<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1999
FILE NO. 333-46593
FILE NO. 811-08663
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 1
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 2
---------------------
AMERICAN EQUITY LIFE ANNUITY ACCOUNT
(Exact Name of Registrant)
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
(Name of Depositor)
--------------------------
5000 WESTOWN PARKWAY, SUITE 440
WEST DES MOINES, IOWA 50266
(Address of Principal Executive Office)
DEBRA J. RICHARDSON
5000 WESTOWN PARKWAY, SUITE 440
WEST DES MOINES, IOWA 50266
(Name and Address of Agent for Service of Process)
--------------------------
COPY TO:
STEPHEN E. ROTH, ESQUIRE
SUTHERLAND ASBILL & BRENNAN LLP
1275 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20004-2415
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: AS SOON AS PRACTICABLE AFTER
THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
SECURITIES BEING OFFERED: FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY
CONTRACTS
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE
BOX):
/X/ IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (b) OF RULE 485;
/ / ON (DATE) PURSUANT TO PARAGRAPH (b) OF RULE 485;
/ / DAYS AFTER FILING PURSUANT TO PARAGRAPH (a) OF RULE 485;
/ / ON (DATE) PURSUANT TO PARAGRAPH (a) OF RULE 485.
- --------------------------------------------------------------------------------
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<PAGE>
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AMERICAN EQUITY LIFE ANNUITY ACCOUNT
INDIVIDUAL FLEXIBLE PREMIUM DEFERRED
VARIABLE ANNUITY CONTRACT
------------------------------------------------------------------------
PROSPECTUS
May 1, 1999
American Equity Investment Life Insurance Company (the "Company") is offering
the individual flexible premium deferred variable annuity contract (the
"Contract") described in this prospectus. The Company sells the Contract to
retirement plans, including those that qualify for special federal tax treatment
under the Internal Revenue Code.
The Owner of a Contract ("you" or "your") may allocate premiums and Accumulated
Value to 1) the Declared Interest Option, an account that provides a specified
rate of interest, and/or 2) Subaccounts of American Equity Life Annuity Account,
each of which invests in one of the following Investment Options:
<TABLE>
<S> <C>
Value Growth Portfolio High Grade Bond Portfolio
High Yield Bond Portfolio Money Market Portfolio
Blue Chip Portfolio Equity Income Portfolio
Mid-Cap Growth Portfolio New America Growth Portfolio
Personal Strategy Balanced Portfolio International Stock Portfolio
Capital Appreciation Portfolio Disciplined Stock Portfolio
Growth & Income Portfolio International Equity Portfolio
Small Cap Portfolio
</TABLE>
The accompanying prospectus for each Investment Option describes the investment
objectives and attendant risks of each Investment Option. If you allocate
premiums to the Subaccounts, the amount of the Contract's Accumulated Value
prior to the retirement date will vary to reflect the investment performance of
the Investment Options you select.
You may find additional information about your Contract and the Account in the
Statement of Additional Information. To obtain a copy of this document, please
contact us at the address or phone number shown on the cover of this prospectus.
Please read this prospectus carefully and retain it for future reference. A
prospectus for each Investment Option must accompany this prospectus and you
should read it in conjunction with this prospectus.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THESE SECURITIES
OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRSENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Issued By
American Equity Investment Life Insurance Company
5000 Westown Parkway, Suite 440
West Des Moines, Iowa 50266
1-888-349-4650
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
DEFINITIONS................................................................................................... 3
EXPENSE TABLES................................................................................................ 5
SUMMARY OF THE CONTRACT....................................................................................... 9
CONDENSED FINANCIAL INFORMATION............................................................................... 11
THE COMPANY, ACCOUNT AND INVESTMENT OPTIONS................................................................... 12
American Equity Investment Life Insurance Company....................................................... 12
American Equity Life Annuity Account.................................................................... 12
Investment Options...................................................................................... 12
Addition, Deletion or Substitution of Investments....................................................... 15
DESCRIPTION OF ANNUITY CONTRACT............................................................................... 16
Issuance of a Contract.................................................................................. 16
Premiums................................................................................................ 16
Free-Look Period........................................................................................ 16
Allocation of Premiums.................................................................................. 16
Variable Accumulated Value.............................................................................. 17
Transfer Privilege...................................................................................... 18
Partial Withdrawals and Surrenders...................................................................... 18
Special Transfer and Withdrawal Options................................................................. 19
Death Benefit Before the Retirement Date................................................................ 20
Death Benefit After the Retirement Date................................................................. 21
Proceeds on the Retirement Date......................................................................... 22
Payments................................................................................................ 22
Modification............................................................................................ 23
Reports to Owners....................................................................................... 23
Inquiries............................................................................................... 23
THE DECLARED INTEREST OPTION.................................................................................. 23
Minimum Guaranteed and Current Interest Rates........................................................... 24
Transfers From Declared Interest Option................................................................. 24
Payment Deferral........................................................................................ 24
CHARGES AND DEDUCTIONS........................................................................................ 25
Surrender Charge (Contingent Deferred Sales Charge)..................................................... 25
Annual Administrative Charge............................................................................ 26
Transfer Processing Fee................................................................................. 26
Mortality and Expense Risk Charge....................................................................... 26
Investment Option Expenses.............................................................................. 26
Premium Taxes........................................................................................... 26
Other Taxes............................................................................................. 27
PAYMENT OPTIONS............................................................................................... 27
Election of Options..................................................................................... 27
Description of Options.................................................................................. 27
YIELDS AND TOTAL RETURNS...................................................................................... 28
FEDERAL TAX MATTERS........................................................................................... 29
Introduction............................................................................................ 29
Tax Status of the Contract.............................................................................. 30
Taxation of Annuities................................................................................... 31
Transfers, Assignments or Exchanges of a Contract....................................................... 33
Withholding............................................................................................. 33
Multiple Contracts...................................................................................... 33
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Taxation of Qualified Plans............................................................................. 34
Possible Charge for the Company's Taxes................................................................. 36
Other Tax Consequences.................................................................................. 36
DISTRIBUTION OF THE CONTRACTS................................................................................. 36
LEGAL PROCEEDINGS............................................................................................. 36
VOTING RIGHTS................................................................................................. 37
YEAR 2000..................................................................................................... 37
FINANCIAL STATEMENTS.......................................................................................... 38
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS......................................................... 39
</TABLE>
The Contract may not be available in all jurisdictions.
This prospectus constitutes an offering or solicitation only in those
jurisdictions where such offering or solicitation may lawfully be made.
2
<PAGE>
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DEFINITIONS
- --------------------------------------------------------------------------------
ACCOUNT: American Equity Life Annuity Account.
ACCUMULATED VALUE: The total amount invested under the Contract, which is the
sum of the values of the Contract in each Subaccount of the Account plus the
value of the Contract in the Declared Interest Option.
ADMINISTRATIVE OFFICE: The administrative offices of the Company at 5400
University Avenue, West Des Moines, Iowa 50266.
ANNUITANT: The person or persons whose life (or lives) determines the annuity
benefits payable under the Contract and whose death determines the death
benefit.
BENEFICIARY: The person to whom the Company pays the proceeds on the death of
the owner/annuitant.
BUSINESS DAY: Each day that the New York Stock Exchange is open for trading,
except the day after Thanksgiving, the weekdays before and after Christmas (in
1999), the weekday after New Year's Day (in 2000) and any day on which the
Administrative Office is closed because of a weather-related or comparable type
of emergency and is unable to segregate orders and redemption requests received
on that day.
THE CODE: The Internal Revenue Code of 1986, as amended.
THE COMPANY ("WE", "US" OR "OUR"): American Equity Investment Life Insurance
Company.
CONTRACT: The individual flexible premium deferred variable annuity contract we
offer and describe in this prospectus, which term includes the Contract
described in this prospectus, the Contract application, and any supplemental
applications and any endorsements.
CONTRACT ANNIVERSARY: The same date in each Contract Year as the Contract Date.
CONTRACT DATE: The date on which the Company receives a properly completed
application at the Administrative Office. It is the date set forth on the data
page of the Contract which the Company uses to determine Contract Years and
Contract Anniversaries.
CONTRACT YEAR: A twelve-month period beginning on the Contract Date or on a
Contract Anniversary.
DECLARED INTEREST OPTION: An investment option under the Contract funded by the
Company's General Account. It is not part of, nor dependent upon, the investment
performance of the Account.
DUE PROOF OF DEATH: Satisfactory documentation provided to the Company verifying
proof of death. This documentation may include the following:
(a) a certified copy of the death certificate;
(b) a certified copy of a court decree reciting a finding of death; or
(c) any other proof satisfactory to the Company.
FUND: An open-end diversified management investment company in which the Account
invests.
GENERAL ACCOUNT: The assets of the Company other than those allocated to the
Account or any other separate account of the Company.
INVESTMENT OPTION: A separate investment portfolio of a Fund.
NET ACCUMULATED VALUE: The Accumulated Value less any applicable Surrender
Charge.
NON-QUALIFIED CONTRACT: A Contract that is not a Qualified Contract.
3
<PAGE>
OWNER ("YOU" OR "YOUR"): The person who owns the Contract and who is entitled to
exercise all rights and privileges provided in the Contract.
QUALIFIED CONTRACT: A Contract the Company issues in connection with plans that
qualify for special federal income tax treatment under Sections 401, 403(b), 408
or 408A of the Code.
