stock outstanding as of February 28, 2014: 71,806,543
Documents incorporated by reference: Portions of the registrant’s definitive proxy statement for the annual meeting of
shareholders to be held June 5, 2014, which will be filed within 120 days after December 31, 2013, 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, 2013
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Consolidated Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
PART I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
Item 6.
Item 7.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III.
PART IV.
Item 15.
SIGNATURES
Consolidated Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
The information required by Items 10 through 14 is incorporated by reference from our definitive
proxy statement to be filed with the Commission pursuant to Regulation 14A within 120 days after
December 31, 2013.
Exhibits, Financial Statement Schedules
Index to Consolidated Financial Statements and Schedules
Exhibit Index
Exhibit 12.1
Ratio of Earnings to Fixed Charges
Exhibit 21.2
Subsidiaries of American Equity Investment Life Holding Company
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
Exhibit 31.1
Certification
Exhibit 31.2
Certification
Exhibit 32.1
Certification
Exhibit 32.2
Certification
1
8
16
16
16
16
16
17
19
46
47
47
47
47
47
48
49
F-1
Item 1. Business
Introduction
PART I
We are a leader in the development and sale of fixed index and fixed rate annuity products. We were incorporated in the state of Iowa on
December 15, 1995. We are a full service underwriter of fixed annuity and life insurance products through our wholly-owned life insurance
subsidiaries, American Equity Investment Life Insurance Company ("American Equity Life"), American Equity Investment Life Insurance
Company of New York and Eagle Life Insurance Company ("Eagle Life"). Our business consists primarily of the sale of fixed index and fixed
rate annuities and, accordingly, we have only one business segment. Our business strategy is to focus on growing our annuity business and earn
predictable returns by managing investment spreads and investment risk. We are currently licensed to sell our products in 50 states and the
District of Columbia. Throughout this report, unless otherwise specified or the context otherwise requires, all references to "American Equity",
the "Company", "we", "our" and similar references are to American Equity Investment Life Holding Company and its consolidated subsidiaries.
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 Securities and Exchange
Commission ("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. The
information incorporated herein by reference is also electronically accessible from the SEC's website at www.sec.gov.
Annuity Market Overview
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 approximately 39 million Americans age 65 and older in 2010, representing 13% of the U.S. population. By 2030, this sector of the
population is expected to increase to 20% of the total population. Our fixed index and fixed rate 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,
guaranteed lifetime income and alternative payout options.
According to Wink's Sales and Market Report publilshed by Wink, Inc., total industry sales of fixed index annuities increased 6.3% to $27.1 billion
for the first three quarters of 2013 from $25.5 billion for the first three quarters of 2012, and increased 4.9% to $34.0 billion in 2012 from
$32.4 billion in 2011. Total industry sales of fixed index annuities have increased 35% over the five year period from 2007 to 2012, which we
believe is attributable to more Americans reaching retirement age and seeking products that will provide principal protection and guaranteed
lifetime income. Our wide range of fixed index and fixed rate annuity products has enabled us to enjoy favorable growth during volatile equity
and bond markets.
Strategy
Our business strategy is to grow our annuity business and earn predictable returns by managing investment spreads and investment risk. Key
elements of this strategy include the following:
Enhance our Current Independent Agency Network. We believe that our successful relationships with approximately 45 national
marketing organizations represent a significant competitive advantage. Our objective is to improve the productivity and efficiency of
our core distribution channel by focusing our marketing and recruiting efforts on those independent agents capable of selling $1 million
or more of annuity premium annually. This level of production qualifies them for our Gold Eagle program which was introduced at
the beginning of 2007. We believe the Gold Eagle program has been effective as evidenced by the number of qualified Gold Eagle
agents ranging from 945 to as many as 1,227 during the last three calendar years. Our Gold Eagle agents accounted for 61% of total
production in 2013, 59% of total production in 2012 and 57% of total production in 2011. Gold Eagle qualifiers receive a combination
of cash and equity-based incentives as motivation for producing business for us. Beginning in 2014, Gold Eagle agents will need to
sell at least $2 million of annuity premium to receive the cash and equity-based incentives under the Gold Eagle program. The equity-
based incentive compensation component of our Gold Eagle program is unique in our industry and distinguishes us from our competitors.
Our continuing focus on relationships and efficiency will ultimately reduce our independent agents to a core group of professional
annuity producers. We will also be alert for opportunities to establish relationships with national marketing organizations and agents
not presently associated with us and will strive to provide all of our marketers with the highest quality service possible.
Continue to Introduce Innovative and Competitive Products. We intend to be at the forefront of the fixed index and fixed rate annuity
industry in developing and introducing innovative and new competitive products. We were one of the first companies to offer a fixed
index annuity that allows a choice among interest crediting strategies which includes both equity and bond indices as well as a traditional
fixed rate strategy. We were also one of the first companies to include a living income benefit rider with our fixed index annuities.
We enhanced our living income benefit rider to provide policyholders with protection against inflation. 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.
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Use our Expertise to Achieve Targeted Spreads on Annuity Products. Historically, we have had a successful track record in achieving
the targeted spreads on our annuity products. This historical success has been challenged in the current extended low interest rate
environment. However, we intend to continue to leverage our experience and expertise in managing the investment spread during a
range of interest rate environments to achieve, or work towards achieving, 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 efficiencies within
our operations. 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 fixed index annuity 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 provider of fixed index annuities in this expanding segment
of the annuity market.
Focus on High Quality Service to Agents and Policyholders. We have maintained high quality personal service as one of our highest
priorities since the inception of our business and continue to strive for an unprecedented level of timely and accurate service to both
our agents and policyholders. Examples of our high quality service include answering our phone calls by a live person and issuing
policies within 24 hours of receiving the application if the paperwork is in good order. We believe high quality service is one of our
strongest competitive advantages.
Expand our Distribution Channels. We formed Eagle Life with the vision of developing a network of broker/dealers, banks and
registered investment advisors that have the ability to distribute fixed index and fixed annuity products in large volume. We believe
this to be the most effective means of building a core distribution channel of selling firms with representatives capable of selling
$1 million or more of annuity premium annually.
Products
Annuities offer our policyholders a tax-deferred means of accumulating retirement savings, as well as a reliable source of income during the
payout period. When our policyholders contribute cash to annuities, we account for these receipts as policy benefit reserves in the liability
section of our consolidated balance sheet. The annuity deposits collected, by product type, during the three most recent fiscal years are as follows:
Year Ended December 31,
2013
2012
2011
Deposits
Collected
Deposits
as a % of
Total
Deposits
Collected
Deposits
as a % of
Total
Deposits
Collected
Deposits
as a % of
Total
(Dollars in thousands)
$
2,861,977
68% $
2,225,902
56% $
2,839,295
1,020,447
3,882,424
277,922
52,142
24%
92%
7%
1%
1,208,324
3,434,226
348,049
164,657
31%
87%
9%
4%
1,377,987
4,217,282
567,229
305,603
$
4,212,488
100% $
3,946,932
100% $
5,090,114
56%
27%
83%
11%
6%
100%
Product Type
Fixed index annuities:
Index strategies
Fixed strategy
Fixed rate annuities
Single premium immediate annuities
Fixed Index Annuities
Fixed index annuities allow policyholders to earn index credits based on 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. Approximately 97%, 97% and 95% of our fixed index annuity sales for the
years ended December 31, 2013, 2012 and 2011, respectively, were "premium bonus" products. The initial annuity deposit on these policies is
increased at issuance by a specified premium bonus ranging from 5% to 10%. Generally, the surrender charge and bonus vesting provisions of
our policies are structured such that we have comparable protection from early termination between bonus and non-bonus products.
The annuity contract value is equal to the sum of premiums paid, premium bonuses and interest credited ("index credits"), which is based upon
an overall limit (or "cap") or 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. Caps and participation rates limit the amount of annual interest the
policyholder may earn in any one contract year and may be adjusted by us annually subject to stated minimums. Caps generally range from 1%
to 12% and participation rates range from 10% to 100%. In addition, some products have a spread or "asset fee" generally ranging from 1.5%
to 3.5%, which is deducted from annual interest to be credited. For products with asset fees, if the annual appreciation in the index does not
exceed the asset fee, the policyholder's index credit is zero. The minimum guaranteed contract values are equal to 87.5% of the premium collected
plus interest credited at an annual rate ranging from 1% to 3.5%.
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Fixed Rate Annuities
Fixed rate deferred annuities include annual reset and multi-year rate guaranteed products. Our annual reset fixed rate annuities have an annual
interest rate (the "crediting rate") that is guaranteed 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. Our multi-year rate guaranteed annuities are similar to our
annual reset products except that the initial crediting rate is guaranteed for up to a seven-year period before it may be changed at our discretion.
The guaranteed rate on our fixed rate deferred annuities ranges from 1% to 4% and the initial guaranteed rate on our multi-year rate guaranteed
policies ranges from 1.8% to 5%.
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 on our investment
portfolio, annuity surrender and withdrawal assumptions, competitive industry pricing and crediting rate history for particular groups of annuity
policies with similar characteristics. As of December 31, 2013, crediting rates on our outstanding fixed rate deferred annuities generally ranged
from 1.1% to 5%. The average crediting rate on our outstanding fixed rate deferred annuities at December 31, 2013 was 3.05%.
We also sell single premium immediate annuities ("SPIAs"). 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 2.30% at December 31, 2013.
Withdrawal Options—Fixed Index and Fixed Rate Annuities
Policyholders are typically permitted penalty-free withdrawals up to 10% of the contract value in 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 ranges from
5 to 17 years for fixed index annuities and 3 to 15 years for fixed rate annuities from the date the policy is issued. This surrender charge initially
ranges from 4.7% to 20% for fixed index annuities and 8.25% to 25% for fixed rate annuities of the contract value and generally decreases by
approximately one-half to two percentage points per year during the surrender charge period. For certain policies the premium bonus is considered
in the establishment of the surrender charge percentages. For other policies there is a vesting schedule ranging from 10 to 14 years that applies
to the premium bonus and any interest earned on that premium bonus. Surrender charges and bonus vesting 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.
The policyholder 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.
Beginning in July 2007, substantially all of our fixed index annuity policies were issued with a lifetime income benefit rider. This rider provides
an additional liquidity option to policyholders. With the lifetime income benefit rider a policyholder can elect to receive guaranteed payments
for life from their contract without requiring them to annuitize their contract value. The amount of the living income benefit available is determined
by the growth in the policy's income account value as defined in the rider (4.0% to 8.0%), which is selected by the policyholder at the time of
purchase, and the policyholder's age at the time the policyholder elects to begin receiving living income benefit payments. Living income benefit
payments may be stopped and restarted at the election of the policyholder. During 2013, we introduced new versions of our lifetime income
benefit rider that had an optional wellbeing benefit or optional death benefit. Policyholders have the choice of selecting a rider with a base level
of benefit for no explicit fee or paying a fee for a rider that has a higher level of benefits. Rider fees range from 0.30% to 1.00%.
Life Insurance
These products include traditional ordinary and term, universal life and other interest-sensitive life insurance products. We have approximately
$2.3 billion of life insurance in force as of December 31, 2013. We intend to continue offering life insurance products for individual and group
markets. Premiums related to this business accounted for 1% or less of revenues for the years ended December 31, 2013, 2012 and 2011.
Investments/Spread Management
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, the cost of options to fund the annual index
credits on our fixed index annuities and rates credited on our fixed rate annuities. We manage the index-based risk component of our fixed index
annuities by purchasing call options on the applicable indices to fund the annual index credits on these annuities and by adjusting the caps,
participation rates and asset fees on policy anniversary dates to reflect the change in the cost of such options which varies based on market
conditions. All options are purchased to fund the index credits on our fixed index annuities on their respective anniversary dates, and new options
are purchased at each of the anniversary dates to fund the next annual index credits. All credited rates on non-multi-year rate guaranteed fixed
rate deferred annuities may be changed annually, subject to minimum guarantees. Changes in caps, participation rates and asset fees on fixed
index annuities and crediting rates on fixed rate annuities 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 caps, participation rates, asset fees and crediting rates at levels necessary to avoid narrowing of spreads under
certain market conditions.
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For additional information regarding the composition of our investment portfolio and our interest rate risk management, see Management's
Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Investments, Quantitative and Qualitative
Disclosures About Market Risk and Note 3 to our audited consolidated financial statements.
Marketing
We market our products through a variable cost brokerage distribution network of approximately 45 national marketing organizations and,
through them, approximately 27,000 independent agents. 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 actively recruit
new agents and terminate those agents who have not produced business for us in recent periods and are unlikely to sell our products in the future.
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 emphasize our products, service and our Gold Eagle program which provides unique cash and equity-based
incentives to those agents selling $1 million or more of annuity premium annually. We also have favorable relationships with our national
marketing organizations, which have enabled us to efficiently sell through an expanded number of independent agents.
The insurance distribution system is comprised of insurance brokers and marketing organizations. We are pursuing a strategy to increase the
efficiency of our distribution network by strengthening our relationships with key national and regional marketing organizations and are alert
for opportunities to establish relationships with organizations not presently associated with us. These organizations typically recruit agents for
us by advertising our products and our commission structure through direct mail advertising or 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 by 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 and
those agents qualifying for our Gold Eagle program. For additional information regarding our equity-based programs for our leading national
marketers and independent agents, see Note 11 to our audited consolidated financial statements. We generally do not enter into exclusive
arrangements with these marketing organizations.
Eagle Life's fixed index and fixed annuities are being distributed pursuant to selling agreements with the applicable broker dealer, bank or
registered investment advisor. Relationships with these firms are facilitated by wholesalers who promote Eagle Life and are compensated based
upon the sales of the firms that they have contracted with Eagle Life.
One of our national marketing organizations accounted for more than 10% of the annuity deposits and insurance premiums collected during
2013, and we expect this organization to continue as a marketer for American Equity Life with a focus on selling our products. The states with
the largest share of direct premiums collected during 2013 were: Florida (9.9%), California (9.1%), Texas (7.6%), Illinois (6.7%), and Pennsylvania
(5.6%).
Competition and Ratings
We operate in a highly competitive industry. Our annuity products compete with fixed index, fixed rate and variable annuities sold by other
insurance companies and also with mutual fund products, traditional bank products and other investment and retirement funding alternatives
offered by asset managers, banks, and broker-dealers. Our insurance products compete with products of 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 distributor compensation.
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. The degree to which ratings adjustments have affected and will affect our sales and persistency is unknown. Following is a
summary of American Equity Life's financial strength ratings:
Financial Strength Rating
Outlook Statement
A.M. Best Company
January 2011—current
November 2008—January 2011
August 2006—October 2008
Standard & Poor's
June 2013—Current
October 2011—June 2013
September 2010—October 2011
July 2010—September 2010
July 2008—July 2010
Fitch Ratings
May 2013—Current
A-
A-
A-
BBB+
BBB+
BBB+
BBB+
BBB+
BBB+
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Stable
Negative
Stable
Positive
Stable
Positive
Stable
Negative
Stable
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.
In addition to the financial strength ratings, rating agencies use an "outlook statement" to indicate a medium or long-term trend which, if continued,
may lead to a rating change. A positive outlook indicates a rating may be raised and a negative outlook indicates a rating may be lowered. A
stable outlook is assigned when ratings are not likely to be changed. Outlook statements should not be confused with expected stability of the
insurer's financial or economic performance. A rating may have a "stable" outlook to indicate that the rating is not expected to change, but a
"stable" outlook does not preclude a rating agency from changing a rating at any time without notice.
In February 2014, A.M. Best affirmed its rating outlook on the U.S. life/annuity sector as stable, which has been A.M. Best's outlook on our
industry since 2010. In January 2014, Standard & Poor's issued its outlook on the U.S. life insurance sector as stable, which changed from their
cautious outlook in late 2012. Standard & Poor's cites insurers' strong credit characteristics and improving economic conditions as reasons for
their stable outlook. They also state that interest rates remain low but appear on the verge of increasing as the U.S. economy is likely to continue
gaining momentum through a resilient private sector, housing rebound and a strengthening job market. The rating agencies have heightened the
level of scrutiny they apply to insurance companies, increased the frequency and scope of their credit reviews and may adjust upward the capital
and other requirements employed in the rating agency models for maintenance of certain ratings levels.
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
++" (Good) and "B+" (Good). Publications of A.M. Best Company indicate that the "A-" rating is assigned to those companies that, in A.M.
Best Company's opinion, have demonstrated an excellent ability to meet their ongoing obligations to policyholders.
Standard & Poor's insurer financial strength ratings currently range from "AAA (extremely strong)" to "R (under regulatory supervision)", and
include 21 separate ratings categories, while "NR" indicates that Standard & Poor's has no opinion about the insurer's financial strength. 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" is regarded as having good financial security characteristics, but is more likely to be affected by adverse business conditions than are
higher rated insurers.
FitchRating's insurer financial strength ratings currently range from "AAA (exceptionally strong)" to "C (distressed)." Ratings of "BBB-" and
higher are considered to be "secure," and those of "BB+" and lower are considered to be "vulnerable."
A.M. Best Company, Standard & Poor's and Fitch 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 negatively adjusted for any reason, we could experience a material decline in the sales of
our products and the persistency of our existing business.
Reinsurance
Coinsurance
American Equity Life has two coinsurance agreements with EquiTrust Life Insurance Company ("EquiTrust"), covering 70% of certain of our
fixed index and fixed rate 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. The business reinsured under these agreements may not be
recaptured. Coinsurance deposits (aggregate policy benefit reserves transferred to EquiTrust under these agreements) were $0.9 billion and $1.0
billion at December 31, 2013 and 2012, respectively. We remain liable to policyholders with respect to the policy liabilities ceded to EquiTrust
should EquiTrust fail to meet the obligations it has coinsured. EquiTrust has received a financial strength rating of "B+" (Good) with a stable
outlook from A.M. Best Company. None of the coinsurance deposits with EquiTrust are deemed by management to be uncollectible.
American Equity Life has two coinsurance agreements with Athene Life Re Ltd. ("Athene"), an unauthorized life reinsurer domiciled in Bermuda.
One agreement ceded 20% of certain of our fixed index annuities issued from January 1, 2009 through March 31, 2010. The business reinsured
under this agreement is not eligible for recapture until the end of the month following seven years after the date of issuance of the policy. The
other agreement cedes 80% of our multi-year rate guaranteed annuities issued on or after July 1, 2009. The business reinsured under this
agreement may not be recaptured. Coinsurance deposits (aggregate policy benefit reserves transferred to Athene under these agreements) were
$2.1 billion and $1.9 billion at December 31, 2013 and 2012, respectively. We remain liable to policyholders with respect to the policy liabilities
ceded to Athene should Athene fail to meet the obligations it has coinsured. The annuity deposits that have been ceded to Athene are being held
in a trust and American Equity Life is named as the sole beneficiary of the trust. The assets in the trust are required to remain at a value that is
sufficient to support the current balance of policy benefit liabilities of the ceded business on a statutory basis. If the value of the trust account
would ever reach a point where it is less than the amount of the ceded policy benefit liabilities on a statutory basis, Athene is required to either
establish a letter of credit or deposit securities in a trust for the amount of any shortfall. None of the coinsurance deposits with Athene are deemed
by management to be uncollectible.
Effective January 1, 2014, American Equity Life is also an intermediary for reinsurance of 80% of Eagle Life's fixed index and multi-year rate
guaranteed annuities to Athene. The reinsurance agreements specify that the coinsurance percentage for Eagle Life's fixed index annuities
decreases to 50% for policies issued between January 1, 2016 and December 31, 2018, and to 20% for policies issued on or after January 1,
2019. Eagle Life remains liable to policyholders with respect to the policy liabilities ceded to Athene should Athene fail to meet the obligations
5
it has reinsured. The Eagle Life annuity deposits ceded to Athene will be held in the trust referred to above for the benefit of American Equity
Life and Eagle Life. None of Eagle Life's coinsurance deposits with Athene are deemed by management to be uncollectible.
Financing Arrangements
American Equity Life has two reinsurance transactions with Hannover Life Reassurance Company of America, ("Hannover"), which are treated
as reinsurance under statutory accounting practices and as financing arrangements under U.S. generally accepted accounting principles ("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 operations. The transactions became effective March 31, 2011
(the "2011 Hannover Transaction") and July 1, 2013 (the "2013 Hannover Transaction"). The 2011 Hannover Transaction terminates on March
31, 2016, and the statutory surplus benefit is reduced over a five year period and is eliminated upon termination.
The 2011 Hannover Transaction is a coinsurance and yearly renewable term reinsurance agreement for statutory purposes and provided $49.2
million in net pretax statutory surplus benefit at inception in 2011. Pursuant to the terms of this agreement, pretax statutory surplus was reduced
by $11.3 million, $11.8 million and $9.2 million in 2013, 2012 and 2011, respectively, and is expected to be reduced as follows: 2014—$10.8
million, 2015—$10.3 million and 2016—$2.5 million. These amounts include risk charges equal to 1.25% of the pretax statutory surplus benefit
as of the end of each calendar quarter.
The 2013 Hannover Transaction is a yearly renewable term reinsurance agreement for statutory purposes covering 45.6% of waived surrender
charges related to penalty free withdrawals, deaths and lifetime income benefit rider payments as well as lifetime income benefit rider payments
in excess of policy fund values on certain business. We may recapture the risks reinsured under this agreement as of the end of any quarter after
June 30, 2016. However, the agreement, as amended, makes it punitive to us if we do not recapture the business ceded no later than the first
quarter of 2018. The reserve credit recorded on a statutory basis by American Equity Life was $288.2 million at December 31, 2013. We pay
quarterly reinsurance premiums under this agreement with an experience refund calculated on a quarterly basis and a risk charge equal to 1.25%
of the pretax statutory surplus benefit as of the end of each calendar quarter. The 2013 Hannover Transaction replaces a similar reinsurance
agreement with Hannover that was recaptured simultaneously with entering into the 2013 Hannover Transaction. The reserve credit recorded
on a statutory basis by American Equity Life was $180.3 million at December 31, 2012 under the recaptured agreement.
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 annuity, 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. Indemnity reinsurance does not discharge the original insurer's primary liability to the insured.
The maximum loss retained by us on all life insurance policies we have issued was $0.1 million or less as of December 31, 2013. American
Equity Life's reinsured business under indemnity reinsurance agreements is primarily ceded to two reinsurers. Reinsurance related to life and
accident and health insurance that was ceded by us to these 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.
Regulation
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:
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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 for statutory reporting;
regulate the type and amount of permitted investments; and
limit the amount of dividends and surplus note payments that can be paid without obtaining regulatory approval.
Our life subsidiaries are subject to periodic examinations by state regulatory authorities. The Iowa Insurance Division has begun a financial
examination of American Equity Investment Life Insurance Company for the period ending December 31, 2013. In 2014, the New York Insurance
Department completed an examination of American Equity Investment Life Insurance Company of New York as of December 31, 2010. There
were no adjustments to American Equity Investment Life Insurance Company of New York's 2010 statutory financial statements as a result of
this examination. The New York Insurance Department has indicated that they will begin a financial examination of American Equity Investment
Life Insurance Company of New York for the period ending December 31, 2013 in 2014.
6
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 the Iowa Insurance Commissioner, 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 2014, up to $195.0 million can be distributed as dividends by American Equity
Life without prior approval of the Iowa Insurance Commissioner. 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 $926.7 million
of statutory earned surplus at December 31, 2013.
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.
A number of state legislatures have also 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.
Historically, the federal government has not directly regulated the business of insurance. However, 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. Additionally, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the
"Dodd-Frank Act") generally provides for enhanced federal supervision of financial institutions, including insurance companies in certain
circumstances, and financial activities that represent a systemic risk to financial stability or the U.S. economy. Under the Dodd-Frank Act, a
Federal Insurance Office has been established within the U.S. Treasury Department to monitor all aspects of the insurance industry and its
authority may extend to our business, although the Federal Insurance Office is not empowered with any general regulatory authority over insurers.
The director of the Federal Insurance Office serves in an advisory capacity to the newly established Financial Stability Oversight Council and
will have the ability to recommend that an insurance company be subject to heightened prudential standards by the Federal Reserve, if it is
determined that financial distress at the company could pose a threat to financial stability in the U.S. The Dodd-Frank Act also provides for the
preemption of state laws when inconsistent with certain international agreements.
State insurance regulators and the National Association of Insurance Commissioners ("NAIC") are continually reexamining existing laws and
regulations and developing new legislation for the passage by 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:
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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;
principles-based reserving;
own risk solvency assessment;
product approvals;
agent licensing;
underwriting practices; and
life 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 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 and surplus, asset valuation reserve and certain other adjustments. Calculations
using the NAIC formula at December 31, 2013, indicated that American Equity Life's ratio of total adjusted capital to the highest level at which
regulatory action might be initiated was 344%.
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. In 2013, the amount of expense recognized due to guaranty fund assessments was larger than normal as we incurred $8.5
million due to guaranty fund assessments related to the insolvency of Executive Life Insurance Company of New York.
7
Federal Income Tax
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.
Beginning in 2013, distributions from non-qualified annuity policies are now considered "investment income" for purposes of the newly enacted
Medicare tax on investment income contained in the Health Care and Education Reconciliation Act of 2010. As a result, in certain circumstances
a 3.8% tax ("Medicare Tax") may be applied to some or the entire taxable portion of distributions from non-qualified annuities to individuals
whose income exceeds certain threshold amounts. This tax may have an adverse effect on our ability to sell non-qualified annuities to individuals
whose income exceeds these threshold amounts.
Employees
As of December 31, 2013, we had 416 full-time employees. 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.
ITEM 1A. RISK FACTORS
We are exposed to significant financial and capital risk, including changing interest rates, credit spreads and equity prices which may
have an adverse effect on sales of our products, profitability, investment portfolio and reported book value per share.
Future changes in interest rates, credit spreads and equity and bond indices may result in fluctuations in the income derived from our investments.
These and other factors could have a material adverse effect on our financial condition, results of operations or cash flows.
Interest rate and credit spread risk. Our interest rate risk is related to market price and changes in cash flow. 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. A rise in interest rates, in the absence of other countervailing
changes, will decrease the unrealized gain position of our investment portfolio and may result in an unrealized loss position. With respect to
our available for sale fixed maturity securities, such declines in value (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.
If interest rates rise dramatically within a short period of time, our business may be exposed to disintermediation risk. Disintermediation risk
is the risk that our policyholders may surrender all or part of their contracts in a rising interest rate environment, which may require us to sell
assets in an unrealized loss position. Alternatively, we may increase crediting rates to retain business and reduce the level of assets that may
need to be sold at a loss. However, such action would reduce our investment spread and net income.
Due to the long-term nature of our annuity liabilities, sustained declines in long-term interest rates may result in increased redemptions of our
fixed maturity securities that are subject to call redemption prior to maturity by the issuer or prepayments of commercial mortgage loans and
expose us to reinvestment risk. If we are unable to reinvest the proceeds from such redemptions into investments with credit quality and yield
characteristics of the redeemed or prepaid investments, our net income and overall financial performance may be adversely affected. We have
a certain ability to mitigate this risk by lowering crediting rates on our products subject to certain restrictions as discussed below.
Our exposure to credit spreads is related to market price and changes in cash flows related to changes in credit spreads. If credit spreads widen
significantly it could result in greater investment income on new investments but would also indicate growing concern about the ability of credit
issuers to service their debt which could result in additional other than temporary impairments. If credit spreads tighten significantly it could
result in reduced net investment income from new purchases of fixed maturity securities or fundings of commercial mortgage loans.
Credit risk. We are subject to the risk that the issuers of our fixed maturity securities and other debt securities and borrowers on our commercial
mortgages, will default on principal and interest payments, particularly if a major downturn in economic activity occurs. An increase in defaults
on our fixed maturity securities and commercial mortgage loan portfolios could harm our financial strength and reduce our profitability.
Credit and cash flow assumption risk is the risk that issuers of securities, mortgagees on mortgage loans or other parties, including derivatives
counterparties, default on their contractual obligations or experience adverse changes to their contractual cash flow streams. We attempt to
minimize the adverse impact of this risk by monitoring portfolio diversification by asset class, creditor, industry, and by complying with investment
limitations governed by state insurance laws and regulations as applicable. We also consider all relevant objective information available in
estimating the cash flows related to residential and commercial mortgage backed securities.
8
We use derivative instruments to fund the annual credits on our fixed 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 and the maximum credit exposure to any single counterparty is subject to concentration limits. In addition,
we have entered into credit support agreements which allow us to require posting of collateral by our counterparties to secure their obligations
to us under the derivative instruments. If our counterparties fail to honor their obligations under the derivative instruments, our revenues may
not be sufficient to fund the annual index credits on our fixed index annuities. Any such failure could harm our financial strength and reduce
our profitability.
Liquidity risk. We could have difficulty selling our commercial mortgage loans because they are less liquid than our publicly traded securities.
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.
Fluctuations in interest rates and investment spread could adversely affect our financial condition, results of operations and cash flows.
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 (cap, participation or asset fee rates for fixed 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 minimum crediting rates filed 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 conditions. Our policy structure generally provides for resetting of policy
crediting rates at least annually and imposes withdrawal penalties for withdrawals during the first 3 to 17 years a policy is in force.
Managing the investment spread on our fixed index annuities is more complex than it is for fixed rate annuity products. We manage the index-
based risk component of our fixed index annuities by purchasing call options on the applicable indices to fund the annual index credits on these
annuities and by adjusting the caps, participation rates and asset fees on policy anniversary dates to reflect changes in the cost of such options
which varies based on market conditions. The price of such options generally increases with increases in the volatility in both the indices and
interest rates, which may either narrow the spread or cause us to lower caps or 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 caps, participation rates
and asset fees annually on the policy anniversaries.
Persistent environment of low interest rates affects and may continue to negatively affect our results of operations and financial condition.
Prolonged periods of low interest rates may have a negative impact on our ability to sell our fixed index annuities as consumers look for other
savings instruments with potentially higher yields to fund retirement. In times of low interest rates, such as we have been experiencing since
2010 and which we may continue to experience in 2014, it is difficult to offer attractive rates and benefits to customers while maintaining
profitability, which may limit sales growth of interest sensitive products.
Sustained declines in interest rates may subject us to lower returns on our invested assets, and we have had to and may have to continue to invest
the cash we receive from premiums and interest or return of principal on our investments in instruments with yields less than those we currently
own. This may reduce our future net investment income and compress the spread on our annuity products. Further, borrowers may prepay fixed
maturity securities in order to borrow at lower market rates. Any related prepayment fees are recorded in net investment income and may create
income statement volatility.
An environment of rising interest rates may materially affect our liquidity and financial condition.
Periods of rising interest rates may cause increased policy surrenders, withdrawals and requests for policy loans on deferred annuity products,
as policyholders seek investments with higher returns, commonly referred to as disintermediation. This may lead to net cash outflows and the
resulting liquidity demands may require us to sell investment assets when the prices of those assets are adversely affected by the increase in
interest rates, which may result in realized investment losses. Further, a portion of our investment portfolio consists of commercial mortgage
loans and privately placed securities, which are relatively illiquid, thus increasing our liquidity risk in the event of disintermediation. We may
also be required to accelerate the amortization of deferred policy acquisition costs and deferred sales inducements related to surrendered contracts,
which would adversely affect our results of operations.
During such times, we may offer higher crediting rates on new sales of annuity products and increase crediting rates on existing annuity products
to maintain or enhance product competitiveness. We may not be able to purchase enough higher yielding assets necessary to fund higher crediting
rates and maintain our desired spread, which could result in lower profitability on our business. Alternatively, if we seek to maintain profitability
of our products in rising interest rate environments it may be difficult to position our products to offer attractive rates and benefits to customers
which may limit sales growth of interest sensitive products.
9
Our valuation of fixed maturity and equity securities may include methodologies, estimates and assumptions which are subject to
differing interpretations and could result in changes to investment valuations that may materially adversely affect our results of operations
or financial condition.
Fixed maturity securities and equity securities are reported at fair value in our consolidated balance sheets. During periods of market disruption
including periods of significantly rising or high interest rates, rapidly widening credit spreads or illiquidity, it may be difficult to value certain
of our securities if trading becomes less frequent and/or market data becomes less observable. Prices provided by independent broker quotes
or independent pricing services that are used in the determination of fair value can vary significantly for a particular security. There may be
certain asset classes that were in active markets with significant observable data that become illiquid due to the current financial environment.
As such, valuations may include inputs and assumptions that are less observable or require greater judgment as well as valuation methods that
require greater judgment. Further, rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation
of securities as reported in our consolidated financial statements and the period-to-period changes in value could vary significantly. Decreases
in value may have a material adverse effect on our results of operations or financial condition.
Defaults on commercial mortgage loans and volatility in performance may adversely affect our business, financial condition and results
of operations.
Commercial mortgage loans have faced heightened delinquency and default risk since 2010 due to recent economic conditions which have had
a negative impact on the performance of the underlying collateral, resulting in declining values and an adverse impact on the obligors of such
instruments. An increase in the default rate of our commercial mortgage loan investments could have an adverse effect on our business, financial
condition and results of operations.
In addition, the carrying value of commercial mortgage loans is negatively impacted by such factors. The carrying value of commercial mortgage
loans is stated at outstanding principal less any loan loss allowances recognized. Considerations in determining allowances include, but are not
limited to, the following: (i) declining debt service coverage ratios and increasing loan to value ratios; (ii) bankruptcy filings of major tenants
or affiliates of the borrower on the property; (iii) catastrophic events at the property; and (iv) other subjective events or factors, including whether
the terms of the debt will be restructured. There can be no assurance that management's assessment of loan loss allowances on commercial
mortgage loans will not change in future periods, which could lead to investment losses.
We remain vulnerable to market uncertainty and continued financial instability of national, state and local governments. Continued
difficult conditions in the global capital markets and economy could deteriorate in the near future and affect our financial position and
our level of earnings from our operations.
Recovery from the most recent recession in the United States has proven to be slow and long-term. Although unemployment rates and average
household income levels have improved during 2013 there is continuing market uncertainty which has directly and materially affected our
investment portfolio. One of the strategies used by the U.S. government to stimulate the economy has been to keep interest rates low and increase
the supply of United States dollars. While these strategies have appeared to be somewhat successful, any future economic downturn or market
disruption could negatively impact our ability to invest funds.
Specifically, if market conditions deteriorate in 2014 or beyond:
•
•
•
our investment portfolio could incur additional other than temporary impairments;
our commercial mortgage loans could experience a greater amount of loss;
due to potential downgrades in our investment portfolio, we could be required to raise additional capital to sustain our current business
in force and new sales of our annuity products, which may be difficult in a distressed market. If capital would be available, it may be
at terms that are not favorable to us;
• we may be required to limit growth in sales of our annuity products; and/or
•
our liquidity could be negatively affected and we could be forced to limit our operations and our business could suffer, as we need
liquidity to pay our policyholder benefits, operating expenses, dividends on our capital stock, and to service our debt obligations.
The principal sources of our liquidity are annuity deposits, investment income and proceeds from the sale, maturity and call of investments.
Additional sources of liquidity in normal markets also include a variety of short and long-term instruments, including long-term debt and capital
securities.
Governmental initiatives intended to improve global and local economies may be accompanied by other initiatives, including new capital
requirements or other regulations, that could materially affect our business, results of operations, financial condition and liquidity in
ways that we cannot predict.
We are subject to extensive laws and regulations that are administered and enforced by a number of different regulatory authorities including
state insurance regulators, the NAIC, the SEC and the New York Stock Exchange. Some of these authorities are or may in the future consider
enhanced or new regulatory requirements intended to prevent future economic crises or otherwise assure the stability of institutions under their
supervision. These authorities may also seek to exercise their supervisory or enforcement authority in new or more robust ways. All of these
possibilities, if they occurred, could affect the way we conduct our business and manage our capital, and may require us to satisfy increased
capital requirements, any of which in turn could materially affect our results of operations, financial condition and liquidity.
10
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, attract 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
products 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 distributor
compensation.
While we compete with numerous other companies, we view the following as our most significant competitors:
Security Benefit Life;
• Allianz Life Insurance Company of North America;
•
• Great American Life Insurance Company;
• Athene USA Corp;
•
• Midland National Life Insurance Company; and
• North American Company for Life and Health Insurance.
EquiTrust Life Insurance Company;
Our ability to compete depends in part on returns and other benefits we make available to our policyholders through our annuity contracts. 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 lower rates to policyholders which could lead to withdrawals and reduced sales.
We compete for distribution sources for our products. We believe that our success in competing for distributors depends on our financial strength,
the services we provide to and the relationships we develop with these distributors, as well as 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.
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 certain policies to other insurance companies through reinsurance agreements. American Equity Life has
entered into two coinsurance agreements with EquiTrust covering $0.9 billion of policy benefit reserves at December 31, 2013 and American
Equity Life has two coinsurance agreements with Athene Life Re Ltd. ("Athene"), an unauthorized life reinsurer domiciled in Bermuda, covering
$2.1 billion of policy benefit reserves at December 31, 2013. Since Athene is an unauthorized reinsurer, the annuity deposits that have been
ceded to Athene are held in a trust and American Equity Life is named as the sole beneficiary of the trust. The assets in the trust are required to
remain at a value that is sufficient to support the current balance of policy benefit liabilities of the ceded business on a statutory basis. If the
value of the assets in the trust would ever reach a point where it is less than the amount of the ceded policy benefit liabilities on a statutory basis,
Athene is required to either establish a letter of credit or deposit securities in a trust for the amount of any shortfall. We remain liable with respect
to the policy liabilities ceded to EquiTrust and Athene should either fail to meet the obligations assumed by them.
In addition, we have entered into other types of reinsurance contracts including indemnity reinsurance and financing arrangements. Should any
of these reinsurers fail to meet the obligations assumed under such contracts, we remain liable with respect to the liabilities ceded.
Any disruption in our ability to maintain our reinsurance program may hinder our ability to manage our regulatory capital.
No assurances can be made that reinsurance will remain continuously available to us to the same extent and on the same terms as are currently
available. If we were unable to maintain our current level of reinsurance or purchase new reinsurance protection in amounts that we consider
sufficient and at prices that we consider acceptable, we would have to accept an increase in our net liability exposure or a decrease in our statutory
surplus, reduce the amount of business we write or develop other alternatives to reinsurance.
11
We may experience volatility in net income due to the application of fair value accounting to our derivative instruments.
All of our 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 certain revenues and expenses we report for
our fixed index annuity business as follows:
• We must present the call options purchased to fund the annual index credits on our fixed index annuity products at fair value. The fair
value of the call options is based upon the amount of cash that would be required to settle the call options obtained from the counterparties
adjusted for the nonperformance risk of the counterparty. We record the change in fair value of these options as a component of our
revenues. The change in fair value of derivatives includes the gains or losses recognized at expiration of the option term or upon early
termination and changes in fair value for open positions.
•
The contractual obligations for future annual index credits are treated as a "series of embedded derivatives" over the expected life of
the applicable contracts. Increases or decreases in the fair value of embedded derivatives generally correspond to increases or decreases
in equity market performance and changes in the interest rates used to discount the excess of the projected policy contract values over
the projected minimum guaranteed contract values. We record the change in fair value of these embedded derivatives as a component
of our benefits and expenses in our consolidated statements of operations.
The application of fair value accounting for derivatives and embedded derivatives in future periods to our fixed index annuity business may
cause substantial volatility in our reported net income.
Our results of operations and financial condition depend on the accuracy of management assumptions and estimates.
Assumptions and estimates are made regarding expenses and interest rates, tax liability, contingent liabilities, investment performance and other
factors related to our business and anticipated results. We rely on these assumptions and estimates when determining period end accruals, future
earnings and various components of our consolidated balance sheet. All assumptions and estimates utilized incorporate many factors, none of
which can be predicted with certainty. Our actual experiences, as well as changes in estimates, are used to prepare our consolidated statement
of operations. To the extent our actual experience and changes in estimates differ from original estimates, our results of operations and financial
condition could be materially adversely affected.
The calculations we use to estimate various components of our consolidated balance sheet and consolidated statement of operations are necessarily
complex and involve analyzing and interpreting large quantities of data. The assumptions and estimates required for these calculations involve
judgment and by their nature are imprecise and subject to changes and revisions over time. Accordingly, our results may be adversely affected
from time to time by actual results differing from assumptions, by changes in estimates and by changes resulting from implementing more
sophisticated administrative systems and procedures that facilitate the calculation of more precise estimates.
We may face unanticipated losses if there are significant deviations from our assumptions regarding the probabilities that our annuity
contracts will remain in force from one period to the next.
The expected future profitability of our annuity products is based in part upon expected patterns of premiums, expenses and benefits using a
number of assumptions, including those related to the probability that a policy or contract will remain in force, or persistency, and mortality.
Since no insurer can precisely determine persistency or mortality, actual results could differ significantly from assumptions, and deviations from
estimates and assumptions could have a material adverse effect on our business, financial condition or results of operations. For example, actual
persistency that is lower than our assumptions could have an adverse impact on future profitability, especially in the early years of a policy or
contract primarily because we would be required to accelerate the amortization of expenses we deferred in connection with the acquisition of
the policy.
In addition, we set initial crediting rates for our annuity products based upon expected claims and payment patterns, using assumptions for,
among other factors, mortality rates of our policyholders. The long-term profitability of these products depends upon how our actual experience
compares with our pricing assumptions. For example, if mortality rates are lower than our pricing assumptions, we could be required to make
more payments under certain annuity contracts in addition to what we had projected.
If our estimated gross profits change significantly from initial expectations we may be required to expense our deferred policy acquisition
costs and deferred sales inducements in an accelerated manner, which would reduce our profitability.
Deferred policy acquisition costs represent costs that vary with and primarily relate to the acquisition of new business. Deferred sales inducements
are contract enhancements such as first-year premium and interest bonuses that are credited to policyholder account balances. These costs are
capitalized when incurred and are amortized over the life of the contracts. Current amortization of these costs is generally in proportion to
expected gross profits from interest margins and, to a lesser extent, from surrender charges. Unfavorable experience with regard to expected
expenses, investment returns, mortality or withdrawals may cause acceleration of the amortization of these costs resulting in an increase of
expenses and lower profitability.
12
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 experienced rapid growth since our formation in December 1995. 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, 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, we have utilized reinsurance in the
past to support our growth. The future availability and cost 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.
The loss of key employees could disrupt our operations.
Our success depends in part on the continued service of key executives and our ability to attract and retain additional executives and employees.
We do not have employment agreements with our executive officers. The loss of key employees, or our inability to recruit and retain additional
qualified personnel, could cause disruption in our business and prevent us from fully implementing our business strategies, which could materially
and adversely affect our business, growth and profitability.
Our operations support complex transactions and are highly dependent on the proper functioning of information technology and
communication systems. Any failure of our information technology or communications systems may result in a materially adverse effect
on our results of operations and corporate reputation.
While systems and processes are designed to support complex transactions and avoid systems failure, fraud, information security failures,
processing errors and breaches of regulation, any failure could lead to a materially adverse effect on our results of operations and corporate
reputation. In addition, we must commit significant resources to maintain and enhance our existing systems in order to keep pace with industry
standards and customer preferences. If we fail to keep up-to-date information systems, we may not be able to rely on information for product
pricing, risk management and underwriting decisions. In addition, even though backup and recovery systems and contingency plans are in place,
we cannot assure investors that interruptions, failures or breaches in security of these processes and systems will not occur, or if they do occur,
that they can be adequately addressed. The occurrence of any of these events could have a materially adverse effect on our business, results of
operations and financial condition.
An information technology failure or security breach may disrupt our business, damage our reputation and adversely affect our results
of operations, financial condition and cash flows.
We use information technology ("IT") to store, retrieve, evaluate and utilize customer and company data and information. Our business is highly
dependent on our ability to access IT systems to perform necessary business functions such as providing customer support, making changes to
existing policies, filing and paying claims, managing our investment portfolios and producing financial statements. While we have policies,
procedures, automation and backup plans designed to prevent or limit the effect of failure, our IT may be vulnerable to disruptions or breaches
as a result of natural disasters, man-made disasters, criminal activity, pandemics or other events beyond our control. The failure of our IT for
any reason could disrupt our operations, result in the loss of customers and may adversely affect our business, results of operations and financial
condition.
We retain confidential information within our IT, and we rely on sophisticated commercial technologies to maintain the security of those systems.
Anyone who is able to circumvent our security measures and penetrate our IT could access, view, misappropriate, alter, or delete any information
in the systems, including personally identifiable policyholder information and proprietary business information. In addition, an increasing
number of states and foreign countries require that persons be notified if a security breach results in the disclosure of personally identifiable
customer information. Any compromise of the security of our computer systems that results in inappropriate disclosure of personally identifiable
customer information could damage our reputation in the marketplace, deter people from purchasing our products, subject us to significant civil
and criminal liability and require us to incur significant technical, legal and other expenses.
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 includes approximately 45 national marketing organizations
and over 27,000 independent agents. We must attract and retain such marketers and agents to sell our products. Insurance companies compete
vigorously for productive agents. We 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.
13
We may require additional capital to support our business and 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 various elements of required
capital. For the purpose of supporting 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, financing arrangements and/or other surplus relief
transactions. Adverse market conditions have affected and continue to affect the availability and cost of capital. 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 transact business. Our life insurance subsidiaries are domiciled in Iowa and New York. We are currently licensed
to sell our products in 50 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. 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.
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.
The NAIC and state insurance regulators continually reexamine existing laws and regulations. The NAIC may develop and recommend adoption
of new or modify existing Model Laws and Regulations. State insurance regulators may impose those recommended changes, or others, in the
future.
Our life insurance subsidiaries are subject to state insurance regulations based on 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 for 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. In addition, legislation has been enacted which could result in the federal government assuming some
role in the regulation of the insurance industry.
In July 2010, the Dodd-Frank Act was enacted and signed into law. The Dodd-Frank Act made extensive changes to the laws regulating the
financial services industry and requires various federal agencies to adopt a broad range of new rules and regulations. Among other things, the
Dodd-Frank Act imposes a comprehensive new regulatory regime on the over-the-counter ("OTC") derivatives marketplace. This legislation
subjects swap dealers and "major swap participants" (as defined in the legislation and further clarified by the rulemaking) to substantial supervision
and regulation, including capital standards, margin requirements, business conduct standards, recordkeeping and reporting requirements. It also
requires central clearing for certain derivatives transactions that the U.S. Commodities Futures Trading Commission ("CFTC") determines must
be cleared and are accepted for clearing by a "derivatives clearing organization" (subject to certain exceptions) and provides the CFTC with
authority to impose position limits across markets. Many of the key concepts, definitions, processes and issues surrounding regulation of the
OTC derivatives have been left to the relevant regulators to address and many of these regulations have yet to be proposed. The Dodd-Frank
Act and any such regulations may subject us to additional restrictions on our hedging positions which may have an adverse effect on our ability
to hedge risks associated with our business, including our fixed index annuity business, or on the cost of our hedging activity.
The Dodd-Frank Act also created a Financial Stability and Oversight Council ("FSOC"). The FSOC may designate by a 2/3 vote whether certain
insurance companies and insurance holding companies pose a grave threat to the financial stability of the United States, in which case such
companies would become subject to prudential regulation by the Board of Governors of the U.S. Federal Reserve (the "Federal Reserve Board")
(including capital requirements, leverage limits, liquidity requirements and examinations). The Federal Reserve Board may limit such company's
ability to enter into merger transactions, restrict its ability to offer financial products, require it to terminate one or more activities, or impose
conditions on the manner in which it conducts activities.
The Dodd-Frank Act also established a Federal Insurance Office under the U.S. Treasury Department to monitor all aspects of the insurance
industry and of lines of business other than certain health insurance, certain long-term care insurance and crop insurance. The director of the
Federal Insurance Office is a non-voting member of FSOC and can provide guidance regarding insurance company designations as systemically
important. The Dodd-Frank Act also provides for the pre-emption of state laws in certain instances involving the regulation of reinsurance and
other limited insurance matters. The Dodd-Frank Act requires extensive rule-making and other future regulatory action, which in some cases
will take a period of years to implement. It is not possible at this time to assess the impact on our business of the establishment of the Federal
Insurance Office and the FSOC. However, the regulatory framework at the state and federal level applicable to our insurance products is evolving.
The changing regulatory framework could affect the 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.
14
We cannot predict the requirements of any regulations ultimately adopted under the Dodd-Frank Act, the effect that such regulations will have
on financial markets or on our business, the additional costs associated with compliance with such regulations, or any changes to our operations
that may be necessary to comply with the Dodd-Frank Act, any of which could have a material adverse affect on our business, results of operations,
cash flows or financial condition.
The regulatory framework at the state and federal level applicable to our insurance products is evolving. The changing regulatory framework
could affect the design of such products and our ability or the ability of our agents to sell certain products. Any changes in these laws and
regulations could materially and adversely affect our business, financial condition or results of operations.
Changes in federal income taxation laws, including any 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 non-qualified annuity contract values (i.e. the "inside build-up") 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 all or a
portion of 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 a qualified retirement plan.
Beginning in 2013, distributions from non-qualified annuity policies are now considered "investment income" for purposes of the newly enacted
Medicare tax on investment income contained in the Health Care and Education Reconciliation Act of 2010. As a result, in certain circumstances
a 3.8% tax (“Medicare Tax”) may be applied to some or all of the taxable portion of distributions from non-qualified annuities to individuals
whose income exceeds certain threshold amounts. This tax may have an adverse effect on our ability to sell non-qualified annuities to individuals
whose income exceeds these threshold amounts.
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 Financial Industry Regulatory Authority, Inc. ("FINRA"), 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 recently entered into a settlement with respect to a purported class action lawsuit involving
allegations that generally attack the suitability of sales of deferred annuity products to persons over the age of 65. While settlement has been
approved by the district court and the case dismissed, such ruling remains subject to appeal. The settlement is contingent upon final court
approval and appeal. See Note 13 to our audited consolidated financial statements.
A downgrade in our credit or financial strength ratings may increase our future cost of capital, reduce new sales, adversely affect
relationships with distributors and increase policy surrenders and withdrawals.
Currently, our senior unsecured indebtedness carries, a "BB+" rating with a positive outlook from Standard & Poor's, a BB+ rating with a stable
outlook from Fitch Ratings, and a "bbb-" rating with a stable outlook from A.M. Best Company. 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 downgrade of the ratings applicable to our senior unsecured indebtedness.
A downgrade 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, as well as our ability to obtain reinsurance or obtain reasonable pricing on reinsurance.
Financial strength ratings are measures of an insurance company's ability to meet contractholder and policyholder obligations and 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 not recommendations to buy, sell or hold securities.
15
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
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 30, 2026. We also lease our office in Pell City, Alabama, pursuant to an operating lease that expires on December 31, 2014. We are
fully utilizing these facilities and believe both locations to be sufficient to house our operations for the foreseeable future.
Item 3. Legal Proceedings
See Note 13 to our audited consolidated financial statements.
Item 4. Mine Safety Disclosures
None
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange ("NYSE") under the symbol AEL. The following table sets forth the high and
low prices of our common stock as quoted on the NYSE.
2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2012
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$15.03
$16.60
$21.42
$26.46
$13.09
$12.95
$12.41
$12.40
$12.33
$14.03
$15.64
$20.01
$10.13
$10.00
$10.62
$10.56
As of February 19, 2014, there were approximately 16,641 holders of our common stock. In 2013 and 2012, we paid an annual cash dividend
of $0.18 and $0.15, 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.
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 Commissioner. See Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 12 to
our audited consolidated financial statements, which are incorporated by reference in this Item 5.
Issuer Purchases of Equity Securities
There were no issuer purchases of equity securities for the quarter ended December 31, 2013.
16
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 audited 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,
2013
2012
2011
2010
2009
(Dollars in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenues
Premiums and other considerations
$
45,347
$
76,675
$
118,912
$
75,558
$
Annuity product charges
Net investment income
Change in fair value of derivatives
Net realized gains (losses) on investments, excluding
other than temporary impairment ("OTTI") losses
Net OTTI losses recognized in operations
103,591
1,383,927
1,076,015
40,561
(6,234)
89,006
1,286,923
221,138
(6,454)
(14,932)
76,189
1,218,780
(114,728)
(18,641)
(33,976)
69,075
1,036,106
168,862
23,726
(23,867)
37,954
63,358
932,172
216,896
51,279
(86,771)
Total revenues
Benefits and expenses
Insurance policy benefits and change in future policy
benefits
Interest sensitive and index product benefits
Change in fair value of embedded derivatives
Amortization of deferred sales inducements and policy
acquisition costs
Interest expense on notes payable and subordinated
debentures
Other operating costs and expenses
Total benefits and expenses
Income before income taxes
Income tax expense
Net income
Per Share Data:
Earnings per common share
Earnings per common share—assuming dilution
Dividends declared per common share
Non-GAAP Financial Measures (a):
Reconciliation of net income to operating income:
$
$
2,610,692
1,652,356
1,246,536
1,349,168
1,214,213
53,071
1,272,867
133,968
81,481
808,479
286,899
115,291
775,097
(105,194)
70,115
734,930
130,950
39,300
342,772
529,508
618,581
252,076
215,259
196,261
128,008
50,958
91,915
41,937
95,495
45,610
67,559
37,031
114,615
30,672
57,789
2,221,360
1,566,367
1,113,622
1,283,902
1,128,049
389,332
136,049
85,989
28,191
132,914
46,666
65,266
22,333
253,283
$
57,798
$
86,248
$
42,933
$
$
3.86
3.38
0.18
$
0.94
0.89
0.15
$
1.45
1.37
0.12
$
0.73
0.68
0.10
86,164
17,634
68,530
1.22
1.18
0.08
Net income
$
253,283
$
57,798
$
86,248
$
42,933
$
68,530
Net realized gains (losses) and net OTTI losses on
investments, net of offsets
Change in fair value of derivatives and embedded
derivatives - index annuities, net of offsets
Change in fair value of derivatives and embedded
derivatives - debt, net of income taxes
Extinguishment of debt, net of income taxes
Effect of counterparty default, net of offsets
Litigation reserve, net of offsets
Operating income
Operating income per common share
Operating income per common share—assuming dilution
(11,702)
8,648
(98,704)
31,246
(1,192)
21,716
—
19
$
$
$
$
163,420
2.49
2.18
2,915
—
—
9,580
110,187
1.80
1.69
18,354
30,086
(1,035)
—
—
—
$
$
$
$
133,653
2.25
2.12
379
(1,339)
38,114
29,961
53
171
—
27,297
108,947
1.86
1.70
$
$
(9)
687
3,948
—
101,778
1.81
1.75
17
Consolidated Balance Sheet Data:
Total investments
Total assets
Policy benefit reserves
Notes payable
Subordinated debentures
Accumulated other comprehensive income (loss) ("AOCI")
As of and for the Year Ended December 31,
2013
2012
2011
2010
2009
(Dollars in thousands, except per share data)
$
30,346,654
$
27,537,210
$
24,383,451
$
19,816,931
$
15,374,110
39,621,499
35,789,655
549,958
246,050
46,196
35,133,478
31,773,988
309,869
245,869
686,807
30,874,719
28,118,716
297,608
268,593
457,229
26,426,763
23,655,807
21,312,004
19,336,221
330,835
268,435
81,820
938,047
316,468
268,347
(30,456)
754,623
Total stockholders' equity
1,384,687
1,720,237
1,408,679
Other Data:
Life subsidiaries' statutory capital and surplus and asset
valuation reserve
Life subsidiaries' statutory net gain from operations before
income taxes and realized capital gains (losses)
Life subsidiaries' statutory net income
Book value per share (b)
Book value per share, excluding AOCI (b)
1,995,658
1,741,638
1,655,205
1,456,679
1,239,651
305,628
205,112
19.40
18.75
182,057
79,644
27.46
16.49
344,538
167,925
23.82
16.09
322,133
172,865
16.07
14.67
253,146
116,895
13.08
13.61
(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 and losses
on investments including net OTTI losses recognized in operations, fair value changes in derivatives and embedded derivatives, loss on
extinguishment of debt, the effect of counterparty default on expired call options and changes in litigation reserves. 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 AOCI is calculated as total stockholders' equity and total stockholders' equity
excluding AOCI divided by the total number of shares of common stock outstanding. AOCI fluctuates from year to year due to unrealized
changes in the fair value of available for sale investments. Common 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.
18
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, 2013 and 2012, and our consolidated results
of operations for the three years in the period ended December 31, 2013, and where appropriate, factors that may affect future financial
performance. This analysis should be read in conjunction with our audited 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 SEC, 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, which could result in impairments and other than temporary impairments, and certain liabilities, and
the lapse rate and profitability of policies;
customer response to new products and marketing initiatives;
changes in 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; and
the risk factors or uncertainties listed from time to time in our filings with the SEC.
For a detailed discussion of these and other factors that might affect our performance, see Item 1A of this report.
Executive Summary
Since our formation in 1995, we have emphasized industry leading customer service to both our distribution force and our policyholders. We
believe this to be a major part of our ability to attract production from our independent agent network as well as maintain a low rate of policy
surrenders. Excellent customer service teamed with our ability to design innovative insurance products that provide principal protection and
tax deferred growth have continued to result in significant sales of our annuity products. In 2013, our sales increased 7% to $4.2 billion which
has resulted in cash and investments in excess of $31 billion at December 31, 2013. Our sales for the last five years have ranged from $3.7
billion to $5.1 billion and we have exceeded $4 billion in sales in three of those years. We have applied a conservative investment strategy to
the annuity deposits we continue to manage which has provided reliable returns on our invested assets. Our profitability has also been driven
by maintaining an efficient operation.
We are currently in the midst of an unprecedented period of low interest rates. In response to this persistent low interest rate environment, we
have been reducing policyholder crediting rates for new annuities and existing annuities since the fourth quarter of 2011. Spread results for
2013 and 2012 reflect the benefit from these reductions; however, the reductions in cost of money were offset by continued lower yields available
on investments including those purchased with the reinvestment of proceeds from calls of callable bonds in our investment portfolio. We expect
to continue to manage policyholder crediting rates with the objective of restoring our investment spread to our 3.00% target. We have on average
0.60% of room to reduce rates before we would reach minimum guaranteed rates on our entire book of business.
Our investment spread in 2013 and 2012 (see Our Business and Profitability) was impacted by shortfalls in investment income from excess
liquidity resulting from a lag in the reinvestment of proceeds of government agency bonds called for redemption. The callable government
agency securities have been a cornerstone of our investment portfolio since our formation. Through the years they have provided acceptable
yields that met our spread requirements without any risk-based capital charges. We went through several cycles of calls on these securities and
each time we have reinvested a portion of the call redemption proceeds into new callable government agency securities. This kept cash balances
low but perpetuated the call risk. In 2011, we had $3.1 billion in such securities called and purchased $3.7 billion for a $600 million net purchase
of callable government agency securities. However, in 2012, we only purchased $948.9 million compared to $4.3 billion in calls. Consequently,
we managed excess cash and other short-term investments throughout 2012 and into the third quarter of 2013 when we became fully invested.
See Results of Operations—Net investment income for additional information regarding our excess liquidity.
In 2013, we issued $400 million of senior unsecured notes due 2021 (the "2021 Notes") and retired $184 million aggregate principal amount of
three convertible note issues. The total consideration paid to retire the convertible notes included $219 million of cash and 5.5 million shares
of our common stock. In the short-term, these convertible debt retirements reduced net income and book value per share. However, these
retirements are expected to provide long-term benefit by eliminating potential additional dilution from further increases in our stock price. At
December 31, 2013, we had $206 million of net proceeds remaining from the 2021 Notes offering which we intend to use to retire the $160
million aggregate principal amount of convertible notes that were outstanding at December 31, 2013. The form and timing of additional
convertible debt retirements will be dependent upon market conditions and other factors and there can be no assurance that any such transactions
will be completed prior to the December 2014 call date for our 5.25% Contingent Convertible Senior Notes due 2029 (the "2029 notes") or the
September 2015 maturity date for our 3.50% Convertible Senior Notes due 2015 (the "2015 notes").
19
Our Business and Profitability
We specialize in the sale of individual annuities (primarily deferred annuities) and, to a lesser extent, we also sell life insurance policies. Under
U.S. generally accepted accounting principles ("GAAP"), premium collections for deferred annuities are reported as deposit liabilities instead
of as revenues. Similarly, cash payments to policyholders are reported as decreases in the liabilities for policyholder account balances and not
as expenses. Sources of revenues for products accounted for as deposit liabilities are net investment income, surrender and other charges deducted
from the account balances of policyholders, net realized gains (losses) on investments and changes in fair value of derivatives. Components of
expenses for products accounted for as deposit liabilities are interest sensitive and index product benefits (primarily interest credited to account
balances), changes in fair value of embedded derivatives, amortization of deferred sales inducements and deferred policy acquisition costs, other
operating costs and expenses and income taxes.
Our business model contemplates continued growth in invested assets and operating income while maintaining a high quality investment portfolio
that will not experience significant losses from impairments of invested assets. Growth in invested assets is predicated on a continuation of our
high sales achievements of the last five years while at the same time maintaining a high level of retention of the funds received. The economic
and personal investing environments continue to be conducive for high sales levels as retirees and others look to put their money in instruments
that will protect their principal and provide them with consistent cash flow sources in their retirement years. We are committed to maintaining
a high quality investment portfolio with limited exposure to below investment grade securities and other riskier assets.
Earnings from products accounted for as deposit liabilities are primarily generated from the excess of net investment income earned over the
interest credited or the cost of providing index credits to the policyholder, or the "investment spread." Our investment spread is summarized as
follows:
Average yield on invested assets
Aggregate cost of money
Aggregate investment spread
Impact of:
Investment yield - additional prepayment income
Cost of money benefit from over hedging
Year Ended December 31,
2012
5.28%
2.58%
2.70%
0.06%
0.01%
2011
5.80%
2.77%
3.03%
—%
0.06%
2013
4.98%
2.26%
2.72%
0.06%
0.02%
The cost of money for fixed index annuities and average crediting rates for fixed rate annuities are computed based upon policyholder account
balances and do not include the impact of amortization of deferred sales inducements. See Critical Accounting Policies—Deferred Policy
Acquisition Costs and Deferred Sales Inducements. With respect to our fixed index annuities, the cost of money includes the average crediting
rate on amounts allocated to the fixed rate strategy, expenses we incur to fund the annual index credits and where applicable, minimum guaranteed
interest credited. 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—Policy Liabilities for Fixed Index Annuities and Financial Condition—Derivative Instruments.
Our profitability depends in large part upon the amount of assets under our management, investment spreads we earn on our policyholder account
balances, our ability to manage our investment portfolio to maximize returns and minimize risks such as interest rate changes and defaults or
impairment of investments, our ability to manage interest rates credited to policyholders and costs of the options purchased to fund the annual
index credits on our fixed index annuities, our ability to manage the costs of acquiring new business (principally commissions to agents and
bonuses credited to policyholders) and our ability to manage our operating expenses.
20
Results of Operations for the Three Years Ended December 31, 2013
Annuity deposits by product type collected during 2013, 2012 and 2011, were as follows:
Product Type
Fixed index annuities:
Index strategies
Fixed strategy
Fixed rate annuities:
Single-year rate guaranteed
Multi-year rate guaranteed
Single premium immediate annuities
Total before coinsurance ceded
Coinsurance ceded
Net after coinsurance ceded
Year Ended December 31,
2013
2012
2011
(Dollars in thousands)
$
2,861,977
$
2,225,902
$
1,020,447
3,882,424
71,944
205,978
52,142
330,064
4,212,488
182,616
1,208,324
3,434,226
98,821
249,228
164,657
512,706
3,946,932
203,734
$
4,029,872
$
3,743,198
$
2,839,295
1,377,987
4,217,282
169,304
397,925
305,603
872,832
5,090,114
326,531
4,763,583
Annuity deposits before coinsurance ceded increased 7% during 2013 compared to 2012 and decreased 22% during 2012 compared to 2011.
We attribute the continuing significant sales of our products to several factors including the highly competitive rates on our products, our continued
strong relationships with our national marketing organizations and field force of licensed independent insurance agents, the increased
attractiveness of safe money products in volatile markets, lower interest rates on competing products such as bank certificates of deposit and
product enhancements including a new generation of guaranteed income lifetime withdrawal benefit riders. We attribute the decrease in annuity
deposits in 2012 compared to 2011 to certain competitors who were more aggressive in their product pricing. In addition, sales for 2011 benefited
from higher demand in advance of rate decreases implemented during that period. The extent to which our high level of sales will be sustained
in future periods is uncertain.
We believe our existing statutory capital and surplus and the statutory surplus we expect to generate internally through statutory earnings will
support a higher level of new business growth than in previous years. However, while we have the capital resources to accept more business
than was sold in 2013, our capacity is not unlimited and sales growth must be matched with available resources to maintain desired financial
strength ratings from credit rating agencies and in particular, A.M. Best Company. Should sales growth accelerate to levels that cannot be
supported by internal capital generation, we would intend to obtain capital from external sources to facilitate such growth.
Net income, in general, has been positively impacted by the growth in the volume of business in force and the investment spread earned on this
business. The average amount of annuity liabilities outstanding (net of annuity liabilities ceded under coinsurance agreements) increased 14%
to $29.5 billion for the year ended December 31, 2013 compared to $26.0 billion in 2012 and 16% for the year ended December 31, 2012
compared to $22.4 billion in 2011. Our investment spread measured in dollars was $695.6 million, $596.7 million, and $585.9 million for the
years ended December 31, 2013, 2012 and 2011. As previously mentioned, our investment spread in 2013 and 2012 has been negatively impacted
by both the extended low interest rate environment and our excess liquidity due to calls of our United States government agency securities (see
Net investment income). In addition, net income for the year ended December 31, 2013 was positively impacted by a decrease in the change
in fair value of index annuity embedded derivatives due to an increase in the discount rates used to estimate our embedded derivative liabilities
(see Change in fair value of embedded derivatives).
Net income for 2012 was negatively affected by the prospective adoption on January 1, 2012, of an accounting standards update that defines the
types of costs that are deferrable with policy acquisition. This resulted in $9.1 million of costs that were expensed as incurred during the year
ended December 31, 2013, which under the accounting method in effect for the years ended December 31, 2011, would have been capitalized
as deferred policy acquisition costs and amortized in future periods. This change in accounting, including the impact on related amortization
expense, resulted in a $5.8 million decrease in net income for the year ended December 31, 2012.
21
We periodically revise the key assumptions used in the calculation of amortization of deferred policy acquisition costs and deferred sales
inducements retrospectively through an unlocking process when estimates of current or future gross profits/margins (including the impact of
realized investment gains and losses) to be realized from a group of products are revised. The impact of unlocking on our results of operations,
including the impact of account balance true ups and adjustments to future period assumptions for interest margins and surrenders, was as
follows:
Year Ended December 31,
2013
2012
2011
(Dollars in thousands)
Increased (decreased) amortization of deferred sales inducements
$
(11,138) $
(199) $
Increased (decreased) amortization of deferred policy acquisition costs
Increased (decreased) net income
(18,519)
19,099
3,738
(2,243)
(4,979)
(9,132)
9,088
Net income for 2013 and 2012 was positively impacted by a revision of assumptions used in determining liabilities for living income benefit
riders. This revision was consistent with unlocking for deferred policy acquisition costs and deferred sales inducements. The impact decreased
interest sensitive and index product benefits by $1.8 million and $2.2 million and increased net income by $1.1 million and $1.4 million for the
years ended December 31, 2013 and 2012, respectively.
In 2013, we retired $184 million aggregate principal amount of three issues of convertible notes. The loss on retirement was $32.5 million
($21.7 million after income taxes). In connection with the retirement of the 2015 notes, we entered into early termination agreements for a
corresponding amount of the related 2015 notes hedges and the 2015 warrants which resulted in a $3.4 million decrease in net income for 2013
(see Note 5 to our audited consolidated financial statements).
In 2012, we established an estimated litigation liability of $17.5 million ($9.6 million after offsets for income taxes and adjustments to deferred
policy acquisition costs and deferred sales inducements) based upon developments in mediation discussions concerning potential settlement
terms of a purported class action lawsuit. See Note 13 to our audited consolidated financial statements.
During 2011, we discovered a prior period error related to policy benefit reserves for our single premium immediate annuity products. We
evaluated the materiality of the error from qualitative and quantitative perspectives and concluded it was not material to any prior periods. The
correction of the error in 2011 is not material to the results of operations for the year ended December 31, 2011. Accordingly, we made an
adjustment in the first quarter of 2011 which resulted in a decrease of policy benefit reserves and a decrease in interest sensitive and index
product benefits of $4.2 million. On an after-tax basis, the adjustment resulted in a $2.7 million increase in net income for the year December 31,
2011.
Operating income, a non-GAAP financial measure (see reconciliation to net income in Item 6. Selected Consolidated Financial Data)
increased 48% to $163.4 million in 2013 and decreased 18% to $110.2 million in 2012 from $133.7 million in 2011.
In addition to net income, we have consistently utilized operating income, a non-GAAP financial measure commonly used in the life insurance
industry, as an economic measure to evaluate our financial performance. Operating income equals net income adjusted to eliminate the impact
of net realized gains and losses on investments including net OTTI losses recognized in operations, fair value changes in derivatives and embedded
derivatives, loss on extinguishment of debt, and changes in litigation reserves. 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.
Operating income is not a substitute for net income determined in accordance with GAAP. The adjustments made to derive operating income
are important to understanding our overall results from operations and, if evaluated without proper context, operating income possesses material
limitations. As an example, we could produce a low level of net income in a given period, despite strong operating performance, if in that period
we experience significant net realized losses from our investment portfolio. We could also produce a high level of net income in a given period,
despite poor operating performance, if in that period we generate significant net realized gains from our investment portfolio. As an example
of another limitation of operating income, it does not include the decrease in cash flows expected to be collected as a result of credit loss OTTI.
Therefore, our management and board of directors also separately review net realized investment gains (losses) and analyses of our net investment
income, including impacts related to OTTI write-downs, in connection with their review of our investment portfolio. In addition, our management
and board of directors examine net income as part of their review of our overall financial results.
Net realized gains (losses) on investments and net impairment losses recognized in operations fluctuate from year to year based upon changes
in the interest rate and economic environment and the timing of the sale of investments or the recognition of other than temporary impairments.
The amounts disclosed in the reconciliation in Item 6. Selected Consolidated Financial Data are net of related reductions in amortization of
deferred sales inducements and deferred policy acquisition costs and income taxes.
22
Amounts attributable to the fair value accounting for fixed index annuity derivatives and embedded derivatives fluctuate from year to year based
upon changes in the fair values of call options purchased to fund the annual index credits for fixed index annuities and changes in the interest
rates used to discount the embedded derivative liability. The amounts disclosed in the reconciliation in Item 6. Selected Consolidated Financial
Data are net of related adjustments to amortization of deferred sales inducements and deferred policy acquisition costs and income taxes. The
significant changes in the impact from this item disclosed in the reconciliation in Item 6. Selected Consolidated Financial Data relate primarily
to changes in the discount rates used to estimate our embedded derivative liabilities, which increased in 2013 as a result of an increase in the
general level of interest rates during 2013, and decreased in 2009 through 2012 as a result of decreases in the general level of interest rates during
those years.
The impact of unlocking on operating income, including the impact of account balance true ups and adjustments to future period assumptions
for interest margins and surrenders, was as follows:
Year Ended December 31,
2013
2012
2011
(Dollars in thousands)
Increased (decreased) amortization of deferred sales inducements
$
(12,575) $
2,451
$
Increased (decreased) amortization of deferred policy acquisition costs
Increased (decreased) operating income
(20,460)
21,274
7,288
(6,285)
(7,301)
(12,106)
12,498
The revision of assumptions in 2013 and 2012 used in determining liabilities for living income benefit riders had the same effect on operating
income as it had on net income as discussed previously.
Premiums and other considerations decreased 41% to $45.3 million in 2013 and 36% to $76.7 million in 2012 from $118.9 million in 2011.
These revenues are comprised of life insurance premiums and premiums from life contingent single premium immediate annuities including
life contingent supplemental contracts issued upon annuitization of deferred annuities. Life insurance premiums have remained consistent
throughout the periods presented while premiums from life contingent single premium immediate annuities ($34.8 million, $63.8 million and
$106.8 million in 2013, 2012 and 2011, respectively) have decreased over the periods because we have adjusted the rates offered on these
products to be less competitive in the low interest rate environment.
Annuity product charges (surrender charges assessed against policy withdrawals and fees deducted from policyholder account balances for
lifetime income benefit riders) increased 16% to $103.6 million in 2013 and 17% to $89.0 million in 2012 from $76.2 million in 2011. The
components of annuity product charges are set forth in the table that follows:
Surrender charges
Lifetime income benefit riders (LIBR) fees
Withdrawals from annuity policies subject to surrender charges
Average surrender charge collected on withdrawals subject to surrender charges
Fund values on policies subject to LIBR fees
Weighted average per policy LIBR fee
Year Ended December 31,
2013
2012
2011
(Dollars in thousands)
49,193
54,398
103,591
342,087
14.4%
$
$
$
45,190
43,816
89,006
335,552
13.4%
$
$
$
49,973
26,216
76,189
378,892
13.1%
9,904,857
$
8,108,573
$
5,593,631
0.55%
0.54%
0.47%
$
$
$
$
The increases in annuity product charges were primarily attributable to increases in fees assessed for lifetime income benefit riders due to a
larger volume of business in force subject to the fee. See Interest sensitive and index product benefits below for corresponding expense
recognized on lifetime income benefit riders. The increase in surrender charges in 2013 was primarily attributable to surrender charges of $4.7
million deducted from California policyholders surrendering their policies as a condition of receiving certain benefits in a national class action
lawsuit settlement. The decrease in surrender charges in 2012 was primarily attributable to reductions in withdrawals subject to a surrender
charge. The lower amount of withdrawals in 2013 and 2012 was influenced by the continuing low interest rate environment.
Net investment income increased 8% to $1.4 billion in 2013 and 6% to $1.3 billion in 2012 from $1.2 billion in 2011. The increases were
principally attributable to the growth in our annuity business and corresponding increases in our invested assets. Average invested assets excluding
derivative instruments (on an amortized cost basis) increased 14% to $27.8 billion in 2013 and 16% to $24.4 billion in 2012 compared to $21.0
billion in 2011. The average yield earned on average invested assets was 4.98%, 5.28% and 5.80% for 2013, 2012 and 2011, respectively.
23
The decrease in yield earned on average invested assets in 2013 and 2012 was attributable to yields on investments purchased in those periods
and 2011 being lower than the overall portfolio yield. In addition, net investment income and average yield were negatively impacted by a lag
in reinvestment of proceeds from bonds called for redemption during 2013, 2012 and 2011 into new assets causing excess liquidity held in low
yielding cash and other short-term investments. The average balance held in cash and short-term investments was $1.0 billion, $1.7 billion and
$387.0 million in 2013, 2012 and 2011, respectively. The average yield on our cash and short-term investments was 0.38% in 2013 and 0.25%
in 2012. Additionally, net investment income and average yield was positively impacted by prepayment and fee income received resulting in
additional net investment income in 2013 and 2012 of $15.7 million and $14.8 million, respectively. There was no prepayment and fee income
impact for 2011.
Change in fair value of derivatives consists primarily of call options purchased to fund annual index credits on fixed index annuities, the 2015
notes hedges and 2015 warrants related to our 2015 notes and an interest rate swap and interest rate caps that hedge our floating rate subordinated
debentures. The components of change in fair value of derivatives are as follows:
Call options:
Gain on option expiration
Change in unrealized gain (loss)
2015 notes hedges
2015 warrants
Interest rate swap
Interest rate caps
Year Ended December 31,
2013
2012
2011
(Dollars in thousands)
$
554,218
$
80,782
$
377,785
145,751
(9,568)
4,973
2,856
147,828
(2,488)
—
(4,261)
(723)
155,359
(248,941)
(21,002)
—
(144)
—
$
1,076,015
$
221,138
$
(114,728)
The differences between the change in fair value of derivatives between years for call options are primarily due to the performance of the indices
upon which our call options are based. A substantial portion of our call 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 (after applicable caps, participation rates and asset fees) for options
expiring during these years is as follows:
S&P 500 Index
Point-to-point strategy
Monthly average strategy
Monthly point-to-point strategy
Fixed income (bond index) strategies
Year Ended December 31,
2013
2012
2011
1.5 - 11.5%
0.0 - 15.7%
0.0 - 21.7%
0.0 - 8.0%
0.0 - 12.8%
0.0 - 19.3%
0.0 - 18.0%
1.6 - 10.0%
0.0% - 25.0%
0.0% - 15.5%
0.0% - 16.5%
1.3% - 10.0%
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. See Critical Accounting Policies - Policy
Liabilities for Fixed Index Annuities.
The fair value of the 2015 notes hedges changes based upon changes in the price of our common stock, interest rates, stock price volatility,
dividend yield and the time to expiration of the 2015 notes hedges. Similarly, the fair value of the conversion option obligation to the holders
of the 2015 notes changes based upon these same factors and the conversion option obligation is accounted for as an embedded derivative liability
with changes in fair value reported in the Change in fair value of embedded derivatives. The amount of the change in fair value of the 2015
notes hedges has historically been equal to the amount of the change in the related embedded derivative liability and there has been an offsetting
expense in the change in fair value of embedded derivatives. Due to the partial unwind agreements we entered into, the amount of the change
in fair value of the 2015 notes hedges was $3.8 million more than the amount of the change in the related embedded derivative liability for the
year ended December 31, 2013. See Notes 5 and 9 to our audited consolidated financial statements for a discussion of the unwind agreements,
the 2015 notes hedges and the 2015 notes embedded derivative liability.
The 2015 warrants were to be settled in shares of our common stock and accordingly were classified as equity in our consolidated balance sheets,
and the changes in fair value of the 2015 warrants were not recognized in the consolidated financial statements. In conjunction with the retirement
of a portion of the 2015 notes and related early termination of a corresponding portion of the 2015 notes hedges, a corresponding amount of the
2015 warrants were also terminated prior to maturity and settled in cash rather than shares of our common stock. Accordingly, changes in the
fair value of the 2015 warrants that were terminated in 2013 prior to maturity from the dates the early termination agreements were executed
through the dates of settlement are included in the consolidated statement of operations for the year ended December 31, 2013. See Notes 5 and
9 to our audited consolidated financial statements for a discussion of the 2015 warrants.
24
Net realized gains (losses) on investments, excluding OTTI losses include gains and losses on the sale of securities and impairment losses on
mortgage loans on real estate which fluctuate from year to year due to changes in the interest rate and economic environment and the timing of
the sale of investments, as well as gains (losses) recognized on real estate owned due to any sales and impairments on long-lived assets. The
components of net realized gains (losses) on investments are set forth in the table that follows:
Available for sale fixed maturity securities:
Gross realized gains
Gross realized losses
Equity securities:
Gross realized gains
Other investments:
Gain on sale of real estate
Loss on sale of real estate
Impairment losses on real estate
Mortgage loans on real estate:
Increase in allowance for credit losses
Recovery of specific allowance
Year Ended December 31,
2013
2012
2011
(Dollars in thousands)
$
39,079
$
10,906
$
562
966
(6,170)
32,909
9,571
2,144
(1,317)
(1,195)
(368)
(5,621)
4,070
(1,551)
(562)
10,344
5,149
—
(5,677)
(528)
(16,832)
—
(16,832)
12,614
(1,423)
11,191
377
—
(405)
(28)
(30,770)
—
(30,770)
(18,641)
$
40,561
$
(6,454) $
Losses in 2013 were realized primarily due to strategies to reposition the fixed maturity security portfolio that resulted in improved net investment
income, risk or duration profiles as they pertain to our asset liability management. Two corporate issues were sold at a loss in 2013 due to our
fundamental, long-term concern with the issuer's ability to meet its future financial obligations. See Note 4 to our audited consolidated financial
statements for additional discussion of allowance for credit losses recognized on mortgage loans on real estate.
Net OTTI losses recognized in operations decreased to $6.2 million in 2013 and decreased to $14.9 million in 2012 from $34.0 million in
2011. The impairments recognized in 2012 and 2011 were primarily on residential mortgage backed securities and were principally due to
changes of assumptions regarding loss severity of a number of securities we hold which affected our ongoing analysis of expected cash flow
projections. See Financial Condition—Investments and Note 3 to our audited consolidated financial statements for additional discussion of
write downs of securities for other than temporary impairments.
Insurance policy benefits and changes in future policy benefits decreased 35% to $53.1 million in 2013 and 29% to $81.5 million in 2012
from $115.3 million in 2011. These expenses include amounts for life insurance policies and life contingent single premium immediate annuities
including life contingent supplemental contracts issued upon annuitization of deferred annuities. Amounts for life insurance policies have
remained consistent throughout the periods presented while amounts related to life contingent single premium immediate annuities ($46.1 million,
$73.4 million and $107.4 million in 2013, 2012 and 2011, respectively) have decreased over the periods primarily because the related premiums
have decreased as discussed above under Premiums and other considerations.