RETIREMENT DATE: The date when the Company applies the Accumulated Value under a
payment option, if the annuitant is still living.
SEC: The U.S. Securities and Exchange Commission.
SUBACCOUNT: A subdivision of the Account which invests its assets in a
corresponding Investment Option.
VALUATION PERIOD: The period that starts at the close of business (3:00 p.m.
central time) on one Business Day and ends at the close of business on the next
succeeding Business Day.
WRITTEN NOTICE: A written request or notice signed by the owner in a form
satisfactory to the Company which the Company receives at the Administrative
Office.
4
<PAGE>
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EXPENSE TABLES
- --------------------------------------------------------------------------------
The following expense information assumes that the entire accumulated value
is variable accumulated value.
OWNER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Charge Imposed on Premiums None
</TABLE>
Surrender Charge (contingent deferred sales charge) as a percentage of the
amount surrendered:
<TABLE>
<CAPTION>
CONTRACT YEAR* SURRENDER CHARGE
<S> <C>
1 8.5%
2 8
3 7.5
4 7
5 6.5
6 6
7 5
8 3
9 1
10 and after 0
</TABLE>
* In each Contract Year after the first Contract Year, you may withdraw up
to 10% of the Accumulated Value on your most recent Contract Anniversary
without incurring a surrender charge. If you subsequently surrender your
Contract during the Contract Year, the Company will apply a Surrender
Charge to any partial withdrawals taken. The amount that you may withdraw
without incurring a Surrender Charge is not cumulative from Contract Year
to Contract Year.
<TABLE>
<S> <C>
Transfer Processing Fee None*
</TABLE>
* Fees are waived for the first twelve transfers during a Contract Year,
although the Company may charge $25 for each subsequent transfer during
the Contract Year.
<TABLE>
<S> <C>
Annual Administrative Charge $ 45
<CAPTION>
Annual Account Expenses (as a percentage of average net assets)
<S> <C>
Mortality and Expense Risk Charge 1.40%
Other Account Expenses None
Total Account Expenses 1.40%
</TABLE>
5
<PAGE>
ANNUAL INVESTMENT OPTION EXPENSES (as a percentage of average net assets)
<TABLE>
<CAPTION>
OTHER TOTAL
EXPENSES EXPENSES
(AFTER WAIVER (AFTER WAIVER
ADVISORY OR OR
INVESTMENT OPTION FEE REIMBURSEMENT) REIMBURSEMENT)
EquiTrust Variable Insurance Series Fund
<S> <C> <C> <C>
Value Growth 0.45% 0.11% 0.56%
High Grade Bond 0.30% 0.20% 0.50%
High Yield Bond 0.45% 0.16% 0.61%
Money Market 0.25% 0.27% 0.52%
Blue Chip 0.20% 0.10% 0.30%
<CAPTION>
T. Rowe Price Equity Series, Inc.
<S> <C> <C> <C>
Equity Income 0.85% 0.00% 0.85%(1)
Mid-Cap Growth 0.85% 0.00% 0.85%(1)
New America Growth 0.85% 0.00% 0.85%(1)
Personal Strategy Balanced 0.90% 0.00% 0.90%(1)
<CAPTION>
T. Rowe Price International Series, Inc.
<S> <C> <C> <C>
International Stock 1.05% 0.00% 1.05%(1)
<CAPTION>
Dreyfus Variable Investment Fund
<S> <C> <C> <C>
Capital Appreciation Portfolio 0.75% 0.06% 0.81%
Disciplined Stock Portfolio 0.75% 0.13% 0.88%
Growth & Income Portfolio 0.75% 0.03% 0.78%
International Equity Portfolio 0.75% 0.24% 0.99%
Small Cap Portfolio 0.75% 0.02% 0.77%
</TABLE>
(1) Total annual investment option expenses are an all-inclusive fee and
pay for investment management services and other operating costs.
The above tables are intended to assist you in understanding the costs and
expenses that you will bear directly or indirectly. The tables reflect the
expenses for the Account based on the actual expenses for each Investment Option
for the 1998 fiscal year. For a more complete description of the various costs
and expenses see "Charges and Deductions" and the prospectus for each Investment
Option which accompanies this Prospectus.
6
<PAGE>
EXAMPLES: You would pay the following expenses on a $1,000 investment,
assuming a 5% annual return on assets:
1. If you surrender or annuitize the Contract at the end of the applicable time
period:
<TABLE>
<CAPTION>
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
EquiTrust Variable Insurance Series Fund
<S> <C> <C> <C> <C>
Value Growth $ 152 $ 277 $ 403 $ 673
High Grade Bond 152 275 401 667
High Yield Bond 153 279 406 678
Money Market 152 276 402 669
Blue Chip 150 270 391 646
<CAPTION>
T. Rowe Price Equity Series, Inc.
<S> <C> <C> <C> <C>
Equity Income 155 285 417 703
Mid-Cap Growth 155 285 417 703
New America Growth 155 285 417 703
Personal Strategy Balanced 155 287 419 708
<CAPTION>
T. Rowe Price International Series, Inc.
<S> <C> <C> <C> <C>
International Stock 157 291 426 722
<CAPTION>
Dreyfus Variable Investment Fund
<S> <C> <C> <C> <C>
Capital Appreciation Portfolio 154 284 415 698
Disciplined Stock Portfolio 155 286 418 706
Growth & Income Portfolio 154 283 414 696
International Equity Portfolio 156 289 423 716
Small Cap Portfolio 154 283 413 695
</TABLE>
7
<PAGE>
2. If you do not surrender or annuitize the Contract at the end of the
applicable time period:
<TABLE>
<CAPTION>
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
EquiTrust Variable Insurance Series Fund
<S> <C> <C> <C> <C>
Value Growth $ 65 $ 196 $ 330 $ 673
High Grade Bond 64 194 327 667
High Yield Bond 65 198 322 678
Money Market 64 195 328 669
Blue Chip 62 188 316 646
<CAPTION>
T. Rowe Price Equity Series, Inc.
<S> <C> <C> <C> <C>
Equity Income 68 205 344 703
Mid-Cap Growth 68 205 344 703
New America Growth 68 205 344 703
Personal Strategy Balanced 68 206 347 708
<CAPTION>
T. Rowe Price International Series, Inc.
<S> <C> <C> <C> <C>
International Stock 70 211 354 722
<CAPTION>
Dreyfus Variable Investment Fund
<S> <C> <C> <C> <C>
Capital Appreciation Portfolio 67 203 342 698
Disciplined Stock Portfolio 68 206 346 706
Growth & Income Portfolio 67 203 341 696
International Equity Portfolio 69 209 351 716
Small Cap Portfolio 67 202 340 695
</TABLE>
The examples provided above assume that no transfer charges or premium taxes
have been assessed. The examples also assume that the annual administrative
charge is $45 and that the accumulated value per contract is $10,000, which
translates the administrative charge into an assumed .45% charge for the
purposes of the examples based on a $1,000 investment.
Please do not consider the examples a representation of past or future expenses.
The assumed 5% annual rate of return is hypothetical and is a representation of
past or future annual returns, which may be greater or less than this assumed
rate.
8
<PAGE>
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SUMMARY OF THE CONTRACT
- --------------------------------------------------------------------------------
ISSUANCE OF A CONTRACT. The Contract is an individual flexible premium
deferred variable annuity contract with no maximum age required of owners on
the Contract Date (see "DESCRIPTION OF ANNUITY CONTRACT--Issuance of a
Contract"). The Contracts are:
- "flexible premium" because you do not have to pay premiums according to
a fixed schedule, and
- "variable" because, to the extent Accumulated Value is attributable to
the Account, Accumulated Value will increase and decrease based on the
investment performance of the Investment Options corresponding to the
Subaccounts to which you allocate your premiums.
FREE-LOOK PERIOD. You have the right to return the Contract within 20 days
after you receive it (see "DESCRIPTION OF ANNUITY CONTRACT--Free-Look
Period"). If you return the Contract, it will become void and you will receive
either the greater of:
- premiums paid, or
- the Accumulated Value on the date the Company receives the returned
Contract at the Administrative Office, plus administrative charges and
charges deducted from the Account.
PREMIUMS. The minimum initial premium amount the Company accepts is $1,000 for
Qualified Contracts and $5,000 for Non-Qualified Contracts. You may make
subsequent premium payments (minimum $50 each) at any time. (See "DESCRIPTION
OF ANNUITY CONTRACT--Premiums.")
ALLOCATION OF PREMIUMS. You can allocate premiums to one or more Subaccounts,
the Declared Interest Option, or both (see "DESCRIPTION OF ANNUITY
CONTRACT--Allocation of Premiums").
- The Company will allocate the initial premium to the Money Market
Subaccount for 10 days.
- At the end of that period, the Company will allocate those monies among
the Subaccounts and the Declared Interest Option according to the
instructions in your application.
TRANSFERS. You may transfer monies in a Subaccount or the Declared Interest
Option to another Subaccount or the Declared Interest Option on or before the
retirement date (see "DESCRIPTION OF ANNUITY CONTRACT--Transfer Privilege").
- The mimimum amount of each transfer is $100 or the entire amount in the
Subaccount, if less.
- Transfers out of the Declared Interest Option must be for no more than
25% of the Accumulated Value in that option.
- The Company waives fees for the first twelve transfers during a Contract
Year.
- The Company may assess a transfer processing fee of $25 for the 13th and
each subsequent transfer during a Contract Year.
PARTIAL WITHDRAWAL. You may withdraw part of the Accumulated Value upon
written notice at any time before the retirement date (see "DESCRIPTION OF
ANNUITY CONTRACT--Partial Withdrawals and Surrenders--PARTIAL WITHDRAWALS").
SURRENDER. You may surrender your Contract upon written notice on or before
the retirement date (see "DESCRIPTION OF ANNUITY CONTRACT--Partial Withdrawals
and Surrenders--SURRENDERS").
CHARGES AND DEDUCTIONS
Your Contract will be assessed the following charges and deductions:
SURRENDER CHARGE (CONTINGENT DEFERRED SALES CHARGE). We apply a charge if you
make a partial withdrawal from or surrender your Contract during the first
nine Contract Years (see "CHARGES
9
<PAGE>
AND DEDUCTIONS--Surrender Charge (Contingent Deferred Sales Charge)--CHARGE
FOR PARTIAL WITHDRAWAL OR SURRENDER"). We deduct this charge from the amount
surrendered.
<TABLE>
<CAPTION>
YEAR CHARGE
<S> <C>
1 8.5%
2 8
3 7.5
4 7
5 6.5
6 6
7 5
8 3
9 1
10
and
after 0
</TABLE>
In each Contract Year after the first Contract Year, you may withdraw up to
10% of the Accumulated Value on your most recent Contract Anniversary without
a Surrender Charge. If you subsequently surrender your Contract during the
Contract Year, we will apply a Surrender Charge to any partial withdrawals
you've taken. (See "CHARGES AND DEDUCTIONS--Surrender Charge (Contingent
Deferred Sales Charge)--AMOUNTS NOT SUBJECT TO SURRENDER CHARGE.")
We reserve the right to waive the Surrender Charge as provided in the
Contract. (See "CHARGES AND DEDUCTIONS--Surrender Charge (Contingent Deferred
Sales Charge)--WAIVER OF SURRENDER CHARGE.")
ANNUAL ADMINISTRATIVE CHARGE. We charge an annual administrative charge of $45
on the Contract Date and on each Contract Anniversary prior to the retirement
date (see "CHARGES AND DEDUCTIONS--Annual Administrative Charge"). We
currently waive this charge:
- with an initial premium payment of $50,000, or
- if you have a Net Accumulated Value of $50,000 on your Contract
Anniversary.
MORTALITY AND EXPENSE RISK CHARGE. We apply a daily mortality and expense risk
charge (calculated at an annual rate of 1.40% (approximately 1.01% for
mortality risk and 0.39% for expense risks)) (see "CHARGES AND
DEDUCTIONS--Mortality and Expense Risk Charge").
INVESTMENT OPTION EXPENSES. The assets of the Account will reflect the
investment advisory fee and other operating expenses incurred by each
Investment Option. The table on page 6 titled "Annual Investment Option
Expenses" lists these fees.
ANNUITY PROVISIONS
On your retirement date, you may choose to have the Net Accumulated Value
distributed to you as follows:
- under a payment option, or
- in a lump sum (see "PAYMENT OPTIONS").
FEDERAL TAX MATTERS
You may be subject to adverse tax consequences if you take a distribution from
your Contract (see "FEDERAL TAX MATTERS").
10
<PAGE>
- --------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
The Account commenced operations on July 1, 1998; however, no premiums were
received until August 1, 1998. The information presented below reflects the
accumulation unit information for the Subaccounts through December 31,
1998.
<TABLE>
<CAPTION>
ACCUMULATION ACCUMULATION
UNIT VALUE AT UNIT VALUE NUMBER OF UNITS
SUBACCOUNT BEGINNING OF AT END OF AT
YEAR ENDED 12/31/98 YEAR YEAR END OF YEAR
<S> <C> <C> <C>
Value Growth $ 10.000000 $ 10.000000 0.000000
High Grade Bond $ 10.000000 $ 10.216450 5,001.148000
High Yield Bond $ 10.000000 $ 10.156478 5,001.147000
Money Market $ 10.000000 $ 10.012353 4,950.136990
Blue Chip $ 10.000000 $ 10.000000 0.000000
Capital Appreciation $ 10.000000 $ 10.000000 0.000000
Disciplined Stock $ 10.000000 $ 10.000000 0.000000
Growth & Income $ 10.000000 $ 10.000000 0.000000
International Equity $ 10.000000 $ 10.000000 0.000000
Small Cap $ 10.000000 $ 10.000000 0.000000
Equity Income $ 10.000000 $ 10.000000 0.000000
Mid-Cap Growth $ 10.000000 $ 10.000000 0.000000
New America Growth $ 10.000000 $ 10.000000 0.000000
Personal Strategy Balanced $ 10.000000 $ 10.000000 0.000000
International Stock $ 10.000000 $ 10.000000 0.000000
</TABLE>
11
<PAGE>
- --------------------------------------------------------------------------------
THE COMPANY, ACCOUNT AND INVESTMENT OPTIONS
- --------------------------------------------------------------------------------
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
The Company was incorporated on December 19, 1980 in the State of Iowa and
is principally engaged as a full-service underwriter of annuity and
insurance products. We market these products through a network of over
13,000 independent agents in the states of Alabama, Alaska, Arizona,
Arkansas, California, Colorado, Delaware, Florida, Georgia, Hawaii, Idaho,
Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Michigan,
Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico,
North Dakota, Ohio, Oregon, Pennsylvania, South Carolina, South Dakota,
Tennessee, Texas, Utah, Washington, West Virginia, Wisconsin, Wyoming and
the District of Columbia.
- --------------------------------------------------------------------------------
AMERICAN EQUITY LIFE ANNUITY ACCOUNT
On January 12, 1998, we established the Account pursuant to the laws of the
State of Iowa. The Account:
- will receive and invest premiums paid to it under the Contract;
- will receive and invest premiums for other variable annuity
contracts we issue;
- meets the definition of a "separate account" under the federal
securities laws;
- is registered with the SEC as a unit investment trust under the
Investment Company Act of 1940 ("1940 Act"). Such registration does
not involve supervision by the SEC of the management or investment
policies or practices of the Account, us or the Funds.
We own the Account's assets. However, we cannot charge the Account with
liabilities arising out of any other business we may conduct. The Account's
assets are available to cover the general liabilities of the Company only to
the extent that the Account's assets exceed its liabilities. We may transfer
assets which exceed these reserves and liabilities to our General Account.
All obligations arising under the Contracts are general corporate
obligations of the Company.
- --------------------------------------------------------------------------------
INVESTMENT OPTIONS
There are currently fifteen Subaccounts available under the Account, each of
which invests exclusively in shares of a single corresponding Investment
Option. Each of the Investment Options was formed as an investment vehicle
for insurance company separate accounts. Each Investment Option has its own
investment objectives and separately determines the income and losses for
that Investment Option. While you may be invested in all Subaccounts, we
only permit you to "actively participate" in a maximum of 10 Investment
Options at any one time.
The investment objectives and policies of certain Investment Options are
similar to the investment objectives and policies of other portfolios that
the same investment adviser, sub-investment adviser or manager may manage.
The investment results of the Investment Options, however, may be higher or
lower than the results of such other portfolios. There can be no assurance,
and no representation is made, that the investment results of any of the
Investment Options will be comparable to the investment results of any other
portfolio, even if the other portfolio has the same investment adviser,
sub-investment adviser or manager.
12
<PAGE>
We have summarized below the investment objectives and policies of each
Investment Option. There is no assurance that any Investment Option will
achieve its stated objectives. You should also read the prospectus for each
Investment Option, which must accompany or precede this Prospectus, for more
detailed information, including a description of risks and expenses.
EQUITRUST VARIABLE INSURANCE SERIES FUND. EquiTrust Investment Management
Services, Inc. is the investment adviser to the Fund which is comprised of six
portfolios, the following five of which are available under the Contract:
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
Value Growth Portfolio - This Portfolio seeks long-term capital appreciation. The
Portfolio pursues this objective by investing primarily in
equity securities of companies that the investment adviser
believes have a potential to earn a high return on capital
and/or in equity securities that the investment adviser
believes are undervalued by the market place. Such equity
securities may include common stock, preferred stock and
securities convertible or exchangeable into common stock.
High Grade Bond Portfolio - This Portfolio seeks as high a level of current income as is
consistent with an investment in a high grade portfolio of
debt securities. The Portfolio will pursue this objective by
investing primarily in debt securities rated AAA, AA or A by
Standard & Poor's or Aaa, Aa or A by Moody's Investors
Service, Inc. and in securities issued or guaranteed by the
United States government or its agencies or
instrumentalities.
High Yield Bond Portfolio - This Portfolio seeks as a primary objective, as high a level
of current income as is consistent with investment in a
portfolio of fixed-income securities rated in the lower
categories of established rating services (commonly known as
"junk bonds"). As a secondary objective, the Portfolio seeks
capital appreciation when consistent with its primary
objective. The Portfolio pursues these objectives by
investing primarily in fixed-income securities rated Baa or
lower by Moody's Investors Service, Inc. and/or BBB or lower
by Standards & Poor's, or in unrated securities of
comparable quality. AN INVESTMENT IN THIS PORTFOLIO MAY
ENTAIL GREATER THAN ORDINARY FINANCIAL RISK. (See the Fund
Prospectus "HIGHER RISK SECURITIES AND INVESTMENT
STRATEGIES--Lower Rated Debt Securities.")