Interest sensitive and index product benefits increased 57% to $1.3 billion in 2013 and 4% to $808.5 million in 2012 from $775.1 million in
2011. The components of interest sensitive and index product benefits are summarized as follows:
Index credits on index policies
Interest credited (including changes in minimum guaranteed interest for fixed index annuities)
Lifetime income benefit riders
Year Ended December 31,
2013
2012
2011
(Dollars in thousands)
908,717
$
447,393
$
310,369
53,781
319,121
41,965
1,272,867
$
808,479
$
$
$
448,248
302,031
24,818
775,097
The amount of 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 $910.4 million, $447.2 million and $454.2 million for the years
ended December 31, 2013, 2012 and 2011, respectively. The decrease in interest credited for 2013 was due to a decrease in the average rate
credited to the annuity liabilities outstanding receiving a fixed rate of interest. The increase in interest credited for 2012 was due to an increase
in the average amount of annuity liabilities outstanding receiving a fixed rate of interest. The average amount of annuity liabilities outstanding
25
(net of annuity liabilities ceded under coinsurance agreements) increased 14% to $29.5 billion in 2013 and 16% to $26.0 billion in 2012 from
$22.4 billion in 2011. The increases in benefits recognized for lifetime income benefit riders were due to increases in the number of policies
with lifetime income benefit riders and correlates to the increase in fees discussed in Annuity product charges.
Amortization of deferred sales inducements increased 190% to $253.1 million in 2013 and 21% to $87.2 million in 2012 from $71.8 million
in 2011. 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 97%, 97% and
95% of our total net annuity deposits during 2013, 2012 and 2011, respectively. The 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,
amortization associated with the net realized gains (losses) on investments and net OTTI losses recognized in operations and, in 2013 and 2012,
amortization associated with litigation reserves. 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 lives of the contracts which typically exceed ten years. Amortization of deferred sales
inducements is summarized as follows:
Amortization of deferred sales inducements before gross profit adjustments
Gross profit adjustments:
Fair value accounting for derivatives and embedded derivatives
Net realized gains (losses) on investments, net OTTI losses recognized in operations
and changes in litigation reserves
Amortization of deferred sales inducements after gross profit adjustments
$
$
Year Ended December 31,
2013
2012
2011
(Dollars in thousands)
143,415
$
136,254
$
116,938
103,172
(45,010)
(35,498)
6,526
(4,087)
253,113
$
87,157
$
(9,659)
71,781
See Net income and Operating income (a non-GAAP financial measure) above for discussion of the impact of unlocking on amortization of
deferred sales inducements for the years ended December 31, 2013, 2012 and 2011. See Critical Accounting Policies—Deferred Policy Acquisition
Costs and Deferred Sales Inducements.
Change in fair value of embedded derivatives includes changes in the fair value of the embedded derivative related to the conversion option
of our 2015 notes (see Notes 5 and 9 to our audited consolidated financial statements) and changes in the fair value of our fixed index annuity
embedded derivatives. The components of change in fair value of embedded derivatives are as follows:
2015 notes embedded conversion derivative
Fixed index annuities—embedded derivatives
Year Ended December 31,
2013
2012
2011
(Dollars in thousands)
141,974
(8,006)
(2,488)
289,387
(21,002)
(84,192)
$
133,968
$
286,899
$
(105,194)
As discussed above under Change in fair value of derivatives, the fair value of the 2015 notes embedded conversion derivative changes based
upon the same factors effecting the changes in the 2015 notes hedges. The changes in the fair value of the 2015 notes embedded conversion
derivative were offset by a comparable increase or decrease in the change in fair value of the 2015 notes hedges.
The change in fair value of the fixed index annuity embedded derivatives 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 those index credits discussed above
in Change in fair value of derivatives; (ii) changes in discount rates used in estimating our embedded derivative liabilities; and (iii) the growth
in the host component of the policy liability. See Critical Accounting Policies—Policy Liabilities for Fixed Index Annuities. The primary reason
for the decrease in the change in fair value of the fixed index annuity embedded derivatives during 2013 was an increase in the discount rates
used in estimating our embedded derivative liabilities. The discount rates used in estimating our embedded derivative liabilities increased as a
result of the increase in the general level of interest rates during 2013. The primary reasons for the increase in the change in fair value of the
fixed index annuity embedded derivatives during 2012 were increases in the expected index credits that resulted from increases in the fair value
of the call options acquired to fund these index credits and decreases in the discount rates used in estimating our embedded derivative liabilities.
Interest expense on notes payable increased 36% to $38.9 million in 2013 and decreased 10% to $28.5 million in 2012 from $31.6 million in
2011. The increase in 2013 was primarily due to interest expense on the $400 million of 6.625% senior unsecured notes we issued on July 17,
2013. This increase was offset by lower interest expense on our convertible senior notes as we extinguished $155.5 million principal amount
of these notes during the fourth quarter of 2013 and $28.3 million principal amount of these notes during the second quarter of 2013. The
decrease in 2012 was primarily due to the extinguishment of $46.3 million principal amount of our 2024 notes on December 15, 2011. See Note
9 to our audited consolidated financial statements.
26
Interest expense on subordinated debentures decreased 10% to $12.1 million in 2013 and 4% to $13.5 million in 2012 from $14.0 million in
2011. These decreases were primarily due to the redemption of $22 million principal amount of our 8% Convertible Junior Subordinated
Debentures in July 2012 (see Note 10 to our audited consolidated financial statements) and, to a lesser extent, a decrease in 2013 in the interest
on $169.6 million principal amount of the subordinated debentures that have interest based upon the three month London Interbank Offered
Rate plus an applicable margin, which carried a weighted average interest rate of 4.07%, 4.35% and 4.12% for 2013, 2012 and 2011, respectively.
See Financial Condition—Liabilities.
Amortization of deferred policy acquisition costs increased 122% to $365.5 million in 2013 and 15% to $164.9 million in 2012 from $143.5
million in 2011. 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 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, amortization associated with net realized gains (losses) on investments and net OTTI losses recognized in operations
and, in 2013 and 2012, the amortization associated with litigation reserves. As discussed above, 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.
Amortization of deferred policy acquisition costs is summarized as follows:
Amortization of deferred policy acquisition costs before gross profit adjustments
Gross profit adjustments:
Fair value accounting for derivatives and embedded derivatives
Net realized gains (losses) on investments, net OTTI losses recognized in operations
and changes in litigation reserves
Amortization of deferred policy acquisition costs after gross profit adjustments
$
$
Year Ended December 31,
2013
2012
2011
(Dollars in thousands)
215,560
$
224,773
$
203,296
141,283
(53,296)
(45,360)
8,625
(6,558)
365,468
$
164,919
$
(14,458)
143,478
See Net income and Operating income (a non-GAAP financial measure) above for discussion of the impact of unlocking on amortization of
deferred policy acquisition costs for the years ended December 31, 2013, 2012 and 2011. See Critical Accounting Policies—Deferred Policy
Acquisition Costs and Deferred Sales Inducements.
Other operating costs and expenses decreased 4% to $91.9 million in 2013 and increased 41% to $95.5 million in 2012 from $67.6 million in
2011. The decrease in 2013 is due to a decrease in litigation expense of $16.5 million offset by an increase in expense for guaranty fund
assessments of $7.6 million related to the insolvency of Executive Life Insurance Company of New York and compensation costs of $3.3 million
that vary based on the Company's stock price. The increase in 2012 includes the $17.5 million estimated litigation liability that was recorded
in the third quarter of 2012. Other operating expenses also increased $9.1 million during 2012 due to a change in accounting which we adopted
prospectively effective January 1, 2012 for the types of costs that may be capitalized as acquisition costs of new and renewal insurance contracts
(see Note 1 to our audited consolidated financial statements).
In 2013, other operating costs and expenses net of changes in litigation liabilities and guaranty fund assessments are primarily affected by
increases in salaries and benefits, increased risk charges for our financing reinsurance agreement with Hannover (2013 Hannover Transaction)
as well as the fluctuation in legal expense for the cost of defense of on-going litigation. Other operating costs and expenses excluding litigation
expense and guaranty fund assessments discussed previously increased 7% to $82.4 million in 2013 from $77.1 million in 2012.
In 2012, other operating costs and expenses net of litigation settlements and the change in accounting were primarily affected by increases in
salaries and benefits, marketing expenses and general operating expenses due to the growth of our business as well as the fluctuation in legal
expense for the cost of defense of on-going litigation. Other operating costs and expense excluding the litigations settlement and the change in
accounting discussed previously increased 2% to 68.9 million in 2012 from $67.5 million in 2011.
Income tax expense increased in 2013 and decreased in 2012 primarily because of the changes in income before income taxes. The effective
income tax rates were 34.9%, 32.8% and 35.1% for 2013, 2012 and 2011, respectively.
Income tax expense and the resulting effective tax rate are based upon two components of income before income taxes ("pretax income") that
are taxed at different tax rates. Life insurance income is generally taxed at an effective rate of approximately 35.6% reflecting the absence of
state income taxes for substantially all of the states that the life insurance subsidiaries do business in. The income (loss) for the parent company
and other non-life insurance subsidiaries is generally taxed at an effective tax rate of 41.5% reflecting the combined federal / state income tax
rates. The effective tax rates resulting from the combination of the income tax provisions for the life / non-life sources of income (loss) vary
from year to year based primarily on the relative size of pretax income (loss) from the two sources. The effective income tax rate increased in
2013 because a portion of the parent company's loss on extinguishment of debt was not deductible resulting in an effective tax rate on the parent
company's pretax loss that was less than 41.5%. The effective income tax rate decreased in 2012 due to new sources of net investment income
that are exempt from federal income tax.
27
Financial Condition
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 mortgage loans on real estate.
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 and government-sponsored agency securities, corporate securities, residential and commercial mortgage
backed securities, other asset backed securities and United States municipalities, states and territories securities rated investment grade by
established nationally recognized statistical rating organizations ("NRSRO's") or in securities of comparable investment quality, if not rated and
commercial mortgage loans on real estate.
The composition of our investment portfolio is summarized as follows:
Fixed maturity securities:
United States Government full faith and credit
$
United States Government sponsored agencies
United States municipalities, states and territories
Foreign government obligations
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Total fixed maturity securities
Equity securities
Mortgage loans on real estate
Derivative instruments
Other investments
December 31,
2013
2012
Carrying
Amount
Percent
Carrying
Amount
Percent
(Dollars in thousands)
42,925
1,194,289
3,306,743
91,557
17,309,292
1,971,960
1,735,460
1,034,476
26,686,702
7,778
2,581,082
856,050
215,042
0.2% $
3.9%
10.9%
0.3%
57.1%
6.5%
5.7%
3.4%
5,154
1,772,025
3,578,323
105,259
14,542,860
2,888,113
357,982
998,508
88.0%
24,248,224
—%
8.5%
2.8%
0.7%
53,422
2,623,940
415,258
196,366
—%
6.5%
13.0%
0.4%
52.8%
10.5%
1.3%
3.6%
88.1%
0.2%
9.5%
1.5%
0.7%
$
30,346,654
100.0% $
27,537,210
100.0%
During 2013 and 2012, we received $1.1 billion and $4.6 billion, respectively, in net redemption proceeds related to calls of our callable United
States Government sponsored agency securities, of which $2.6 billion for the year ended December 31, 2012, were classified as held for investment.
The proceeds from these redemptions have been reinvested primarily in United States Government sponsored agencies, corporate securities,
residential and commercial mortgage backed securities and other asset backed securities classified as available for sale. We remain committed
to maintaining a high quality investment portfolio with low credit risk. At December 31, 2013, 31% of our fixed income securities have call
features, of which 0.5% ($0.1 billion) were subject to call redemption and another 5% ($1.2 billion) will become subject to call redemption
during 2014.
Fixed Maturity Securities
Our fixed maturity security portfolio is managed to minimize risks such as interest rate changes and defaults or impairments while earning a
sufficient and stable return on our investments. Historically, we have had a high percentage of our fixed maturity securities in U.S. Government
sponsored agency securities (for the most part Federal Home Loan Mortgage Corporation and Federal National Mortgage Association). While
U.S. Government sponsored agency securities are of high credit quality, the call features resulted in our excess cash position during 2011, 2012
and the first nine months of 2013. These calls resulted from the low interest rate and tight agency spread environment. Since 2007, when we
had almost 80% of our fixed maturity portfolio invested in callable agencies, we have reallocated a significant portion of our fixed maturities
from the callable agency securities to other highly rated, long-term securities. The largest portion of our fixed maturity securities are now in
investment grade (NAIC designation 1 or 2) publicly traded or privately placed corporate securities. We have also built a portfolio of residential
mortgage backed securities ("RMBS") that provide our investment portfolio a source of regular cash flow and higher yielding assets than our
agency securities. In addition, we have acquired a portfolio of taxable bonds issued by municipalities, states and territories of the United States
that provide us with attractive yields while being consistent with our credit risk parameters. Beginning in 2012, we have increased our position
in other asset backed securities as well as establishing a position in commercial mortgage backed securities ("CMBS").
28
A summary of our fixed maturity securities by NRSRO ratings is as follows:
Rating Agency Rating
Aaa/Aa/A
Baa
Total investment grade
Ba
B
Caa and lower
In or near default
Total below investment grade
December 31,
2013
2012
Carrying
Amount
Percent of Fixed
Maturity Securities
Carrying
Amount
Percent of Fixed
Maturity Securities
(Dollars in thousands)
$
$
16,122,487
9,147,584
25,270,071
477,477
128,488
617,900
192,766
1,416,631
26,686,702
60.4% $
34.3%
94.7%
1.8%
0.5%
2.3%
0.7%
5.3%
100.0% $
14,613,775
8,190,220
22,803,995
365,102
79,789
862,650
136,688
1,444,229
24,248,224
60.3%
33.8%
94.1%
1.5%
0.3%
3.5%
0.6%
5.9%
100.0%
The NAIC's Securities Valuation Office ("SVO") is responsible for the day-to-day credit quality assessment and the valuation of fixed maturity
securities owned by state regulated insurance companies. The purpose of such assessment and valuation is for determining regulatory capital
requirements and regulatory reporting. Insurance companies report ownership to the SVO when such securities are eligible for regulatory filings.
The SVO conducts credit analysis on these securities for the purpose of assigning a NAIC designation and/or unit price. Typically, if a security
has been rated by a NRSRO, the SVO utilizes that rating and assigns a NAIC designation based upon the following system:
NAIC Designation
NRSRO Equivalent Rating
1
2
3
4
5
6
Aaa/Aa/A
Baa
Ba
B
Caa and lower
In or near default
For most of the bonds held in our portfolio the NAIC designation matches the NRSRO equivalent rating. However, for certain loan-backed and
structured securities, as defined by the NAIC, the NAIC rating is not always equivalent to the NRSRO rating presented in the previous table.
The NAIC has adopted revised rating methodologies for certain loan-backed and structured securities comprised of non-agency RMBS and
CMBS. The NAIC’s objective with the revised rating methodologies for these structured securities is to increase the accuracy in assessing
expected losses and use the improved assessment to determine a more appropriate capital requirement for such structured securities. The revised
methodologies reduce regulatory reliance on rating agencies and allow for greater regulatory input into the assumptions used to estimate expected
losses from structured securities.
The use of this process by the SVO may result in certain non-agency RMBS and CMBS being assigned an NAIC designation that is higher than
the equivalent NRSRO rating. The NAIC designations for non-agency RMBS and CMBS are based on security level expected losses as modeled
by an independent third party (engaged by the NAIC) and the statutory carrying value of the security, including any purchase discounts or
impairment charges previously recognized. Evaluation of non-agency RMBS and CMBS held by insurers using the revised NAIC rating
methodologies is performed on an annual basis.
As stated previously, our fixed maturity security portfolio is managed to minimize risks such as defaults or impairments while earning a sufficient
and stable return on our investments. Our strategy has been to invest primarily in investment grade fixed maturity securities. Investment grade
is NAIC 1 and 2 securities and Baa3/BBB- and better securities on the NRSRO scale. This strategy meets the objective of minimizing risk while
also managing asset capital charges on a regulatory capital basis.
29
A summary of our fixed maturity securities by NAIC designation is as follows:
December 31, 2013
December 31, 2012
NAIC
Designation
Amortized
Cost
Fair Value
Carrying
Amount
Percentage
of Total
Carrying
Amount
Amortized
Cost
Fair Value
Carrying
Amount
1
2
3
4
5
6
(Dollars in thousands)
(Dollars in thousands)
$ 16,394,654
$ 16,531,250
$ 16,531,250
62.0% $ 13,737,381
$ 15,250,560
$ 15,250,560
9,630,251
9,598,399
9,598,399
36.0%
7,838,186
8,533,121
8,533,121
502,822
74,493
—
1,765
474,165
66,078
—
1,395
489,579
66,078
—
1,396
1.8%
0.2%
—%
—%
398,294
53,879
—
5,375
387,222
56,151
—
6,603
401,789
56,151
—
6,603
Percentage
of Total
Carrying
Amount
62.9%
35.2%
1.7%
0.2%
—%
—%
$ 26,603,985
$ 26,671,287
$ 26,686,702
100.0% $ 22,033,115
$ 24,233,657
$ 24,248,224
100.0%
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, 2013:
Collateral Type
OTTI has not been recognized
Government agency
Prime
Alt-A
OTTI has been recognized
Prime
Alt-A
Total by collateral type
Government agency
Prime
Alt-A
Total by NAIC designation
1
2
3
4
6
Principal
Amount
Amortized
Cost
Fair Value
(Dollars in thousands)
$
$
$
$
$
$
$
$
738,681
$
677,394
$
$
$
$
$
$
$
536,476
30,735
1,305,892
464,539
355,715
820,254
738,681
1,001,015
386,450
2,126,146
1,979,769
104,543
39,274
—
2,560
$
$
$
$
$
$
508,173
31,081
1,216,648
399,708
279,557
679,265
677,394
907,881
310,638
1,895,913
1,761,462
97,861
34,825
—
1,765
679,518
542,633
30,818
1,252,969
421,810
297,181
718,991
679,518
964,443
327,999
1,971,960
1,834,105
101,180
35,299
—
1,376
2,126,146
$
1,895,913
$
1,971,960
The amortized cost and fair value of fixed maturity securities at December 31, 2013, by contractual maturity are presented in Note 3 to our
audited consolidated financial statements in this Form 10-K, which is incorporated by reference in this Item 7.
30
Unrealized Losses
The amortized cost and fair value of fixed maturity securities and equity securities that were in an unrealized loss position were as follows:
Number of
Securities
Amortized
Cost
Unrealized
Losses
Fair Value
(Dollars in thousands)
December 31, 2013
Fixed maturity securities, available for sale:
United States Government full faith and credit
United States Government sponsored agencies
United States municipalities, states and territories
Foreign government obligations
Corporate securities:
Finance, insurance and real estate
Manufacturing, construction and mining
Utilities and related sectors
Wholesale/retail trade
Services, media and other
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Fixed maturity securities, held for investment:
Corporate security:
Insurance
December 31, 2012
Fixed maturity securities, available for sale:
United States Government sponsored agencies
United States municipalities, states and territories
Corporate securities:
Finance, insurance and real estate
Manufacturing, construction and mining
Utilities and related sectors
Wholesale/retail trade
Services, media and other
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Fixed maturity securities, held for investment:
Corporate security:
Insurance
Equity securities, available for sale:
Finance, insurance and real estate
4
27
151
3
124
249
167
38
74
52
123
34
$
35,263
$
(2,294) $
32,969
1,280,991
(121,362)
1,159,629
653,130
29,760
1,949,182
3,671,716
2,027,723
473,275
1,003,852
384,521
1,591,057
479,153
(39,074)
(3,462)
(105,299)
(207,333)
(114,305)
(27,181)
(61,911)
(43,183)
(89,815)
(30,763)
614,056
26,298
1,843,883
3,464,383
1,913,418
446,094
941,941
341,338
1,501,242
448,390
1,046
13,579,623
(845,982) $
12,733,641
1
$
76,255
$
(15,415) $
60,840
6
8
$
$
977,196
24,518
$
$
(3,468) $
(125) $
19
34
20
11
19
56
12
11
276,235
453,679
269,667
113,032
267,506
508,576
163,565
174,342
(12,564)
(5,584)
(9,399)
(992)
(3,085)
(27,728)
(1,983)
(2,973)
973,728
24,393
263,671
448,095
260,268
112,040
264,421
480,848
161,582
171,369
196
$
3,228,316
$
(67,901) $
3,160,415
1
$
76,088
$
(14,567) $
61,521
1
$
10,125
$
(1,403)
8,722
Unrealized losses increased $777.5 million from $83.9 million at December 31, 2012 to $861.4 million at December 31, 2013. The increase
in unrealized losses was primarily due to an increase in interest rates during 2013.
31
The following table sets forth the composition by credit quality (NAIC designation) of fixed maturity securities with gross unrealized losses:
NAIC Designation
December 31, 2013
1
2
3
4
5
6
December 31, 2012
1
2
3
4
5
6
Carrying Value of
Securities with
Gross Unrealized
Losses
Percent of
Total
Gross
Unrealized
Losses
Percent of
Total
(Dollars in thousands)
$
$
$
$
7,214,149
5,278,699
258,516
57,156
—
1,376
56.3% $
41.2%
2.0%
0.5%
—%
—%
(511,245)
(306,659)
(34,036)
(9,068)
—
(389)
59.3%
35.6%
4.0%
1.1%
—%
—%
12,809,896
100.0% $
(861,397)
100.0%
1,992,406
1,071,009
157,464
13,812
—
1,812
61.5% $
33.1%
4.9%
0.4%
—%
0.1%
(38,125)
(23,969)
(19,410)
(299)
—
(665)
46.2%
29.1%
23.5%
0.4%
—%
0.8%
3,236,503
100.0% $
(82,468)
100.0%
Our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities (consisting
of 1,047 and 198 securities, respectively) have been in a continuous unrealized loss position at December 31, 2013 and 2012, along with a
description of the factors causing the unrealized losses is presented in Note 3 to our audited consolidated financial statements in this Form 10-
K, which is incorporated by reference in this Item 7.
32
The amortized cost and fair value of fixed maturity securities and equity securities in an unrealized loss position and the number of months in
a continuous unrealized loss position (fixed maturity securities that carry an NRSRO rating of BBB/Baa or higher are considered investment
grade) were as follows:
Number of
Securities
Amortized
Cost
Fair Value
(Dollars in thousands)
Gross
Unrealized
Losses
December 31, 2013
Fixed maturity securities:
Investment grade:
Less than six months
Six months or more and less than twelve months
Twelve months or greater
Total investment grade
Below investment grade:
Less than six months
Six months or more and less than twelve months
Twelve months or greater
Total below investment grade
December 31, 2012
Fixed maturity securities
Investment grade:
Less than six months
Six months or more and less than twelve months
Twelve months or greater
Total investment grade
Below investment grade:
Less than six months
Six months or more and less than twelve months
Twelve months or greater
Total below investment grade
Equity securities:
Less than six months
Six months or more and less than twelve months
Twelve months or greater
Total equity securities
329
630
43
1,002
19
11
15
45
$
3,700,588
$
3,627,962
$
8,499,453
1,102,199
13,302,240
101,690
76,214
175,734
353,638
7,842,391
1,011,904
12,482,257
99,509
66,136
146,579
312,224
(72,626)
(657,062)
(90,295)
(819,983)
(2,181)
(10,078)
(29,155)
(41,414)
1,047
$
13,655,878
$
12,794,481
$
(861,397)
106
$
2,464,476
$
2,440,131
$
4
14
124
23
9
41
73
—
1
—
1
40,054
165,718
2,670,248
110,435
135,915
387,806
634,156
—
10,125
—
10,125
39,151
155,618
2,634,900
108,531
129,086
349,419
587,036
—
8,722
—
8,722
198
$
3,314,529
$
3,230,658
$
(24,345)
(903)
(10,100)
(35,348)
(1,904)
(6,829)
(38,387)
(47,120)
—
(1,403)
—
(1,403)
(83,871)
33
The amortized cost and fair value of fixed maturity securities (excluding United States Government and United States Government sponsored
agency securities) segregated by investment grade (NRSRO rating of BBB/Baa or higher) and below investment grade and equity securities that
had unrealized losses greater than 20% and the number of months in a continuous unrealized loss position were as follows:
Number of
Securities
Amortized
Cost
Fair
Value
(Dollars in thousands)
Gross
Unrealized
Losses
December 31, 2013
Investment grade:
Less than six months
Six months or more and less than twelve months
Twelve months or greater
Total investment grade
Below investment grade:
Less than six months
Six months or more and less than twelve months
Twelve months or greater
Total below investment grade
December 31, 2012
Investment grade:
Less than six months
Six months or more and less than twelve months
Twelve months or greater
Total investment grade
Below investment grade:
Less than six months
Six months or more and less than twelve months
Twelve months or greater
Total below investment grade
2
1
1
4
1
4
2
7
$
14,516
$
11,368
$
4,465
20,000
38,981
25,043
101,244
1,765
128,052
3,419
14,513
29,300
18,813
77,350
1,376
97,539
11
$
167,033
$
126,839
$
— $
— $
— $
1
—
1
1
—
3
4
5
20,000
—
20,000
1,416
—
9,324
10,740
15,379
—
15,379
1,131
—
7,148
8,279
$
30,740
$
23,658
$
(3,148)
(1,046)
(5,487)
(9,681)
(6,230)
(23,894)
(389)
(30,513)
(40,194)
—
(4,621)
—
(4,621)
(285)
—
(2,176)
(2,461)
(7,082)
34
The amortized cost and fair value of fixed maturity securities, 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 and other asset backed securities provide for periodic payments throughout their lives, and are
shown below as a separate line.
December 31, 2013
Due in one year of less
Due after one year through five years
Due after five years through ten years
Due after ten years through twenty years
Due after twenty years
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
December 31, 2012
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years through twenty years
Due after twenty years
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
International Exposure
Available for sale
Held for investment
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
(Dollars in thousands)
$
— $
— $
— $
7,227
5,328,034
3,337,145
2,452,486
7,213
5,055,734
3,086,150
2,293,574
11,124,892
10,442,671
384,521
1,591,057
479,153
341,338
1,501,242
448,390
—
—
—
76,255
76,255
—
—
—
—
—
—
—
60,840
60,840
—
—
—
$
$
13,579,623
$
12,733,641
$
76,255
$
60,840
— $
— $
— $
22,160
623,802
1,319,250
416,621
2,381,833
508,576
163,565
174,342
21,059
617,848
1,302,283
405,426
2,346,616
480,848
161,582
171,369
—
—
—
76,088
76,088
—
—
—
—
—
—
—
61,521
61,521
—
—
—
$
3,228,316
$
3,160,415
$
76,088
$
61,521
We hold fixed maturity securities with international exposure. As of December 31, 2013, 15% of the carrying value of our fixed maturity
securities was comprised of corporate debt securities of issuers based outside of the United States and debt securities of foreign governments.
All of these securities are denominated in U.S. dollars and all are investment grade (NAIC designation of either 1 or 2), except for eighteen
securities with a total fair value of $88.2 million which have an NAIC 3 designation and one security with a fair value of $19.5 million which
has an NAIC 4 designation. Our investment professionals analyze each holding for credit risk by economic and other factors of each country
and industry. The following table presents our international exposure in our fixed maturity portfolio by country or region:
GIIPS (1)
Asia/Pacific
Non-GIIPS Europe
Latin America
Non-U.S. North America
Australia & New Zealand
Other
December 31, 2013
Amortized
Cost
Carrying
Amount/
Fair Value
Percent of
Total
Carrying
Amount
(Dollars in thousands)
$
230,496
$
194,141
1,885,848
195,147
807,393
384,470
374,466
230,847
186,718
1,870,729
187,637
800,211
376,001
385,806
$
4,071,961
$
4,037,949
0.9%
0.7%
7.0%
0.7%
3.0%
1.4%
1.4%
15.1%
(1) Greece, Ireland, Italy, Portugal and Spain continue to cause credit risk as economic conditions in these countries continue to be volatile, especially within
the financial and banking sectors. All of our exposure in GIIPS are corporate securities with issuers domiciled in these countries. None of our foreign
government obligations were held in any of these countries.
35
Watch List
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 temporary impairments and
related credit losses to be recognized in operations. At December 31, 2013, the amortized cost and fair value of securities on the watch list are
as follows:
General Description
Number of
Securities
Amortized
Cost
Unrealized
Losses
Fair Value
(Dollars in thousands)
Months in
Continuous
Unrealized
Loss Position
Months
Unrealized
Losses
Greater
Than 20%
Investment grade
Corporate fixed maturity securities:
Finance
Below investment grade
Corporate fixed maturity securities:
Industrial
Industrial
1
4
1
5
6
$
20,000
$
(5,487) $
14,513
28
26
49,467
9,349
58,816
(9,150)
65
(9,085)
$
78,816
$
(14,572) $
40,317
9,414
49,731
64,244
14-40
0-7
Four of the securities, including the investment grade security, on the watch list have Eurozone exposure that has contributed to their depressed
fair values. Our analysis of all of the securities on the watch list that we have determined are temporarily impaired and their credit performance
at December 31, 2013 is as follows:
Finance: The decline in value of this security which is rated investment grade 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 events of the past three years and the ongoing events in the
Eurozone. While this issuer has had its financial position and profitability weakened by the credit and liquidity crisis, we have determined that
this security was not other than temporarily impaired due to our evaluation of the operating performance and the credit worthiness of the issuer.
Industrial: The decline in value of these securities relates to ongoing operational issues or recent corporate actions. These issues have caused
the price for these securities to decline; however, the companies have strong liquidity and ample time to strengthen their credit profile. We have
determined that these securities were not other than temporarily impaired due to the issuers' very strong market positions, restructuring actions
that are expected to favorably impact future profitability and a history of strong, reliable operating performance, improving economic conditions
and rising security prices.
We do not intend to sell these securities and it is more likely than not we will not have to sell these securities before recovery of their amortized
cost and, as such, there were no other than temporary impairments on these securities at December 31, 2013.
Other Than Temporary Impairments
We have a policy and process in place to identify securities in our investment portfolio for which we should recognize impairments. See Critical
Accounting Policies—Evaluation of Other Than Temporary Impairments. We recognized other than temporary impairments and additional
credit losses on a number of securities for which we have previously recognized OTTI. A summary of OTTI is presented in Note 3 to our audited
consolidated financial statements in this Form 10-K, which is incorporated by reference in this Item 7.
Several factors led us to believe that full recovery of amortized cost will not be expected. A discussion of these factors and our policy and process
in place to identify securities that could potentially have impairment that is other than temporary is in Note 3 to our audited consolidated financial
statements in this Form 10-K, which is incorporated by reference in this Item 7.
36
Mortgage Loans on Real Estate
Our commercial mortgage loan portfolio consists of mortgage loans collateralized by the related properties and diversified as to property type,
location and loan size. Our mortgage lending policies establish limits on the amount that can be loaned to one borrower and other criteria to
attempt to reduce the risk of default. Our commercial mortgage loans on real estate are reported at cost, adjusted for amortization of premiums
and accrual of discounts net of valuation allowances. At December 31, 2013 and 2012, the largest principal amount outstanding for any single
mortgage loan was $14.6 million and $15.0 million, respectively, and the average loan size was $2.5 million for 2013 and $2.4 million for 2012.
We have the contractual ability to pursue full personal recourse on 9.7% of the loans and partial personal recourse on 26.7% of the loans. In
addition, the average loan to value ratio for the overall portfolio was 54.3% and 53.5% at December 31, 2013 and 2012, respectively, based upon
the underwriting and appraisal at the time the loan was made. This loan to value is indicative of our conservative underwriting policies and
practices for making commercial mortgage loans and may not be indicative of collateral values at the current reporting date. Our current practice
is to only obtain market value appraisals of the underlying collateral at the inception of the loan unless we identify indicators of impairment in
our ongoing analysis of the portfolio, in which case, we either calculate a value of the collateral using a capitalization method or obtain a current
appraisal of the underlying collateral. The commercial mortgage loan portfolio is summarized by geographic region and property type in Note
4 of our audited consolidated financial statements of this Form 10-K, which is incorporated by reference in this Item 7.
In the normal course of business, we commit to fund commercial mortgage loans up to 90 days in advance. At December 31, 2013, we had
commitments to fund commercial mortgage loans totaling $79.6 million, with fixed interest rates ranging from 4.50% to 5.09%. During 2013
and 2012, due to historically low interest rates, the commercial mortgage loan industry has been very competitive. This competition has resulted
in a number of borrowers refinancing with other lenders. For the year ended December 31, 2013, we received $441.7 million in cash for loans
being paid in full compared to $439.7 million for the year ended December 31, 2012. Some of the loans being paid off have either reached their
maturity or are nearing maturity; however, some borrowers are paying the prepayment fee and refinancing at a lower rate.
See Note 4 to our audited consolidated financial statements for a presentation of our specific and general loan loss allowances, impaired loans,
foreclosure activity and troubled debt restructure analysis.
We increased the specific allowance for loan losses by $7.5 million on thirteen mortgage loans with outstanding principal due totaling $32.7
million, by $15.0 million on 23 mortgage loans with outstanding principal due totaling $67.2 million, and by $24.5 million on 32 mortgage loans
with outstanding principal due totaling $99.4 million during the years ended December 31, 2013, 2012 and 2011, respectively.
We have a process by which we evaluate the credit quality of each of our commercial mortgage loans. This process utilizes each loan's debt
service coverage ratio as a primary metric. A summary of our portfolio by debt service coverage ratio follows:
Debt Service Coverage Ratio:
Greater than or equal to 1.5
Greater than or equal to 1.2 and less than 1.5
Greater than or equal to 1.0 and less than 1.2
Less than 1.0
December 31, 2013
December 31, 2012
Principal
Outstanding
(Dollars in
thousands)
$
$
1,572,241
595,786
209,717
229,954
2,607,698
Percent of Total
Principal
Outstanding
Principal
Outstanding
(Dollars in
thousands)
Percent of Total
Principal
Outstanding
60.3% $
1,517,840
22.9%
8.0%
8.8%
604,512
262,165
274,366
100.0% $
2,658,883
57.1%
22.7%
9.9%
10.3%
100.0%
At December 31, 2013, we have three mortgage loans that are in the process of being satisfied by our taking ownership of the real estate serving
as collateral on the loan. These loans have a total outstanding principal balance of $6.8 million and we have recorded specific loan loss allowances
totaling $1.3 million ($(0.1) million in 2013, $0.4 million in 2012 and $1.0 million in 2011). We also have three commercial mortgage loans at
December 31, 2013 with an outstanding principal balance of $6.2 million that have been given "workout" terms which generally allow for interest
only payments or the capitalization of interest for a specified period of time. We have recorded specific loan loss allowances on two of these
loans (principal balance of $3.9 million) of $0.7 million ($0.2 million in 2013 and $0.5 million in 2012). The total outstanding principal balance
of these 6 loans is $13.0 million, which represents less than 1% of our total mortgage loan portfolio. For the year ended December 31, 2013,
we agreed to discounted payoffs on four commercial mortgage loans with a principal balance of $9.9 million. The principal forgiven on these
four loans was $1.7 million.
37
Mortgage loans summarized in the following table represent all loans that we are either not currently collecting or those we feel it is probable
we will not collect all amounts due according to the contractual terms of the loan agreements (all loans that we have worked with the borrower
to alleviate short-term cash flow issues, loans delinquent for 60 days or more at the reporting date, loans we have determined to be collateral
dependent and loans that we have recorded specific impairments on that we feel may continue to have performance issues).
Impaired mortgage loans with allowances
Impaired mortgage loans with no allowance for losses
Allowance for probable loan losses
Net carrying value of impaired mortgage loans
December 31,
2013
2012
(Dollars in thousands)
$
$
47,018
$
3,264
(16,847)
33,435
$
53,110
27,765
(23,134)
57,741
At December 31, 2013, we had no commercial mortgage loans that were delinquent (60 days or more past due at the reporting date) in their
principal and interest payments.
Derivative Instruments
Our derivative instruments primarily consist of call options purchased to provide the income needed to fund the annual index credits on our
fixed index annuity products. The fair value of the call options is based upon the amount of cash that would be required to settle the call options
obtained from the counterparties adjusted for the nonperformance risk of the counterparty. The nonperformance risk for each counterparty is
based upon its credit default swap rate. We have no performance obligations related to the call options.
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.
A presentation of our derivative instruments along with a discussion of the business strategy involved with our derivatives is included in Note
5 to our audited consolidated financial statements in this Form 10-K, which is incorporated by reference in this Item 7.
Liabilities
Our liability for policy benefit reserves increased to $35.8 billion at December 31, 2013 compared to $31.8 billion at December 31, 2012,
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.
See Note 9 to our audited consolidated financial statements in this Form 10-K, which is incorporated by reference in this Item 7 for discussion
of our notes payable and borrowings under repurchase agreements.
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. Accounting standards for consolidation of
variable interest entities, specifically exempts qualifying special purpose entities from consolidation; therefore, we do not consolidate our
subsidiary trusts and record our subordinated debt obligations to the trusts and our equity investments in the trusts. See Note 10 to our audited
consolidated financial statements for additional information concerning our subordinated debentures payable to, and the preferred securities
issued by, the subsidiary trusts.
Liquidity and Capital Resources
Liquidity for Insurance Operations
Our insurance 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 and bonus vesting, that help limit and discourage early withdrawals. At December 31, 2013,
approximately 95% of our annuity liabilities were subject to penalty upon surrender, with a weighted average remaining surrender charge period
of 9.6 years and a weighted average surrender charge percentage of 15.1%.
38
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
$2.4 billion for the year ended December 31, 2013 compared to $2.2 billion for the year ended December 31, 2012 with the increase primarily
attributable to a $399.2 million increase in net annuity deposits after coinsurance and a $188.7 million (after coinsurance) increase in funds
returned to policyholders. 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 2012 and
2011 we experienced a significant amount of calls of United States Government sponsored agency securities. As a result we had elevated levels
of short-term investments and cash and cash equivalents during 2012 and 2011 and into the third quarter of 2013. At December 31, 2013, 31%
of our fixed income securities have call features, of which 0.5% ($0.1 billion) were subject to call redemption. Another 5% ($1.2 billion) will
become subject to call redemption during 2014.
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 senior notes, convertible senior notes and subordinated debentures issued to subsidiary trusts, pay
operating expenses and pay dividends to stockholders. Our assets consist primarily of the capital stock and surplus notes of our subsidiaries.
Accordingly, our future cash flows depend upon the availability of dividends, surplus note interest payments and other statutorily permissible
payments from our subsidiaries, such as payments under our investment advisory agreements and tax allocation agreement with our 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 2014.
The ability of our life insurance subsidiaries to pay dividends or distributions, including surplus note payments, will be limited by applicable
laws and regulations of the states in which our life insurance subsidiaries are domiciled, which subject our life insurance subsidiaries to significant
regulatory restrictions. These laws and regulations require, among other things, our insurance subsidiaries to maintain minimum solvency
requirements and limit the amount of dividends these subsidiaries can pay.
Currently, American Equity Life may pay dividends or make other distributions without the prior approval of the Iowa Insurance Commissioner,
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 capital and surplus at the preceding
December 31. For 2014, up to $195.0 million can be distributed as dividends by American Equity Life without prior approval of the Iowa
Insurance Commissioner. 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 $926.7
million of statutory earned surplus at December 31, 2013.
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. Along with solvency regulations, the primary
driver in determining the amount of capital used for dividends is the level of capital needed to maintain desired financial strength ratings from
A.M. Best. Given recent economic events that have affected the insurance industry, both regulators and rating agencies could become more
conservative in their methodology and criteria, including increasing capital requirements for our insurance subsidiaries which, in turn, could
negatively affect the cash available to us from insurance subsidiaries. As of December 31, 2013, we estimate American Equity Life has sufficient
statutory capital and surplus, combined with capital available to the holding company, to meet this rating objective. However, this capital may
not be sufficient if significant future losses are incurred or A.M. Best modifies its rating criteria and access to additional capital could be limited.
The transfer of funds by American Equity Life is also restricted by a covenant in our line of credit agreement which requires American Equity
Life to maintain a minimum risk-based capital ratio of 275% and a minimum level of statutory surplus equal to the sum of 1) 80% of statutory
surplus at September 30, 2013, 2) 50% of the statutory net income for each fiscal quarter ending after December 31, 2013, and 3) 50% of all
capital contributed to American Equity Life after September 30, 2013. American Equity Life's risk-based capital ratio was 344% at December 31,
2013. Under this agreement we are also required to maintain a maximum ratio of adjusted debt to total adjusted capital of 0.35.