Money Market Portfolio - This Portfolio seeks maximum current income consistent with
liquidity and stability of principal. The Portfolio will
pursue this objective by investing in high quality
short-term money market instruments. AN INVESTMENT IN THE
MONEY MARKET PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY
THE U.S. GOVERNMENT AND ITS AGENCIES. THERE CAN BE NO
ASSURANCE THAT THE PORTFOLIO WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.
Blue Chip Portfolio - This Portfolio seeks growth of capital and income. The
Portfolio pursues this objective by investing primarily in
common stocks of well-capitalized, established companies.
Because this Portfolio may be invested heavily in particular
stocks or industries, an investment in this Portfolio may
entail relatively greater risk of loss.
</TABLE>
13
<PAGE>
T. ROWE PRICE EQUITY SERIES, INC. T. Rowe Price Associates, Inc. is the
investment adviser to the Fund.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
Equity Income Portfolio - This Portfolio seeks to provide substantial dividend income
and long-term capital appreciation by investing primarily in
established companies considered by the adviser to have
favorable prospects for both increasing dividends and
capital appreciation.
Mid-Cap Growth Portfolio - This Portfolio seeks long-term capital appreciation by
investing primarily in common stocks of medium-sized
(mid-cap) growth companies which offer the potential for
above-average earnings growth.
New America Growth Portfolio - This Portfolio seeks long-term capital growth by investing
primarily in common stocks of U.S. growth companies
operating in service industries.
Personal Strategy Balanced - This Portfolio seeks the highest total return over time
Portfolio consistent with an emphasis on both capital appreciation and
income.
</TABLE>
T. ROWE PRICE INTERNATIONAL SERIES, INC. Rowe Price-Fleming International, Inc.
is the investment adviser to the Fund.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
International Stock Portfolio - This Portfolio seeks to provide capital appreciation through
investments primarily in established companies based outside
the United States.
</TABLE>
DREYFUS VARIABLE INVESTMENT FUND. The Dreyfus Corporation serves as the
investment adviser to the Fund. Fayez Sarofim and Co. serves as the
sub-investment adviser to the Dreyfus Variable Investment Fund: Capital
Appreciation Portfolio. The following Fund portfolios are available under the
Contract.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
Dreyfus Variable Investment - This Portfolio primarily seeks long-term capital growth,
Fund: Capital Appreciation consistent with the preservation of capital; current income
Portfolio is a secondary investment objective. This Portfolio invests
primarily in the common stocks of domestic and foreign
issuers.
Dreyfus Variable Investment - This Portfolio seeks to provide investment results that are
Fund: Disciplined Stock greater than the total return performance of publicly-traded
Portfolio common stocks in the aggregate, as represented by the
Standard & Poor's 500 Composite Stock Price Index. The
Portfolio will use quantitative statistical modeling
techniques to construct a portfolio in an attempt to achieve
its investment objective, without assuming undue risk
relative to the broad stock market.
Dreyfus Variable Investment - This Portfolio seeks to provide long-term capital growth,
Fund: Growth & Income current income and growth of income, consistent with
Portfolio reasonable investment risk by investing primarily in equity
securities, debt securities and money market instruments of
domestic and foreign issuers.
Dreyfus Variable Investment - This Portfolio seeks to maximize capital growth through
Fund: International Equity investments in equity securities of foreign issuers located
Portfolio throughout the world.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
Dreyfus Variable Investment - This Portfolio seeks maximum capital appreciation by
Fund: Small Cap Portfolio investing primarily in common stocks of domestic and foreign
issuers. The Portfolio will be particularly alert to
companies considered by the adviser to be emerging
smaller-sized companies which are believed to be
characterized by new or innovative products, services or
processes which should enhance prospects for growth in
future earnings.
</TABLE>
The Funds currently sell shares: (a) to the Account as well as to separate
accounts of insurance companies that may or may not be affiliated with the
Company or each other; and (b) to separate accounts to serve as the
underlying investment for both variable insurance policies and variable
annuity contracts. We currently do not foresee any disadvantages to owners
arising from the sale of shares to support variable annuity contracts and
variable life insurance policies, or from shares being sold to separate
accounts of insurance companies that may or may not be affiliated with the
Company. However, we will monitor events in order to identify any material
irreconcilable conflicts that might possibly arise. In that event, we would
determine what action, if any, should be taken in response to the conflict.
In addition, if we believe that a Fund's response to any of those events or
conflicts insufficiently protects owners, we will take appropriate action on
our own, which may include withdrawing the Account's investment in that
Fund. (See the Fund prospectuses for more detail.)
We may receive compensation from an affiliate(s) of one or more of the Funds
based upon an annual percentage of the average assets we hold in the
Investment Options. These amounts are intended to compensate us for
administrative and other services we provide to the Funds and/or
affiliate(s).
Each Fund is registered with the SEC as an open-end, diversified management
investment company. Such registration does not involve supervision of the
management or investment practices or policies of the Fund by the SEC.
- --------------------------------------------------------------------------------
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
We reserve the right, subject to compliance with applicable law, to make
additions to, deletions from or substitutions for the shares that are held
in the Account or that the Account may purchase. We reserve the right to
eliminate the shares of any Investment Option and to substitute any shares
of another Investment Option. We will not substitute any shares attributable
to your interest in a Subaccount without notice and prior approval of the
SEC and state insurance authorities, to the extent required by the 1940 Act
or other applicable law.
We also reserve the right to establish additional subaccounts of the
Account, each of which would invest in a new Investment Option, or in shares
of another investment company with a specified investment objective. We may
establish new subaccounts when, in our sole discretion, marketing needs or
investment conditions warrant, and we will make any new subaccounts
available to existing Contract Owners on a basis we determine. We may also
eliminate one or more Subaccounts if, in our sole discretion, marketing,
tax, regulatory requirements or investment conditions warrant.
In the event of any such substitution, deletion or change, we may make
appropriate changes in this and other contracts to reflect such
substitution, deletion or change. If you allocated all or a portion of your
premiums to any of the current Subaccounts that are being substituted for or
deleted, you may surrender the portion of the Accumulated Value funded by
such Subaccount without paying the associated Surrender Charge. You may also
transfer the portion of the Accumulated Value affected without paying a
transfer charge.
If we deem it to be in the best interest of persons having voting rights
under the Contracts, we may:
- operate the Account as a management investment company under the
1940 Act,
15
<PAGE>
- deregister the Account under that Act in the event such registration
is no longer required, or
- combine the Account with our other separate accounts.
In addition, we may, when permitted by law, restrict or eliminate your
voting rights under the Contract.
- --------------------------------------------------------------------------------
DESCRIPTION OF ANNUITY CONTRACT
- --------------------------------------------------------------------------------
ISSUANCE OF A CONTRACT
You must complete an application in order to purchase a Contract, which can
be obtained through a licensed representative of the Company, who is also a
registered representative of American Equity Capital, Inc., the distributor
and principal underwriter of the Contracts, a broker-dealer having a selling
agreement with American Equity Capital, Inc. or a broker-dealer having a
selling agreement with such broker-dealer. Your Contract Date will be the
date the properly completed application is received at our Administrative
Office. (If this date is the 29th, 30th or 31st of any month, the Contract
Date will be the 28th of such month.) The Company sells the Contract to
retirement plans that qualify for special federal tax treatment under the
Code. We do not apply a maximum age for owners on the Contract Date.
- --------------------------------------------------------------------------------
PREMIUMS
The minimum initial premium amount the Company will accept is $1,000 for
Qualified Contracts and $5,000 for Non-Qualified Contracts. You may make
mimimum subsequent premium payments of $50 at any time during the
annuitant's lifetime and before the retirement date.
You may select to receive a premium reminder notice schedule based on an
annual, semi-annual or quarterly payment, for which you may change the
amount and frequency of the notice at any time. Also, under the Automatic
Payment Plan, you can select a monthly payment schedule for premium payments
to be automatically deducted from a bank account or other source. Your
Contract will not necessarily lapse even if premiums are not paid.
- --------------------------------------------------------------------------------
FREE-LOOK PERIOD
We provide for an initial "free-look" period during which time you have the
right to return the Contract within 20 days after you receive it. If you
return the Contract, it will become void and you will receive the greater
of:
- premiums paid, or
- the Accumulated Value on the date we receive the returned Contract
at the Administrative Office, plus administrative charges and
charges deducted from the Account.
- --------------------------------------------------------------------------------
ALLOCATION OF PREMIUMS
Upon receipt at our Administrative Office of your properly completed
Contract application and initial premium payment, we will allocate the
initial premium to the Money Market Subaccount within two business days. If
your application is not properly completed, we reserve the right to retain
your initial premium for up to five business days while we attempt to
complete the application. At the end of this 5-day period, if the
application is not complete, we will inform you of the reason for the delay
and we will return the initial premium immediately, unless you specifically
provide us your consent to retain the premium until the application is
complete.
16
<PAGE>
You can allocate premiums paid to one or more Subaccounts, the Declared
Interest Option, or both. Each allocation must be in whole percentages for a
minimum of 10% of your premium payment.
- We will allocate the initial premium to the Money Market Subaccount
for 10 days.
- At the end of that period, we will allocate those monies among the
Subaccounts and the Declared Interest Option according to the
instructions in your application.
- We will allocate subsequent premiums in the same manner at the end
of the valuation period when we receive them at our Administrative
Office, unless the allocation percentages are changed.
- If you change your allocation percentages, we will allocate
subsequent premium payments in accordance with the allocation
schedule in effect.
- You may, however, direct individual payments to a specific
Subaccount, the Declared Interest Option, or any combination
thereof, without changing the existing allocation schedule.
You may change your allocation schedule at any time by sending written
notice to the Administrative Office. Changing your allocation schedule will
not alter the allocation of your existing Accumulated Values among the
Subaccounts or the Declared Interest Option.
Because the Accumulated Values in each Subaccount will vary with that
Subaccount's investment experience, you bear the entire investment risk. You
should periodically review your premium allocation schedule in light of
market conditions and your overall financial objectives.
- --------------------------------------------------------------------------------
VARIABLE ACCUMULATED VALUE
The variable accumulated value of your Contract will reflect the investment
experience of your selected Subaccounts, any premiums paid, surrenders or
partial withdrawals, transfers and charges assessed. The Company does not
guarantee a minimum variable accumulated value, and, because your Contract's
variable accumulated value on any future date depends upon a number of
variables, it cannot be predetermined.
CALCULATION OF VARIABLE ACCUMULATED VALUE. Your Contract's variable
accumulated value is determined at the end of each valuation period and is
the aggregate of the values in each of the Subaccounts under your Contract.
These values are determined by multiplying each Subaccount's unit value by
the number of units allocated to that Subaccount.
DETERMINATION OF NUMBER OF UNITS. The amounts you allocate to your selected
Subaccounts are converted into Subaccount units. The number of units
credited to each Subacount in your Contract is calculated at the end of the
valuation period by dividing the dollar amount allocated by the unit value
for that Subaccount. At the end of the valuation period, we will increase
the number of units in each Subaccount by:
- any premiums paid, and
- any amounts transferred from another Subaccount or the Declared
Interest Option.
We will decrease the number of units in each Subaccount by:
- any amounts withdrawn,
- applicable charges assessed, and
- any amounts transferred to another Subaccount.
17
<PAGE>
DETERMINATION OF UNIT VALUE. We have set the unit value for each
Subaccount's first valuation period at $10. We calculate the unit value for
a Subaccount for each subsequent valuation period by dividing (a) by (b)
where:
(a) is the net result of:
1. the value of the net assets in the Subaccount at the end
of the preceding valuation period; plus
2. the investment income, dividends and capital gains,
realized or unrealized, credited to the Subaccount during
the current valuation period; minus
3. the capital losses, realized or unrealized, charged
against the Subaccount during the current valuation
period; minus
4. any amount charged for taxes or any amount set aside
during the valuation period as a provision for taxes
attributable to the Subaccount; minus
5. the daily amount charged for mortality and expense risks
for each day of the current valuation period.
(b) is the number of units outstanding at the end of the preceding
valuation period.
- --------------------------------------------------------------------------------
TRANSFER PRIVILEGE
You may transfer monies in a Subaccount or the Declared Interest Option to
another Subaccount or the Declared Interest Option on or before the
retirement date. We will process all transfers as of the Business Day on or
next following receipt of your written request at the Administrative Office.
- The minimum amount of each transfer is $100 or the entire amount in
that Subaccount, if less.
- Transfers out of the Declared Interest Option must be for no more
than 25% of the Accumulated Value in that option.
- If a transfer would reduce the Accumulated Value in the Declared
Interest Option below $1,000, you may transfer the entire amount in
that option.
- The Company waives fees for the first twelve transfers during a
Contract Year.
- The Company may assess a transfer processing fee of $25 for the 13th
and each subsequent transfer during a Contract Year.
- We allow an unlimited number of transfers among or between the
Subaccounts or the Declared Interest Option. (See "DECLARED INTEREST
OPTION--Transfers from Declared Interest Option.")
All transfer requests received in a valuation period will be considered to
be one transfer, regardless of the Subaccounts or Declared Interest Option
affected. We will deduct the transfer processing fee on a pro-rata basis
from the Subaccounts or Declared Interest Option to which the transfer is
made unless it is paid in cash.
You may also transfer monies via telephone request if you selected this
option on your initial application or have provided us with proper
authorization. We reserve the right to suspend telephone transfer privileges
at any time.
- --------------------------------------------------------------------------------
PARTIAL WITHDRAWALS AND SURRENDERS
PARTIAL WITHDRAWALS. You may withdraw part of the Accumulated Value upon
written notice at any time before the retirement date.
- The minimum amount which you may partially withdraw is $500.
18
<PAGE>
- The maximum amount which you may partially withdraw is that which
would leave the remaining Accumulated Value equal to or less than
$2,000.
If your partial withdrawal reduces your Accumulated Value to $2,000 or less,
it will be treated as a full surrender of the Contract. We will process your
partial withdrawal as of the Business Day on or next following receipt of
your written request at the Administrative Office. You may elect to have any
applicable Surrender Charge deducted from your remaining Accumulated Value
or the amount partially withdrawn. (See "Surrender Charge.")
You may specify the amount of the partial withdrawal to be made from
selected Subaccounts or the Declared Interest Option. If you do not so
specify, or if the amount in the designated Subaccount(s) or Declared
Interest Option is insufficient to comply with your request, we will make
the partial withdrawal from each Subaccount and the Declared Interest Option
based on the proportion that each Subaccount's value bears to the total
Accumulated Value on the date we receive your request at the Administrative
Office.
SURRENDER. You may surrender your Contract upon written notice on or before
the retirement date. We will determine your Net Accumulated Value as of the
Business Day on or next following receipt of your written request at the
Administrative Office, which must be accompanied by your Contract. You may
choose to have the Net Accumulated Value distributed to you as follows:
- under a payment option, or
- in a lump sum.
SURRENDER AND PARTIAL WITHDRAWAL RESTRICTIONS. Your right to make partial
withdrawals and surrenders is subject to any restrictions imposed by
applicable law or employee benefit plan and you may realize adverse federal
income tax consequences, including a penalty tax, upon utilization of these
features. (See "Taxation of Annuities.")
RESTRICTIONS ON DISTRIBUTIONS FROM CERTAIN TYPES OF CONTRACTS. Surrenders
and partial withdrawals of Contracts which are used as funding vehicles for
Code Section 403(b) retirement plans are subject to certain restrictions.
(See "FEDERAL TAX MATTERS--Taxation of Qualified Plans--TAX SHELTERED
ANNUITIES.")
- --------------------------------------------------------------------------------
SPECIAL TRANSFER AND WITHDRAWAL OPTIONS
You may elect the following options on your initial application or at a
later date by completing the applicable Request Form and returning it to the
Administrative Office. The options selected will remain in effect until we
receive a written termination request from you at the Administrative Office.
The use of Automatic Rebalancing or Dollar Cost Averaging does not guarantee
profits, nor protect you against losses.
AUTOMATIC REBALANCING. You may automatically reallocate your Accumulated
Value among the Subaccounts and Declared Interest Option.
- We will reallocate monies according to the percentage allocation
schedule in effect on your Contract Anniversary.
- The maximum number of Subaccounts which you may select at any one
time is ten.
- Rebalancing will occur on the fifth Business Day of the month
following your Contract Anniversary.
- This feature is not considered in the twelve free transfers during a
Contract Year.
- This feature cannot be utilized in combination with Dollar Cost
Averaging.
19
<PAGE>
DOLLAR COST AVERAGING. You may periodically transfer a specified amount
among the Subaccounts or the Declared Interest Option.
- The minimum amount of each transfer is $100.
- The maximum number of Subaccounts which you may select at any one
time is ten, including the Declared Interest Option.
- You select the date to implement this program which will occur on
the same date each month, or on the next Business Day.
- We will terminate this option when monies in the source account are
inadequate.
- This feature is considered in the twelve free transfers during a
Contract Year.
- This feature cannot be utilized in combination with Automatic
Rebalancing or Systematic Withdrawals.
SYSTEMATIC WITHDRAWALS. You may elect to receive automatic partial
withdrawals.
- You specify the amount of the partial withdrawals to be made from
selected Subaccounts or the Declared Interest Option.
- You specify the allocation of the withdrawals among the Subaccounts
and Declared Interest Option, and the frequency (monthly, quarterly,
semi-annually or annually).
- The minimum amount which you may withdraw is $500.
- The maximum amount which you may withdraw is that which would leave
the remaining Accumulated Value equal to or less than $2,000.
- You may annually withdraw a maximum of 10% of Accumulated Value
without incurring a Surrender Charge.
- Distributions will take place on the same date each month as the
Contract Date.
- You may change the amount and frequency upon written request to the
Administrative Office.
- This feature cannot be utilized in combination with Dollar Cost
Averaging.
We may terminate these privileges at any time.
- --------------------------------------------------------------------------------
DEATH BENEFIT BEFORE THE RETIREMENT DATE
DEATH OF OWNER. If an owner dies prior to the retirement date, any surviving
owner becomes the sole owner. If there is no surviving owner, the annuitant
becomes the new owner unless the deceased owner was also the annuitant. If
the deceased owner was also the annuitant, then the provisions relating to
the death of an annuitant (described below) will govern unless the deceased
owner was one of two joint annuitants. (In the latter event, the surviving
annuitant becomes the owner.)