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, 2013 and 2012 and for the years ended December 31, 2013, 2012 and 2011 is included in Note 12
to our audited consolidated financial statements.
Cash and cash equivalents of the parent holding company at December 31, 2013, were $252.2 million, which includes approximately $206
million in remaining net proceeds from the $400 million senior unsecured notes issue described below. In addition, as discussed in Note 9 to
our audited consolidated financial statements, during 2013, we terminated the $160 million line of credit and entered into a $140 million revolving
line of credit agreement. The new revolving line of credit terminates on November 22, 2017, and borrowings are available for general corporate
purposes of the parent company and its subsidiaries. We also have the ability to issue equity, debt or other types of securities through one or
more methods of distribution under a currently effective shelf registration statement on Form S-3. The terms of any offering would be established
at the time of the offering, subject to market conditions.
39
On July 17, 2013, we issued $400 million aggregate principal amount of senior unsecured notes due 2021 which bear interest at 6.625% per
year and will mature on July 15, 2021. We used $15 million of the net proceeds from the issuance to repay the entire amount outstanding under
our revolving credit facility and $169 million of the net of proceeds to pay a portion of the cash consideration component of the convertible note
exchange offers discussed in Note 9 to our audited consolidated financial statements. We intend to use the $206 million of remaining net proceeds
from the notes issuance to tender for, redeem or repurchase the $160 million aggregate principal amount of convertible notes that were outstanding
at December 31, 2013. The form and timing of any such activity will be dependent upon market conditions and other factors and there can be
no assurance that any such transactions will be completed prior to the December 2014 call date for our 2029 notes or the September 2015 maturity
date for our 2015 notes.
On March 25, 2013, notice of mandatory redemption was issued for our 2024 notes. $25.8 million principal amount of the convertible notes
exercised their conversion rights prior to the April 30, 2013 mandatory redemption date. The holders of these notes received the principal amount
of their notes in cash and the conversion premium in shares of our common stock, for which 216,729 shares were issued. The balance of the
convertible notes ($2.5 million principal amount) was redeemed for cash.
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, 2013.
Total
Less Than
1 year
Payments Due by Period
1–3 Years
4–5 Years
(Dollars in thousands)
After
5 Years
Annuity and single premium universal life products (1)
$
34,585,242
$
2,260,926
$
8,169,774
$
5,618,647
$
18,535,895
Notes payable, including interest payments (2)
Subordinated debentures, including interest payments (3)
Operating leases
Mortgage loan funding and other investments
768,296
562,320
12,788
124,758
101,681
11,339
1,782
100,382
147,365
22,678
3,974
16,570
53,000
22,678
2,804
—
466,250
505,625
4,228
7,806
Total
$
36,053,404
$
2,476,110
$
8,360,361
$
5,697,129
$
19,519,804
(1) Amounts shown in this table are projected payments through the year 2033 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.
(2) Period that principal amounts are due is determined by the earliest of the call/put date or the maturity date of each note payable.
(3) Amount shown is net of equity investments in the capital trusts due to the contractual right of offset upon repayment of the notes.
Inflation
Inflation does not have a significant effect on our consolidated 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 and widening spreads experienced in 2013 have decreased the value of our fixed maturity investments. It is
likely that lower interest rates and tighter spreads 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.
Critical Accounting Policies
The increasing complexity of the business environment and applicable authoritative accounting guidance require us to closely monitor our
accounting policies. We have identified five 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 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 income (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.
GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction
between market participants at the measurement date. We categorize our investments into three levels of fair value hierarchy based on the priority
of inputs used in determining fair value. The hierarchy defines the highest priority inputs (Level 1) as quoted prices in active markets for identical
assets or liabilities. The lowest priority inputs (Level 3) are our own assumptions about what a market participant would use in determining fair
value such as estimated future cash flows. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value
hierarchy. In such cases, a financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to
40
the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment
and considers factors specific to the financial instrument.
We categorize investments recorded at fair value in the consolidated balance sheets as follows:
Level 1 —
Level 2 —
Quoted prices are available in active markets for identical financial instruments as of the reporting date. We do not
adjust the quoted price for these financial instruments, even in situations where we hold a large position and a sale
could reasonably impact the quoted price.
Quoted prices in active markets for similar financial instruments, quoted prices for identical or similar financial
instruments in markets that are not active; and models and other valuation methodologies using inputs other than quoted
prices that are observable.
Level 3 — Models and other valuation methodologies using significant inputs that are unobservable for financial instruments and
include situations where there is little, if any, market activity for the financial instrument. The inputs into the
determination of fair value require significant management judgment or estimation. Financial instruments that are
included in Level 3 are securities for which no market activity or data exists and for which we used discounted expected
future cash flows with our own assumptions about what a market participant would use in determining fair value.
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, 2013 and 2012, respectively:
December 31, 2013
Priced via third party pricing services
Priced via independent broker quotations
Priced via matrices
Priced via other methods
% of Total
December 31, 2012
Priced via third party pricing services
Priced via independent broker quotations
Priced via matrices
Priced via other methods
% of Total
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(Dollars in thousands)
Total
$
$
$
$
5,184
$
26,505,929
$
— $
26,511,113
—
—
—
40,330
—
65,406
5,184
$
26,611,665
$
—
—
1,376
1,376
40,330
—
66,782
$
26,618,225
—%
100.0%
—%
100.0%
75,592
$
24,101,390
$
— $
24,176,982
—
—
—
32,492
—
14,272
75,592
$
24,148,154
$
—
—
1,812
1,812
32,492
—
16,084
$
24,225,558
0.3%
99.7%
—%
100.0%
Management's assessment of all available data when determining fair value of our investments is necessary to appropriately apply fair value
accounting.
We utilize independent pricing services in estimating the fair values of investment securities. The independent pricing services incorporate a
variety of observable market data in their valuation techniques, including:
•
•
•
•
•
•
•
•
reported trading prices,
benchmark yields
broker-dealer quotes,
benchmark securities,
bids and offers,
credit ratings,
relative credit information, and
other reference data.
The independent pricing services also take into account perceived market movements and sector news, as well as a security's terms and conditions,
including any features specific to that issue that may influence risk and marketability. Depending on the security, the priority of the use of
observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary.
41
The independent pricing services provide quoted market prices when available. Quoted prices are not always available due to market inactivity.
When quoted market prices are not available, the third parties use yield data and other factors relating to instruments or securities with similar
characteristics to determine fair value for securities that are not actively traded. We generally obtain one value from our primary external pricing
service. In situations where a price is not available from this service, we may obtain further quotes or prices from additional parties as needed.
In addition, for our callable United States Government sponsored agencies we obtain two broker quotes and take the average of two broker prices
received. Market indices of similar rated asset class spreads are considered for valuations and broker indications of similar securities are
compared. Inputs used by the broker include market information, such as yield data and other factors relating to instruments or securities with
similar characteristics. Valuations and quotes obtained from third party commercial pricing services are non-binding and do not represent quotes
on which one may execute the disposition of the assets.
We validate external valuations at least quarterly through a combination of procedures that include the evaluation of methodologies used by the
pricing services, analytical reviews and performance analysis of the prices against trends, and maintenance of a securities watch list. Additionally,
as needed we utilize discounted cash flow models or perform independent valuations on a case-by-case basis of inputs and assumptions similar
to those used by the pricing services. Although we do identify differences from time to time as a result of these validation procedures, we did
not make any significant adjustments as of December 31, 2013 and 2012.
Evaluation of Other Than Temporary Impairments and Allowance for Loan Loss
The evaluation of investments for other than temporary impairments involves significant judgment and estimates by management. We review
and analyze all investments on an ongoing basis for changes in market interest rates and credit deterioration. This review process includes
analyzing our ability to recover the amortized cost or cost basis of each investment that has a fair value that is lower than its amortized cost or
cost and requires a high degree of management judgment and involves uncertainty. The evaluation of securities for other than temporary
impairments is a quantitative and qualitative process, which is subject to risks and uncertainties.
We have a policy and process in place to identify securities that could potentially have an impairment that is other than temporary. This process
involves monitoring market events and other items that could impact issuers. The evaluation includes but is not limited to such factors as:
•
the length of time and the extent to which the fair value has been less than amortized cost or cost;
• whether the issuer is current on all payments and all contractual payments have been made as agreed;
•
the remaining payment terms and the financial condition and near-term prospects of the issuer;
•
the lack of ability to refinance due to liquidity problems in the credit market;
•
the fair value of any underlying collateral;
•
the existence of any credit protection available;
•
our intent to sell and whether it is more likely than not we would be required to sell prior to recovery for debt securities;
•
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;
our intent and ability to retain equity securities for a period of time sufficient to allow for recovery;
consideration of rating agency actions; and
changes in estimated cash flows of residential mortgage and asset backed securities.
•
•
•
We determine whether other than temporary impairment losses should be recognized for debt and equity securities by assessing all facts and
circumstances surrounding each security. Where the decline in market value of debt securities is attributable to changes in market interest rates
or to factors such as market volatility, liquidity and spread widening, and we anticipate recovery of all contractual or expected cash flows, we
do not consider these investments to be other than temporarily impaired because we do not intend to sell these investments and it is not more
likely than not we will be required to sell these investments before a recovery of amortized cost, which may be maturity. For equity securities,
we recognize an impairment charge in the period in which we do not have the intent and ability to hold the securities until recovery of cost or
we determine that the security will not recover to book value within a reasonable period of time. We determine what constitutes a reasonable
period of time on a security-by-security basis by considering all the evidence available to us, including the magnitude of any unrealized loss and
its duration. In any event, this period does not exceed 18 months from the date of impairment for perpetual preferred securities for which there
is evidence of deterioration in credit of the issuer and common equity securities. For perpetual preferred securities absent evidence of a deterioration
in credit of the issuer we apply an impairment model, including an anticipated recovery period, similar to a debt security.
Other than temporary impairment losses on equity securities are recognized in operations. If we intend to sell a debt security or if it is more
likely than not that we will be required to sell a debt security before recovery of its amortized cost basis, other than temporary impairment has
occurred and the difference between amortized cost and fair value will be recognized as a loss in operations.
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 discounted at each
security's acquisition yield based on our consideration of whether the security was of high credit quality at the time of acquisition. 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.
42
The determination of the credit loss component of a residential mortgage backed security is based on a number of factors. The primary consideration
in this evaluation process is the issuer's ability to meet current and future interest and principal payments as contractually stated at time of
purchase. Our review of these securities includes an analysis of the cash flow modeling under various default scenarios considering independent
third party benchmarks, the seniority of the specific tranche within the structure of the security, the composition of the collateral and the actual
default, loss severity and prepayment experience exhibited. With the input of third party assumptions for default projections, loss severity and
prepayment expectations, we evaluate the cash flow projections to determine whether the security is performing in accordance with its contractual
obligation.
We utilize the models from a leading structured product software specialist serving institutional investors. These models incorporate each
security's seniority and cash flow structure. In circumstances where the analysis implies a potential for principal loss at some point in the future,
we use our "best estimate" cash flow projection discounted at the security's effective yield at acquisition to determine the amount of our potential
credit loss associated with this security. The discounted expected future cash flows equates to our expected recovery value. Any shortfall of
the expected recovery when compared to the amortized cost of the security will be recorded as the credit loss component of the other than
temporary impairment.
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 determination of the credit loss component of a corporate bond (including redeemable preferred stocks) is based on the underlying financial
performance of the issuer and their ability to meet their contractual obligations. Considerations in our evaluation include, but are not limited
to, credit rating changes, financial statement and ratio analysis, changes in management, large changes in credit spreads, breaches of financial
covenants and a review of the economic outlook for the industry and markets in which they trade. In circumstances where an issuer appears
unlikely to meet its future obligation, or the security's price decline is deemed other than temporary, an estimate of credit loss is determined.
Credit loss is calculated using default probabilities as derived from the credit default swaps markets in conjunction with recovery rates derived
from independent third party analysis or a best estimate of credit loss. This credit loss rate is then incorporated into a present value calculation
based on an expected principal loss in the future discounted at the yield at the date of purchase and compared to amortized cost to determine the
amount of credit loss associated with the security.
In addition, for debt securities which we do not intend to sell and it is not more likely than not we will be required to sell, but our intent changes
due to changes or events that could not have been reasonably anticipated, an other than temporary impairment charge is recognized. 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. Unrealized losses may be recognized in future periods through a charge to earnings, should we later conclude that the decline
in fair value below amortized cost is other than temporary pursuant to our accounting policy described above. The use of different methodologies
and assumptions to determine the fair value of investments and the timing and amount of impairments may have a material effect on the amounts
presented in our audited consolidated financial statements.
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. 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. 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 less estimated costs to sell. In
addition, we analyze the mortgage loan portfolio for the need of a general loan allowance for probable losses on all other loans. 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.
Our commercial mortgage loan portfolio has had a population of mortgage loans that we have been carrying with workout terms (e.g. interest
only periods, period of suspended payments, etc.) and a population of mortgage loans that have been in a delinquent status (i.e. more than 60
days past due). It is from this population that we have been recognizing some impairment loss due to nonpayment and eventual satisfaction of
the loan by taking ownership of the collateral real estate. In most cases the fair value of the collateral less estimated costs to sell such collateral
has been less than the outstanding principal amount of the mortgage loan.
Our general loan loss allowance for periods through September 30, 2011 was calculated on the cumulative outstanding principal on loans making
up the group of loans currently in workout terms and loans currently more than 60 days past due. We applied a factor to the total outstanding
principal of these loans that was calculated as the average specific impairment loss for the most recent 4 quarters divided by the sum of the
average of the total outstanding principal of delinquent loans for the most recent 4 quarters and the average of the total outstanding principal of
loans in workout for the most recent 4 quarters. In the fourth quarter of 2011, we modified the calculation for determining our general loan loss
allowance. The group of loans that we utilized to calculate an estimate of general loan loss allowance were those that had a debt service coverage
ratio (DSCR) of less than 1.0. The DSCR is calculated by dividing the net operating income of the mortgaged property by the contractual
principal and interest payment due for the corresponding period. We developed the loss rates to apply to this group of loans by dividing the
specific impairment loss for the most recent 4 quarters by the principal outstanding of the loans with a DSCR of less than 1.0.
43
For the years ended December 31, 2013 and 2012, we utilized a process of rating the mortgage loans in our portfolio based on factors such as
historical operating performance, loan to value ratio and economic outlook, among others. We calculate a loss factor to apply to each rating
based on historical losses we have recognized in our mortgage loan portfolio. We apply the loss factors to the total principal outstanding within
each rating category to determine an appropriate estimate of the general loan loss allowance at the reporting date.. The change in methodology
utilized to determine the general loan loss allowance did not result in a material adjustment.
Policy Liabilities for Fixed Index Annuities
We offer a variety of fixed index annuities with crediting strategies linked to the S&P 500 Index and other equity and bond market indices. We
purchase call options on the applicable indices as an investment to provide the income needed to fund the annual index credits on the index
products. See Financial Condition—Derivative Instruments. Certain derivative instruments embedded in the fixed index annuity contracts are
recognized in the consolidated balance sheet at their fair values and changes in fair value are recognized immediately in our consolidated
statements of operations in accordance with accounting standards for derivative instruments and hedging activities.
Accounting for derivatives prescribes that the contractual obligations for future annual index credits are treated as a "series of embedded
derivatives" over the expected life of the applicable contracts. Policy liabilities for fixed index annuities are equal to the sum of the "host" (or
guaranteed) component and the embedded derivative component for each fixed index annuity policy. The host value is established at inception
of the contract and accreted over the policy's life at a constant rate of interest. We estimate the fair value of the embedded derivative component
at each valuation date by (i) projecting policy contract values and minimum guaranteed contract values over the expected lives of the contracts
and (ii) discounting the excess of the projected contract value amounts at the applicable risk free interest rates adjusted for our nonperformance
risk related to those liabilities. The projections of policy contract values are based on our best estimate assumptions for future policy growth
and future policy decrements. Our best estimate assumptions for future policy growth include assumptions for the expected index credits on
the next policy anniversary date which are derived from the fair values of the underlying call options purchased to fund such index credits and
the expected costs of annual call options we will purchase in the future to fund index credits beyond the next policy anniversary. The projections
of minimum guaranteed contract values include the same best estimate assumptions for policy decrements as were used to project policy contract
values. The amounts reported in the consolidated statements of operations as "Interest sensitive and index product benefits" represent amounts
credited to policy liabilities pursuant to accounting by insurance companies for certain long-duration contracts which include index credits
through the most recent policy anniversary. The amounts reported in the consolidated statements of operations as "Changes in fair value of
embedded derivatives" equal the change in the difference between policy benefit reserves for fixed index annuities computed under the derivative
accounting standard and the long-duration contracts accounting standard at each balance sheet date.
In general, the change in the fair value of the embedded derivatives will not correspond to the change in fair value of the purchased call options
because the purchased call options are one year options while the options valued in the embedded derivatives represent the rights of the contract
holder to receive index credits over the entire period the fixed index annuities are expected to be in force, which typically exceeds 10 years.
The most sensitive assumption in determining policy liabilities for fixed index annuities is the rates used to discount the excess projected contract
values. As indicated above, the discount rate reflects our nonperformance risk. If the discount rates used to discount the excess projected contract
values at December 31, 2013 were to increase by 100 basis points, our reserves for fixed index annuities would decrease by $279.3 million
recorded through operations as a decrease in the change in fair value of embedded derivatives and there would be a corresponding decrease of
$192.9 million to our combined balance for deferred policy acquisition costs and deferred sales inducements recorded through operations as an
increase in amortization of deferred policy acquisition costs and deferred sales inducements. A decrease by 100 basis points in the discount rate
used to discount the excess projected contract values would increase our reserves for fixed index annuities by $309.9 million recorded through
operations as a increase in the change in fair value of embedded derivatives and increase our combined balance for deferred policy acquisition
costs and deferred sales inducements by $183.5 million recorded through operations as a decrease in amortization of deferred policy acquisition
costs and deferred sales inducements.
Deferred Policy Acquisition Costs and Deferred Sales Inducements
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 and deferred sales inducements are subject to loss recognition testing on a quarterly basis or when an event
occurs that may warrant loss recognition. Deferred policy acquisition costs consist principally of commissions and certain costs of policy
issuance. Deferred sales inducements consist of premium and interest bonuses credited to policyholder account balances. See Adopted
Accounting Pronouncements in Note 1 to our audited consolidated financial statements in this Form 10-K for discussion of an accounting
standards update that modifies the definition of the types of costs that can be capitalized as deferred policy acquisition costs.
For annuity products, these costs are being amortized generally in proportion to expected gross profits from interest margins and, to a lesser
extent, from product charges. Current and future period gross profits/margins for fixed index annuities also include the impact of amounts
recorded for the change in fair value of derivatives and the change in fair value of embedded derivatives. Current period amortization is adjusted
retrospectively through an unlocking process when estimates of current or future gross profits/margins (including the impact of realized investment
gains and losses) to be realized from a group of products are revised. 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. Revisions are made based on historical results and our best estimates of future experience.
44
The impact of unlocking during 2013 was a $11.1 million decrease in amortization of deferred sales inducements and a $18.5 million decrease
in amortization of deferred policy acquisition costs. The impact of unlocking in 2013 was primarily due to account balance true-ups and
adjustments made to future period assumptions for surrenders and maintenance expense levels. The impact of unlocking during 2012 was a
$0.2 million decrease in amortization of deferred sales inducements and a $3.7 million increase in amortization of deferred policy acquisition
costs. The impact of unlocking in 2012 was primarily due to adjustments made to future period assumptions for interest margins, surrenders,
and lifetime income benefit rider utilization. The impact of unlocking during 2011 was a $5.0 million decrease in amortization of deferred sales
inducements and a $9.1 million decrease in amortization of deferred policy acquisition costs. The impact of unlocking in 2011 was primarily
due to account balance true ups and adjustments to future period assumptions for interest margins and surrenders.
Estimated future gross profits vary based on a number of sources including investment spread margins, surrender charge income, policy
persistency, policy administrative expenses and realized gains and losses on investments including credit related other than temporary impairment
losses. Estimated future gross profits are most sensitive to changes in investment spread margins which are the most significant component of
gross profits. If estimated gross profits for all future years on business in force at December 31, 2013 were to increase by 10%, our combined
balance for deferred policy acquisition costs and deferred sales inducements at December 31, 2013 would increase by $118.3 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 $133.3 million decrease in the combined December 31, 2013 balances
recorded through operations as an increase to amortization of deferred policy acquisition costs and deferred sales inducements.
Deferred Income Taxes
We account for income taxes using the liability method. This method provides for the tax effects of transactions reported in the audited consolidated
financial statements for both taxes currently due and deferred. Deferred income taxes reflect the impact of temporary differences between the
amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. A temporary difference
is a transaction, or amount of a transaction, that is recognized currently for financial reporting purposes but will not be recognized for tax purposes
until a future tax period, or is recognized currently for tax purposes but will not be recognized for financial reporting purposes until a future
reporting period. Deferred income taxes are measured by applying enacted tax rates for the years in which the temporary differences are expected
to be recovered or settled to the amount of each temporary difference.
The realization of deferred income tax assets is primarily based upon management's estimates of future taxable income. Valuation allowances
are established when management estimates, based on available information, that it is more likely than not that deferred income tax assets will
not be realized. Significant judgment is required in determining whether valuation allowances should be established, as well as the amount of
such allowances. When making such determination, consideration is given to, among other things, the following:
•
•
•
•
future taxable income of the necessary character exclusive of reversing temporary differences and carryforwards;
future reversals of existing taxable temporary differences;
taxable income in prior carryback years; and
tax planning strategies.
Actual realization of deferred income tax assets and liabilities may materially differ from these estimates as a result of changes in tax laws as
well as unanticipated future transactions impacting related income tax balances.
The realization of deferred income tax assets related to unrealized losses on our available for sale fixed maturity securities is also based upon
our intent to hold these securities for a period of time sufficient to allow for a recovery in fair value and not realize the unrealized loss.
New Accounting Pronouncements
See Note 1 to our audited consolidated financial statements in this Form 10-K beginning on page F-9, which is incorporated by reference in this
Item 7, for new accounting pronouncement disclosures.
45
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 substantially 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. An OTTI shall be considered to have occurred when we have an intention
to sell available for sale securities in an unrealized loss position. If we do not intend to sell a debt security, we consider all available evidence
to make an assessment of whether it is more likely than not that we will be required to sell the security before the recovery of its amortized cost
basis. If it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, an OTTI will be
considered to have occurred.
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 fair value of our investments and the amount of interest we pay on our floating rate subordinated debentures.
Our floating rate trust preferred securities bear interest at the three month LIBOR plus 3.50% - 4.00%. Our outstanding balance of floating rate
trust preferred securities was $164.5 million at December 31, 2013, of which $85.5 million has been swapped to a fixed rate and $79.0 million
has been capped for a term of seven years beginning March or July 2014 (See Note 5 to our audited consolidated financial statements in this
Form 10-K). The profitability of most of our products depends on the spreads between interest yield on investments and rates credited on
insurance liabilities. We have the ability to adjust crediting rates (caps, participation rates or asset fee rates for fixed index annuities) on
substantially all of our annuity liabilities 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% (40 basis points) from levels at December 31, 2013, we estimate that the fair value of our fixed maturity
securities would decrease by approximately $922.9 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 a decrease of $250.8
million in accumulated other comprehensive income and a decrease in stockholders' equity. 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 their maturity to meet our liquidity needs, which we manage using the surrender and withdrawal provisions of our annuity
contracts and through other means. See Financial Condition—Liquidity for Insurance Operations for a further discussion of the liquidity risk.
At December 31, 2013, 31% of our fixed income securities have call features, of which 0.5% ($0.1 billion) were subject to call redemption.
Another 5% ($1.2 billion) will become subject to call redemption during 2014. During the years ended December 31, 2013 and 2012, we received
$1.1 billion and $4.6 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 annuity liabilities, we have the ability to reduce crediting rates (caps,
participation rates or asset fees for index annuities) on most of our annuity liabilities to maintain the spread at our targeted level. At December 31,
2013, approximately 99% of our annuity liabilities were subject to annual adjustment of the applicable crediting rates at our discretion, limited
by minimum guaranteed crediting rates specified in the policies.
46
We purchase call options on the applicable indices to fund the annual index credits on our fixed index 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 fixed index products. For the years
ended December 31, 2013, 2012 and 2011, the annual index credits to policyholders on their anniversaries were $908.7 million, $447.4 million
and $448.2 million, respectively. Proceeds received at expiration or gains recognized upon early termination of these options related to such
credits were $910.4 million, $447.2 million and $454.2 million for the years ended December 31, 2013, 2012 and 2011, respectively. The
difference between proceeds received at expiration or gains recognized upon early termination of these options and index credits is primarily
due to credits attributable to minimum guaranteed interest self funded by us and over or under hedging as a result of policyholder behavior being
different than our expectations.
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.
We manage this risk through the terms of our fixed index annuities, which permit us to change caps, participation rates and asset fees, subject
to contractual features. By modifying caps, participation rates or asset fees, 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 audited consolidated financial statements are included as a part of this report on Form 10-K on pages F-1 through F-57.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
In accordance with the Securities Exchange Act Rules 13a-15 and 15d-15, our management, under the supervision of our Chief Executive Officer
and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures
as of the end of the period covered by this report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the design and operation of our disclosure controls and procedures were effective as of December 31, 2013 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.
(b) 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. 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 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, 2013
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 has determined that we maintained effective internal control over financial reporting as of
December 31, 2013.
The Company's independent registered public accounting firm, KPMG LLP, issued an attestation report on the effectiveness of management's
internal control over financial reporting. This report appears on page F-2.
(c) Changes in Internal Control over Financial Reporting.
There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2013, that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
There is no information required to be disclosed on Form 8-K for the quarter ended December 31, 2013 which has not been previously reported.
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 5, 2014 to be filed with the Commission pursuant to Regulation 14A within 120 days after December 31, 2013.
47
PART III
Item 15. Exhibits and Financial Statement Schedules
PART IV
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 audited 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 audited consolidated financial statements or notes thereto.
Exhibits. See Exhibit Index immediately preceding the Exhibits for a list of Exhibits filed with this report.
48
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 3rd day of March 2014.
SIGNATURES
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
By:
/s/ JOHN M. MATOVINA
John M. Matovina,
Chief Executive Officer and President
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:
Signature
Title (Capacity)
/s/ JOHN M. MATOVINA
John M. Matovina
/s/ TED M. JOHNSON
Ted M. Johnson
/s/ SCOTT A. SAMUELSON
Scott A. Samuelson
/s/ D.J. NOBLE
D.J. Noble
/s/ JOYCE A. CHAPMAN
Joyce A. Chapman
/s/ ALEXANDER M. CLARK
Alexander M. Clark
/s/ JAMES M. GERLACH
James M. Gerlach
/s/ ROBERT L. HOWE
Robert L. Howe
/s/ DAVID S. MULCAHY
David S. Mulcahy
/s/ GERARD D. NEUGENT
Gerard D. Neugent
/s/ DEBRA J. RICHARDSON
Debra J. Richardson
/s/ A.J. STRICKLAND, III
A.J. Strickland, III
/s/ HARLEY A. WHITFIELD
Harley A. Whitfield
Chief Executive Officer, President and Director
(Principal Executive Officer)
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Vice President—Controller
(Principal Accounting Officer)
Date
March 3, 2014
March 3, 2014
March 3, 2014
Executive Chairman and Director
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
Director
Director
Director
Director
Director
Director
Director
Director
Director
49
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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
YEARS ENDED DECEMBER 31, 2013, 2012 and 2011
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Schedules:
Schedule I—Summary of Investments—Other Than Investments in Related Parties
Schedule II—Condensed Financial Information of Registrant
Schedule III—Supplementary Insurance Information
Schedule IV—Reinsurance
Schedule V—Valuation and Qualifying Accounts
F-2
F-3
F-4
F-5
F-6
F-7
F-9
F-49
F-50
F-55
F-56
F-57
F-1
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 sheets of American Equity Investment Life Holding Company and subsidiaries
(the Company) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), changes
period ended December 31, 2013. In connection with our audits
in stockholders’ equity, and cash flows for each of the years in the
of the consolidated financial statements, we also have audited the financial statement schedules listed in the Index on
We also have
audited the Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control -
Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s
management is responsible for these consolidated financial statements and financial statement schedules, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules and an opinion on the Company’s internal control over financial reporting
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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement
and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit
of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.
Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
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 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 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 statements.
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 or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company
as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the
period ended
December 31, 2013, 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. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
As discussed in note 1 to the consolidated financial statements, effective January 1, 2012, the Company modified the types of costs incurred that
can be capitalized when issuing or renewing insurance contracts due to the prospective adoption of Financial Accounting Standards Board
Accounting Standards Update (ASU)
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.
Des Moines, Iowa
March 3, 2014
/s/ KPMG LLP
F-2
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
December 31,
2013
2012
Assets
Investments:
Fixed maturity securities:
Available for sale, at fair value (amortized cost: 2013 - $26,527,730; 2012 - $21,957,027)
$
26,610,447
$
24,172,136
Held for investment, at amortized cost (fair value: 2013 - $60,840; 2012 - $61,521)
Equity securities, available for sale, at fair value (cost: 2013 - $7,503; 2012 - $44,598)
Mortgage loans on real estate
Derivative instruments
Other investments
Total investments
Cash and cash equivalents
Coinsurance deposits
Accrued investment income
Deferred policy acquisition costs
Deferred sales inducements
Deferred income taxes
Other assets
Total assets
Liabilities and Stockholders' Equity
Liabilities:
Policy benefit reserves
Other policy funds and contract claims
Notes payable
Subordinated debentures
Deferred income taxes
Income taxes payable
Other liabilities
Total liabilities
Stockholders' equity:
Preferred stock, par value $1 per share, 2,000,000 shares authorized,
2013 and 2012 - no shares issued and outstanding
Common stock, par value $1 per share, 200,000,000 shares authorized; issued and outstanding:
2013 - 70,535,404 shares (excluding 4,876,735 treasury shares);
2012 - 61,750,601 shares (excluding 5,127,379 treasury shares)
Additional paid-in capital
Unallocated common stock held by ESOP; 2013 - 58,618 shares; 2012 - 239,799 shares
Accumulated other comprehensive income
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
See accompanying notes to consolidated financial statements.
F-3
76,255
7,778
2,581,082
856,050
215,042
76,088
53,422
2,623,940
415,258
196,366
30,346,654
27,537,210
897,529
2,999,618
301,641
2,426,652
1,875,880
301,856
471,669
1,268,545
2,910,701
261,833
1,709,799
1,292,341
—
153,049
39,621,499
$
35,133,478
35,789,655
$
31,773,988
418,033
549,958
246,050
—
10,153
1,222,963
38,236,812
455,752
309,869
245,869
49,303
4,756
573,704
33,413,241
$
$
—
—
70,535
550,400
(631)
46,196
718,187
1,384,687
61,751
496,715
(2,583)
686,807
477,547
1,720,237
$
39,621,499
$
35,133,478
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Revenues:
Premiums and other considerations
Annuity product charges
Net investment income
Change in fair value of derivatives
Net realized gains (losses) on investments, excluding other than temporary
impairment ("OTTI") losses
OTTI losses on investments:
Total OTTI losses
Portion of OTTI losses recognized from other comprehensive income
Net OTTI losses recognized in operations
Loss on extinguishment of debt
Total revenues
Benefits and expenses:
Insurance policy benefits and change in future policy benefits
Interest sensitive and index product benefits
Amortization of deferred sales inducements
Change in fair value of embedded derivatives
Interest expense on notes payable
Interest expense on subordinated debentures
Amortization of deferred policy acquisition costs
Other operating costs and expenses
Total benefits and expenses
Income before income taxes
Income tax expense
Net income
Earnings per common share
Earnings per common share - assuming dilution
Weighted average common shares outstanding (in thousands):
Earnings per common share
Earnings per common share - assuming dilution
See accompanying notes to consolidated financial statements.
Year Ended December 31,
2013
2012
2011
$
45,347
$
76,675
$
103,591
1,383,927
1,076,015
89,006
1,286,923
221,138
118,912
76,189
1,218,780
(114,728)
40,561
(6,454)
(18,641)
(5,411)
(9,521)
(14,932)
—
(20,180)
(13,796)
(33,976)
—
1,652,356
1,246,536
(4,964)
(1,270)
(6,234)
(32,515)
2,610,692
53,071
1,272,867
253,113
133,968
38,870
12,088
365,468
91,915
81,481
808,479
87,157
286,899
28,479
13,458
164,919
95,495
115,291
775,097
71,781
(105,194)
31,633
13,977
143,478
67,559
1,113,622
132,914
46,666
86,248
1.45
1.37
59,482
63,619
2,221,360
1,566,367
$
$
$
$
$
$
389,332
136,049
253,283
3.86
3.38
65,544
75,041
$
$
$
85,989
28,191
57,798
0.94
0.89
61,259
65,676
F-4
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
Net income
Other comprehensive income (loss):
Change in net unrealized investment gains/losses (1)
Noncredit component of OTTI losses (1)
Reclassification of unrealized investment gains/losses to net income (1)
Other comprehensive income (loss) before income tax
Income tax effect related to other comprehensive income (loss)
Other comprehensive income (loss)
Comprehensive income (loss)
Year Ended December 31,
2013
2012
2011
$
253,283
$
57,798
86,248
(1,001,943)
586
15,802
(985,555)
344,944
(640,611)
358,894
4,571
(10,267)
353,198
(123,620)
229,578
$
(387,328) $
287,376
$
595,141
6,251
(23,840)
577,552
(202,143)
375,409
461,657
(1) Net of related adjustments to amortization of deferred sales inducements and deferred policy acquisition costs.
See accompanying notes to consolidated financial statements.
F-5
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
Conversion of $20,770 of subordinated debentures
2,564
17,027
Balance at December 31, 2010
Net income for the year
Other comprehensive income
Acquisition of 48,235 shares of common stock
Allocation of 110,955 shares of common stock by
ESOP, including excess income tax benefits
Share-based compensation, including excess income tax
benefits
Issuance of 916,329 shares of common stock under
compensation plans, including excess income tax
benefits
Dividends on common stock ($0.12 per share)
Balance at December 31, 2011
Net income for the year
Other comprehensive income
Allocation of 96,294 shares of common stock by ESOP,
including excess income tax benefits
Share-based compensation, including excess income tax
benefits
Issuance of 1,349,914 shares of common stock under
compensation plans, including excess income tax
benefits
Dividends on common stock ($0.15 per share)
Balance at December 31, 2012
Net income for the year
Other comprehensive loss
Allocation of 181,181 shares of common stock by
ESOP, including excess income tax benefits
Share-based compensation, including excess income tax
benefits
Issuance of 3,294,995 shares of common stock under
compensation plans, including excess income tax
benefits
Extinguishment of convertible senior notes, net of tax,
including 5,489,808 shares of common stock issued
upon conversion
Warrants to be settled in cash
Dividends on common stock ($0.18 per share)
Common
Stock
Additional
Paid-in
Capital
Unallocated
Common
Stock Held
by ESOP
Accumulated
Other
Comprehensive
Income
Retained
Earnings
Total
Stockholders'
Equity
$
56,968
$
454,454
$
(4,815) $
81,820
$
349,620
$
938,047
—
86,248
—
—
(48)
—
—
917
—
—
—
(436)
—
—
—
60
1,195
10,320
3,883
—
—
—
—
57,837
468,281
(3,620)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,350
—
61,751
—
—
—
—
48
1,037
6,904
4,455
—
—
—
—
496,715
(2,583)
—
—
—
—
686,807
—
(640,611)
1,438
1,952
13,624
3,295
29,440
5,489
—
—
57,174
(47,991)
—
375,409
—
—
—
—
—
457,229
—
229,578
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(6,916)
428,952
57,798
—
—
—
—
—
(9,203)
477,547
253,283
—
—
—
—
—
—
(12,643)
86,248
375,409
(484)
1,255
10,320
4,800
(6,916)
1,408,679
57,798
229,578
19,591
1,085
6,904
5,805
(9,203)
1,720,237
253,283
(640,611)
3,390
13,624
32,735
62,663
(47,991)
(12,643)
Balance at December 31, 2013
$
70,535
$
550,400
$
(631) $
46,196
$
718,187
$
1,384,687
See accompanying notes to consolidated financial statements.
F-6
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
2013
2012
2011
$
253,283
$
57,798
$
86,248
1,272,867
253,113
(103,591)
133,968
14,997
(425,800)
365,468
18,375
6,861
32,515
(34,327)
(1,076,015)
3,013
10,476
(39,808)
5,397
1,113
(47,445)
236,702
(11,435)
(7,059)
862,668
3,456,719
—
46,674
539,240
971,432
24,050
808,479
87,157
(89,006)
286,899
35,758
(403,411)
164,919
18,404
(69,828)
—
21,386
(221,138)
(52,336)
6,552
(32,896)
13,197
(7,090)
55,158
99,242
5,927
(857)
784,314
3,298,623
2,618,207
13,604
543,211
483,362
33,601
(7,962,150)
(8,266,692)
—
(505,953)
(419,345)
(29,015)
(948)
—
(386,507)
(379,592)
(86,569)
(738)
775,097
71,781
(76,189)
(105,194)
76,880
(478,834)
143,478
18,970
(154,483)
—
52,617
112,608
(80,869)
9,339
(61,292)
(2,307)
5,005
177,734
(215,775)
(77,082)
59
277,791
3,705,605
219,372
2,958
206,741
506,057
2,274
(5,347,839)
(1,940,163)
(481,680)
(395,938)
(77,955)
(5,265)
(3,879,296)
(2,129,490)
(3,605,833)
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Interest sensitive and index product benefits
Amortization of deferred sales inducements
Annuity product charges
Change in fair value of embedded derivatives
Increase in traditional life and accident and health insurance reserves
Policy acquisition costs deferred
Amortization of deferred policy acquisition costs
Provision for depreciation and other amortization
Amortization of discounts and premiums on investments
Loss on extinguishment of debt
Realized gains/losses on investments and net OTTI losses recognized in operations
Change in fair value of derivatives
Deferred income taxes
Share-based compensation
Change in accrued investment income
Change in income taxes recoverable/payable
Change in other assets
Change in other policy funds and contract claims
Change in collateral held for derivatives
Change in other liabilities
Other
Net cash provided by operating activities
Investing activities
Sales, maturities, or repayments of investments:
Fixed maturity securities—available for sale
Fixed maturity securities—held for investment
Equity securities—available for sale
Mortgage loans on real estate
Derivative instruments
Other investments
Acquisitions of investments:
Fixed maturity securities—available for sale
Fixed maturity securities—held for investment
Mortgage loans on real estate
Derivative instruments
Other investments
Purchases of property, furniture and equipment
Net cash used in investing activities
F-7
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
Financing activities
Receipts credited to annuity and single premium universal life policyholder account balances
$
4,160,346
$
3,782,275
$
4,784,511
Year Ended December 31,
2013
2012
2011
Coinsurance deposits
Return of annuity policyholder account balances
Financing fees incurred and deferred
Proceeds from notes payable
Repayment of notes payable
Net proceeds from settlement of notes hedges and warrants
Repayment of subordinated debentures
Acquisition of common stock
Excess tax benefits realized from share-based compensation plans
Proceeds from issuance of common stock
Change in checks in excess of cash balance
Dividends paid
Net cash provided by financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest expense
Income taxes
Income tax refunds received
Non-cash operating activity:
Deferral of sales inducements
Non-cash investing activity:
Real estate acquired in satisfaction of mortgage loans
Mortgage loan on real estate sold
Non-cash financing activities:
Conversion of subordinated debentures
Common stock issued in extinguishment of debt
See accompanying notes to consolidated financial statements.
25,729
4,885
(122,415)
(1,763,913)
(1,575,340)
(1,494,554)
(11,942)
415,000
(234,154)
22,170
—
—
4,043
31,764
9,212
(12,643)
2,645,612
(371,016)
1,268,545
—
—
—
—
(1,141)
—
481
5,741
1,071
(9,203)
2,208,769
863,593
404,952
897,529
$
1,268,545
$
(1,566)
—
(46,251)
—
—
(484)
1,061
4,686
17,156
(6,916)
3,135,228
(192,814)
597,766
404,952
25,608
$
27,666
$
128,225
—
67,450
512
30,650
129,250
466
337,787
306,659
385,123
8,217
—
—
117,463
26,324
—
20,770
—
20,978
1,215
—
—
$
$
F-8
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Nature of Operations
American Equity Investment Life Holding Company ("we", "us" or "our"), through its wholly-owned subsidiaries, American Equity Investment
Life Insurance Company ("American Equity Life"), American Equity Investment Life Insurance Company of New York ("American Equity Life
of New York") and Eagle Life Insurance Company ("Eagle Life"), is licensed to sell insurance products in 50 states and the District of Columbia
at December 31, 2013. We operate solely in the insurance business.
We primarily market fixed index and fixed rate annuities and to a lesser extent, life insurance. Premiums and annuity deposits (net of coinsurance)
collected in 2013, 2012 and 2011, by product type were as follows:
Product Type
Fixed index annuities:
Index strategies
Fixed strategy
Fixed rate annuities
Single premium immediate annuities (SPIA)
Life insurance
Year Ended December 31,
2013
2012
2011
(Dollars in thousands)
$
2,847,370
$
2,223,652
$
1,017,620
3,864,990
112,740
52,142
10,556
1,206,784
3,430,436
148,105
164,657
12,877
2,835,422
1,375,321
4,210,743
247,237
305,603
12,151
$
4,040,428
$
3,756,075
$
4,775,734
One national marketing organization through which we market our products accounted for more than 10% of the annuity deposits and insurance
premium collections during 2013 representing 11% of the annuity deposits and insurance premiums collected. Three national marketing
organization accounted for more than 10% of the annuity deposits and insurance premium collections during 2012 representing 12%, 11% and
10% individually, of the annuity deposits and insurance premiums collected. Two national marketing organization accounted for more than 10%
of the annuity deposits and insurance premium collections during 2011 representing 14% and 12% individually, of the annuity deposits and
insurance premiums collected.
Consolidation and Basis of Presentation
The consolidated financial statements include our accounts and our wholly-owned subsidiaries: American Equity Life, American Equity Life
of New York, Eagle Life, AERL, L.C., American Equity Capital, Inc., American Equity Investment Properties, L.C., American Equity Advisors,
Inc. and American Equity Investment Service Company. All significant intercompany accounts and transactions have been eliminated.
During 2013, we identified certain classification errors related to the presentation of premiums and other considerations, insurance policy benefits
and change in future policy benefits and interest sensitive and index product benefits related to life contingent immediate annuities in our
consolidated statements of operations. We evaluated the materiality of the errors from qualitative and quantitative perspectives and concluded
they were not material to any prior periods. However, we revised the 2012 and 2011 consolidated statements of operations to be consistent with
the 2013 presentation. The changes resulted in increases to premiums and other considerations of $63.8 million and $106.8 million and insurance
policy benefits and change in future policy benefits of $73.4 million and $107.4 million, as well as decreases to interest sensitive and index
product benefits of $9.6 million and $0.6 million for the years ended December 31, 2012 and 2011, respectively.
Reclassifications have been made to prior period consolidated financial statements to conform to the December 31, 2013 presentation.
Estimates and Assumptions
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") 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, policy
benefit reserves, valuation of derivatives, including embedded derivatives on index annuity reserves, contingent convertible senior notes, valuation
of investments, other than temporary impairment of investments, allowances for loan losses on mortgage loans and valuation allowances on
deferred tax assets. A description of each critical estimate is incorporated within the discussion of the related accounting policies which follow.
It is reasonably possible that actual experience could differ from the estimates and assumptions utilized.
F-9
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Investments
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 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 assumed changes in
amortization of deferred policy acquisition costs and deferred sales inducements. Fair values, as reported herein, of fixed maturity and equity
securities are based on quoted market prices in active markets when available, or for those fixed maturity securities not actively traded, yield
data and other factors relating to instruments or securities with similar characteristics are used. See Note 2 for more information on the
determination of fair value. 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 residential and commercial mortgage backed securities incorporate
prepayment assumptions to estimate the securities' expected lives. Interest income is recognized as earned.
Fixed maturity securities that we have the positive intent and ability to hold to maturity are classified as held for investment. Such securities
may, at times, be called prior to maturity. 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 our consolidated financial
statements.
Equity securities, comprised of common and perpetual preferred stocks, are classified as available for sale and are reported at fair value. Unrealized
gains and losses are included directly in a separate component of stockholders' equity, net of income taxes and certain adjustments for assumed
changes in amortization of deferred policy acquisition costs and deferred sales inducements. Dividends are recognized when declared.
The carrying amounts of our impaired investments in fixed maturity and equity securities are adjusted for declines in value that are other than
temporary. Other than temporary impairment losses are reported as a component of revenues in the consolidated statements of operations, which
presents the amount of noncredit impairment losses for certain fixed maturity securities that is reported in accumulated other comprehensive
income (loss). See Note 3 for further discussion of other than temporary impairment losses.
Deterioration in credit quality of the companies or assets backing our investment securities, deterioration in the condition of the financial services
industry, imbalances in liquidity recurring in the marketplace or declines in real estate values may further affect the fair value of these investment
securities and increase the potential that certain unrealized losses will be recognized as other than temporary impairments in the future.
Mortgage loans on real estate are reported at cost, adjusted for amortization of premiums and accrual of discounts. Interest income is recorded
when earned; however, interest ceases to accrue for loans on which interest is more than 90 days past due based upon contractual terms and/or
when the collection of interest is not considered probable. We evaluate the mortgage loan portfolio for the establishment of a loan loss reserve
by specific identification of impaired loans and the measurement of an estimated loss, if any, for each impaired loan identified and an analysis
of the mortgage loan portfolio for the need of a general loan allowance for probable losses on all 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 contractual interest rate, or the fair value of the underlying collateral, less costs
to sell. The amount of the general loan allowance, if any, is based upon our evaluation of the probability of collection, historical loss experience,
delinquencies, credit concentrations, underwriting standards and national and local economic conditions. The carrying value of impaired loans
is reduced by the establishment of an allowance for loan losses, changes to which are recognized as realized gains or losses on investments.
Interest income on impaired loans is recorded on a cash basis.
Other invested assets include company owned life insurance, real estate, limited partnerships accounted for using the equity method and policy
loans. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the end of the reporting
period, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Policy loans are stated
at current unpaid principal balances.
Real estate owned is reported at cost less accumulated depreciation. Cost is determined at the time ownership is acquired in satisfaction of
mortgage loans and is the lower of the carrying value of the mortgage loan or fair value of the real estate less its estimated cost to sell. Buildings
and improvements are depreciated using the straight-line method over their estimated useful lives. Impairment losses on real estate owned are
recognized when there are indicators of impairment present and the expected future undiscounted cash flows are not sufficient to recover the
real estate's carrying value. Any impairment losses are reported as realized losses and are part of net income.
Derivative Instruments
Our derivative instruments include call options used to fund fixed index annuity credits, interest rate swap and caps used to manage interest rate
risk associated with the floating rate component on certain of our subordinated debentures, call options to hedge the conversion spread on our
convertible senior notes (see Note 9) and certain other derivative instruments embedded in other contracts. All of our derivative instruments
are recognized in the balance sheet at fair value and changes in fair value are recognized immediately in operations. See Note 5 for more
information on derivative instruments.
Cash and Cash Equivalents
We consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
F-10
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We also consider reverse repurchase agreements, which typically have an initial maturity of 6 weeks or less, to be cash equivalents. Amounts
advanced under these agreements represent short-term loans that carry a fixed rate of interest. Borrowers under these agreements are required
to post collateral that is investment grade debt securities with fair value in excess of the amount advanced.
Book Overdrafts
Under our cash management system, checks issued but not yet presented to banks frequently result in overdraft balances for accounting purposes
and are classified as Other liabilities on our consolidated balance sheets. We report the changes in the amount of the overdraft balance as a
financing activity in our consolidated statement of cash flows as Change in checks in excess of cash balance.
Deferred Policy Acquisition Costs and Deferred Sales Inducements
To the extent recoverable from future policy revenues and gross profits, certain costs that are incremental or directly related to the successful
production of new business are not expensed when incurred but instead are capitalized as deferred policy acquisition costs or deferred sales
inducements. Deferred policy acquisition costs and deferred sales inducements are subject to loss recognition testing on a quarterly basis or
when an event occurs that may warrant loss recognition. Deferred policy acquisition costs consist primarily of commissions and certain costs
of policy issuance. Deferred sales inducements consist of premium and interest bonuses credited to policyholder account balances.
For annuity products, these capitalized costs are being amortized generally in proportion to expected gross profits from investment spreads,
including the cost of hedging the fixed indexed annuity obligations, and, to a lesser extent, from product charges and mortality and expense
margins. That amortization is adjusted retrospectively through an unlocking process when estimates of current or future gross profits/margins
(including the impact of net realized gains on investments and net OTTI losses recognized in operations) 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 and equity securities had been sold at their aggregate fair value at the end of the reporting
period and the proceeds reinvested at current yields. The impact of this adjustment is included in accumulated other comprehensive income
within consolidated stockholders' equity, net of applicable taxes. See Note 6 for more information on deferred policy acquisition costs and
deferred sales inducements.
Policy Benefit Reserves
Policy benefit reserves for fixed index annuities with returns linked to the performance of a specified market index are equal to the sum of the
fair value of the embedded derivatives and the host (or guaranteed) component of the contracts. The host value is established at inception of
the contract and accreted over the policy's life at a constant rate of interest. Future policy benefit reserves for fixed index annuities earning a
fixed rate of interest and other deferred annuity products are computed under a retrospective deposit method and represent policy account balances
before applicable surrender charges. For the years ended December 31, 2013, 2012 and 2011, interest crediting rates for these products ranged
from 1.50% to 5.00%. These rates include interest bonuses capitalized as deferred sales inducements.
Policy benefit reserves are not reduced for amounts ceded under coinsurance agreements which are reported as coinsurance deposits on our
consolidated balance sheets. See Note 7 for more information on reinsurance.
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 3.00%
to 5.50%. Policy benefit claims are charged to expense in the period that the claims are incurred.
Deferred Income Taxes
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 realization of deferred income tax assets primarily depends on generating future taxable income during the periods in which
temporary differences become deductible. Deferred income tax assets are reduced by a valuation allowance if, based on the weight of available
evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. In making such a determination, all
available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning
strategies and recent financial operations, is considered. The realization of deferred income tax assets related to unrealized losses on available
for sale fixed maturity securities is also based upon our intent and ability to hold those securities for a period of time sufficient to allow for a
recovery in fair value and not realize the unrealized loss.
Recognition of Premium Revenues and Costs
Revenues for annuity products include surrender and living income benefit rider charges assessed against policyholder account balances during
the period. Interest sensitive and index product benefits related to annuity products include interest credited or index credits to policyholder
account balances. In addition, the change in fair value of embedded derivatives within fixed index annuity contracts is included in benefits and
expenses.
Considerations from immediate annuities with life contingencies are recognized as revenue when the policy is issued.
F-11
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Traditional life insurance premiums are recognized as revenues over the premium-paying period. 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
(2013 - $1.1 million; 2012 - $1.1 million; and 2011 - $1.8 million) are reported as a reduction of traditional life insurance premiums in the
consolidated statements of operations. 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, including the change in the fair value of derivatives for call options related to the business ceded under coinsurance
agreements (see Note 7), benefits, losses and expenses are reported net of reinsurance ceded.
Other Comprehensive Income
Other comprehensive income includes all changes in stockholders' equity during a period except those resulting from investments by and
distributions to stockholders. Other comprehensive income excludes net realized investment gains (losses) included in net income which merely
represent transfers from unrealized to realized gains and losses. These amounts totaled $34.3 million, $(21.4) million and $(52.6) million in
2013, 2012 and 2011, 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 $24.1 million in 2013, $(12.8) million in 2012 and $(34.3) million in
2011.
Adopted Accounting Pronouncements
In October 2010, as a result of a consensus of the Financial Accounting Standards Board ("FASB") Emerging Issues Task Force (EITF), the
FASB issued an accounting standards update (ASU) that modifies the definition of the types of costs incurred that can be capitalized in the
acquisition of new and renewal insurance contracts. This guidance defines the costs that qualify for deferral as incremental direct costs that
result directly from and are essential to successful contract transactions and would not have been incurred by the insurance entity had the contract
transactions not occurred. In addition, it lists certain costs as deferrable as those that are directly related to underwriting, policy issuance and
processing, medical and inspection, and sales force contract selling as deferrable, as well as the portion of an employee's total compensation
related directly to time spent performing those activities for actual acquired contracts and other costs related directly to those activities that would
not have been incurred if the contract had not been acquired. This amendment to current GAAP became effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2011. For the year ended December 31, 2011, other operating costs and expenses
that were deferred that would not qualify for deferral under this guidance totaled $9.8 million, which if expensed as incurred would have
decreased net income $6.2 million and earnings per common share and earnings per common - assuming dilution by $0.10.
In May 2011, the FASB issued an ASU that addresses fair value measurement and disclosure as part of its convergence efforts with the International
Accounting Standards Board. The guidance is intended to create common fair value measurement and disclosure requirements in GAAP and
International Financial Reporting Standards. This ASU changes the wording used to describe many of the requirements in GAAP for measuring
fair value and for disclosing information about fair value measurements. Some changes clarify the FASB's intent about the application of existing
fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing
information about fair value measurements. The disclosure requirements add information about transfers between Level 1 and Level 2 of the
fair value hierarchy, information about the sensitivity of a fair value measurement categorized within Level 3 of the fair value hierarchy to
changes in unobservable inputs and any interrelationships between those unobservable inputs and the categorization by level of the fair value
hierarchy for items that are not measured at fair value in the statement of financial position, but for which the fair value of such items is required
to be disclosed. This ASU became effective for interim and annual periods beginning after December 15, 2011. See Note 2 for disclosures
regarding fair value measurements.
In June 2011, the FASB issued an ASU that expands the disclosure requirements related to other comprehensive income (loss). A reporting
entity is now required to present the total of comprehensive income (loss), the components of net income, and the components of other
comprehensive income (loss) either in a single continuous statement of comprehensive income (loss) or in two separate but consecutive statements.
Under both choices, the reporting entity is required to present each component of net income along with total net income, each component of
other comprehensive income (loss) along with a total for other comprehensive income (loss) and a total amount for comprehensive income (loss).
This ASU became effective for interim and annual periods beginning after December 15, 2011. We adopted this ASU on January 1, 2012.
In February 2013, the FASB issued an ASU that expands the disclosure requirements related to other comprehensive income (loss). A reporting
entity is now required to provide information about the amounts reclassified out of accumulated other comprehensive income (loss) by component.
In addition, a reporting entity is required to present, either on the face of the statement where net income is presented or in the notes, significant
amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified
is required to be reclassified to net income in its entirety in the same reporting period. This ASU became effective for interim and annual periods
beginning after December 15, 2012. We adopted this ASU on January 1, 2013.
New Accounting Pronouncements
There are no accounting standards updates finalized to become effective in the future that will significantly affect our consolidated financial
statements.
F-12
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Fair Values of Financial Instruments
The following sets forth a comparison of the carrying amounts and fair values of our financial instruments:
Assets
Fixed maturity securities:
Available for sale
Held for investment
Equity securities, available for sale
Mortgage loans on real estate
Derivative instruments
Other investments
Cash and cash equivalents
Coinsurance deposits
Interest rate caps
Interest rate swap
2015 notes hedges
Counterparty collateral
Liabilities
Policy benefit reserves
Single premium immediate annuity (SPIA) benefit reserves
Notes payable
Subordinated debentures
2015 notes embedded conversion derivative
Interest rate swap
December 31,
2013
2012
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
(Dollars in thousands)
$
26,610,447
$
26,610,447
$
24,172,136
$
24,172,136
76,255
7,778
60,840
7,778
2,581,082
2,615,410
856,050
192,198
897,529
856,050
193,343
897,529
2,999,618
2,669,432
6,103
712
107,041
315,824
6,103
712
107,041
315,824
76,088
53,422
2,623,940
415,258
163,193
1,268,545
2,910,701
3,247
—
43,105
63,012
61,521
53,422
2,848,235
415,258
163,517
1,268,545
2,563,356
3,247
—
43,105
63,012
35,453,166
29,670,827
31,452,496
26,264,831
417,625
549,958
246,050
107,041
—
430,835
699,435
234,959
107,041
—
455,167
309,869
245,869
43,105
4,261
469,768
379,070
218,283
43,105
4,261
Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market
participants at the measurement date. The objective of a fair value measurement is to determine that price for each financial instrument at each
measurement date. We meet this objective using various methods of valuation that include market, income and cost approaches.
We categorize our financial instruments into three levels of fair value hierarchy based on the priority of inputs used in determining fair value.
The hierarchy defines the highest priority inputs (Level 1) as quoted prices in active markets for identical assets or liabilities. The lowest priority
inputs (Level 3) are our own assumptions about what a market participant would use in determining fair value such as estimated future cash
flows. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, a financial
instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our
assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific
to the financial instrument. We categorize financial assets and liabilities recorded at fair value in the consolidated balance sheets as follows:
Level 1—
Level 2—
Quoted prices are available in active markets for identical financial instruments as of the reporting date. We do not adjust
the quoted price for these financial instruments, even in situations where we hold a large position and a sale could reasonably
impact the quoted price.
Quoted prices in active markets for similar financial instruments, quoted prices for identical or similar financial instruments
in markets that are not active; and models and other valuation methodologies using inputs other than quoted prices that are
observable.
Level 3— Models and other valuation methodologies using significant inputs that are unobservable for financial instruments and include
situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair
value require significant management judgment or estimation. Financial instruments that are included in Level 3 are securities
for which no market activity or data exists and for which we used discounted expected future cash flows with our own
assumptions about what a market participant would use in determining fair value.
Transfers of securities among the levels occur at times and depend on the type of inputs used to determine fair value of each security. There
were no transfers between levels during 2013 and 2012.
F-13
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our assets and liabilities which are measured at fair value on a recurring basis as of December 31, 2013 and 2012 are presented below based on
the fair value hierarchy levels:
December 31, 2013
Assets
Fixed maturity securities:
Available for sale:
United States Government full faith and credit
United States Government sponsored agencies
United States municipalities, states and territories
Foreign government obligations
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Equity securities, available for sale: finance, insurance and real estate
Derivative instruments
Cash and cash equivalents
Interest rate caps
Interest rate swap
2015 notes hedges
Counterparty collateral
Liabilities
2015 notes embedded conversion derivative
Fixed index annuities—embedded derivatives
December 31, 2012
Assets
Fixed maturity securities:
Available for sale:
United States Government full faith and credit
United States Government sponsored agencies
United States municipalities, states and territories
Foreign government obligations
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Equity securities, available for sale: finance, insurance and real estate
Derivative instruments
Cash and cash equivalents
Interest rate caps
2015 notes hedges
Liabilities
2015 notes embedded conversion derivative
Interest rate swap
Fixed index annuities—embedded derivatives
Total
Fair Value
Quoted
Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
(Dollars in thousands)
Significant
Unobservable
Inputs
(Level 3)
$
42,925
$
4,805
$
38,120
$
1,194,289
3,306,743
91,557
17,233,037
1,971,960
1,735,460
1,034,476
7,778
856,050
897,529
6,103
712
107,041
315,824
—
—
—
20
—
—
359
—
—
897,529
—
—
—
—
1,194,289
3,306,743
91,557
17,233,017
1,970,584
1,735,460
1,034,117
7,778
856,050
—
6,103
712
107,041
315,824
—
—
—
—
—
1,376
—
—
—
—
—
—
—
—
—
28,801,484
107,041
4,406,163
4,513,204
$
$
$
902,713
$
27,897,395
— $
—
— $
107,041
—
107,041
$
$
$
1,376
—
4,406,163
4,406,163
5,154
$
5,154
$
— $
1,772,025
3,578,323
105,259
14,466,772
2,888,113
357,982
998,508
53,422
415,258
—
—
—
33,131
—
—
378
36,928
—
1,268,545
1,268,545
—
—
3,247
43,105
25,955,713
43,105
4,261
3,337,556
3,384,922
$
$
$
1,772,025
3,578,323
105,259
14,433,641
2,886,301
357,982
998,130
16,494
415,258
—
3,247
43,105
—
—
—
—
—
1,812
—
—
—
—
—
—
—
1,344,136
$
24,609,765
— $
—
—
— $
43,105
4,261
—
47,366
$
$
$
1,812
—
—
3,337,556
3,337,556
$
$
$
$
$
$
$
F-14
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following methods and assumptions were used in estimating the fair values of financial instruments during the periods presented in these
consolidated financial statements.
Fixed maturity securities and equity securities
The fair values of fixed maturity securities and equity securities in an active and orderly market are determined by utilizing independent pricing
services. The independent pricing services incorporate a variety of observable market data in their valuation techniques, including:
•
•
•
•
•
•
•
•
reported trading prices,
benchmark yields,
broker-dealer quotes,
benchmark securities,
bids and offers,
credit ratings,
relative credit information, and
other reference data.
The independent pricing services also take into account perceived market movements and sector news, as well as a security's terms and conditions,
including any features specific to that issue that may influence risk and marketability. Depending on the security, the priority of the use of
observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary.
The independent pricing services provide quoted market prices when available. Quoted prices are not always available due to market inactivity.
When quoted market prices are not available, the third parties use yield data and other factors relating to instruments or securities with similar
characteristics to determine fair value for securities that are not actively traded. We generally obtain one value from our primary external pricing
service. In situations where a price is not available from this service, we may obtain further quotes or prices from additional parties as needed.
In addition, for our callable United States Government sponsored agencies we obtain multiple broker quotes and take the average the broker
prices received. Market indices of similar rated asset class spreads are considered for valuations and broker indications of similar securities are
compared. Inputs used by the broker include market information, such as yield data and other factors relating to instruments or securities with
similar characteristics. Valuations and quotes obtained from third party commercial pricing services are non-binding and do not represent quotes
on which one may execute the disposition of the assets.
We validate external valuations at least quarterly through a combination of procedures that include the evaluation of methodologies used by the
pricing services, analytical reviews and performance analysis of the prices against trends, and maintenance of a securities watch list. Additionally,
as needed we utilize discounted cash flow models or perform independent valuations on a case-by-case basis using inputs and assumptions
similar to those used by the pricing services. Although we do identify differences from time to time as a result of these validation procedures,
we did not make any significant adjustments as of December 31, 2013 and 2012.
Mortgage loans on real estate
Mortgage loans on real estate are not measured at fair value on a recurring basis. The fair values of mortgage loans on real estate are calculated
using discounted expected cash flows using current competitive market interest rates currently being offered for similar loans. The fair values
of impaired mortgage loans on real estate that we have considered to be collateral dependent are based on the fair value of the real estate collateral
(based on appraised values) less estimated costs to sell. The inputs utilized to determine fair value of all mortgage loans are unobservable market
data (competitive market interest rates and appraised property values); therefore, fair value of mortgage loans falls into Level 3 in the fair value
hierarchy.
Derivative instruments
The fair values of derivative instruments, primarily call options, are based upon the amount of cash that we will receive to settle each derivative
instrument on the reporting date. These amounts are determined by our investment team using industry accepted valuation models and are
adjusted for the nonperformance risk of each counterparty net of any collateral held. Inputs include market volatility and risk free interest rates
and are used in income valuation techniques in arriving at a fair value for each option contract. The nonperformance risk for each counterparty
is based upon its credit default swap rate. We have no performance obligations related to the call options purchased to fund our fixed index
annuity policy liabilities.
Other investments
None of the financial instruments included in other investments are measured at fair value on a recurring basis. Financial instruments included
in other investments are policy loans, equity method investments and company owned life insurance (COLI). We have not attempted to determine
the fair values associated with our policy loans, as we believe any differences between carrying value and the fair values afforded these instruments
are immaterial to our consolidated financial position and, accordingly, the cost to provide such disclosure does not justify the benefit to be
derived. The fair value of our equity method investment qualifies as a Level 3 fair value and was determined by calculating the present value
of future cash flows discounted by a risk free rate, a risk spread and a liquidity discount. The risk spread and liquidity discount are rates determined
F-15
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
by our investment professionals and are unobservable market inputs. The fair value of our COLI approximates the cash surrender value of the
policies and whose fair values fall within Level 2 of the fair value hierarchy.
Cash and cash equivalents
Amounts reported in the consolidated balance sheets for these instruments are reported at their historical cost which approximates fair value due
to the nature of the assets assigned to this category.
Interest rate caps and swap
The fair values of our pay fixed/receive variable interest rate swap and interest rate caps are obtained from third parties and are determined by
discounting expected future cash flows using projected LIBOR rates for the term of the swap and caps.
2015 notes hedges
The fair value of these call options has been determined by a third party who applies market observable data such as our common stock price,
its dividend yield and its volatility, as well as the time to expiration of the call options to determine a fair value of the buy side of these options.
Counterparty collateral
Amounts reported in other assets of the consolidated balance sheets for these instruments are reported at their historical cost which approximates
fair value due to the nature of the assets assigned to this category.
Policy benefit reserves, coinsurance deposits and SPIA benefit reserves
The fair values of the liabilities under contracts not involving significant mortality or morbidity risks (principally deferred annuities), are stated
at the cost we would incur to extinguish the liability (i.e., the cash surrender value) as these contracts are generally issued without an annuitization
date. The coinsurance deposits related to the annuity benefit reserves have fair values determined in a similar fashion. For period-certain annuity
benefit contracts, the fair value is determined by discounting the benefits at the interest rates currently in effect for newly purchased immediate
annuity contracts. We are not required to and have not estimated the fair value of the liabilities under contracts that involve significant mortality
or morbidity risks, as these liabilities fall within the definition of insurance contracts that are exceptions from financial instruments that require
disclosures of fair value. Policy benefit reserves, coinsurance deposits and SPIA benefit reserves are not measured at fair value on a recurring
basis. All of the fair values presented within these categories fall within Level 3 of the fair value hierarchy as most of the inputs are unobservable
market data.
Notes payable
The fair values of our senior unsecured notes and convertible senior notes are based upon pricing matrices developed by a third party pricing
service when quoted market prices are not available and are categorized as Level 2 within the fair value hierarchy. Notes payable are not
remeasured at fair value on a recurring basis.
Subordinated debentures
Fair values for subordinated debentures are estimated using discounted cash flow calculations based principally on observable inputs including
our incremental borrowing rates, which reflect our credit rating, for similar types of borrowings with maturities consistent with those remaining
for the debt being valued. These fair values are categorized as Level 2 within the fair value hierarchy. Subordinated debentures are not measured
at fair value on a recurring basis.
2015 notes embedded conversion derivative
The fair value of this embedded derivative is determined by pricing the call options that hedge this potential liability. The terms of the conversion
option are identical to the 2015 notes hedges and the method of determining fair value of the call options is based upon observable market data.
Fixed index annuities - embedded derivatives
We estimate the fair value of the embedded derivative component of our fixed index annuity policy benefit reserves at each valuation date by
(i) projecting policy contract values and minimum guaranteed contract values over the expected lives of the contracts and (ii) discounting the
excess of the projected contract value amounts at the applicable risk free interest rates adjusted for our nonperformance risk related to those
liabilities. The projections of policy contract values are based on our best estimate assumptions for future policy growth and future policy
decrements. Our best estimate assumptions for future policy growth include assumptions for the expected index credit on the next policy
anniversary date which are derived from the fair values of the underlying call options purchased to fund such index credits and the expected
costs of annual call options we will purchase in the future to fund index credits beyond the next policy anniversary. The projections of minimum
guaranteed contract values include the same best estimate assumptions for policy decrements as were used to project policy contract values.
F-16
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables provide a reconciliation of the beginning and ending balances for our Level 3 assets and liabilities, which are measured at
fair value on a recurring basis using significant unobservable inputs for the years ended December 31, 2013 and 2012:
Available for sale securities
Beginning balance
Principal returned
Accretion of discount
Total gains (losses) (unrealized/realized):
Included in other comprehensive income (loss)
Included in operations
Ending balance
Year Ended December 31,
2013
2012
(Dollars in thousands)
$
$
1,812
$
(864)
152
276
—
1,376
$
2,098
(300)
67
250
(303)
1,812
The Level 3 assets included in the table above are not material to our financial position, results of operations or cash flows, and it is management's
opinion that the sensitivity of the inputs used in determining the fair value of these assets is not material as well.
Fixed index annuities—embedded derivatives
Beginning balance
Premiums less benefits
Change in unrealized losses (gains), net
Ending balance
Year Ended December 31,
2013
2012
(Dollars in thousands)
$
$
3,337,556
$
2,530,496
1,485,109
(416,502)
765,942
41,118
4,406,163
$
3,337,556
Change in unrealized losses (gains), net for each period in our embedded derivatives are included in change in fair value of embedded derivatives
in the consolidated statements of operations.
Certain derivatives embedded in our fixed index annuity contracts are our most significant financial instrument measured at fair value that are
categorized as Level 3 in the fair value hierarchy. The contractual obligations for future annual index credits within our fixed index annuity
contracts are treated as a "series of embedded derivatives" over the expected life of the applicable contracts. We estimate the fair value of these
embedded derivatives at each valuation date by the method described above under fixed index annuities - embedded derivatives. The projections
of minimum guaranteed contract values include the same best estimate assumptions for policy decrements as were used to project policy contract
values.
The most sensitive assumption in determining policy liabilities for fixed index annuities is the rates used to discount the excess projected contract
values. As indicated above, the discount rate reflects our nonperformance risk. If the discount rates used to discount the excess projected contract
values at December 31, 2013, were to increase by 100 basis points, the fair value of the embedded derivatives would decrease by $279.3 million
recorded through operations as a decrease in the change in fair value of embedded derivatives and there would be a corresponding decrease of
$192.9 million to our combined balance for deferred policy acquisition costs and deferred sales inducements recorded through operations as an
increase in amortization of deferred policy acquisition costs and deferred sales inducements. A decrease by 100 basis points in the discount rate
used to discount the excess projected contract values would increase the fair value of the embedded derivatives by $309.9 million recorded
through operations as an increase in the change in fair value of embedded derivatives and there would be a corresponding increase of $183.5
million to our combined balance for deferred policy acquisition costs and deferred sales inducements recorded through operations as a decrease
in amortization of deferred policy acquisition costs and deferred sales inducements.
F-17
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Investments
At December 31, 2013 and 2012, the amortized cost and fair value of fixed maturity securities and equity securities were as follows:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(Dollars in thousands)
Fair Value
December 31, 2013
Fixed maturity securities:
Available for sale:
United States Government full faith and credit
$
44,852
$
367
$
(2,294) $
United States Government sponsored agencies
United States municipalities, states and territories
Foreign government obligations
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Held for investment:
Corporate security
Equity securities, available for sale:
Finance, insurance and real estate
December 31, 2012
Fixed maturity securities:
Available for sale:
United States Government full faith and credit
United States Government sponsored agencies
United States municipalities, states and territories
Foreign government obligations
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Held for investment:
Corporate security
Equity securities, available for sale:
Finance, insurance and real estate
$
$
$
$
$
$
$
1,313,776
3,181,032
86,112
17,142,118
1,895,913
1,821,988
1,041,939
26,527,730
76,255
$
$
1,875
164,785
8,907
606,948
119,230
3,287
23,300
(121,362)
(39,074)
(3,462)
(516,029)
(43,183)
(89,815)
(30,763)
42,925
1,194,289
3,306,743
91,557
17,233,037
1,971,960
1,735,460
1,034,476
928,699
$
(845,982) $
26,610,447
— $
(15,415) $
60,840
7,503
$
275
$
— $
7,778
4,590
$
564
$
— $
1,763,789
3,116,678
86,099
12,930,173
2,743,537
354,870
957,291
21,957,027
76,088
$
$
11,704
461,770
19,160
1,568,223
172,304
5,095
44,190
(3,468)
(125)
—
(31,624)
(27,728)
(1,983)
(2,973)
5,154
1,772,025
3,578,323
105,259
14,466,772
2,888,113
357,982
998,508
2,283,010
$
(67,901) $
24,172,136
— $
(14,567) $
61,521
44,598
$
10,227
$
(1,403) $
53,422
During 2013 and 2012, we received $1.1 billion and $4.6 billion, respectively, in net redemption proceeds related to calls of our callable United
States Government sponsored agency securities and public and private bonds, of which $2.6 billion for the year ended December 31, 2012,
were classified as held for investment. The proceeds from these redemptions have been reinvested primarily in United States Government
sponsored agencies, corporate securities, residential and commercial mortgage backed securities and other asset backed securities classified as
available for sale. At December 31, 2013, 31% of our fixed income securities have call features, of which 0.5% ($0.1 billion) were subject to
call redemption and another 5% ($1.2 billion) will become subject to call redemption during 2014.
F-18
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The amortized cost and fair value of fixed maturity securities at December 31, 2013, 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 our mortgage and other asset backed securities provide for periodic payments throughout their lives and are shown below as
separate lines.
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years through twenty years
Due after twenty years
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Available for sale
Held for investment
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
$
75,295
$
76,482
$
— $
(Dollars in thousands)
851,732
7,828,092
6,494,544
6,518,227
953,159
7,720,501
6,472,508
6,645,901
21,767,890
21,868,551
1,895,913
1,821,988
1,041,939
1,971,960
1,735,460
1,034,476
—
—
—
76,255
76,255
—
—
—
—
—
—
—
60,840
60,840
—
—
—
$
26,527,730
$
26,610,447
$
76,255
$
60,840
Net unrealized gains on available for sale fixed maturity securities and equity securities reported as a separate component of stockholders' equity
were comprised of the following:
Net unrealized gains on available for sale fixed maturity securities and equity securities
Adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales
inducements
Deferred income tax valuation allowance reversal
Deferred income tax benefit
Net unrealized gains reported as accumulated other comprehensive income
December 31,
2013
2012
(Dollars in thousands)
$
$
82,992
$
2,223,933
(46,588)
22,534
(12,742)
46,196
$
(1,201,974)
22,534
(357,686)
686,807
The National Association of Insurance Commissioners ("NAIC") assigns designations to fixed maturity securities. These designations range
from Class 1 (highest quality) to Class 6 (lowest quality). In general, securities are assigned a designation based upon the ratings they are given
by the Nationally Recognized Statistical Rating Organizations ("NRSRO's"). The NAIC designations are utilized by insurers in preparing their
annual statutory statements. NAIC Class 1 and 2 designations are considered "investment grade" while NAIC Class 3 through 6 designations
are considered "non-investment grade." Based on the NAIC designations, we had 98% of our fixed maturity portfolio rated investment grade
at both December 31, 2013 and 2012.
The following table summarizes the credit quality, as determined by NAIC designation, of our fixed maturity portfolio as of the dates indicated:
December 31,
2013
2012
NAIC
Designation
Amortized
Cost
Fair
Value
Amortized
Cost
(Dollars in thousands)
Fair
Value
1
2
3
4
5
6
$
16,394,654
$
16,531,250
$
13,737,381
$
15,250,560
9,630,251
502,822
74,493
—
1,765
9,598,399
474,165
66,078
—
1,395
7,838,186
398,294
53,879
—
5,375
8,533,121
387,222
56,151
—
6,603
$
26,603,985
$
26,671,287
$
22,033,115
$
24,233,657
F-19
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table shows our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that
individual securities (consisting of 1,047 and 198 securities, respectively) have been in a continuous unrealized loss position, at December 31,
2013 and 2012:
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(Dollars in thousands)
December 31, 2013
Fixed maturity securities:
Available for sale:
United States Government full faith and credit
$
32,969
$
(2,294) $
— $
— $
32,969
$
(2,294)
United States Government sponsored agencies
United States municipalities, states and territories
Foreign government obligations
Corporate securities:
Finance, insurance and real estate
Manufacturing, construction and mining
Utilities and related sectors
Wholesale/retail trade
Services, media and other
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
692,320
614,056
26,298
1,690,846
3,370,775
1,829,868
428,407
834,699
309,599
1,450,143
356,018
(88,671)
(39,074)
(3,462)
(92,426)
(191,245)
(102,758)
(25,189)
(51,508)
(41,080)
(83,814)
(20,426)
467,309
(32,691)
1,159,629
(121,362)
—
—
153,037
93,608
83,550
17,687
107,242
31,739
51,099
92,372
—
—
614,056
26,298
(39,074)
(3,462)
(12,873)
(16,088)
(11,547)
(1,992)
(10,403)
(2,103)
(6,001)
(10,337)
1,843,883
3,464,383
1,913,418
446,094
941,941
341,338
1,501,242
448,390
(105,299)
(207,333)
(114,305)
(27,181)
(61,911)
(43,183)
(89,815)
(30,763)
$ 11,635,998
$
(741,947) $
1,097,643
$
(104,035) $ 12,733,641
$
(845,982)
Held for investment:
Corporate security:
Insurance
December 31, 2012
Fixed maturity securities:
Available for sale:
$
— $
— $
60,840
$
(15,415) $
60,840
$
(15,415)
United States Government sponsored agencies
973,728
(3,468)
United States municipalities, states and territories
$
24,393
$
(125) $
—
— $
—
973,728
— $
24,393
$
(3,468)
(125)
Corporate securities:
Finance, insurance and real estate
Manufacturing, construction and mining
Utilities and related sectors
Wholesale/retail trade
Services, media and other
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
177,962
426,120
221,044
101,790
264,421
220,622
161,582
145,238
(4,126)
(4,303)
(5,187)
(784)
(3,085)
(8,679)
(1,983)
(2,242)
85,709
21,975
39,224
10,250
—
260,226
—
26,131
(8,438)
(1,281)
(4,212)
(208)
—
(19,049)
—
(731)
263,671
448,095
260,268
112,040
264,421
480,848
161,582
171,369
(12,564)
(5,584)
(9,399)
(992)
(3,085)
(27,728)
(1,983)
(2,973)
$
2,716,900
$
(33,982) $
443,515
$
(33,919) $
3,160,415
$
(67,901)
Held for investment:
Corporate security:
Insurance
Equity security, available for sale:
Services
$
$
— $
— $
61,521
$
(14,567) $
61,521
$
(14,567)
— $
— $
8,722
$
(1,403) $
8,722
$
(1,403)
F-20
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following is a description of the factors causing the temporary unrealized losses by investment category as of December 31, 2013:
United States Government full faith and credit and sponsored agencies: These securities are relatively long in duration; however, they are
callable in less than 12 months making the value of such securities sensitive to changes in market interest rates. The timing of when some of
these securities were purchased gave rise to unrealized losses at December 31, 2013.
United States municipalities, states and territories: These securities are relatively long in duration and their fair values are sensitive to changes
in market interest rates. The timing of the purchase of these securities have resulted in unrealized losses at this point in time.
Foreign government obligations: The unrealized losses on these securities are due to wider spreads on the announcement of increased capital
expenditures with resulting higher leverage and greater supply.
Corporate securities: The unrealized losses in these securities are due partially to the timing of purchases in 2012 and 2013. These securities
carry yields less than those available at December 31, 2013 as a result of rising interest rates in 2013. In addition, a small number of securities
have seen their credit spreads remain wide due to issuer or industry specific news while some financial and industrial sector credit spreads remain
wide due to continued economic uncertainty and concerns of economic instability.
Residential mortgage backed securities: At December 31, 2013, we had no exposure to sub-prime residential mortgage backed securities. All
of our residential mortgage backed securities are pools of first-lien residential mortgage loans. Substantially all of the securities that we own
are in the most senior tranche of the securitization in which they are structured and are not subordinated to any other tranche. Our "Alt-A"
residential mortgage backed securities are comprised of 36 securities with a total amortized cost basis of $310.6 million and a fair value of $328.0
million. Despite recent improvements in the capital markets, the fair values of RMBS with weaker borrower characteristics continue at prices
below amortized cost. These RMBS prices will likely remain below our cost basis until the housing market is able to absorb current and future
foreclosures.
Commercial mortgage backed securities: The unrealized losses in these securities are due partially to the timing of purchases in 2012 and 2013.
A number of purchases made in the middle of the fourth quarter 2012 were at yields lower than what could be executed at the end of 2013 due
to the increase in the treasury yield since the time of purchase.
Other asset backed securities: The unrealized losses in these securities are predominantly assigned to financial sector capital trust securities
which have longer maturity dates and have declined in price due to prolonged stress in the financial sector. No securities in an unrealized loss
position are rated below investment grade.
Approximately 95% and 75% of the unrealized losses on fixed maturity securities shown in the above table for December 31, 2013 and 2012,
respectively, are on securities that are rated investment grade, defined as being the highest two NAIC designations. All of the fixed maturity
securities with unrealized losses are current with respect to the payment of principal and interest.