The surviving owners or new owners are afforded the following options:
1. If the sole surviving owner or the sole new owner is the spouse
of the deceased owner, he or she may continue the Contract as
the new owner.
2. If the surviving owner or the new owner is not the spouse of
the deceased owner:
(a) he or she may elect to receive the Net Accumulated Value
in a single sum within 5 years of the deceased owner's
death, or
(b) he or she may elect to receive the Net Accumulated Value
paid out under one of the annuity payment options, with
payments beginning within one year after the date of the
owner's death and with payments being made over the
lifetime
20
<PAGE>
of the owner, or over a period that does not exceed the
life expectancy of the owner.
Under either of these options, surviving owners or new owners may exercise
all ownership rights and privileges from the date of the deceased owner's
death until the date that the net accumulated value is paid.
Other rules may apply to a Qualified Contract.
DEATH OF AN ANNUITANT. If the annuitant dies before the retirement date, we
will pay the death benefit under the Contract to the beneficiary. If there
is no surviving beneficiary, we will pay the death benefit to the owner or
the owner's estate. If the annuitant's age on the Contract Date was less
than 76, the death benefit is equal to the greater of:
- the sum of the premiums paid, less the sum of all partial withdrawal
reductions (including applicable surrender charges), plus the
Accumulated Value on the date we receive due proof of the
annuitant's death, or
- the Accumulated Value on the most recent Contract Anniversary (plus
subsequent premiums paid and less subsequent partial withdrawals).
If the annuitant's age on the Contract Date was 76 or older, the death
benefit will be determined as of the date we receive due proof of death and
is equal to the greater of:
- the sum of the premiums paid, less the sum of all partial withdrawal
reductions (including applicable Surrender Charges), or
- the Accumulated Value.
A partial withdrawal reduction is defined as (a) times (b) divided by (c)
where:
(a) is the death benefit immediately prior to withdrawal;
(b) is the amount of the partial withdrawal (including applicable
surrender charges); and
(c) is the Accumulated Value immediately prior to withdrawal.
We will pay the death benefit to the beneficiary in a lump sum unless the
owner or beneficiary elects a payment option. We do not pay a death benefit
if the annuitant dies after the retirement date.
If the annuitant who is also the owner dies, the provisions described
immediately above apply except that the beneficiary may only apply the death
benefit payment to an annuity payment option if:
- payments under the option begin within 1 year of the annuitant's
death, and
- payments under the option are payable over the beneficiary's life or
over a period not greater than the beneficiary's life expectancy.
If the owner's spouse is the designated beneficiary, the Contract may be
continued with such surviving spouse as the new owner.
Other rules may apply to a Qualified Contract.
- --------------------------------------------------------------------------------
DEATH BENEFIT AFTER THE RETIREMENT DATE
If an owner dies on or after the retirement date, any surviving owner
becomes the sole owner. If there is no surviving owner, the payee receiving
annuity payments becomes the new owner and retains the rights provided to
owners during the annuity period, including the right to name successor
payees if the deceased owner had not previously done so. On or after the
retirement date, if any owner dies before the entire interest in the
Contract has been distributed, the remaining portion of such interest will
be distributed at least as quickly as under the method of distribution being
used as of the date of death.
21
<PAGE>
If the annuitant dies before 120 payments have been received, we will make
any remaining payments to the beneficiary. There is no death benefit payable
if the annuitant dies after the retirement date.
Other rules may apply to a Qualified Contract.
- --------------------------------------------------------------------------------
PROCEEDS ON THE RETIREMENT DATE
You select the retirement date. For Non-Qualified Contracts, the retirement
date may not be after the later of the annuitant's age 95 or 10 years after
the Contract Date. For Qualified Contracts, the retirement date must be no
later than the annuitant's age 70 1/2 or such other date as meets the
requirements of the Code.
On the retirement date, we will apply the proceeds under the life income
annuity payment option with ten years guaranteed, unless you choose to have
the proceeds paid under another option or in a lump sum. (See "Payment
Options.") If a payment option is elected, we will apply the Accumulated
Value less any applicable Surrender Charge. If a lump sum payment is chosen,
we will pay the net accumulated value on the retirement date.
You may change the retirement date subject to these limitations:
- we must receive a written notice at the Administrative Office at
least 30 days before the current retirement date;
- the requested retirement date must be a date that is at least 30
days after receipt of the written notice; and
- the requested retirement date must be no later than the annuitant's
70th birthday for Qualified Contracts or age 95 for Non-Qualified
Contracts, or any earlier date required by law.
- --------------------------------------------------------------------------------
PAYMENTS
We will usually pay any surrender, partial withdrawal or death benefit
within seven days of receipt of a written request at the Administrative
Office. We also require any information or documentation necessary to
process the request, and in the case of a death benefit, we must receive Due
Proof of Death. We may postpone payments if:
- the New York Stock Exchange is closed, other than customary weekend
and holiday closings, or trading on the exchange is restricted as
determined by the SEC;
- the SEC permits by an order the postponement for the protection of
owners; or
- the SEC determines that an emergency exists that would make the
disposal of securities held in the Account or the determination of
the value of the Account's net assets not reasonably practicable.
If you have submitted a recent check or draft, we have the right to delay
payment until we are assured that the check or draft has been honored.
We have the right to defer payment of any surrender, partial withdrawal or
transfer from the Declared Interest Option for up to six months. If payment
has not been made within 30 days after receipt of all required
documentation, or such shorter period as necessitated by a particular
jurisdiction, we will add interest at the rate of 3% (or a higher rate if
required by a particular state) to the amount paid from the date all
documentation was received.
22
<PAGE>
- --------------------------------------------------------------------------------
MODIFICATION
Upon notification to you, we may modify your Contract if:
- necessary to make your Contract or the Account comply with any law
or regulation issued by a governmental agency to which the Company
is subject;
- necessary to assure continued qualification of your Contract under
the Code or other federal or state laws relating to retirement
annuities or variable annuity contracts;
- necessary to reflect a change in the operation of the Account; or
- the modification provides additional Subaccount and/or fixed
accumulation options.
We will make the appropriate endorsement to your Contract in the event of
most such modifications.
- --------------------------------------------------------------------------------
REPORTS TO OWNERS
We will mail to you, at least annually, a report containing the Accumulated
Value of your Contract (reflecting each Subaccount and the Declared Interest
Option), premiums paid, withdrawals taken and charges deducted since your
last report, and any other information required by any applicable law or
regulation.
- --------------------------------------------------------------------------------
INQUIRIES
You may contact the Company in writing at our Administrative Office if you
have any questions regarding your Contract
- --------------------------------------------------------------------------------
THE DECLARED INTEREST OPTION
- --------------------------------------------------------------------------------
You may allocate some or all of your premium payments, and transfer some or
all of your Accumulated Value, to the Declared Interest Option, which is
part of the General Account and pays interest at declared rates guaranteed
for each Contract Year (subject to a minimum guaranteed interest rate of
3%).
IN COMPLIANCE WITH SPECIFIC STATE INSURANCE REGULATIONS, THE DECLARED
INTEREST OPTION IS NOT AVAILABLE IN ALL STATES. A REGISTERED REPRESENTATIVE
CAN PROVIDE INFORMATION ON THE AVAILABILITY OF THIS INVESTMENT OPTION.
The Declared Interest Option has not been, and is not required to be,
registered with the SEC under the Securities Act of 1933 (the "1933 Act"),
and neither the Declared Interest Option nor the Company's General Account
has been registered as an investment company under the 1940 Act. Therefore,
neither the Company's General Account, the Declared Interest Option, nor any
interests therein are generally subject to regulation under the 1933 Act or
the 1940 Act. The disclosures relating to these accounts, which are included
in this Prospectus, are for your information and have not been reviewed by
the SEC. However, such disclosures may be subject to certain generally
applicable provisions of Federal securities laws relating to the accuracy
and completeness of statements made in prospectuses.
The portion of your Accumulated Value allocated to the Declared Interest
Option (the "Declared Interest Option accumulated value") will be credited
with rates of interest, as described below. Since the Declared Interest
Option is part of the General Account, we assume the risk of investment gain
or loss on this amount. All assets in the General Account are subject to the
Company's general liabilities from business operations.
23
<PAGE>
- --------------------------------------------------------------------------------
MINIMUM GUARANTEED AND CURRENT INTEREST RATES
The Declared Interest Option accumulated value is guaranteed to accumulate
at a minimum effective annual interest rate of 3%. While we intend to credit
the Declared Interest Option accumulated value with current rates in excess
of the minimum guarantee, we are not obligated to do so. These current
interest rates are influenced by, but do not necessarily correspond to,
prevailing general market interest rates, and any interest credited on your
amounts in the Declared Interest Option in excess of the minimum guaranteed
rate will be determined in the sole discretion of the Company. You,
therefore, assume the risk that interest credited may not exceed the
guaranteed rate.
Occasionally, we establish new current interest rates for the Declared
Interest Option. The rate applicable to your Contract is the rate in effect
on your most recent Contract Anniversary. This rate will remain unchanged
until your next Contract Anniversary (i.e., for your entire Contract Year).