Changes in net unrealized gains/losses on investments for the years ended December 31, 2013, 2012 and 2011 are as follows:
Fixed maturity securities held for investment carried at amortized cost
Investments carried at fair value:
Fixed maturity securities, available for sale
Equity securities, available for sale
Adjustment for effect on other balance sheet accounts:
Deferred policy acquisition costs and deferred sales inducements
Deferred income tax asset/liability
Year Ended December 31,
2013
2012
2011
(Dollars in thousands)
(848) $
(14,783) $
40,668
(2,132,392) $
731,279
$
1,275,061
$
$
(8,549)
(2,140,941)
1,155,386
344,944
1,500,330
4,417
735,696
(382,498)
(123,620)
(506,118)
(369)
1,274,692
(697,140)
(202,143)
(899,283)
375,409
Change in net unrealized gains/losses on investments carried at fair value
$
(640,611) $
229,578
$
F-21
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Components of net investment income are as follows:
Fixed maturity securities
Equity securities
Mortgage loans on real estate
Cash and cash equivalents
Other
Less investment expenses
Net investment income
Year Ended December 31,
2013
2012
2011
(Dollars in thousands)
$
1,229,486
$
1,112,296
$
1,048,376
1,586
159,769
775
5,711
1,397,327
(13,400)
3,090
176,354
2,243
6,348
1,300,331
(13,408)
3,315
172,731
554
4,020
1,228,996
(10,216)
$
1,383,927
$
1,286,923
$
1,218,780
Proceeds from sales of available for sale securities for the years ended December 31, 2013, 2012 and 2011 were $1.5 billion, $492.5 million and
$252.2 million, respectively. Scheduled principal repayments, calls and tenders for available for sale fixed maturity securities for the years
ended December 31, 2013, 2012 and 2011 were $2.1 billion, $2.8 billion and $3.4 billion, respectively. Calls of held for investment fixed maturity
securities for the years ended December 31, 2012 and 2011 were $2.6 billion and $0.2 billion, respectively.
Realized gains and losses on sales are determined on the basis of specific identification of investments based on the trade date. Net realized
gains (losses) on investments, excluding net OTTI losses are as follows:
Available for sale fixed maturity securities:
Gross realized gains
Gross realized losses
Equity securities:
Gross realized gains
Other investments:
Gain on sale of real estate
Loss on sale of real estate
Impairment losses on real estate
Mortgage loans on real estate:
Increase in allowance for credit losses
Recovery of specific allowance
Year Ended December 31,
2013
2012
2011
(Dollars in thousands)
$
39,079
$
10,906
$
(6,170)
32,909
(562)
10,344
12,614
(1,423)
11,191
9,571
562
966
2,144
(1,317)
(1,195)
(368)
(5,621)
4,070
(1,551)
5,149
—
(5,677)
(528)
(16,832)
—
(16,832)
$
40,561
$
(6,454) $
377
—
(405)
(28)
(30,770)
—
(30,770)
(18,641)
Losses in 2013 were realized primarily due to strategies to reposition the fixed maturity security portfolio that result in improved net investment
income, risk or duration profiles as they pertain to our asset liability management. Two corporate issues were sold at a loss in 2013 due to the
our long-term fundamental concern with the issuer's ability to meet its future financial obligations.
F-22
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the carrying value of our fixed maturity securities, mortgage loans on real estate and real estate owned that have
been non-income producing for 12 consecutive months:
Fixed maturity securities, available for sale
Mortgage loans on real estate
Real estate owned
December 31,
2013
2012
(Dollars in thousands)
$
$
20
3,511
—
3,531
$
4,691
2,783
1,270
8,744
We review and analyze all investments on an ongoing basis for changes in market interest rates and credit deterioration. This review process
includes analyzing our ability to recover the amortized cost basis of each investment that has a fair value that is materially lower than its amortized
cost and requires a high degree of management judgment and involves uncertainty. The evaluation of securities for other than temporary
impairments is a quantitative and qualitative process, which is subject to risks and uncertainties.
We have a policy and process in place to identify securities that could potentially have an impairment that is other than temporary. This process
involves monitoring market events and other items that could impact issuers. The evaluation includes but is not limited to such factors as:
•
the length of time and the extent to which the fair value has been less than amortized cost or cost;
• whether the issuer is current on all payments and all contractual payments have been made as agreed;
the remaining payment terms and the financial condition and near-term prospects of the issuer;
•
the lack of ability to refinance due to liquidity problems in the credit market;
•
the fair value of any underlying collateral;
•
the existence of any credit protection available;
•
our intent to sell and whether it is more likely than not we would be required to sell prior to recovery for debt securities;
•
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;
our intent and ability to retain equity securities for a period of time sufficient to allow for recovery;
consideration of rating agency actions; and
changes in estimated cash flows of mortgage and asset backed securities.
•
•
•
We determine whether other than temporary impairment losses should be recognized for debt and equity securities by assessing all facts and
circumstances surrounding each security. Where the decline in market value of debt securities is attributable to changes in market interest rates
or to factors such as market volatility, liquidity and spread widening, and we anticipate recovery of all contractual or expected cash flows, we
do not consider these investments to be other than temporarily impaired because we do not intend to sell these investments and it is not more
likely than not we will be required to sell these investments before a recovery of amortized cost, which may be maturity. For equity securities,
we recognize an impairment charge in the period in which we do not have the intent and ability to hold the securities until recovery of cost or
we determine that the security will not recover to book value within a reasonable period of time. We determine what constitutes a reasonable
period of time on a security-by-security basis by considering all the evidence available to us, including the magnitude of any unrealized loss and
its duration. In any event, this period does not exceed 18 months from the date of impairment for perpetual preferred securities for which there
is evidence of deterioration in credit of the issuer and common equity securities. For perpetual preferred securities absent evidence of a deterioration
in credit of the issuer we apply an impairment model, including an anticipated recovery period, similar to a debt security.
Other than temporary impairment losses on equity securities are recognized in operations. If we intend to sell a debt security or if it is more
likely than not that we will be required to sell a debt security before recovery of its amortized cost basis, other than temporary impairment has
occurred and the difference between amortized cost and fair value will be recognized as a loss in operations.
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 discounted at each
security's acquisition yield based on our consideration of whether the security was of high credit quality at the time of acquisition. 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 determination of the credit loss component of a mortgage backed security is based on a number of factors. The primary consideration in
this evaluation process is the issuer's ability to meet current and future interest and principal payments as contractually stated at time of purchase.
Our review of these securities includes an analysis of the cash flow modeling under various default scenarios considering independent third
party benchmarks, the seniority of the specific tranche within the structure of the security, the composition of the collateral and the actual default,
loss severity and prepayment experience exhibited. With the input of third party assumptions for default projections, loss severity and prepayment
expectations, we evaluate the cash flow projections to determine whether the security is performing in accordance with its contractual obligation.
F-23
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We utilize the models from a leading structured product software specialist serving institutional investors. These models incorporate each
security's seniority and cash flow structure. In circumstances where the analysis implies a potential for principal loss at some point in the future,
we use the "best estimate" cash flow projection discounted at the security's effective yield at acquisition to determine the amount of our potential
credit loss associated with this security. The discounted expected future cash flows equates to our expected recovery value. Any shortfall of
the expected recovery when compared to the amortized cost of the security will be recorded as the credit loss component of the other than
temporary impairment.
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 following table presents the range of significant assumptions used to determine the credit loss component of other than temporary impairments
we have recognized on residential mortgage backed securities for the years ended December 31, 2013 and 2012, which are all senior level
tranches within the structure of the securities:
Sector
Vintage
Min
Max
Min
Max
Min
Max
Discount Rate
Default Rate
Loss Severity
Year ended December 31, 2013
Prime
Alt-A
Year ended December 31, 2012
Prime
Alt-A
2003
2005
2006
2007
2008
2009
2005
2007
2005
2006
2007
2004
2005
2006
2007
5.1%
6.5%
5.8%
6.2%
6.6%
6.8%
5.6%
6.2%
6.5%
5.8%
6.1%
5.8%
5.6%
6.0%
6.2%
5.1%
7.7%
6.9%
6.7%
6.6%
6.8%
8.7%
6.9%
7.7%
7.6%
7.3%
5.8%
8.7%
6.0%
7.0%
2%
8%
9%
11%
16%
17%
13%
38%
8%
9%
11%
11%
12%
32%
31%
2%
18%
16%
25%
16%
17%
81%
52%
19%
19%
38%
11%
38%
46%
55%
30%
50%
45%
40%
45%
60%
2%
60%
40%
40%
40%
60%
5%
55%
55%
30%
65%
50%
60%
45%
60%
65%
65%
50%
55%
60%
60%
55%
60%
65%
The determination of the credit loss component of a corporate bond (including redeemable preferred stocks) is based on the underlying financial
performance of the issuer and their ability to meet their contractual obligations. Considerations in our evaluation include, but are not limited
to, credit rating changes, financial statement and ratio analysis, changes in management, significant changes in credit spreads, breaches of
financial covenants and a review of the economic outlook for the industry and markets in which they trade. In circumstances where an issuer
appears unlikely to meet its future obligation, or the security's price decline is deemed other than temporary, an estimate of credit loss is determined.
Credit loss is calculated using default probabilities as derived from the credit default swaps markets in conjunction with recovery rates derived
from independent third party analysis or a best estimate of credit loss. This credit loss rate is then incorporated into a present value calculation
based on an expected principal loss in the future discounted at the yield at the date of purchase and compared to amortized cost to determine the
amount of credit loss associated with the security.
In addition, for debt securities which we do not intend to sell and it is not more likely than not we will be required to sell, but our intent changes
due to changes or events that could not have been reasonably anticipated, an other than temporary impairment charge is recognized. 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. Unrealized losses may be recognized in future periods through a charge to earnings, should we later conclude that the decline
in fair value below amortized cost is other than temporary pursuant to our accounting policy described above. The use of different methodologies
and assumptions to determine the fair value of investments and the timing and amount of impairments may have a material effect on the amounts
presented in our consolidated financial statements.
F-24
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes other than temporary impairments by asset type:
Number
of Securities
Total
OTTI Losses
Portion of
OTTI Losses
Recognized from
Other
Comprehensive
Income
Net OTTI
Losses
Recognized
in Operations
(Dollars in thousands)
Year ended December 31, 2013
Fixed maturity securities, available for sale:
United States Government sponsored agencies
Corporate securities:
Industrial
Residential mortgage backed securities
Equity security, available for sale:
Industrial
Year ended December 31, 2012
Fixed maturity securities, available for sale:
Corporate securities:
Finance
Retail
Residential mortgage backed securities
Year ended December 31, 2011
Fixed maturity securities, available for sale:
Residential mortgage backed securities
Equity security, available for sale:
Finance
2
1
6
1
$
(2,775) $
— $
(2,775)
(1,761)
—
(428)
—
(1,270)
—
(1,761)
(1,270)
(428)
(6,234)
10
$
(4,964) $
(1,270) $
1
1
39
41
$
$
(1,765) $
(622)
(3,024)
(5,411) $
— $
—
(9,521)
(9,521) $
(1,765)
(622)
(12,545)
(14,932)
66
$
(19,420) $
(13,796) $
(33,216)
1
67
$
(760)
—
(20,180) $
(13,796) $
(760)
(33,976)
The cumulative portion of other than temporary impairments determined to be credit losses which have been recognized in operations for debt
securities are summarized as follows:
Cumulative credit loss at beginning of year
Credit losses on securities for which OTTI has not previously been recognized
Additional credit losses on securities for which OTTI has previously been recognized
Accumulated losses on securities that were disposed of during the period
Cumulative credit loss at end of year
Year Ended December 31,
2013
2012
(Dollars in thousands)
(134,027)
$
(119,095)
(4,536)
(1,270)
13,873
(12,365)
(2,567)
—
(125,960)
$
(134,027)
$
$
F-25
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the cumulative noncredit portion of OTTI and the change in fair value since recognition of OTTI, both of which
were recognized in other comprehensive income, by major type of security, for securities that are part of our investment portfolio at December 31,
2013 and 2012:
December 31, 2013
Fixed maturity securities, available for sale:
Corporate securities
Residential mortgage backed securities
December 31, 2012
Fixed maturity securities, available for sale:
Corporate securities
Residential mortgage backed securities
Equity securities, available for sale:
Finance, insurance and real estate
Amortized Cost
OTTI Recognized
in Other
Comprehensive
Income
Change in
Fair Value Since
OTTI was
Recognized
(Dollars in thousands)
Fair Value
$
$
$
$
— $
— $
679,265
(176,334)
679,265
$
(176,334) $
20
216,061
216,081
$
$
10,599
$
(2,151) $
5,676
$
855,915
(177,604)
171,514
9,976
—
9,668
876,490
$
(179,755) $
186,858
$
20
718,992
719,012
14,124
849,825
19,644
883,593
At December 31, 2013 and 2012, fixed maturity securities and short-term investments with an amortized cost of $31.7 billion and $27.2 billion,
respectively, were on deposit with state agencies to meet regulatory requirements. There are no restrictions on these assets.
At December 31, 2013 and 2012, we had no investment in any person or its affiliates (other than bonds issued by agencies of the United States
Government) that exceeded 10% of stockholders' equity.
4. Mortgage Loans on Real Estate
Our mortgage loan portfolio, summarized in the following table, totaled $2.6 billion at both December 31, 2013 and 2012, respectively, with
commitments outstanding of $79.6 million at December 31, 2013.
Principal outstanding
Loan loss allowance
Deferred prepayment fees
Carrying value
December 31,
2013
2012
(Dollars in thousands)
$
$
2,607,698
$
2,658,883
(26,047)
(569)
(34,234)
(709)
2,581,082
$
2,623,940
F-26
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The portfolio consists of commercial mortgage loans collateralized by the related properties and diversified as to property type, location and
loan size. Our mortgage lending policies establish limits on the amount that can be loaned to one borrower and other criteria to attempt to reduce
the risk of default. The mortgage loan portfolio is summarized by geographic region and property type as follows:
Geographic distribution
East
Middle Atlantic
Mountain
New England
Pacific
South Atlantic
West North Central
West South Central
Property type distribution
Office
Medical Office
Retail
Industrial/Warehouse
Hotel
Apartment
Mixed use/other
December 31,
2013
2012
Principal
Percent
Principal
Percent
(Dollars in thousands)
$
$
$
765,717
156,489
356,246
21,324
317,431
483,852
351,794
154,845
29.4% $
6.0%
13.7%
0.8%
12.2%
18.5%
13.5%
5.9%
732,762
155,094
387,599
26,385
320,982
458,802
370,168
207,091
27.5%
5.8%
14.6%
1.0%
12.1%
17.3%
13.9%
7.8%
2,607,698
100.0% $
2,658,883
100.0%
590,414
125,703
711,364
673,449
61,574
291,823
153,371
22.6% $
4.8%
27.3%
25.8%
2.4%
11.2%
5.9%
666,467
136,764
677,951
692,637
94,045
219,335
171,684
25.1%
5.1%
25.5%
26.1%
3.5%
8.2%
6.5%
$
2,607,698
100.0% $
2,658,883
100.0%
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. 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. 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 less estimated costs to sell. In
addition, we analyze the mortgage loan portfolio for the need of a general loan allowance for probable losses on all other loans. 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.
Our financing receivables currently consist of one portfolio segment which is our commercial mortgage loan portfolio. These are mortgage
loans with collateral consisting of commercial real estate and borrowers consisting mostly of limited liability partnerships or limited liability
corporations.
We have a population of mortgage loans that we have been carrying with workout terms (e.g. interest only periods, period of suspended payments,
etc.) and a population of mortgage loans that have been in a delinquent status (i.e. more than 60 days past due). It is from this population that
we have been recognizing some impairment loss due to nonpayment and, in some cases, eventual satisfaction of the loan by taking ownership
of the collateral real estate. In most cases the fair value of the collateral less estimated costs to sell such collateral has been less than the outstanding
principal amount of the mortgage loan.
Our general loan loss allowance for periods through September 30, 2011 was calculated on the cumulative outstanding principal on loans making
up the group of loans currently in workout terms and loans currently more than 60 days past due. We applied a factor to the total outstanding
principal of these loans that was calculated as the average specific impairment loss for the most recent four quarters divided by the sum of the
average of the total outstanding principal of delinquent loans for the most recent four quarters and the average of the total outstanding principal
of loans in workout for the most recent four quarters. In the fourth quarter of 2011, we modified the calculation for determining our general
loan loss allowance. The group of loans that we utilized to calculate an estimate of general loan loss allowance were those that had a debt service
coverage ratio (DSCR) of less than 1.0. The DSCR is calculated by dividing the net operating income of the mortgaged property by the contractual
principal and interest payment due for the corresponding period. We developed the loss rates to apply to this group of loans by dividing the
specific impairment loss for the most recent four quarters by the principal outstanding of the loans with a DSCR of less than 1.0.
F-27
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 31, 2013 and 2012, we utilized a process of rating the mortgage loans in our portfolio based on factors such as
historical operating performance, loan to value ratio and economic outlook, among others. We calculated a loss factor to apply to each rating
based on historical losses we have recognized in our mortgage loan portfolio. We applied the loss factors to the total principal outstanding within
each rating category to determine an appropriate estimate of general loan loss allowance at December 31, 2013 and 2012. The change in
methodology utilized to determine the general loan loss allowance did not result in a material adjustment.
The following table presents a rollforward of our specific and general valuation allowances for mortgage loans on real estate:
Year Ended December 31,
2013
2012
2011
Specific
Allowance
General
Allowance
Specific
Allowance
General
Allowance
Specific
Allowance
General
Allowance
(Dollars in thousands)
Beginning allowance balance
$
(23,134)
$
(11,100)
$
(23,664) $
(9,300)
$
(13,224)
$
(3,000)
Charge-offs
Recoveries
Change in provision for credit losses
9,738
4,070
(7,521)
—
—
1,900
15,562
—
(15,032)
—
—
(1,800)
14,030
—
(24,470)
Ending allowance balance
$
(16,847)
$
(9,200)
$
(23,134) $
(11,100)
$
(23,664)
$
—
—
(6,300)
(9,300)
The specific allowance represents the total credit loss allowances on loans which are individually evaluated for impairment. The general allowance
is the group of loans discussed above which are collectively evaluated for impairment. The following table presents the total outstanding principal
of loans evaluated for impairment by basis of impairment method:
Individually evaluated for impairment
Collectively evaluated for impairment
Total loans evaluated for impairment
December 31,
2013
2012
2011
(Dollars in thousands)
$
$
47,018
2,560,680
2,607,698
$
$
53,110
2,605,773
2,658,883
67,698
2,788,313
2,856,011
Charge-offs include allowances that have been established on loans that were satisfied by taking ownership of the collateral. When the property
is taken it is recorded at its fair value as a component of other investments and the mortgage loan is recorded as fully paid, with any allowance
for credit loss that has been established charged off. Fair value of the real estate is determined by third party appraisal. There could be other
situations that develop where we have established a larger specific loan loss allowance than is needed based on increases in the fair value of
collateral supporting collateral dependent loans or improvements in the financial position of a borrower so that a loan would become reliant on
cash flows from debt service instead of dependent upon sale of the collateral. Charge-offs of the allowance would be recognized in those
situations as well. We define collateral dependent loans as those mortgage loans for which we still depend on the value of the collateral real
estate to satisfy the outstanding principal of the loan.
During the years ended December 31, 2013 and 2012, five and thirteen mortgage loans, respectively, were satisfied by taking ownership of any
real estate serving as collateral. The following table summarizes the activity in the real estate owned which was obtained in satisfaction of
mortgage loans on real estate:
Real estate owned at beginning of period
Real estate acquired in satisfaction of mortgage loans
Additions
Sales
Impairments
Depreciation
Real estate owned at end of period
Year Ended December 31,
2013
2012
2011
(Dollars in thousands)
33,172
$
36,821
$
8,217
626
(17,358)
(1,195)
(618)
26,324
398
(23,825)
(5,677)
(869)
22,844
$
33,172
$
19,122
20,978
387
(3,027)
—
(639)
36,821
$
$
F-28
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We analyze credit risk of our mortgage loans by analyzing all available evidence on loans that are delinquent and loans that are in a workout
period.
Credit Exposure--By Payment Activity
Performing
In workout
Delinquent
Collateral dependent
December 31,
2013
2012
(Dollars in thousands)
$
$
2,593,276
2,597,440
6,248
—
8,174
26,723
—
34,720
2,607,698
$
2,658,883
Mortgage loans are considered delinquent when they become 60 days past due. When loans become 90 days past due, become collateral dependent
or enter a period with no debt service payments required we place them on non-accrual status and discontinue recognizing interest income. If
payments are received on a delinquent loan, interest income is recognized to the extent it would have been recognized if normal principal and
interest would have been received timely. If the payments are received to bring a delinquent loan back to current we will resume accruing interest
income on that loan. Outstanding principal of loans in a non-accrual status at December 31, 2013 and 2012 totaled $8.2 million and $34.7
million, respectively.
All of our commercial mortgage loans depend on the cash flow of the borrower to be at a sufficient level to service the principal and interest
payments as they come due. In general, cash inflows of the borrowers are generated by collecting monthly rent from tenants occupying space
within the borrowers' properties. Our borrowers face collateral risks such as tenants going out of business, tenants struggling to make rent
payments as they become due, and tenants canceling leases and moving to other locations. We have a number of loans where the real estate is
occupied by a single tenant. Our borrowers sometimes face both a reduction in cash flow on their mortgage property as well as a reduction in
the fair value of the real estate collateral. If borrowers are unable to replace lost rent revenue and increases in the fair value of their property do
not materialize we could potentially incur more losses than what we have allowed for in our specific and general loan loss allowances.
Aging of financing receivables is summarized in the following table, with loans in a "workout" period as of the reporting date considered current
if payments are current in accordance with agreed upon terms:
30 - 59 Days
60 - 89 Days
90 Days
and Over
Total
Past Due
Current
Collateral
Dependent
Receivables
Total
Financing
Receivables
(Dollars in thousands)
Commercial Mortgage Loans
December 31, 2013
December 31, 2012
$
$
— $
— $
— $
— $
— $
— $
— $
2,599,524
— $
2,624,163
$
$
8,174
34,720
$
$
2,607,698
2,658,883
F-29
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Financing receivables summarized in the following table represent all loans that we are either not currently collecting or those we feel it is
probable we will not collect all amounts due according to the contractual terms of the loan agreements (all loans that we have worked with the
borrower to alleviate short-term cash flow issues, loans delinquent for more than 60 days at the reporting date, loans we have determined to be
collateral dependent and loans that we have recorded specific impairments on that we feel may continue to have performance issues).
December 31, 2013
Mortgage loans with an allowance
Mortgage loans with no related allowance
December 31, 2012
Mortgage loans with an allowance
Mortgage loans with no related allowance
December 31, 2011
Mortgage loans with an allowance
Mortgage loans with no related allowance
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
(Dollars in thousands)
$
$
$
$
$
$
30,171
3,264
33,435
29,976
27,765
57,741
44,034
63,023
107,057
$
$
$
$
$
$
47,018
3,264
50,282
53,110
27,765
80,875
67,698
63,023
130,721
$
$
$
$
$
$
(16,847) $
—
(16,847) $
(23,134) $
—
(23,134) $
(23,664) $
—
(23,664) $
33,772
3,264
37,036
37,480
27,696
65,176
53,617
60,974
114,591
$
$
$
$
$
$
2,094
138
2,232
1,946
1,664
3,610
3,284
3,509
6,793
The loans that are categorized as "in workout" consist of loans that we have agreed to lower or no mortgage payments for a period of time while
the borrowers address cash flow and/or operational issues. The key features of these workouts have been determined on a loan-by-loan basis.
Most of these loans are in a period of low cash flow due to tenants vacating their space or tenants requesting rent relief during difficult economic
periods. Generally, we have allowed the borrower a six month interest only period and in some cases a twelve month period of interest only.
Interest only workout loans are expected to return to their regular debt service payments after the interest only period. Interest only loans that
are not fully amortizing will have a larger balance at their balloon date than originally contracted. Fully amortizing loans that are in interest
only periods will have larger debt service payments for their remaining term due to lost principal payments during the interest only period. In
limited circumstances we have allowed borrowers to pay the principal portion of their loan payment into an escrow account that can be used for
capital and tenant improvements for a period of not more than twelve months. In these situations new loan amortization schedules are calculated
based on the principal not collected during this twelve month workout period and larger payments are collected for the remaining term of each
loan. In all cases, original interest rate and maturity date have not been modified, and we have not forgiven any principal amounts.
A Troubled Debt Restructuring ("TDR") is a situation where we have granted a concession to a borrower for economic or legal reasons related
to the borrower's financial difficulties that we would not otherwise consider. A mortgage loan that has been granted new terms, including workout
terms as described previously, would be considered a TDR if it meets conditions that would indicate a borrower is experiencing financial difficulty
and the new terms constitute a concession on our part. We analyze all loans where we have agreed to workout terms and all loans that we have
refinanced to determine if they meet the definition of a TDR. We consider the following factors in determining whether or not a borrower is
experiencing financial difficulty:
•
•
•
•
•
•
borrower is in default,
borrower has declared bankruptcy,
there is growing concern about the borrower's ability to continue as a going concern,
borrower has insufficient cash flows to service debt,
borrower's inability to obtain funds from other sources, and
there is a breach of financial covenants by the borrower.
If the borrower is determined to be in financial difficulty, we consider the following conditions to determine if the borrower was granted a
concession:
assets used to satisfy debt are less than our recorded investment,
interest rate is modified,
•
•
• maturity date extension at an interest rate less than market rate,
•
•
•
capitalization of interest,
delaying principal and/or interest for a period of three months or more, and
partial forgiveness of the balance or charge-off.
F-30
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Mortgage loan workouts, refinances or restructures that are classified as TDR are individually evaluated and measured for impairment. A
summary of mortgage loans on commercial real estate with outstanding principal at December 31, 2013 and 2012 that we determined to be TDRs
are as follows:
Geographic Region
Year ended December 31, 2013:
East
Mountain
South Atlantic
East North Central
West North Central
West South Central
Year ended December 31, 2012:
East
Mountain
South Atlantic
East North Central
West North Central
5. Derivative Instruments
Number of
TDRs
Principal
Balance
Outstanding
Specific Loan
Loss Allowance
Net
Carrying
Amount
(Dollars in thousands)
1
7
7
1
1
1
18
1
10
9
1
3
24
$
$
$
$
3,712
$
(949)
$
22,140
13,930
2,219
1,938
1,714
(329)
(4,177)
(467)
(475)
(256)
2,763
21,811
9,753
1,752
1,463
1,458
45,653
$
(6,653)
$
39,000
4,208
$
(1,425)
$
28,786
23,358
2,232
9,466
(1,702)
(5,047)
(467)
(2,328)
68,050
$
(10,969)
$
2,783
27,084
18,311
1,765
7,138
57,081
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 fair value of our derivative instruments, including derivative instruments embedded in fixed index annuity contracts and derivative instruments
embedded in a convertible debt issue, presented in the consolidated balance sheets are as follows:
December 31,
2013
2012
(Dollars in thousands)
$
$
$
$
856,050
$
415,258
107,041
6,103
712
969,906
$
43,105
3,247
—
461,610
4,406,163
$
3,337,556
107,041
—
43,105
4,261
4,513,204
$
3,384,922
Assets
Derivative instruments
Call options
Other assets
2015 notes hedges
Interest rate caps
Interest rate swap
Liabilities
Policy benefit reserves—annuity products
Fixed index annuities—embedded derivatives
Other liabilities
2015 notes embedded conversion derivative
Interest rate swap
F-31
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The changes in fair value of derivatives included in the consolidated statements of operations are as follows:
Change in fair value of derivatives:
Call options
2015 notes hedges
2015 warrants
Interest rate swap
Interest rate caps
Change in fair value of embedded derivatives:
2015 notes embedded conversion derivative (see Note 9)
Fixed index annuities—embedded derivatives
$
$
$
$
Year Ended December 31,
2013
2012
2011
(Dollars in thousands)
932,003
$
228,610
$
145,751
(9,568)
4,973
2,856
1,076,015
141,974
(8,006)
133,968
$
$
$
(2,488)
—
(4,261)
(723)
(93,582)
(21,002)
—
(144)
—
221,138
$
(114,728)
(2,488) $
289,387
286,899
$
(21,002)
(84,192)
(105,194)
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 deposits are received, a portion of the deposit 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.
Our strategy attempts to mitigate any potential risk of loss under these agreements through a regular monitoring process which evaluates the
program's effectiveness. We do not purchase call options that would require payment or collateral to another institution and our call options do
not contain counterparty credit-risk-related contingent features. We are exposed to risk of loss in the event of nonperformance by the counterparties
and, accordingly, we purchase our option contracts from multiple counterparties and evaluate the creditworthiness of all counterparties prior to
purchase of the contracts. All of these options have been purchased from nationally recognized financial institutions with a Standard and Poor's
credit rating of A- or higher at the time of purchase and the maximum credit exposure to any single counterparty is subject to concentration
limits. We also have credit support agreements that allow us to request the counterparty to provide collateral to us when the fair value of our
exposure to the counterparty exceeds specified amounts.
The notional amount and fair value of our call options by counterparty and each counterparty's current credit rating are as follows:
Counterparty
Bank of America
Barclays
BNP Paribas
Citibank, N.A.
Credit Suisse
Deutsche Bank
HSBC
J.P. Morgan
Morgan Stanley
Royal Bank of Canada
Wells Fargo (Wachovia)
Credit Rating
(S&P)
Credit Rating
(Moody's)
Notional
Amount
Fair Value
Notional
Amount
Fair Value
December 31,
2013
2012
A
A
A+
A
A
A
AA-
A+
A-
AA-
AA-
A2
A2
A2
A2
A1
A2
A1
Aa3
Baa2
Aa3
Aa3
$
1,683,911
$
73,836
$
568,786
$
(Dollars in thousands)
2,396,839
1,382,661
1,536,547
4,060,352
747,587
200,011
786,429
3,546,487
714,941
2,221,874
113,513
38,849
72,310
193,304
41,074
10,518
36,863
150,437
25,140
100,206
3,463,777
2,207,097
2,878,588
936,625
886,688
295,520
735,016
1,590,505
—
2,060,903
$
19,277,639
$
856,050
$
15,623,505
$
16,533
103,929
60,301
67,592
21,518
20,787
6,539
21,940
40,113
—
56,006
415,258
F-32
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2013 and 2012, we held $818.2 million and $328.7 million, respectively, of cash and cash equivalents and other securities
from counterparties for derivative collateral, which is included in other liabilities on our consolidated balance sheets. This derivative collateral
limits the maximum amount of economic 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 to $71.7 million and $93.7 million at December 31, 2013 and 2012, respectively.
The future annual index credits on our fixed index annuities are treated as a "series of embedded derivatives" over the expected life of the
applicable contract. We do not purchase call options to fund the index liabilities which may arise after the next policy anniversary date. We
must value both the call options and the related forward embedded options in the policies at fair value.
We entered into an interest rate swap and interest rate caps to manage interest rate risk associated with the floating rate component on certain
of our subordinated debentures. See Note 10 for more information on our subordinated debentures. The terms of the interest rate swap provide
that we pay a fixed rate of interest and receive a floating rate of interest. The terms of the interest rate caps limit the three month London Interbank
Offered Rate ("LIBOR") to 2.50%. The interest rate swap and caps are not effective hedges under accounting guidance for derivative instruments
and hedging activities. Therefore, we record the interest rate swap and caps at fair value and any net cash payments received or paid are included
in the change in fair value of derivatives in the consolidated statements of operations.
Details regarding the interest rate swap are as follows:
Maturity Date
Notional
Amount
Receive Rate
Pay Rate
Counterparty
Fair Value
Fair Value
(Dollars in thousands)
March 15, 2021
$
85,500
LIBOR
2.415%
SunTrust
$
712
$
(4,261)
Details regarding the interest rate caps are as follows:
December 31,
2013
2012
December 31,
2013
2012
Maturity Date
July 7, 2021
July 8, 2021
July 29, 2021
Notional
Amount
$
$
40,000
12,000
27,000
79,000
Floating Rate
Cap Rate
Counterparty
Fair Value
Fair Value
LIBOR
LIBOR
LIBOR
2.50%
2.50%
2.50%
SunTrust
SunTrust
SunTrust
(Dollars in thousands)
$
$
3,073
$
923
2,107
6,103
$
1,634
490
1,123
3,247
The interest rate swap has a forward starting date beginning in March 2014 and converts floating rates to fixed rates for seven years. The interest
rate caps have a forward starting date beginning in July 2014 and cap our interest rates for seven years. As of December 31, 2013 we held $6.7
million of cash and cash equivalents from the counterparty for derivative collateral related to the swap and caps, which is included in other
liabilities on our consolidated balance sheets.
In September 2010, concurrently with the issuance of $200.0 million principal amount of 3.5% Convertible Senior Notes Due 2015 (the "2015
notes"), we entered into hedge transactions (the "2015 notes hedges") with two counterparties whereby we have the option to receive the cash
equivalent of the conversion spread on 16.0 million shares of our common stock based upon a strike price of $12.50 per share, subject to certain
conversion rate adjustments in the 2015 notes. As of December 31, 2013, such adjustments and partial unwind agreements settled in cash during
2013, as described below, have resulted in 2015 notes hedges outstanding whereby we have the option to receive the cash equivalent of the
conversion spread on 7.5 million shares of our common stock based upon a strike price of $12.35 per share. These options expire on September 15,
2015, and must be settled in cash. The 2015 notes hedges are accounted for as derivative assets and are included in other assets in our consolidated
balance sheets. The 2015 notes embedded conversion derivative and the 2015 notes hedges are adjusted to fair value each reporting period and
unrealized gains and losses are reflected in our consolidated statements of operations.
In separate transactions, we also sold warrants (the "2015 warrants") to two counterparties for the purchase of up to 16.0 million shares of our
common stock at a price of $16.00 per share. We received $15.6 million in cash proceeds from the sale of the 2015 warrants, which has been
recorded as an increase in additional paid-in capital. The number of shares and strike price of the warrants are subject to adjustment based on
dividends we pay subsequent to selling the warrants. As of December 31, 2013, such adjustments and partial unwind agreements settled in cash
during 2013, as described below, have resulted in warrants outstanding for the purchase of up to 7.5 million shares of our common stock at a
strike price of $15.75 per share. The warrants expire on various dates from December 2015 through March 2016 and are intended to be settled
in net shares. The total number of shares of common stock deliverable under the 2015 warrants is, however, currently limited to 11.7 million
shares. Changes in the fair value of these warrants will not be recognized in our consolidated financial statements as long as the instruments
F-33
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
remain classified as equity. At December 31, 2013, the remaining 2015 warrants that were not settled with the partial unwind agreements were
dilutive as the average price of our commons stock exceeded the $15.75 strike price of the 2015 warrants and the effect has been included in
diluted earnings per share for the year ended December 31, 2013. The warrants were not dilutive for the year ended December 31, 2012.
In 2013, we entered into three separate partial unwind agreements with the two counterparties to the 2015 notes hedges and the 2015 warrants
to coincide with the extinguishment of a portion of our 2015 notes, see note 9. We agreed to settle 54% of both the outstanding 2015 notes
hedges and the 2015 warrants and received net cash from the counterparties totaling $22.2 million. The agreements to settle the 2015 warrants
in cash required us to reclassify $48.0 million from equity to a derivative liability which represented the fair value of the 2015 warrants committed
to the unwind on the day that we entered into the unwind agreements. Subsequent to the reclassification, we were required to recognize any
change in fair value of the 2015 warrants committed to the unwind agreements through net income.
6. Deferred Policy Acquisition Costs and Deferred Sales Inducements
Policy acquisition costs deferred and amortized are as follows:
Balance at beginning of year
Costs deferred during the year:
Commissions
Policy issue costs
Amortization
Effect of net unrealized gains/losses
December 31,
2013
2012
2011
(Dollars in thousands)
$
1,709,799
$
1,683,857
$
1,747,760
420,378
5,422
(365,468)
656,521
399,001
4,410
(164,919)
(212,550)
463,889
14,945
(143,478)
(399,259)
Balance at end of year
$
2,426,652
$
1,709,799
$
1,683,857
Sales inducements deferred and amortized are as follows:
Balance at beginning of year
Costs deferred during the year
Amortization
Effect of net unrealized gains/losses
Balance at end of year
2013
December 31,
2012
(Dollars in thousands)
2011
$
$
1,292,341
337,787
$
(253,113)
498,865
1,242,787
306,659
$
(87,157)
(169,948)
1,227,328
385,123
(71,781)
(297,883)
1,875,880
$
1,292,341
$
1,242,787
We periodically revise the key assumptions used in the calculation of amortization of deferred policy acquisition costs and deferred sales
inducements retrospectively through an unlocking process when estimates of current or future gross profits/margins (including the impact of
realized investment gains and losses) to be realized from a group of products are revised. The unlocking adjustment in 2013 decreased amortization
of deferred policy acquisition costs by $18.5 million and amortization of deferred sales inducements by $11.1 million and included the impact
of account balance true ups and adjustment to future period assumptions for surrenders and certain expenses. The unlocking adjustment in 2012
increased amortization of deferred policy acquisition costs by $3.7 million and decreased amortization for deferred sales inducements by $0.2
million. The unlocking adjustment in 2011 decreased amortization of deferred policy acquisition costs by $9.1 million and amortization for
deferred sales inducements by $5.0 million.
7. Reinsurance and Policy Provisions
Coinsurance
We have two coinsurance agreements with EquiTrust Life Insurance Company ("EquiTrust"), covering 70% of certain of our index and fixed
rate 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. The business reinsured under these agreements may not be recaptured. Coinsurance
deposits (aggregate policy benefit reserves transferred to EquiTrust under these agreements) were $0.9 billion and $1.0 billion at December 31,
2013 and 2012, respectively. We remain liable to policyholders with respect to the policy liabilities ceded to EquiTrust should EquiTrust fail to
meet the obligations it has coinsured. None of the coinsurance deposits with EquiTrust are deemed by management to be uncollectible. The
balance due under these agreements to EquiTrust was $20.7 million and $9.2 million at December 31, 2013 and 2012, respectively, and represents
the fair value of call options held by us to fund index credits related to the ceded business net of cash due to or from EquiTrust related to monthly
settlements of policy activity and other expenses.
F-34
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We have two coinsurance agreements with Athene Life Re Ltd. ("Athene"), an unauthorized life reinsurer domiciled in Bermuda. One agreement
cedes 20% of certain of our fixed index annuities issued from January 1, 2009 through March 31, 2010. The business reinsured under this
agreement is not eligible for recapture until the end of the month following seven years after the date of issuance of the policy. The other
agreement cedes 80% of our multi-year rate guaranteed annuities issued on or after July 1, 2009. The business reinsured under this agreement
may not be recaptured. Coinsurance deposits (aggregate policy benefit reserves transferred to Athene under these agreements) were $2.1 billion
and $1.9 billion at December 31, 2013 and 2012, respectively. We remain liable to policyholders with respect to the policy liabilities ceded to
Athene should Athene fail to meet the obligations it has coinsured. The annuity deposits that have been ceded to Athene are being held in a trust
and American Equity Life is named as the sole beneficiary of the trust. The assets in the trust are required to remain at a value that is sufficient
to support the current balance of policy benefit liabilities of the ceded business on a statutory basis. If the value of the trust account would ever
reach a point where it is less than the amount of the ceded policy benefit liabilities on a statutory basis, Athene is required to either establish a
letter of credit or deposit securities in a trust for the amount of any shortfall. None of the coinsurance deposits with Athene are deemed by
management to be uncollectible. The balance due under these agreements to Athene was $27.3 million and $14.0 million at December 31, 2013
and 2012, respectively, and represents the fair value of call options held by us to fund index credits related to the ceded business net of cash due
from Athene related to monthly settlements of policy activity.
Amounts ceded to EquiTrust and Athene under these agreements are as follows:
Consolidated Statements of Operations
Annuity product charges
Change in fair value of derivatives
Interest sensitive and index product benefits
Change in fair value of embedded derivatives
Other operating costs and expenses
Consolidated Statements of Cash Flows
Annuity deposits
Cash payments to policyholders
Year Ended December 31,
2013
2012
2011
(Dollars in thousands)
$
$
$
$
$
$
$
$
$
6,551
60,876
67,427
117,934
2,898
9,926
$
$
$
6,796
17,106
23,902
94,113
9,373
9,333
130,758
$
112,819
$
8,149
(2,771)
5,378
99,724
(12,428)
8,970
96,266
(182,616) $
(203,552) $
208,345
208,437
25,729
$
4,885
$
(326,531)
204,116
(122,415)
Financing Arrangements
We have two reinsurance transactions with Hannover Life Reassurance Company of America ("Hannover"), which are treated as reinsurance
under statutory accounting practices and as financing arrangements under 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 operations. The transactions became effective March 31, 2011 (the "2011 Hannover Transaction") and July 1, 2013
(the "2013 Hannover Transaction"). The 2011 Hannover Transaction terminates on March 31, 2016, and the statutory surplus benefit is reduced
over a five year period and is eliminated upon termination.