During each Contract Year, your entire Declared Interest Option accumulated
value (including amounts allocated or transferred to the Declared Interest
Option during the year) is credited with the interest rate in effect for
that period and becomes part of your Declared Interest Option accumulated
value.
We reserve the right to change the method of crediting interest, provided
that such changes do not have the effect of reducing the guaranteed interest
rate below 3% per annum, or shorten the period for which the current
interest rate applies to less than a Contract Year.
CALCULATION OF DECLARED INTEREST OPTION ACCUMULATED VALUE. The Declared
Interest Option accumulated value is equal to:
- amounts allocated and transferred to it, plus
- interest credited, less
- amounts deducted, transferred or withdrawn.
- --------------------------------------------------------------------------------
TRANSFERS FROM DECLARED INTEREST OPTION
You may make an unlimited number of transfers from the Declared Interest
Option to any or all of the Subaccounts in each Contract Year. The amount
you transfer may not exceed 25% of the Declared Interest Option accumulated
value on the date of transfer. However, if the balance after the transfer is
less than $1,000, you may transfer the entire amount.
- --------------------------------------------------------------------------------
PAYMENT DEFERRAL
We have the right to defer payment of any surrender, partial withdrawal or
transfer from the Declared Interest Option for up to six months.
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- --------------------------------------------------------------------------------
CHARGES AND DEDUCTIONS
- --------------------------------------------------------------------------------
SURRENDER CHARGE (CONTINGENT DEFERRED SALES CHARGE)
CHARGE FOR PARTIAL WITHDRAWAL OR SURRENDER. We apply a charge if you make a
partial withdrawal from or surrender your Contract during the first nine
Contract years.
<TABLE>
<CAPTION>
CONTRACT YEAR IN WHICH CHARGE AS PERCENTAGE OF
SURRENDER OCCURS AMOUNT SURRENDERED
<S> <C>
1 8.5%
2 8
3 7.5
4 7
5 6.5
6 6
7 5
8 3
9 1
10 after after 0
</TABLE>
If Surrender Charges are not sufficient to cover sales expenses, the loss
will be borne by the Company; conversely, if the amount of such charges
proves more than enough, the Company will retain the excess. In no event
will the total Surrender Charges assessed under a Contract exceed 8.5% of
the total premiums paid under that Contract.
If the Contract is being surrendered, the Surrender Charge is deducted from
the Accumulated Value in determining the Net Accumulated Value. For a
partial withdrawal, the Surrender Charge may, at the election of the owner,
be deducted from the Accumulated Value remaining after the amount requested
is withdrawn or be deducted from the amount of the withdrawal requested.
AMOUNTS NOT SUBJECT TO SURRENDER CHARGE. In each Contract Year after the
first Contract Year, you may withdraw up to 10% of the Accumulated Value on
your most recent Contract Anniversary without a Surrender Charge. If you
subsequently surrender your Contract during the Contract Year, we will apply
a Surrender Charge to any partial withdrawals you've taken during the
Contract Year. (This right is not cumulative from Contract Year to Contract
Year.)
SURRENDER CHARGE AT THE RETIREMENT DATE. A Surrender Charge will be assessed
against your Accumulated Value at the retirement date if you select a
payment option other than options 2-5 described below (see "Payment
Options"). We do not apply a Surrender Charge if you select payment options
3 or 5. If you select payment options 2 or 4, we assess a Surrender Charge
by adding 1/2 the number of years for which payments will be made to the
number of Contract Years since your Contract inception and applying this sum
in the table of Surrender Charges.
WAIVER OF SURRENDER CHARGE. We reserve the right to waive the Surrender
Charge after your first Policy Year if the annuitant is terminally ill (as
defined in your Contract), stays in a qualified nursing center for 90 days,
or is required to satisfy minimum distribution requirements in accordance
with the Code. (The waiver for terminal illness or nursing home stay is only
available for annuitants with an issue
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<PAGE>
age of 76 or below.) We must receive written notification, before the
retirement date, at the Administrative Office in order to activate this
waiver.
- --------------------------------------------------------------------------------
ANNUAL ADMINISTRATIVE CHARGE
We apply an annual administrative charge of $45 on the Contract Date and on
each Contract Anniversary prior to the retirement date. We deduct this
charge from your Accumulated Value and use it to reimburse us for
administrative expenses relating to your Contract. We will make the
withdrawal from each Subaccount and the Declared Interest Option based on
the proportion that each Subaccount's value bears to the total Accumulated
Value. We do not assess this charge during the annuity payment period.
We currently waive the annual administrative charge:
- with an initial premium payment of $50,000, or
- upon a Net Accumulated Value of $50,000 on your Contract
Anniversary.
We may terminate this privilege at any time.
- --------------------------------------------------------------------------------
TRANSFER PROCESSING FEE
We waive the transfer processing fee for the first twelve transfers during a
Contract Year, but may assess a $25 charge for each subsequent transfer. We
will deduct this fee on a pro-rata basis from the Subaccounts or Declared
Interest Option to which the transfer is made unless it is paid in cash.
- --------------------------------------------------------------------------------
MORTALITY AND EXPENSE RISK CHARGE
We apply a daily mortality and expense risk charge at an annual rate of
1.40% (daily rate of 0.0038091%) (approximately 1.01% for mortality risk and
0.39% for expense risk). This charge is used to compensate the Company for
assuming mortality and expense risks.
The mortality risk we assume is that annuitants may live for a longer period
of time than estimated when the guarantees in the Contract were established.
Through these guarantees, each payee is assured that longevity will not have
an adverse effect on the annuity payments received. The mortality risk also
includes a guarantee to pay a death benefit if the owner/annuitant dies
before the retirement date. The expense risk we assume is that the annual
administrative and transfer processing fees may be insufficient to cover
actual future expenses.
We may realize a profit from this charge and we may use such profit for any
lawful purpose including paying distribution expenses.
- --------------------------------------------------------------------------------
INVESTMENT OPTION EXPENSES
The assets of the Account will reflect the investment advisory fee and other
operating expenses incurred by each Investment Option. (See the Expense
Tables in this prospectus and the accompanying Investment Option
prospectuses.)
- --------------------------------------------------------------------------------
PREMIUM TAXES
Currently, we do not charge for premium taxes levied by various states and
other governmental entities on annuity contracts issued by insurance
companies. These taxes range up to 3.5% and are subject to change. We
reserve the right, however, to deduct such taxes from Accumulated Value.
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<PAGE>
- --------------------------------------------------------------------------------
OTHER TAXES
Currently, we do not charge for any federal, state or local taxes incurred
by the Company which may be attributable to the Account or the Contracts. We
reserve the right, however, to make such a charge in the future.
- --------------------------------------------------------------------------------
PAYMENT OPTIONS
- --------------------------------------------------------------------------------
Your Contract ends on the retirement date. At that time, your Net
Accumulated Value will be applied under a payment option, unless you elect
to receive this amount in a single sum. Should you not elect a payment
option on the retirement date, proceeds will be paid as a life income
annuity with payments guaranteed for ten years.
Prior to the retirement date, you may have your Net Accumulated Value
applied under a payment option, or a beneficiary can have the death benefit
applied under a payment option. In either case, the Contract must be
surrendered for a lump sum payment to be made, or a supplemental contract to
be issued for the payment option.
We have provided a description of the available payment options below. The
term "payee" means a person who is entitled to receive payment under that
option. All payment options offer a fixed and guaranteed amount to be paid
during the annuity payment period, independent of the investment experience
of the Account.
- --------------------------------------------------------------------------------
ELECTION OF OPTIONS
While the annuitant is living, you may elect, revoke or change a payment
option at any time before the retirement date. Upon an annuitant's death, if
a payment option is not in effect or if payment will be made in one lump sum
under an existing option, the beneficiary may elect one of the options after
the death of the owner/annuitant.
We will initiate an election, revocation or change of a payment option upon
receipt of your written request at the Administrative Office.
We reserve the right to refuse the election of a payment option, other than
in a lump sum, if:
1) the total payments would be less than $2,000;
2) each payment would be less than $50; or
3) the payee is an assignee, estate, trustee, partnership,
corporation or association.
- --------------------------------------------------------------------------------
DESCRIPTION OF OPTIONS
OPTION 1--INTEREST INCOME. The proceeds are left with the Company to earn a
set interest rate. The payee may elect to have the interest paid monthly,
quarterly, semi-annually or annually. Under this option, the payee may
withdraw part or all of the proceeds at any time.
OPTION 2--INCOME FOR A FIXED TERM. The proceeds are paid in equal
installments for a fixed number of years.
OPTION 3--LIFE INCOME OPTION WITH TERM CERTAIN. The proceeds are paid in
equal amounts (at intervals elected by the payee) during the payee's
lifetime with the guarantee that payments will be made for a specified
number of years. Under this option, at the death of a payee having no
beneficiary (or where the beneficiary died prior to the payee), the present
value of the dollar amount of any remaining guaranteed payments will be paid
in one lump sum to the executors or administrators of the payee's estate.
Also under this option, if any beneficiary dies while receiving
27
<PAGE>
payment, the present value of the dollar amount of any remaining guaranteed
payments will be paid in one lump sum to the executors or administrators of
the beneficiary's estate. The amount to be paid is calculated as of the date
of death of the payee, or beneficiary if applicable, and the calculation of
present value shall be no less than 3%.