The 2011 Hannover Transaction is a coinsurance and yearly renewable term reinsurance agreement for statutory purposes and provided
$49.2 million in net pretax statutory surplus benefit at inception in 2011. Pursuant to the terms of this agreement, pretax statutory surplus was
reduced by $11.3 million, $11.8 million and $9.2 million in 2013, 2012 and 2011, respectively, and is expected to be reduced as follows: 2014
—$10.8 million and 2015—$10.3 million and 2016—$2.5 million. These amounts include risk charges equal to 1.25% of the pretax statutory
surplus benefit as of the end of each calendar quarter. Risk charges attributable to this agreement were $1.3 million, $1.8 million and $1.7 million
during 2013, 2012 and 2011, respectively.
The 2013 Hannover Transaction is a yearly renewable term reinsurance agreement for statutory purposes covering 45.6% of waived surrender
charges related to penalty free withdrawals, deaths and lifetime income benefit rider payments as well as lifetime income benefit rider payments
in excess of policy fund values on certain business. We may recapture the risks reinsured under this agreement as of the end of any quarter after
June 30, 2016. However, the agreement, as amended, makes it punitive to us if we do not recapture the business ceded no later than the first
quarter of 2018. The reserve credit recorded on a statutory basis by American Equity Life was $288.2 million at December 31, 2013. We pay
quarterly reinsurance premiums under this agreement with an experience refund calculated on a quarterly basis and a risk charge equal to 1.25%
of the pretax statutory surplus benefit as of the end of each calendar quarter. Risk charges attributable to the 2013 Hannover Transaction were
$7.0 million during 2013.
F-35
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The 2013 Hannover Transaction replaces a similar reinsurance agreement with Hannover that was entered into in 2005 (the "2005 Hannover
Agreement") which was recaptured simultaneously with entering into the 2013 Hannover Transaction. The 2005 Hannover Agreement was a
yearly renewable term reinsurance agreement for statutory purposes covering 47% of waived surrender charges related to penalty free withdrawals
and deaths on certain business. The reserve credit recorded on a statutory basis by American Equity Life was $180.3 million at December 31,
2012 under the 2005 Hannover Agreement. Risk charges attributable to the 2005 Hannover Transaction were $5.4 million, $9.9 million and
$8.6 million during 2013, 2012 and 2011, respectively.
Prior to its recapture in 2013, we had a coinsurance and yearly renewable term reinsurance agreement for statutory purposes that provided
$29.5 million in net pretax statutory surplus benefit at inception in 2008 (the "2008 Hannover Transaction"). Pursuant to the terms of this
agreement, pretax statutory surplus was reduced by $6.9 million and $6.8 million in 2013 and 2012, respectively. These amounts include risk
charges equal to 1.25% of the pretax statutory surplus benefit as of the end of each calendar quarter. Risk charges attributable to the 2008
Hannover Transaction were $0.1 million, $0.5 million and $0.8 million during 2013, 2012 and 2011, respectively.
Indemnity Reinsurance
In the normal course of business, we seek to limit our exposure to loss on any single insured and to recover a portion of benefits paid under our
annuity, life and accident and health insurance products by ceding reinsurance to other insurance enterprises or reinsurers. Reinsurance contracts
do not relieve us of our obligations to our policyholders. To the extent that reinsuring companies are later unable to meet obligations under
reinsurance agreements, our life insurance subsidiaries would be liable for these obligations, and payment of these obligations could result in
losses to us. To limit the possibility of such losses, we evaluate the financial condition of our reinsurers, and monitor concentrations of credit
risk. No allowance for uncollectible amounts has been established against our asset for amounts receivable from other insurance companies as
none of the receivables are deemed by management to be uncollectible.
8. Income Taxes
We file consolidated federal income tax returns that include all of our wholly-owned subsidiaries except Eagle Life which must file a separate
federal income tax return for 2009–2013 under applicable federal income tax guidelines. Our income tax expense as presented in the consolidated
financial statements is summarized as follows:
Consolidated statements of operations:
Current income taxes
Deferred income taxes (benefits)
Total income tax expense included in consolidated statements of operations
Stockholders' equity:
Expense (benefit) relating to:
Change in net unrealized investment losses
Share-based compensation
Extinguishment of convertible debt
Year Ended December 31,
2013
2012
2011
(Dollars in thousands)
$
133,036
$
80,527
$
3,013
136,049
(344,944)
(4,043)
(4,546)
(52,336)
28,191
123,620
(392)
—
127,535
(80,869)
46,666
202,143
(1,061)
—
Total income tax expense included in consolidated financial statements
$
(217,484) $
151,419
$
247,748
F-36
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income tax expense in the consolidated statements of operations differed from the amount computed at the applicable statutory federal income
tax rate of 35% as follows:
Income before income taxes
Income tax expense on income before income taxes
Tax effect of:
Tax exempt net investment income
Extinguishment of convertible debt
Other
Income tax expense
Effective tax rate
Year Ended December 31,
2013
2012
2011
$
$
$
(Dollars in thousands)
389,332
136,266
$
$
85,989
30,096
$
$
(2,657)
2,695
(255)
(1,876)
—
(29)
136,049
$
28,191
$
34.9%
32.8%
132,914
46,520
—
—
146
46,666
35.1%
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, respectively, in future years. The tax effects of temporary differences that give
rise to the deferred tax assets and liabilities at December 31, 2013 and 2012, are as follows:
Deferred income tax assets:
Policy benefit reserves
Other than temporary impairments
Investment income items
Amounts due reinsurer
Other policyholder funds
Litigation settlement accrual
Deferred compensation
Convertible senior notes
Net operating loss carryforwards
Other
Gross deferred tax assets
Deferred income tax liabilities:
Deferred policy acquisition costs and deferred sales inducements
Net unrealized gains on available for sale fixed maturity and equity securities
Convertible senior notes
Derivative instruments
Investment income items
Other
Gross deferred tax liabilities
Net deferred income tax (liability) asset
December 31,
2013
2012
(Dollars in thousands)
$
1,875,516
$
1,698,831
901
2,121
7,366
9,200
7,420
13,430
34,818
24,179
8,835
8,177
—
—
10,860
7,351
14,659
—
16,783
7,192
1,983,786
1,763,853
(1,475,403)
(12,742)
—
(193,067)
—
(718)
(1,681,930)
$
301,856
$
(1,425,266)
(357,686)
(6,665)
(18,280)
(2,588)
(2,671)
(1,813,156)
(49,303)
The total deferred income tax asset includes other than temporary impairments on investments. The other than temporary impairments will not
be available for utilization for tax purposes until the securities are either sold at a loss or deemed completely worthless. The other than temporary
impairments totaled $2.6 million and $23.4 million as of December 31, 2013 and 2012, respectively.
Included in the deferred income taxes is the expected income tax benefit attributable to unrealized losses on available for sale fixed maturity
securities. There is no valuation allowance provided for the deferred income tax asset attributable to unrealized losses on available for sale fixed
maturity securities. Management expects that the passage of time will result in the reversal of these unrealized losses due to the fair value
increasing as these securities near maturity. Management has the intent and ability to hold these securities to maturity because we generate
adequate cash flow from new business to fund all foreseeable cash flow needs and do not believe it would be necessary to liquidate these securities
at a loss to meet cash flow needs.
F-37
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Realization of our deferred income tax assets is more likely than not based on expectations as to our future taxable income and considering all
other available evidence, both positive and negative. Therefore, no valuation allowance against deferred income tax assets has been established
as of December 31, 2013 and 2012.
There were no material income tax contingencies requiring recognition in our consolidated financial statements as of December 31, 2013. We
are no longer subject to income tax examinations by tax authorities for years prior to 2009.
At December 31, 2013, we had non-life net operating loss carryforwards for federal income tax purposes totaling $36.8 million which expire
beginning in 2018 through 2033.
9. Notes Payable and Amounts Due Under Repurchase Agreements
On July 17, 2013, we issued $400 million aggregate principal amount of senior unsecured notes due 2021 which bear interest at 6.625% per
year and will mature on July 15, 2021. We used $15 million of the net proceeds from the issuance to repay the entire amount outstanding under
our revolving credit facility and $168.7 million, net of proceeds of $22.2 million in settlement of 2015 notes hedges and 2015 warrants, to pay
the cash consideration portion of the convertible note tender and exchange offers discussed below. We intend to use the remaining net proceeds
from the notes issuance to tender for, redeem or repurchase the $160.3 million aggregate principal amount of convertible notes that are currently
outstanding. The form and timing of any such activity will be dependent upon market conditions and other factors and there can be no assurance
that any such transactions can be completed prior to the December 2014 call date for the 5.25% Contingent Convertible Senior Notes due
December 15, 2029 (the "2029 notes") or the September 2015 maturity date for the 2015 notes.
In September 2010, we issued $200.0 million principal amount of 2015 notes. The 2015 notes have a stated interest rate of 3.5%, mature on
September 15, 2015, and are intended to be settled in cash; however, in certain limited circumstances we have the discretion to settle in shares
of our common stock or a combination of cash and shares of our common stock. Contractual interest payable on the 2015 notes began accruing
in September 2010 and is payable semi-annually in arrears each March 15th and September 15th. The initial transaction fees and expenses
totaling $6.8 million were capitalized as deferred financing costs and are being amortized over the term of the 2015 notes using the effective
interest method.
Upon occurrence of any of the conditions described below, holders may convert their 2015 notes at the applicable conversion rate at any time
prior to June 15, 2015. On or after June 15, 2015 through the maturity date of September 15, 2015, holders may convert each of their 2015 notes
at the applicable conversion rate regardless of the following conditions:
•
•
•
during the 5 business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price
per $1,000 principal amount of notes was less than 98% of the product of the last reported sale price of our common stock and the
applicable conversion rate on such trading day;
during any calendar quarter commencing after December 31, 2010, the Notes may be converted if the last reported price of the common
stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last
trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the applicable conversion price on each
applicable trading day. The “last reported sale price” means the closing sale price per share (or if no closing sale price is reported, the
average of the bid and ask prices or, if more than one in either case, the average of the average bid and the average ask prices) on that
date as reported in composite transactions for the New York Stock Exchange; or
upon the occurrence of specified corporate transactions.
The initial conversion rate for the 2015 notes was 80 shares of our common stock per $1,000 principal amount of 2015 notes, equivalent to a
conversion price of approximately $12.50 per share of our common stock, with the amount due on conversion. Upon conversion, a holder will
receive the sum of the daily settlement amounts, calculated on a proportionate basis for each day, during a specified observation period following
the conversion date. The conversion rate for the 2015 notes was adjusted to 80.9486 shares in December 2012, equivalent to a conversion price
of approximately $12.35 per share.
If a fundamental change, as defined in the indenture, occurs prior to maturity and our stock price is at least $10.00 per share at that time, the
conversion rate will increase by an additional amount of up to 20 shares of our common stock per $1,000 principal amount of 2015 notes, which
amount would be paid to each holder that elects to convert its 2015 notes at that time.
The conversion option of the 2015 notes (the "2015 notes embedded conversion derivative") is an embedded derivative that requires bifurcation
from the 2015 notes and is accounted for as a derivative liability, which is included in Other liabilities in our Consolidated Balance Sheets. The
fair value of the 2015 notes embedded conversion derivative at the time of issuance of the 2015 notes was $37.0 million, and was recorded as
the original debt discount for purposes of accounting for the debt component of the 2015 notes. This discount is being recognized as interest
expense using the effective interest method over the term of the 2015 notes. The estimated fair value of the 2015 notes embedded conversion
derivative was $107.0 million and $43.1 million as of December 31, 2013 and 2012, respectively.
F-38
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In December 2004, we issued $260.0 million of convertible senior notes due December 15, 2024 (the "2024 notes"), of which $22.9 million was
assigned to the equity component (net of income tax of $16.1 million). On March 25, 2013, notice of mandatory redemption was issued for the
remaining outstanding amount of our 2024 notes and holders of $25.8 million principal amount of the convertible notes exercised their conversion
rights prior to the April 30, 2013 mandatory redemption date. The holders of these notes received the principal amount of their notes in cash
and the conversion premium in shares of our common stock, for which 216,729 shares were issued. The balance of the convertible notes ($2.5
million principal amount) was redeemed for cash. The 2024 notes bore interest at a fixed rate of 5.25% per annum. Interest was payable semi-
annually in arrears on June 6 December 6 of each year.
In December 2009, we issued $115.8 million of contingent convertible senior notes due December 15, 2029, of which $15.6 million was assigned
to the equity component (net of income tax of $11.0 million), $52.2 million principal amount were issued for cash and $63.6 million were issued
in exchange of $63.6 million of the 2024 notes. The 2029 notes 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. In addition to regular interest on the 2029 notes, beginning with the six-month
interest period ending June 6, 2015, 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 2029 notes are convertible at the holders' option prior to the maturity date into cash and shares of our common stock under the following
conditions:
•
during any fiscal quarter, if the closing sale price of our 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;
• we have 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 2029 notes into cash and shares of our common stock at a conversion price per share of $9.57. This
represents a conversion rate of approximately 104.5 shares of common stock per $1,000 in principal amount of notes (the "conversion rate").
Subject to certain exceptions described in the indentures covering these notes, at the time the notes are tendered for conversion, the value (the
"conversion value") of the cash and shares of our 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 our 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. We 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 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.
We may redeem some or all of the 2029 notes at any time on or after December 15, 2014. In addition, the holders may require us to repurchase
all or a portion of their 2029 notes on December 15, 2014, 2019 and 2024, and upon a change in control, as defined in the indenture governing
the notes, holders may require us 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.
Our convertible 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. Our convertible 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. Our convertible notes are structurally
subordinated to all liabilities of our subsidiaries.
We are required to include the dilutive effect of the 2029 notes in our diluted earnings per share calculation. Because these notes include a
mandatory cash settlement feature for the principal amount, incremental dilutive shares will only exist when the fair value of our common stock
at the end of the reporting period exceeds the conversion price per share disclosed above. At December 31, 2013 and 2012, the conversion
premium of the 2029 notes was dilutive and the effect has been included in diluted earnings per share for the years ended December 31, 2013
and 2012. The 2015 notes and the 2015 notes hedges are excluded from the dilutive effect in our diluted earnings per share calculation as they
are intended to be settled only in cash.
In 2013, we extinguished $108.0 million principal amount of our 2015 notes and $47.5 million principal amount of our 2029 notes pursuant to
public and private exchange offers with holders of our outstanding convertible debt instruments. Total consideration paid to holders of the 2015
notes consisted of $116.1 million in cash and $79.2 million in shares of our common stock (3,643,402 shares). Total consideration paid to holders
of the 2029 notes consisted of $74.8 million in cash and $34.9 million in shares of our common stock (1,629,677 shares). Total consideration
paid to the holders of the 2015 notes and 2029 notes excludes the accrued interest through the settlement date that was also paid. The carrying
value of the convertible notes at extinguishment was $99.6 million and $44.5 million for the 2015 notes and 2029 notes, respectively, and losses
net of tax of $15.2 million for the 2015 notes and $5.2 million for the 2029 notes were recognized.
F-39
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In connection with the extinguishment of our 2015 notes, we terminated the related 2015 notes hedges associated with the 2015 notes extinguished
and received cash proceeds of $22.2 million from the 2015 notes hedges counterparties (see Notes 5). After the unwind agreements, 7,474,817
warrants remain outstanding with a strike price of $15.75 and continue to be accounted for as equity. The 2015 notes hedges with two counterparties
remain outstanding whereby we have the option to receive the cash equivalent of the conversion spread on approximately 7,474,817 shares of
our common stock based upon a strike price of $12.35 per share, subject to certain conversion rate adjustments in the 2015 notes.
Subsequent to the year ended December 31, 2013, we extinguished $22.7 million principal amount of our 2029 notes for a combination of cash
and shares of our common stock (946,793 shares) pursuant to a private exchange offer that was settled on February 10, 2014. The carrying value
of the 2029 notes at extinguishment was $21.6 million which resulted in a loss of $1.7 million on extinguishment of debt net of income taxes.
The convertible senior notes included in notes payable are accounted for separately as a liability component and an equity component in the
consolidated balance sheets. The liability component and equity component are as follows:
December 31, 2013
December 31, 2012
September
2015 Notes
December
2029 Notes
September
2015 Notes
December
2029 Notes
December
2024 Notes
(Dollars in thousands)
(Dollars in thousands)
Notes payable:
Principal amount of liability component
Unamortized discount
Net carrying amount of liability component
Additional paid-in capital:
Carrying amount of equity component
$
$
91,951
(6,623)
85,328
Amount by which the if-converted value exceeds principal
$
104,403
$
$
$
$
68,373
(3,743)
64,630
$
$
15,586
200,000
(21,944)
178,056
$
$
$
113,169
$
— $
115,839
(12,269)
103,570
15,586
30,382
$
$
$
$
28,243
—
28,243
22,637
—
The discount is being amortized over the expected lives of the notes, which is December 15, 2014 for the 2029 notes and September 15, 2015
for the 2015 notes and was December 15, 2011 for the 2024 notes. The effective interest rates during the discount amortization periods are 8.9%,
8.5% and 11.9% on the 2015 notes, the 2024 notes and 2029 notes, respectively. The interest cost recognized in operations for the convertible
notes, inclusive of the coupon and amortization of the discount and debt issue costs was $26.4 million, $28.5 million, and $31.6 million for the
years ended December 31, 2013, 2012 and 2011, respectively.
In November 2013, we terminated our $160 million unsecured revolving line of credit agreement and entered into a $140 million unsecured
revolving line of credit agreement with five banks for which the revolving period is four years. The interest rate is floating at a rate based on
our election that will be equal to the alternate base rate (as defined in the credit agreement) plus the applicable margin or the adjusted LIBOR
rate (as defined in the credit agreement) plus the applicable margin. We also pay a commitment fee based on the available unused portion of
the credit facility. The applicable margin and commitment fee rate are based on our credit rating and can change throughout the period of the
credit facility. Based upon our current credit rating, the applicable margin is 1.00% for alternate base rate borrowings and 2.00% for adjusted
LIBOR rate borrowings, and the commitment fee is 0.35%. Under this agreement, we are required to maintain a minimum risk-based capital
ratio at American Equity Life of 275%, a maximum ratio of adjusted debt to total adjusted capital of 0.35, and a minimum level of statutory
surplus at American Equity Life equal to the sum of 1) 80% of statutory surplus at September 30, 2013, 2) 50% of the statutory net income for
each fiscal quarter ending after September 30, 2013, and 3) 50% of all capital contributed to American Equity Life after September 30, 2013.
The agreement contains an accordion feature that allows us, on up to three occasions and subject to credit availability, to increase the credit
facility by an additional $50 million in the aggregate. We also have the ability to extend the maturity date by an additional one year past the
initial maturity date of November 22, 2017 with the consent of the extending banks. There are currently no guarantors of the credit facility, but
certain of our subsidiaries must guarantee our obligations under the credit agreement if such subsidiaries guarantee other material amounts of
our debt. No amounts were outstanding at December 31, 2013 and no amounts were outstanding under the previous line of credit at December
31, 2012. As of December 31, 2013, $389.0 million is unrestricted and could be distributed to shareholders and still be in compliance with all
covenants under this credit agreement.
As part of our investment strategy, we enter into securities repurchase agreements (short-term collateralized borrowings). The maximum amount
borrowed during 2013 was $258.6 million. We had no borrowings under repurchase agreements during 2012. When we do borrow cash on
these repurchase agreements, we pledge collateral in the form of debt securities with fair values approximately equal to the amount due and we
use the cash to purchase debt securities ahead of the time we collect the cash from selling annuity policies to avoid a lag between the investment
of funds and the obligation to credit interest to policyholders. 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 $38.3 million and $12.9 million for the years ended December 31,
2013 and 2011. The weighted average interest rate on amounts due under repurchase agreements was 0.20% and 0.23% for the years ended
December 31, 2013 and 2011.
F-40
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Subordinated Debentures
Our wholly-owned subsidiary trusts (which are not consolidated) have issued fixed rate and floating rate trust preferred securities and 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 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. Our obligations under the subordinated debentures
and related agreements provide a full and unconditional guarantee of payments due under the trust preferred securities. All subordinated debentures
are callable by us at any time, except for the Trust II subordinated debt obligations.
Following is a summary of subordinated debt obligations to the trusts at December 31, 2013 and 2012:
December 31,
2013
2012
Interest Rate
Due Date
American Equity Capital Trust II
American Equity Capital Trust III
American Equity Capital Trust IV
American Equity Capital Trust VII
American Equity Capital Trust VIII
American Equity Capital Trust IX
American Equity Capital Trust X
American Equity Capital Trust XI
American Equity Capital Trust XII
(Dollars in thousands)
$
76,440
$
76,259
5%
27,840
12,372
10,830
20,620
15,470
20,620
20,620
41,238
June 1, 2047
April 29, 2034
27,840
*LIBOR + 3.90%
12,372
*LIBOR + 4.00%
January 8, 2034
10,830
*LIBOR + 3.75%
December 14, 2034
20,620
*LIBOR + 3.75%
December 15, 2034
15,470
*LIBOR + 3.65%
June 15, 2035
20,620
*LIBOR + 3.65%
September 15, 2035
20,620
*LIBOR + 3.65%
December 15, 2035
41,238
*LIBOR + 3.50%
April 7, 2036
*—three month London Interbank Offered Rate
$
246,050
$
245,869
During 2012, we issued a notice of mandatory redemption of all of our 8% Convertible Junior Subordinated Debentures (the "Debentures") and
American Equity Capital Trust I, the holder of all of the Debentures, issued notices of mandatory redemption of all of its 8% Convertible Trust
Preferred Securities and all of its 8% Trust Common Securities. As a result of this mandatory redemption, $20.6 million principal amount
(688,327 shares) of 8% Convertible Trust Preferred Securities were converted into 2,549,333 shares of our common stock and 38,001 shares of
these trust preferred securities were settled in cash of approximately $1.1 million. The remaining 6,000 shares will be settled in cash of $0.2
million. During 2012, prior to the mandatory redemption, 4,000 shares of these trust preferred securities were converted into 14,814 shares of
our common stock.
The principal amount of the subordinated debentures issued by us 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 6.8%). 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"). 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.
11. Retirement and Share-based Compensation Plans
We have adopted a contributory defined contribution plan which is qualified under Section 401(k) of the Internal Revenue Code. The plan
covers substantially all of our full-time employees subject to minimum eligibility requirements. Employees can contribute a percentage of their
annual salary (up to a maximum contribution of $17,500 in 2013, $17,000 in 2012 and $16,500 in 2011) to the plan. We contribute 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 $0.4 million, $0.4 million and $0.3
million for the years ended December 31, 2013, 2012 and 2011, respectively.
During 2010, we established the American Equity Investment Life Holding Company Short-Term Performance Incentive Plan. Under this plan,
certain members of our senior management may receive incentive awards comprised of a cash component and a restricted stock component.
Shares of restricted stock received will be granted pursuant to the 2009 Employee Incentive Plan and will vest on the date three years following
the date the Committee approves the payment of the incentive award provided that the participant remains employed by us. Compensation
expense is recognized over the three year vesting period. Shares vest immediately for participants 65 years of age with 10 years of service with
us and compensation expense under this plan for these participants is recognized upon approval of the incentive award by the compensation
committee. During 2013, 2012 and 2011, we issued 33,489, 51,810 and 24,497 shares of common stock (23,681, 37,369 and 16,819 shares were
restricted stock), respectively, and recognized share-based compensation expense of $0.4 million, $0.5 million and $0.1 million, respectively.
F-41
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In April 2013, the Short-Term Performance Incentive Plan was amended and restated to provide for only cash bonuses for awards made with
respect to 2013 and following years.
During 2013, we established a long-term performance incentive plan utilizing restricted stock units granted pursuant to the 2009 Employee
Incentive Plan. During 2013, we issued 78,260 restricted stock units under this plan. Vesting is tied to threshold and target performance goals
for the three year period ending December 31, 2015. Fifty percent of the restricted stock units will vest if we meet threshold goals and 100%
of the restricted stock units will vest if we meet target performance goals. Compensation expense is recognized over the three year vesting
period based on the likelihood of meeting threshold and target goals. During 2013, we recognized share-based compensation expense of $0.3
million. Restricted stock units that ultimately vest are payable in an equal number of shares of our common stock. Restricted stock units are
accounted for as equity awards and the estimated fair value of restricted stock units is based upon the closing price of our common stock on the
date of grant.
During 2013, we issued 26,087 (20,889 shares were restricted stock) shares of common stock under the 2009 Employee Incentive Plan to certain
employees. These shares will vest on the date three years following the grant date provided the participant remains employed with us.
Compensation expense is recognized over the three year vesting period. Shares vest immediately for participants over 65 years of age with 10
years of service with us. During 2013, we recognized share-based compensation expense of $0.2 million related to these restricted stock awards.
In 2013, we adopted the 2013 Director Equity and Incentive Plan which authorized the grant of options, stock appreciation rights, restricted
stock awards and restricted stock units convertible into or based upon our common stock of up to 250,000 shares to our Directors. During 2013,
we issued 40,000 shares of common stock, all of which are restricted stock, and which vest one year from the grant date provided the individual
remains a Director during that time period. During 2013, we recognized share-based compensation expense of $0.4 million related to these
restricted stock awards. At December 31, 2013, we had 210,000 shares of common stock available for future grant under the 2013 Director and
Equity Incentive Plan.
We have deferred compensation arrangements with certain officers, directors, and consultants, whereby these individuals agreed to take our
common stock 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, 2013 and 2012, these individuals have earned, and we have reserved
for future issuance, 356,897 and 354,923 shares of common stock, respectively, pursuant to these arrangements. We have incurred share-based
compensation expense of $0.2 million, $0.2 million and $0.3 million for the years ended December 31, 2013, 2012 and 2011, respectively, under
these arrangements.
We have deferred compensation agreements with certain officers whereby these individuals may defer certain salary and bonus compensation
which is deposited into the American Equity Officer Rabbi Trust (Officer Rabbi Trust). The amounts deferred for certain employees are invested
in assets at the direction of the employee. The assets of the Officer Rabbi Trust are included in our assets and a corresponding deferred
compensation liability is recorded. The deferred compensation liability is recorded at the fair market value of the assets in the Officer Rabbi
Trust with the change in fair value included as a component of compensation expense. The deferred compensation liability related to these
agreements was $3.1 million and $1.4 million at December 31, 2013 and 2012, respectively. During 2011, the Officer Rabbi Trust purchased
1,250 shares of our common stock at a cost of $0.01 million, respectively. The Officer Rabbi Trust did not purchase any shares during 2013 and
2012. The Officer Rabbi Trust held 103,551 shares and 104,551 shares of our common stock at December 31, 2013 and 2012, respectively,
which are treated as treasury shares.
During 1997, we 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. The NMO Deferred Compensation Plan was effective until December 31,
2006 at which time it was suspended. Awards were calculated using formulas determined annually by our Board of Directors. These shares are
being distributed at the end of the vesting and deferral period of nine years. We recognize commission expense and an increase to additional
paid-in capital as share-based compensation when the awards vest. All outstanding shares issued under this plan were fully vested at December
31, 2010. At December 31, 2013 and 2012, the total number of undistributed vested shares under the NMO Deferred Compensation Plan was
892,688 and 1,142,332, respectively. These shares are included in the computation of earnings per share and earnings per share—assuming
dilution.
We have a Rabbi Trust, the NMO Deferred Compensation Trust (the "NMO Trust"), which has purchased shares of our common stock to fund
the amount of vested shares under the NMO Deferred Compensation Plan. The common stock held in the NMO Trust is treated as treasury
stock. The NMO Trust purchased 81,745 shares of our common stock during 2011 at a cost of $0.9 million. The NMO Trust did not purchase
any shares during 2013 and 2012. The NMO Trust distributed 249,644, 489,216 and 306,032 shares during 2013, 2012 and 2011, respectively.
The number of shares held by the NMO Trust at December 31, 2013 and 2012, was 892,688 and 1,142,332, respectively.
Our 1996 Stock Option Plan, 2000 Employee Stock Option Plan, 2000 Directors Stock Option Plan and 2011 Director Stock Option Plan (adopted
in 2011) authorized grants of options to officers, directors and employees for an aggregate of up to 3,475,000 shares of our common stock. All
options granted under these plans have ten year terms and a six month or three year vesting period after which they become fully exercisable
immediately. At December 31, 2013, we had 18,000 shares of common stock available for future grant under the 2011 Director Stock Option
Plan. In 2009, we adopted the 2009 Employee Incentive Plan which authorizes the grant of options, stock appreciation rights, restricted stock
awards and restricted stock units convertible into or based upon our common stock up to 2,500,000 shares. All options granted under this plan
have six or ten year terms and a three year vesting period after which they become fully exercisable immediately. At December 31, 2013, we
had 1,563,907 shares of common stock available for future grant under the 2009 Employee Incentive Plan.
F-42
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair value for each stock option granted to officers, directors and employees during the years ended December 31, 2012 and 2011 was
estimated at the date of grant using a Black-Scholes option valuation model with the following assumptions:
Average risk-free interest rate
Dividend yield
Average expected life (years)
Volatility
Year Ended December 31,
2012
2011
Directors and
Retirement
Eligible
Employees
Non-Retirement
Eligible
Employees
Directors and
Retirement
Eligible
Employees
Non-Retirement
Eligible
Employees
0.76%
1.1%
5
62.5%
1.36%
1.3%
8
50.9%
1.66%
0.8%
5
66.1%
2.00%
1.0%
8
52.0%
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. We use the historical realized volatility of our
stock for the expected volatility assumption within the valuation model. For options granted since 2007, the weighted average expected term
for the majority of our options were calculated using average historical behavior.
During 2007, 2010 and 2012 we established Independent Insurance Agent Stock Option plans. Under these plans, agents of American Equity
Life may receive grants of options to acquire shares of our common stock based upon their individual sales. The plans authorize grants of options
to agents for an aggregate of up to 8,000,000 shares of our common stock. We recognize commission expense and an increase to additional
paid-in capital as share-based compensation equal to the fair value of the options as they are earned.
The fair value for each stock option granted to agents during the years ended December 31, 2013, 2012 and 2011 was estimated using a Black-
Scholes option valuation model until the grant date, at which time the options are included as permanent equity, with the following assumptions:
Average risk-free interest rate
Dividend yield
Average expected life (years)
Volatility
Year Ended December 31,
2013
2012
2011
1.21%
0.7%
3.75
31.2%
0.51%
1.2%
3.75
41.1%
0.58%
1.2%
3.75
67.2%
American Equity Life's agents earned 1,284,950 options during 2013, which were granted in January 2014, and we recorded commission expense
(capitalized as deferred policy acquisition costs) of $8.1 million in 2013. American Equity Life's agents earned 1,125,100 options during 2012,
which were granted in January 2013, and we recorded commission expense (capitalized as deferred policy acquisition costs) of $3.9 million in
2012. American Equity Life's agents earned 1,422,050 options during 2011, which were granted in January 2012, and we recorded commission
expense (capitalized as deferred policy acquisition costs) of $6.8 million in 2011. All options granted have seven year terms and a six month
vesting period after which they become exercisable immediately.
F-43
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Changes in the number of stock options outstanding during the years ended December 31, 2013, 2012 and 2011 are as follows:
Number of
Shares
Weighted-Average
Exercise Price
per Share
Total
Exercise
Price
(Dollars in thousands, except per share data)
Outstanding at January 1, 2011
4,120,850
$
8.78
$
Granted
Canceled
Exercised
Outstanding at December 31, 2011
Granted
Canceled
Exercised
Outstanding at December 31, 2012
Granted
Canceled
Exercised
Outstanding at December 31, 2013
1,486,850
(177,500)
(585,350)
4,844,850
1,558,900
(28,050)
(643,250)
5,732,450
1,210,950
(29,400)
(2,937,275)
3,976,725
12.99
9.66
8.00
10.13
10.40
8.97
8.93
10.35
13.13
9.96
10.81
10.86
$
36,187
19,309
(1,714)
(4,685)
49,097
16,216
(251)
(5,741)
59,321
15,899
(293)
(31,756)
43,171
The following table summarizes information about stock options outstanding at December 31, 2013:
Stock Options Outstanding
Stock Options Vested
Range of Exercise Prices
Number of
Awards
Remaining
Life (yrs)
Weighted-Average
Exercise Price
Per Share
Number of
Awards
Remaining
Life (yrs)
Weighted-Average
Exercise Price
Per Share
$5.07 - $9.16
$9.27 - $11.35
$11.87 - $14.62
$5.07 - $14.62
756,550
1,681,475
1,538,700
3,976,725
$
3.17
5.04
5.29
4.78
7.48
10.33
13.10
10.86
756,550
1,592,475
1,433,700
3,782,725
$
3.17
4.85
5.11
4.61
7.48
10.31
13.16
10.83
The aggregate intrinsic value for stock options outstanding and vested awards was $61.7 million and $58.8 million, respectively, at December 31,
2013. For the years ended December 31, 2013, 2012 and 2011, the total intrinsic value of options exercised by officers, directors and employees
was $10.4 million, $0.9 million and $0.3 million, respectively. Intrinsic value for stock options is calculated as the difference between the
exercise price of the underlying awards and the price of our common stock as of the reporting date. Cash received from stock options exercised
for the years ended December 31, 2013, 2012 and 2011 was $31.8 million, $5.7 million and $4.7 million, respectively. The tax benefit realized
for the tax deduction from the exercise of stock options by officers, directors, employees and agents for the years ended December 31, 2013,
2012 and 2011, was $1.0 million, $0.1 million and $0.1 million, respectively.
We established the American Equity Investment Employee Stock Ownership Plan ("ESOP") effective July 1, 2007. The principal purpose of
the ESOP is to provide each eligible employee with an equity interest in us. Employees become eligible once they have completed a minimum
of six months of service. Employees become 100% vested after two years of service. Our contribution to the ESOP is determined by the Board
of Directors.
In August 2007, we issued a loan to the ESOP in the amount of $7.0 million to purchase 650,000 shares of our common stock from David J.
Noble, our Executive Chairman. The loan is to be repaid over a period of 20 years with annual interest payments due on December 31 of each
year. Required principal payments according to the terms of the loan of $1.8 million are due on December 31, 2017 and 2022 with the final
principal payment due on August 31, 2027; however, at December 31, 2013, the outstanding balance on this loan is $0.2 million as we have been
prepaying the balance due. The loan is eliminated in the consolidated financial statements. The shares purchased by the ESOP were pledged
as collateral for this debt and are reported as unallocated common stock held by the ESOP, a contra-equity account in stockholders' equity. When
shares are committed for release, the shares become outstanding for earnings per share computations. For each plan year in which a payment
or prepayment of principal or interest is made, we will release from the pledge the number of shares determined under the principal and interest
method. Dividends on allocated ESOP shares are recorded as a reduction in retained earnings and are credited to employee accounts. Dividends
on unallocated shares held by the ESOP will be used to repay indebtedness. As of December 31, 2013 and 2012, there were 127,867 shares and
54,971 shares committed for release and compensation expense of $3.5 million, $1.1 million and $1.3 million was recognized in 2013, 2012
and 2011, respectively. The fair value of 58,618 unreleased shares and 239,799 unreleased shares was $1.5 million and $2.9 million at
December 31, 2013 and 2012, respectively.
F-44
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Statutory Financial Information and Dividend Restrictions
Statutory accounting practices prescribed or permitted by regulatory authorities for our life insurance subsidiaries differ from GAAP. Net income
for our primary life insurance subsidiary as determined in accordance with statutory accounting practices was as follows:
American Equity Life
$
205,202
$
82,039
$
169,365
Statutory capital and surplus for our primary life insurance subsidiary was as follows:
Year Ended December 31,
2013
2012
2011
(Dollars in thousands)
December 31,
2013
2012
(Dollars in thousands)
American Equity Life
$
1,870,728
$
1,658,929
American Equity Life is domiciled in the state of Iowa and is regulated by the Iowa Insurance Division. Life insurance companies are subject
to the National Association of Insurance Commissioners ("NAIC") risk-based capital (RBC) 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. Calculations using the NAIC formula indicated that American Equity Life's ratio of total adjusted capital to the highest level
of required capital at which regulatory action might be initiated (Company Action Level) is as follows:
Total adjusted capital
Company Action Level RBC
Ratio of adjusted capital to Company Action Level RBC
December 31,
2013
2012
(Dollars in thousands)
$
1,995,658
$
1,741,638
580,085
344%
524,928
332%
Prior approval of regulatory authorities is required for the payment of dividends to American Equity Investment Life Holding Company ("Parent
Company") by American Equity Life which exceed an annual limitation. American Equity Life may pay dividends without prior approval,
unless such payments, together with all other such payments within the preceding twelve months, exceed the greater of (1) net gain from operations
before net realized capital gains/losses for the preceding calendar year or, (2) 10% of the American Equity Life's capital and surplus at the
preceding year-end. The amount of dividends permitted to be paid by American Equity Life to its Parent Company without prior approval of
regulatory authorities is $195.0 million as of December 31, 2013. No dividends were paid by any of our insurance subsidiaries for any of the
years presented in these financial statements.
The Parent Company relies on its subsidiaries for cash flow, which has primarily been in the form of investment management fees and/or
dividends. Retained earnings in our consolidated financial statements primarily represent undistributed earnings of American Equity Life. As
such, our ability to pay dividends is limited by the regulatory restriction placed upon insurance companies as described above. In addition,
American Equity Life retains funds to allow for sufficient capital for growth.
13. Commitments and Contingencies
We lease our home office space and certain equipment under various operating leases. Rent expense for the years ended December 31, 2013,
2012 and 2011 totaled $2.3 million, $2.0 million and $1.9 million, respectively. At December 31, 2013, the aggregate future minimum lease
payments are $12.8 million. The following represents payments due by period for operating lease obligations as of December 31, 2013 (dollars
in thousands):
Year Ending December 31:
2014
2015
2016
2017
2018
2019 and thereafter
$
1,782
2,289
1,685
1,440
1,364
4,228
F-45
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, FINRA, 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.
In accordance with applicable accounting guidelines, we establish an accrued liability for litigation and regulatory matters when those matters
present loss contingencies that are both probable and estimable. As a litigation or regulatory matter is developing we, in conjunction with outside
counsel, evaluate on an ongoing basis whether the matter presents a loss contingency that meets conditions indicating the need for accrual and/
or disclosure, and if not the matter will continue to be monitored for further developments. If and when the loss contingency related to litigation
or regulatory matters is deemed to be both probable and estimable, we will establish an accrued liability with respect to that matter and will
continue to monitor the matter for further developments that may affect the amount of the accrued liability. In connection with the matter
described below, we recorded an estimated litigation liability of $17.5 million during the third quarter of 2012. Based on developments in the
claims process discussed below, we increased our estimated litigation liability for this matter to $21.2 million during the fourth quarter of 2013.
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. We were a defendant in a purported class action, McCormack, et al. v. American
Equity Investment Life Insurance Company, et al., in the United States District Court for the Central District of California, Western Division and
Anagnostis v. American Equity, et al., coordinated in the Central District, entitled, In Re: American Equity Annuity Practices and Sales Litigation
(complaint filed September 7, 2005) (the "Los Angeles Case"), involving allegations of improper sales practices and similar claims as described
below.
The Los Angeles Case was a consolidated action involving several lawsuits filed by putative class members seeking class action status for a
national class of purchasers of annuities issued by us. The allegations generally attacked the suitability of sales of deferred annuity products to
persons over the age of 65. The plaintiffs sought rescission and injunctive relief including restitution and disgorgement of profits on behalf of
all class members under California Business & Professions Code section 17200 et seq. and Racketeer Influenced and Corrupt Organizations
Act; compensatory damages for breach of fiduciary duty and aiding and abetting of breach of fiduciary duty; unjust enrichment and constructive
trust; and other pecuniary damages under California Civil Code section 1750 and California Welfare & Institutions Codes section 15600 et seq.
On July 30, 2013, the parties entered into a settlement agreement and stipulated to certification of the case as a class action for settlement purposes
only. Notice of the terms of the settlement was mailed to the members of the class on October 7, 2013 and settlement claim forms were due
from members of the class on or before December 6, 2013. On January 27, 2014, a hearing was held regarding the fairness of the settlement.
On January 29, 2014, the Court signed a final order approving the settlement and finding the settlement is fair and represents a complete resolution
of all claims asserted on behalf of the class. On January 30, 2014, a final judgment, which is still subject to appeal, was entered dismissing the
case on the merits and with prejudice. While review of the claim forms submitted is still ongoing and it is difficult to predict the amount of the
liabilities that will ultimately result from the completion of the claim process, the $21.2 million litigation liability referred to above represents
our best estimate of probable loss with respect to this litigation. In light of the inherent uncertainties involved in the matter described above,
there can be no assurance that such litigation, or any other pending or future litigation, will not have a material adverse effect on our business,
financial condition, or results of operations.
In addition to our commitments to fund mortgage loans, we have unfunded commitments at December 31, 2013 to limited partnerships of $24.4
million and to secured bank loans of $20.8 million.
F-46
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Earnings Per Share
The following table sets forth the computation of earnings per common share and earnings per common share—assuming dilution:
Numerator:
Net income—numerator for earnings per common share
Interest on convertible subordinated debentures (net of income tax benefit)
Numerator for earnings per common share—assuming dilution
Denominator:
Weighted average common shares outstanding (1)
Effect of dilutive securities:
Convertible subordinated debentures
Convertible senior notes
2015 warrants
Stock options and deferred compensation agreements
Denominator for earnings per common share—assuming dilution
Earnings per common share
Earnings per common share—assuming dilution
Year Ended December 31,
2013
2012
2011
(Dollars in thousands, except per share data)
253,283
—
253,283
$
$
57,798
517
58,315
$
$
86,248
1,034
87,282
65,543,895
61,258,825
59,482,349
—
7,088,149
1,184,549
1,224,053
75,040,646
1,348,447
2,515,067
—
553,312
65,675,651
2,727,084
848,164
—
561,898
63,619,495
3.86
3.38
$
$
0.94
0.89
$
$
1.45
1.37
$
$
$
$
(1) Weighted average common shares outstanding include shares vested under the NMO Deferred Compensation Plan and exclude unallocated shares held by
the ESOP.
Options to purchase shares of our common stock that were outstanding during the respective periods indicated but were not included in the
computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares
are as follows:
Period
Year ended December 31, 2013
Year ended December 31, 2012
Year ended December 31, 2011
Number of
Shares
Range of
Exercise Prices
Minimum
Maximum
—
1,522,100
2,290,200
—
$11.35
$10.65
—
$14.34
$14.34
F-47
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Quarterly Financial Information (Unaudited)
Unaudited quarterly results of operations are summarized below.
2013
Premiums and product charges
Net investment income
Change in fair value of derivatives
Net realized gains (losses) on investments, excluding OTTI losses
Net OTTI losses recognized in operations
Loss on extinguishment of debt
Total revenues
Net income
Earnings per common share
Earnings per common share—assuming dilution
2012
Premiums and product charges
Net investment income
Change in fair value of derivatives
Net realized gains (losses) on investments, excluding OTTI losses
Net OTTI losses recognized in operations
Total revenues
Net income (loss)
Earnings (loss) per common share
Earnings (loss) per common share—assuming dilution
Quarter ended
March 31,
June 30,
September 30,
December 31,
(Dollars in thousands, except per share data)
$
34,565
$
35,062
$
36,325
$
329,690
373,962
10,585
(3,237)
—
745,565
26,031
0.41
0.38
336,143
64,040
15,689
(2,775)
(589)
447,570
120,113
1.87
1.71
354,147
193,028
(2,077)
(222)
(938)
580,263
56,181
0.86
0.75
$
37,731
$
40,817
$
47,413
$
326,910
259,161
(6,076)
(2,881)
614,845
10,471
0.18
0.16
320,259
(150,847)
(611)
(978)
208,640
18,759
0.31
0.30
318,594
161,090
(1,238)
(1,686)
524,173
(7,829)
(0.13)
(0.13)
42,986
363,947
444,985
16,364
—
(30,988)
837,294
50,958
0.73
0.65
39,720
321,160
(48,266)
1,471
(9,387)
304,698
36,397
0.58
0.55
Earnings 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 per common share amounts may not equal the earnings per common share for the year.
The differences between the change in fair value of derivatives for each quarter primarily correspond to the performance of the indices upon
which our call options are based. The comparability of net income (loss) is impacted by the application of fair value accounting to our fixed
index annuity business is as follows:
Quarter ended
March 31,
June 30,
September 30,
December 31,
(Dollars in thousands)
2013
2012
$
10,973
$
(80,658) $
(5,601) $
16,317
5,070
18,148
(23,418)
(8,289)
During the fourth quarter of 2013, we identified certain classification errors related to life contingent immediate annuities in our consolidated
statements of operations as described in Note 1. We evaluated the materiality of the errors from qualitative and quantitative perspectives and
concluded they were not material to any prior periods. However, we revised the premiums and product charges listed above for all quarterly
periods prior to the quarter ended December 31, 2013 to be consistent with the presentation for the quarter ended December 31, 2013. The
changes resulted in increases to premiums and product charges of $10.4 million, $8.6 million and $7.4 million for the quarters ended March 31,
2013, June 30, 2013 and September 30, 2013, respectively and increases of $15.1 million, $15.7 million, $20.2 million and $12.8 million for
the quarters ended March 31, 2012, June 30, 2012, September 30, 2012 and December 31, 2012, respectively.
F-48
Schedule I—Summary of Investments—
Other Than Investments in Related Parties
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
December 31, 2013
Column A
Column B
Column C
Column D
Type of Investment
Fixed maturity securities:
Available for sale:
United States Government full faith and credit
United States Government sponsored agencies
United States municipalities, states and territories
Foreign government obligations
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Held for investment:
Corporate security
Total fixed maturity securities
Equity securities, available for sale:
Common stocks
Total equity securities
Mortgage loans on real estate
Derivative instruments
Other investments
Total investments
Amortized
Cost (1)
Fair
Value
(Dollars in thousands)
Amount at
which shown
in the balance
sheet
$
44,852
$
42,925
$
42,925
1,313,776
3,181,032
86,112
1,194,289
3,306,743
91,557
1,194,289
3,306,743
91,557
17,142,118
17,233,037
17,233,037
1,895,913
1,821,988
1,041,939
1,971,960
1,735,460
1,034,476
1,971,960
1,735,460
1,034,476
26,527,730
26,610,447
26,610,447
76,255
60,840
76,255
26,603,985
26,671,287
26,686,702
7,503
7,503
2,581,082
223,530
215,042
7,778
7,778
2,615,410
856,050
7,778
7,778
2,581,082
856,050
215,042
$
29,631,142
$
30,346,654
(1) On the basis of cost adjusted for repayments and amortization of premiums and accrual of discounts for fixed maturity securities and short-
term investments, original cost for derivative instruments and unpaid principal balance less allowance for credit losses for mortgage loans.
See accompanying Report of Independent Registered Public Accounting Firm.
F-49
Schedule II—Condensed Financial Information of Registrant
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
Condensed Balance Sheets
(Dollars in thousands)
Assets
Cash and cash equivalents
Equity securities of subsidiary trusts
Receivable from subsidiaries
Deferred income taxes
Federal income tax recoverable, including amount from subsidiaries
Other assets, including 2015 notes hedges
Investment in and advances to subsidiaries
Total assets
Liabilities and Stockholders' Equity
Liabilities:
Notes payable
Subordinated debentures payable to subsidiary trusts
Other liabilities, including 2015 notes embedded derivative
Total liabilities
Stockholders' equity:
Common stock
Additional paid-in capital
Unallocated common stock held by ESOP
Accumulated other comprehensive income
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
December 31,
2013
2012
$
252,541
$
11,220
7,403
1,158
15,734
11,551
131,424
419,811
7,398
535
2,378
11,613
55,010
88,154
1,889,648
2,235,403
$
2,309,459
$
2,323,557
$
549,958
$
246,050
128,764
924,772
70,535
550,400
(631)
46,196
718,187
309,869
245,869
47,582
603,320
61,751
496,715
(2,583)
686,807
477,547
1,384,687
1,720,237
$
2,309,459
$
2,323,557
See accompanying note to condensed financial statements.
See accompanying Report of Independent Registered Public Accounting Firm.
F-50
Schedule II—Condensed Financial Information of Registrant (Continued)
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
Condensed Statements of Operations
(Dollars in thousands)
Year Ended December 31,
2013
2012
2011
Revenues:
Net investment income
Dividends from subsidiary trusts
Investment advisory fees
Surplus note interest from subsidiary
Realized gain on investments
Change in fair value of derivatives
Loss on extinguishment of debt
Total revenues
Expenses:
Change in fair value of embedded derivatives
Interest expense on notes payable
Interest expense on subordinated debentures issued to subsidiary trusts
Other operating costs and expenses
Total expenses
Loss before income taxes and equity in undistributed income of subsidiaries
Income tax benefit
Loss before equity in undistributed income of subsidiaries
Equity in undistributed income of subsidiaries
$
$
130
361
$
565
403
44,469
4,080
—
144,012
(32,515)
160,537
141,974
38,870
12,088
8,163
201,095
(40,558)
(13,880)
(26,678)
279,961
36,178
4,080
—
(7,472)
—
33,754
(2,488)
28,479
13,458
8,228
47,677
(13,923)
(5,944)
(7,979)
65,777
Net income
$
253,283
$
57,798
$
See accompanying note to condensed financial statements.
See accompanying Report of Independent Registered Public Accounting Firm.
298
427
29,765
4,080
18
(21,146)
—
13,442
(21,002)
31,633
13,977
7,307
31,915
(18,473)
(7,407)
(11,066)
97,314
86,248
F-51
Schedule II—Condensed Financial Information of Registrant (Continued)
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
Condensed Statements of Cash Flows
(Dollars in thousands)
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Change in fair value of 2015 notes embedded conversion derivative
Provision for depreciation and amortization
Accrual of discount on equity security
Equity in undistributed income of subsidiaries
Amortization of premium on fixed maturity security
Accrual of discount on contingent convertible notes
Change in fair value of derivatives
Realized gain on investments
Loss on extinguishment of debt
Accrual of discount on debenture issued to subsidiary trust
Share-based compensation
ESOP compensation
Deferred income tax benefit
Other
Changes in operating assets and liabilities:
Receivable from subsidiaries
Federal income tax recoverable
Other assets
Other liabilities
Net cash provided by operating activities
Investing activities
Capital contributions to subsidiaries
Purchase of fixed maturity security
Sales, maturities or repayments of fixed maturity securities—available for sale
Net cash used in investing activities
Year Ended December 31,
2013
2012
2011
$
253,283
$
57,798
$
86,248
141,974
2,831
(5)
(279,961)
—
12,417
(144,012)
—
32,515
181
1,407
110
(5,202)
(3,608)
995
62
(1,945)
20,131
31,173
—
—
—
—
(2,488)
2,382
(5)
(65,777)
—
12,261
7,472
—
—
169
1,348
45
(2,838)
—
1,205
(2,745)
(549)
(4,528)
3,750
—
—
—
—
(21,002)
2,395
(5)
(97,314)
1,005
13,024
21,002
(18)
—
158
866
45
(4,355)
—
1,596
142
1,702
(1,562)
3,927
(2,450)
(53,610)
52,623
(3,437)
See accompanying note to condensed financial statements.
See accompanying Report of Independent Registered Public Accounting Firm.
F-52
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)
Financing activities
Financing fees incurred and deferred
Proceeds from notes payable
Repayments of notes payable
Net proceeds from settlement of notes hedge and warrants
Repayment of subordinated debentures
Excess tax benefits realized from share-based compensation plans
Proceeds from issuance of common stock
Dividends paid
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest on notes payable
Interest on subordinated debentures
Non-cash financing activity:
Conversion of subordinated debentures
Common stock issued in extinguishment of debt
Year Ended December 31,
2013
2012
2011
$
(11,942) $
— $
(1,566)
415,000
(234,154)
22,170
—
159
31,764
(12,849)
210,148
241,321
11,220
—
—
—
(1,141)
6
5,370
(9,374)
(5,139)
(1,389)
12,609
252,541
$
11,220
$
—
(46,251)
—
—
28
4,686
(7,102)
(50,205)
(49,715)
62,324
12,609
13,758
$
14,564
$
11,850
13,102
16,917
13,703
—
117,463
20,770
—
—
—
$
$
See accompanying note to condensed financial statements.
See accompanying Report of Independent Registered Public Accounting Firm.
F-53
Schedule II—Condensed Financial Information of Registrant (Continued)
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
Note to Condensed Financial Statements
December 31, 2013
1. Basis of Presentation
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 (Parent Company).
In the Parent Company financial statements, its investment in and advances to subsidiaries 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.
See Notes 9 and 10 to the consolidated financial statements for a description of the Parent Company's notes payable and subordinated debentures
payable to subsidiary trusts.
F-54
Schedule III—Supplementary Insurance Information
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
Column A
As of December 31, 2013:
Life insurance
As of December 31, 2012:
Life insurance
As of December 31, 2011:
Life insurance
Column B
Column C
Column D
Column E
Deferred policy
acquisition
costs
Future policy
benefits,
losses, claims
and loss
expenses
Unearned
premiums
Other policy
claims and
benefits
payable
(Dollars in thousands)
$
$
$
2,426,652
1,709,799
1,683,857
$
$
$
35,789,655
31,773,988
28,118,716
$
$
$
— $
418,033
— $
455,752
— $
400,594
Column A
Column F
Column G
Premium
revenue
Net
investment
income
Column H
Benefits,
claims,
losses and
settlement
expenses
Column I
Column J
Amortization
of deferred
policy
acquisition
costs
Other
operating
expenses
(Dollars in thousands)
For the year ended December 31, 2013:
Life insurance
For the year ended December 31, 2012:
Life insurance
For the year ended December 31, 2011:
Life insurance
$
$
$
148,938
165,681
195,101
$
$
$
1,383,927
1,286,923
1,218,780
$
$
$
1,713,019
1,264,016
856,975
$
$
$
365,468
164,919
143,478
$
$
$
142,873
137,432
113,169
See accompanying Report of Independent Registered Public Accounting Firm.
F-55
Schedule IV—Reinsurance
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
Column A
Column B
Column C
Gross amount
Ceded to
other
companies
Column D
Assumed
from
other
companies
Column E
Net amount
Column F
Percent of
amount
assumed
to net
(Dollars in thousands)
Year ended December 31, 2013
Life insurance in force, at end of year
Insurance premiums and other considerations:
Annuity product charges
Traditional life, accident and health insurance, and
life contingent immediate annuity premiums
Year ended December 31, 2012
Life insurance in force, at end of year
Insurance premiums and other considerations:
Annuity product charges
Traditional life, accident and health insurance, and
life contingent immediate annuity premiums
Year ended December 31, 2011
Life insurance in force, at end of year
Insurance premiums and other considerations:
Annuity product charges
Traditional life, accident and health insurance, and
life contingent immediate annuity premiums
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,250,112
110,142
45,057
155,199
2,350,473
95,802
76,323
172,125
2,469,428
84,338
118,538
$
$
$
$
$
$
$
$
13,521
6,551
328
6,879
4,742
6,796
364
7,160
4,692
8,149
348
202,876
$
8,497
$
57,976
$
2,294,567
2.53%
— $
103,591
—
1.36%
0.41%
—
0.93%
0.43%
2,407,219
2.55%
— $
89,006
45,347
148,938
76,675
165,681
618
618
61,488
$
$
716
716
65,197
$
$
2,529,933
2.58%
— $
76,189
722
722
$
118,912
195,101
—
0.61%
0.37%
See accompanying Report of Independent Registered Public Accounting Firm.
F-56
Schedule V—Valuation and Qualifying Accounts
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
Year ended December 31, 2013
Valuation allowance on mortgage loans
Year ended December 31, 2012
Valuation allowance on mortgage loans
Year ended December 31, 2011
Valuation allowance on mortgage loans
$
$
$
Balance
January 1,
Charged to Costs
and Expenses
Translation
Adjustment
Write-offs/
Payments/Other
Balance
December 31,
(Dollars in thousands
(34,234) $
(5,621) $
— $
13,808
$
(26,047)
(32,964) $
(16,832) $
— $
15,562
$
(34,234)
(16,224) $
(30,770) $
— $
14,030
$
(32,964)
See accompanying Report of Independent Registered Public Accounting Firm.
F-57
Item 15. Exhibits and Financial Statement Schedules.
(a) Exhibits:
Exhibit No.
Description
3.1
3.2
3.3
3.4
3.5
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
Articles of Incorporation, including Articles of Amendment (Incorporated by reference to Exhibit 3.1 to Form 10-Q for the period ended June
30, 2000 filed on August 14, 2000, File No. 000-25986)
Articles of Amendment to Articles of Incorporation (Incorporated by reference to the Registration Statement on Form S-1, File No. 333-108794,
including all pre-effective amendments thereto)
Articles of Amendment to Articles of Incorporation (Incorporated by reference to Exhibit 3.3 to the Registration Statement on Form S-3, File
No. 333-14681, filed on January 15, 2008)
Third Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.1 to Form 8-K filed on September 2, 2008, File No. 001-31911)
Articles of Amendment to Articles of Incorporation (Incorporated by reference to Exhibit 3.5 to Form 10-Q for the period ended June 30,
2011 filed on August 5, 2011, File No. 001-31911)
Indenture dated October 29, 1999 between American Equity Investment Life Holding Company and Wilmington Trust Company (as successor
in interest to West Des Moines State Bank), as trustee (Incorporated by reference to Exhibit 10.19 to the Registration Statement on Form S-1,
File No. 333-108794, including all pre-effective amendments thereto)
Trust Preferred Securities Guarantee Agreement dated October 29, 1999 between American Equity Investment Life Holding Company and
Wilmington Trust Company (as successor in interest to West Des Moines State Bank), as trustee (Incorporated by reference to Exhibit 10.20
to the Registration Statement on Form S-1, File No. 333-108794, including all pre-effective amendments thereto)
Trust Common Securities Guarantee Agreement dated October 29, 1999 between American Equity Investment Life Holding Company and
West Des Moines State Bank, as trustee (Incorporated by reference to Exhibit 10.21 to the Registration Statement on Form S-1, File No.
333-108794, including all pre-effective amendments thereto)
Instruments of Resignation, Appointment and Acceptance, effective September 12, 2006, among American Equity Investment Life Holding
Company, Wilmington Trust Company, West Des Moines State Bank and Delaware Trust Company, National Association (formerly known
as First Union Trust Company, National Association) (Incorporated by reference to Exhibit 4.10A to Form 10-K for the year ended December
31, 2008 filed on March 16, 2009)
Indenture dated December 16, 2003, between American Equity Investment Life Holding Company and Wilmington Trust Company, as trustee
(Incorporated by reference to Exhibit 4.11 to Form 10-K for the year ended December 31, 2003 filed on March 4, 2004)
Guarantee Agreement dated December 16, 2003, between American Equity Investment Life Holding Company and Wilmington Trust
Company, as trustee (Incorporated by reference to Exhibit 4.12 to Form 10-K for the year ended December 31, 2003 filed on March 4, 2004)
Indenture dated April 29, 2004, between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National
Association, as trustee (Incorporated by reference to Exhibit 4.13 to Form 10-Q for the period ended September 30, 2004 filed on November
9, 2004)
Guarantee Agreement dated April 29, 2004, between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National
Association, as trustee (Incorporated by reference to Exhibit 4.14 to Form 10-Q for the period ended September 30, 2004 filed on November
9, 2004)
Indenture dated September 14, 2004, between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National
Association, as trustee (Incorporated by reference to Exhibit 4.15 to Form 10-Q for the period ended September 30, 2004 filed on November
9, 2004)
Guarantee Agreement dated September 14, 2004, between American Equity Investment Life Holding Company and JP Morgan Chase Bank,
National Association, as trustee (Incorporated by reference to Exhibit 4.16 to Form 10-Q for the period ended September 30, 2004 filed on
November 9, 2004)
Indenture dated December 22, 2004, between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National
Association, as trustee (Incorporated by reference to Exhibit 4.17 to Form 10-K for the year ended December 31, 2004 filed on March 14,
2005)
Guarantee Agreement dated December 22, 2004, between American Equity Investment Life Holding Company and JP Morgan Chase Bank,
National Association, as trustee (Incorporated by reference to Exhibit 4.18 to Form 10-K for the year ended December 31, 2004 filed on
March 14, 2005)
Indenture dated June 15, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National Association,
as trustee (Incorporated by reference to Exhibit 4.23 to Form 10-Q for the period ended June 30, 2005 filed on August 4, 2005)
Guarantee Agreement dated June 15, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National
Association, as trustee (Incorporated by reference to Exhibit 4.24 to Form 10-Q for the period ended June 30, 2005 filed on August 4, 2005)
Indenture dated August 4, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National
Association, as trustee (Incorporated by reference to Exhibit 4.25 to Form 10-Q for the period ended September 30, 2005 filed on November
4, 2005)
Guarantee Agreement dated August 4, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National
Association, as trustee (Incorporated by reference to Exhibit 4.26 to Form 10-Q for the period ended September 30, 2005 filed on November
4, 2005)
Indenture dated December 15, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National
Association, as trustee (Incorporated by reference to Exhibit 4.27 to Form 10-K for the year ended December 31, 2005 filed on March 14,
2006)
Guarantee Agreement dated December 15, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank,
National Association, as trustee (Incorporated by reference to Exhibit 4.28 to Form 10-K for the year ended December 31, 2005 filed on
March 14, 2006)
Amended and Restated Indenture dated July 7, 2006 between American Equity Investment Life Holding Company and Wells Fargo Bank,
National Association, as trustee (Incorporated by reference to Exhibit 4.31 to Form 10-Q for the period ended September 30, 2006 filed on
November 3, 2006)
F-58
Exhibit No.
Description
4.20
4.21
4.22
4.23
4.24
4.25
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
Amended and Restated Guarantee Agreement dated July 7, 2006 between American Equity Investment Life Holding Company and Wells
Fargo Delaware Trust Company, as trustee (Incorporated by reference to Exhibit 4.32 to Form 10-Q for the period ended September 30, 2006
filed on November 3, 2006)
Indenture dated December 22, 2009 between American Equity Investment Life Holding Company and U.S. Bank National Association, as
trustee (Incorporated by reference to Exhibit 4.1 to Form 8-K filed on December 23, 2009)
Indenture dated September 22, 2010 between American Equity Investment Life Holding Company and U.S. Bank National Association, as
trustee (Incorporated by reference to Exhibit 4.1 to Form 8-K filed on September 28, 2010)
Senior Amended and Restated Indenture, dated as of April 22, 2004, between American Equity Investment Life Holding Company and U.S.
Bank National Association (Incorporated by reference to Exhibit 4.1 to Amendment No.1 to Form S-3 filed on April 22, 2004).
First Supplemental Indenture, dated July 17, 2013, among American Equity Investment Life Holding Company, U.S. Bank National
Association, and Wells Fargo Bank, National Association (Incorporated by reference to Exhibit 4.2 to Form 8-K filed on July 17, 2013)
Second Supplemental Indenture, dated as of July 17, 2013, between American Equity Investment Life Holding Company and Wells Fargo
Bank, National Association (Incorporated by reference to Exhibit 4.3 to Form 8-K filed on July 17, 2013)
Deferred Compensation Agreement between American Equity Investment Life Holding Company and David S. Mulcahy dated December 31,
1997 (Incorporated by reference to Exhibit 10.5 to the Registration Statement on Form 10 filed on May 6, 1999)
2000 Employee Stock Option Plan (Incorporated by reference to Exhibit 10.7 to Form 10-Q for the period ended June 30, 2000 filed on
August 14, 2000)
2000 Director Stock Option Plan (Incorporated by reference to Exhibit 10.8 to Form 10-Q for the period ended June 30, 2000 filed on August
14, 2000)
American Equity Investment Life Holding Company 2009 Employee Incentive Plan (Incorporated by reference to Exhibit 10.2 to Form 8-K
filed on June 9, 2009)
Coinsurance Agreement dated December 19, 2001, including First Amendment dated February 26, 2002 between American Equity Investment
Life Insurance Company and EquiTrust Life Insurance Company (Incorporated by reference to Exhibit 10.10 to Form 10-K for the year ended
December 31, 2001 filed on April 1, 2002)
Coinsurance Agreement dated December 29, 2003 between American Equity Investment Life Insurance Company and EquiTrust Life
Insurance Company (Incorporated by reference to Exhibit 10.10-A to Form 10-K for the year ended December 31, 2003 filed on April 1,
2002)
First Amendment to Coinsurance Agreement dated July 30, 2004 between American Equity Investment Life Insurance Company and EquiTrust
Life Insurance Company (Incorporated by reference to Exhibit 10.10-B to Form 10-Q for the period ended June 30, 2004 filed on August 4,
2004)
Form of Change in Control Agreement between American Equity Investment Life Holding Company and each of John M. Matovina and
Debra J. Richardson (Incorporated by reference to the Registration Statement on Form S-1, File No. 333-108794, including all pre-effective
amendments thereto)
Form of Amendment to Change in Control Agreement between American Equity Investment Life Holding Company and each of John M.
Matovina and Debra J. Richardson (Incorporated by reference to Exhibit 10.11-A to Form 10-K for the year ended December 31, 2012 filed
on March 7, 2013)
American Equity Investment Life Holding Company Independent Insurance Agent Stock Option Plan (Incorporated by reference to Exhibit
10.26 to Form 10-Q for the period ended September 30, 2007 filed on November 2, 2007)
Coinsurance Agreement effective July 1, 2009, between American Equity Investment Life Insurance Company and Athene Life Re Ltd (Treaty
#070109) (Incorporated by reference to Exhibit 10.29 to Form 10-Q for the period ended September 30, 2009 filed on November 9, 2009)
Coinsurance Agreement effective July 1, 2009, between American Equity Investment Life Insurance Company and Athene Life Re Ltd (Treaty
#08042009) (Incorporated by reference to Exhibit 10.29 to Form 10-Q for the period ended September 30, 2009 filed on November 9, 2009)
Amended Retirement Benefit Agreement, dated as of March 29, 2010, between American Equity Investment Life Holding Company and
David J. Noble (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on April 2, 2010)
American Equity Investment Life Holding Company Short-Term Performance Incentive Plan (Incorporated by reference to Exhibit 10.2 to
Form 10-Q for the period ended September 30, 2010 filed on November 9, 2010)
2010 Independent Insurance Agent Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-3
filed on December 15, 2010)
American Equity Investment Life Holding Company 2011 Director Stock Option Plan (Incorporated by reference to Appendix A to Schedule
14A Definitive Proxy Statement for the 2011 annual meeting of stockholders filed on April 25, 2011)
Second Amendment to Coinsurance Agreement effective August 1, 2001 between American Equity Investment Life Insurance Company and
EquiTrust Life Insurance Company (Incorporated by reference to Exhibit 10.36 to Form 10-Q for the period ended September 30, 2011 filed
on November 7, 2011)
Second Amendment to Coinsurance Agreement effective January 1, 2004 between American Equity Investment Life Insurance Company and
EquiTrust Life Insurance Company (Incorporated by reference to Exhibit 10.37 to Form 10-Q for the period ended September 30, 2011 filed
on November 7, 2011)
2012 Independent Insurance Agent Stock Option Plan (Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-3
filed on August 23, 2012)
Form of Change in Control Agreement between American Equity Investment Life Holding Company and each of Ted M. Johnson, Ronald
J. Grensteiner and William R. Kunkel (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on December 13, 2012)
Form of Change in Control Agreement between American Equity Investment Life Holding Company and Jeffrey D. Lorenzen (Incorporated
by reference to Exhibit 10.42 to Form 10-K for the year ended December 31, 2012 filed on March 7, 2013)
American Equity Investment Life Holding Company Short-Term Performance Incentive Plan adopted April 15, 2013, as amended and restated
(Incorporated by reference to Exhibit 10.1 to Form 8-K filed on April 15, 2013)
Form of Restricted Stock Award Agreement with respect to Common Stock of American Equity Investment Life Holding Company-
Nonperformance Based (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the period ended March 31, 2013 filed on May 8, 2013)
F-59
Exhibit No.
Description
10.24
10.25
10.26
10.27
10.28
12.1
21.2
23.1
31.1
31.2
32.1
32.2
Form of Performance Restricted Stock Unit Award Agreement (Incorporated by reference to Exhibit 10.2 to Form 10-Q for the period ended
March 31, 2013 filed on May 8, 2013)
Form of Restricted Stock Award Agreement with respect to Common Stock of American Equity Investment Life Holding Company-
Performance Based (Incorporated by reference to Exhibit 10.3 to Form 10-Q for the period ended March 31, 2013 filed on May 8, 2013)
Form of Change in Control Agreement between American Equity Investment Life Holding Company and Scott A, Samuelson (Incorporated
by reference to Exhibit 10.3 to Form 10-Q for the period ended June 30, 2013 filed on August 8, 2013)
2013 Director Equity and Incentive Plan (Incorporated by reference to Exhibit 10.4 to Form 10-Q for the period ended June 30, 2013 filed
on August 8, 2013)
Credit Agreement dated November 22, 2013 among American Equity Life Investment Holding Company, JP Morgan Chase Bank, National
Association and SunTrust Bank (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on November 26, 2013)
Ratio of Earnings to Fixed Charges
Subsidiaries of American Equity Investment Life Holding Company
Consent of Independent Registered Public Accounting Firm
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
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
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
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
F-60
Ratio of Earnings to Fixed Charges
Exhibit 12.1
2013
2012
2011
2010
2009
Year Ended December 31,
(Dollars in thousands)
Consolidated income before income taxes
$
389,332
$
85,989
$
132,914
$
65,266
$
86,164
Interest sensitive and index product benefits and
amortization of deferred sales inducements
Interest expense on notes payable
Interest expense on subordinated debentures
Interest expense on amounts due under repurchase
agreements and other interest expense
Interest portion of rental expense
Consolidated earnings
Interest sensitive and index product benefits and
amortization of deferred sales inducements
Interest expense on notes payable
Interest expense on subordinated debentures
Interest expense on amounts due under repurchase
agreements and other interest expense
Interest portion of rental expense
Combined fixed charges
Ratio of consolidated earnings to fixed charges
Ratio of consolidated earnings to fixed charges, both
excluding interest sensitive and index product benefits
and amortization of deferred sales inducements
1,525,980
38,870
12,088
139
797
895,636
28,479
13,458
—
697
846,878
31,633
13,977
30
665
794,803
22,125
14,906
—
648
382,771
14,853
15,819
534
570
1,967,206
$
1,024,259
$
1,026,097
$
897,748
$
500,711
1,525,980
$
895,636
$
846,878
$
794,803
$
382,771
38,870
12,088
139
797
28,479
13,458
—
697
31,633
13,977
30
665
22,125
14,906
—
648
14,853
15,819
534
570
$
$
$
1,577,874
$
938,270
$
893,183
$
832,482
$
414,547
1.2
8.5
1.1
3.0
1.1
3.9
1.1
2.7
1.2
3.7
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
Subsidiaries of American Equity Investment Life Holding Company
Insurance Subsidiaries:
American Equity Investment Life Insurance Company
American Equity Investment Life Insurance Company of New York
Eagle Life Insurance Company
Noninsurance Subsidiaries:
American Equity Investment Service Company
American Equity Properties, L.C.
American Equity Capital, Inc.
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
American Equity Capital Trust X
American Equity Capital Trust XI
American Equity Capital Trust XII
AERL, L.C.
American Equity Advisors, Inc.
Exhibit 21.2
State of
Incorporation
Iowa
New York
Iowa
Iowa
Iowa
Iowa
Iowa
Iowa
Iowa
Iowa
Iowa
Iowa
Iowa
Iowa
Iowa
Iowa
Iowa
Iowa
Iowa
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
American Equity Investment Life Holding Company:
We consent to the incorporation by reference in the registration statements (No. 333-184162, No 333-183504, No. 333-171161, No. 333-149854,
No. 333-148681, and No. 333-123862) on Form S-3 and the registration statements (No. 333-175355, No. 333-167755, and No. 333-127001)
on Form S-8 of American Equity Investment Life Holding Company and subsidiaries (the Company) of our report dated March 3, 2014, with
respect to the consolidated balance sheets of the Company as of December 31, 2013 and 2012, and the related consolidated statements of
operations, comprehensive income (loss), changes in stockholders' equity, and cash flows for each of the years in the three-year period ended
December 31, 2013, and all related financial statement schedules, and the effectiveness of internal control over financial reporting as of
December 31, 2013, which report appears in the December 31, 2013 annual report on Form 10-K of American Equity Investment Life Holding
Company.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2012, the Company modified the types of costs incurred
that can be capitalized when issuing or renewing insurance contracts due to the prospective adoption of Financial Accounting Standards Board
Accounting Standards Update (ASU) No. 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.
Des Moines, Iowa
March 3, 2014
/s/ KPMG LLP
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, John M. Matovina, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of American Equity Investment Life Holding Company;
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;
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;
The registrant's other certifying officer 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)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
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;
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;
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
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 fiscal 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; and
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 the registrant's board of directors (or persons performing the equivalent
functions):
(a)
(b)
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
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: March 3, 2014
By:
/s/ JOHN M. MATOVINA
John M. Matovina, Chief Executive Officer and President
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Ted M. Johnson, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of American Equity Investment Life Holding Company;
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;
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;
The registrant's other certifying officer 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)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
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;
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;
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
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 fiscal 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; and
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 the registrant's board of directors (or persons performing the equivalent
functions):
(a)
(b)
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
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: March 3, 2014
By:
/s/ TED M. JOHNSON
Ted M. Johnson, Chief Financial Officer and Treasurer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
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, 2013 as filed with the Securities and Exchange Commission on or about the date hereof (the "Report"), I, John M.
Matovina, Chief Executive Officer and President 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;
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
and
Date: March 3, 2014
By:
/s/ JOHN M. MATOVINA
John M. Matovina, Chief Executive Officer and President
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
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, 2013 as filed with the Securities and Exchange Commission on or about the date hereof (the "Report"), I, Ted M.
Johnson, Chief Financial Officer and Treasurer 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;
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
and
Date: March 3, 2014
By:
/s/ TED M. JOHNSON
Ted M. Johnson, Chief Financial Officer and Treasurer
(Principal Financial Officer)
(This page has been left blank intentionally.)
American Equity Investment Life
Holding Company Board of Directors
E X E C U T I V E C H A I R M A N ’ S L E T T E R
N O B L E
F R O M D AV I D J .
D.J. Noble
Executive Chairman
John M. Matovina
Chief Executive Officer
and President
Debra J. Richardson
Executive Vice President
and Corporate Secretary
Joyce A. Chapman
Retired Banking Executive
and Community Volunteer
Robert L. Howe
Consultant and Retired
Deputy Director
A pair of bald eagles will spend many, many years
Iowa Insurance Division
adding to their nest to ensure its strength and
stability. At American Equity, we see the wisdom
in the practice of these majestic birds. Our people
make up our nest. Without each one doing his or
her job, the nest would become unstable. All of
us see the value we add each day in serving our
policyholders and agents. It’s the strength of our
people that makes American Equity what it is
today . . . a stable, consistent company that
continues to gain momentum. A company poised
to soar even higher!
David S. Mulcahy
Chairman
Monarch Materials
Group, Inc.
Gerard D. Neugent
President and COO
Knapp Properties, Inc.
A.J. Strickland, III
Professor of Strategic
Our People Continue to Make a Difference
Management
The steady growth of American Equity is the direct
University of Alabama
result of the dedication of our people. Each of the
School of Business
more than 400 people who work in our offices brings
a high level of talent to what they do. Focusing on
our independent agents and our policyholders is our
way of life, and many of our people have more than
10 years of experience serving them. In addition,
most of our management team has been working
together for more than 15 years within American
Equity and our predecessor organizations.
Harley A. Whitfield, Sr.
Attorney, Of Counsel
Whitfield & Eddy, PLC
Robert L. Hilton
Director Emeritus
We’re so thankful for the more than 27,000
independent agents who believe in American
Equity and bring their clients the peace of mind
our products provide. The year 2013 saw 1,045 of
these agents rise to the rank of “Gold Eagle,” each
producing more than $1 million in sales of American
Equity annuity products in a single calendar year.
Alexander M. Clark
Senior Managing Director
Griffin Financial Group
“Our business philosophy
is simple: Through sound
financial management,
prudent investment and
development of innovative
products, we will position
ourselves as one of
the leaders within the
insurance industry.”
–D.J. Noble, Executive Chairman
James M. Gerlach
Retired Executive
Vice President
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:
2013 Highlights
Julie L. LaFollette
Director of Investor Relations
6000 Westown Parkway
West Des Moines, IA 50266
(515) 273-3602
Fax (515) 221-9989
jlafollette@american-equity.com
by operating income and net income.
In 2013, we marked great progress:
• We experienced a record year measured
Stock Listing
American Equity is listed on the
New York Stock Exchange under
the ticker symbol AEL.
Website
American Equity’s website,
www.american-equity.com, is
continuously updated and includes
news releases, conference calls,
stock price information, quarterly
reports, SEC filings, management
presentations and more.
Annual Shareholders Meeting
Thursday, June 5, 2014,
3:30 p.m. CDT
AEL Headquarters
• Our stock price rose 116 percent from the
Debra J. Richardson
end of 2012.
Executive Vice President and Corporate
• The annual cash dividend of $0.18 per share to
Secretary
6000 Westown Parkway
owners of our common stock is a 20 percent
West Des Moines, IA 50266
increase from the $0.15 annual dividend paid in
(515) 273-3602
2012. This marks the 15th consecutive year a cash
Fax (515) 221-9989
dividend has been declared and the 10th year in a
drichardson@american-equity.com
row the company has increased its cash dividend.
Corporate Headquarters
American Equity Investment
Life Holding Company
6000 Westown Parkway
West Des Moines, IA 50266
(515) 221-0002
Toll-free (888) 221-1234
www.american-equity.com
Stock Transfer and Registrar
Computershare Trust Company, N.A.
P.O. Box 30170
College Station, TX 77842-3170
(877) 282-1169
www.computershare.com
Independent Registered
Public Accounting Firm
KPMG LLP
2500 Ruan Center
Des Moines, IA 50309
Officer Certifications
American Equity submitted its CEO
Certification to the New York Stock
Exchange in 2013. Additionally,
American Equity filed as an exhibit to
its 2013 annual report on Form 10-K,
a CEO/CFO Certification with the
Securities and Exchange Commission
as required under Section 302 of the
Sarbanes-Oxley Act.
• We issued non-convertible senior debt securities
for the first time, broadening our range of capital
markets transactions.
• We retired almost one-half of our outstanding
convertible debt, reducing potential future dilution
from further increases in our stock price.
Industry Recognition
• Our S&P outlook rose from “stable” to “positive,”
a sign of more success to come.
Through all of this, two things have stayed the
same—and will never change—the way we operate
our company and the way we treat our policyholders
and agents. We’re in this for the long haul and will
continue our steady, conservative growth. And
just as important, we’ll continue our legacy of
person-to-person customer service. We’ll always
answer the phone!
American Equity’s commitment
to sound business principles has
been recognized by A.M. Best,
a nationally recognized industry
rating authority.
Ten Years on the New York Stock Exchange
On December 4, 2013, American Equity celebrated
our 10th year as a publicly traded company. Over
the years, we’ve experienced the steady growth
for which we strive, and celebrated years of record-
breaking achievement.
A.M. Best’s rating of “A-”
(Excellent) for American Equity is
an independent opinion of our
financial strength and ability to meet
our ongoing insurance policy
and contract obligations. It is based
on a comprehensive quantitative
and qualitative evaluation of our
balance sheet strength, operating
performance and business profile.
A.M. Best’s rating process includes
comparisons to peers and industry
standards as well as assessments
of operating plans, philosophy and
management.
D.J. Noble
Executive Chairman
Thank you to all who contributed to American
Equity’s success in 2013.
A.M. Best uses 16 rating categories
ranging from A++ to F. Rating
effective 08/02/06, affirmed
01/10/14 An A- rating from A.M.
Best is its fourth highest rating.
0250_AmEq_CVR.indd 2
3/25/14 7:59 PM
P O I S E D
T O S O A R
H I G H E R
A M E R I C A N E Q U I T Y I N V E S T M E N T L I F E H O L D I N G C O M PA N Y | 2 0 1 3 A N N U A L R E P O R T & F O R M 1 0 - K
American Equity Investment Life Holding Company
6000 Westown Parkway
West Des Moines, Iowa 50266
515-221-0002 | 888-221-1234
www.american-equity.com
AEL-AR-13