OPTION 4--INCOME FOR FIXED AMOUNT. The proceeds are paid in equal
installments (at intervals elected by the payee) for a specific amount and
will continue until all the proceeds plus interest are exhausted.
OPTION 5--JOINT AND TWO-THIRDS TO SURVIVOR MONTHLY LIFE INCOME. The proceeds
are paid in equal installments while two joint payees live. When one payee
dies, future proceeds equal to two-thirds of the initial payment will be
made to the survivor for their lifetime.
The amount of each payment is calculated from the tables in the Contract
which apply to that particular option using the payee's age and sex. Age is
determined as the last birthday at the date of the first payment.
ALTERNATE PAYMENT OPTION. The Company may make available an alternative
payment option.
- --------------------------------------------------------------------------------
YIELDS AND TOTAL RETURNS
- --------------------------------------------------------------------------------
We may advertise, or include in sales literature, yields, effective yields
and total returns for the Subaccounts. THESE FIGURES ARE BASED ON HISTORICAL
EARNINGS AND DO NOT INDICATE OR PROJECT FUTURE PERFORMANCE. Each Subaccount
may also advertise, or include in sales literature, performance relative to
certain performance rankings and indices compiled by independent rating
organizations. You may refer to the Statement of Additional Information for
more detailed information relating to performance.
The effective yield and total return calculated for each Subaccount is based
on the investment performance of the corresponding Investment Option, which
includes the Investment Option's total operating expenses. (See the
accompanying Investment Option prospectuses.)
The yield of a Subaccount (except the Money Market Subaccount) refers to the
annualized income generated by an investment in the Subaccount over a
specified 30-day or one-month period. This yield is calculated by assuming
that the income generated during that 30-day or one-month period is
generated each period over 12-months and is shown as a percentage of the
investment.
The yield of the Money Market Subaccount refers to the annualized income
generated by an investment in the Subaccount over a specified seven-day
period. This yield is calculated by assuming that the income generated for
that seven-day period is generated each period for 52-weeks and is shown as
a percentage of the investment. The effective yield is calculated similarly
but, when annualized, the income earned by an investment in the Subaccount
is assumed to be reinvested. The effective yield will be slightly higher
than the yield because of the compounding effect of this assumed
reinvestment.
The total return of a Subaccount refers to return quotations of an
investment in a Subaccount for various periods of time. Total return figures
are provided for each Subaccount for one, five and ten year periods,
respectively. For periods prior to the date the Account commenced
operations, performance information is calculated based on the performance
of the Investment Options and the assumption that the Subaccounts were in
existence for those same periods, with the level of Contract charges which
were in effect at inception of the Subaccounts.
The average annual total return quotations represent the average annual
compounded rates of return that would equate an initial investment of $1,000
to the redemption value of that investment as of the last day of each of the
periods for which total return quotations are provided. Average annual total
return information shows the average percentage change in the value of an
investment in the Subaccount from the beginning date of the measuring period
to the end of that period. This
28
<PAGE>
standardized version of average annual total return reflects all historical
investment results less all charges and deductions applied against the
Subaccount (including any surrender charge that would apply if you
terminated your Contract at the end of each period indicated, but excluding
any deductions for premium taxes).
In addition to standardized average annual total return, non-standardized
total return information may be used in advertisements or sales literature.
Non-standardized return information will be computed on the same basis as
described above, but does not include a surrender charge. In addition, the
Company may disclose cumulative total return for Contracts funded by
Subaccounts.
Each Investment Option's yield, and standardized and non-standardized
average annual total returns may also be disclosed, which may include
investment periods prior to the date the Account commenced operations.
Non-standardized performance data will only be disclosed if standardized
performance data is also disclosed. Please refer to the Statement of
Additional Information for additional information regarding the calculation
of other performance data.
In advertising and sales literature, Subaccount performance may be compared
to the performance of other issuers of variable annuity contracts which
invest in mutual fund portfolios with similar investment objectives. Lipper
Analytical Services, Inc. ("Lipper") and the Variable Annuity Research Data
Service ("VARDS") are independent services which monitor and rank the
performance of variable annuity issuers according to investment objectives
on an industry-wide basis.
The rankings provided by Lipper include variable life insurance issuers as
well as variable annuity issuers, whereas the rankings provided by VARDS
compare only variable annuity issuers. The performance analyses prepared by
Lipper and VARDS each rank such issuers on the basis of total return,
assuming reinvestment of distributions, but do not take sales charges,
redemption fees or certain expense deductions at the separate account level
into consideration. In addition, VARDS prepares risk rankings, which
consider the effects of market risk on total return performance. This type
of ranking provides data as to which funds provide the highest total return
within various categories of funds defined by the degree of risk inherent in
their investment objectives.
Advertising and sales literature may also compare the performance of each
Subaccount to the Standard & Poor's Index of 500 Common Stocks, a widely
used measure of stock performance. This unmanaged index assumes the
reinvestment of dividends but does not reflect any deductions for operating
expenses. Other independent ranking services and indices may also be used as
a source of performance comparison.
We may also report other information including the effect of tax-deferred
compounding on a Subaccount's investment returns, or returns in general,
which may be illustrated by tables, graphs or charts. All income and capital
gains derived from Subaccount investments are reinvested and can lead to
substantial long-term accumulation of assets, provided that the underlying
Portfolio's investment experience is positive.
- --------------------------------------------------------------------------------
FEDERAL TAX MATTERS
- --------------------------------------------------------------------------------
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE
INTRODUCTION
This discussion is based on the Company's understanding of the present
federal income tax laws as they are currently interpreted by the Internal
Revenue Service. No representation is made as to the likelihood of the
continuation of these current tax laws and interpretations. Moreover, no
attempt has been made to consider any applicable state or other tax laws.
A Contract may be purchased on a non-qualified basis ("Non-Qualified
Contract") or purchased and used in connection with plans qualifying for
favorable tax treatment ("Qualified Contract"). A Qualified Contract is
designed for use by individuals whose premium payments are comprised solely
29
<PAGE>
of proceeds from and/or contributions under retirement plans which are
intended to qualify as plans entitled to special income tax treatment under
Sections 401(a), 403(b), 408 or 408A of the Internal Revenue Code of 1986,
as amended (the "Code"). The effect of federal income taxes on amounts held
under a Contract or annuity payments, and on the economic benefit to the
owner, the annuitant or the beneficiary depends on the type of retirement
plan, the tax and employment status of the individual concerned, and the
Company's tax status. In addition, an individual must satisfy certain
requirements in connection with:
- purchasing a Qualified Contract with proceeds from a tax-qualified
plan, and
- receiving distributions from a Qualified Contract
in order to continue to receive favorable tax treatment.
Therefore, purchasers of Qualified Contracts are encouraged to seek
competent legal and tax advice regarding the suitability and tax
considerations specific to their situation. The following discussion assumes
that Qualified Contracts are purchased with proceeds from and/or
contributions under retirement plans that qualify for the intended special
federal income tax treatment.
- --------------------------------------------------------------------------------
TAX STATUS OF THE CONTRACT
The Company believes that the Contract will be subject to tax as an annuity
contract under the Code, which generally means that any increase in
Accumulated Value will not be taxable until monies are received from the
Contract, either in the form of annuity payments or in some other form. The
following Code requirement must be met in order to be subject to annuity
contract treatment for tax purposes:
DIVERSIFICATION REQUIREMENTS. Section 817(h) of the Code provides that
separate account investments must be "adequately diversified" in accordance
with Treasury regulations in order for the Contract to qualify as an annuity
contract for federal tax purposes. The Account, through each Investment
Option, intends to comply with the diversification requirements prescribed
in regulations under Section 817(h) of the Code, which affect how the assets
in each Subaccount may be invested. Although the investment adviser of
EquiTrust Variable Insurance Series Fund is an affiliate of the Company, we
do not have control over the Fund or its investments. Nonetheless, the
Company believes that each Investment Option in which the Account owns
shares will meet the diversification requirements.
OWNER CONTROL. In certain circumstances, owners of variable annuity
contracts may be considered the owners, for federal income tax purposes, of
the assets of the separate account used to support their contracts. In those
circumstances, income and gains from the separate account assets would be
includable in the variable annuity contract owner's gross income. The IRS
has stated in published rulings that a variable annuity contract owner will
be considered the owner of separate account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. The Treasury Department also
announced, in connection with the issuance of regulations concerning
investment diversification, that those regulations "do not provide guidance
concerning the circumstances in which investor control of the investments of
a segregated asset account may cause the investor (i.e., the contract
owner), rather than the insurance company, to be treated as the owner of the
assets in the account." This announcement also stated that guidance would be
issued by way of regulations or rulings on the "extent to which
policyholders may direct their investments to particular subaccounts without
being treated as owners of the underlying assets."
The ownership rights under the Contracts are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that contract owners were not owners of separate account assets.
For example, the contract owner has additional flexibility in allocating
premium payments and Accumulated Values. These differences could result in a
contract owner being treated as the owner of a pro rata potion of the assets
of the Account. In addition, the Company does not know what standards will
be set forth, if any, in the regulations or rulings which the
30
<PAGE>
Treasury Department has stated it expects to issue. The Company therefore
reserves the right to modify the Contract as necessary to attempt to prevent
the contract owner from being considered the owner of the assets of the
Account.
REQUIRED DISTRIBUTIONS. In order to be treated as an annuity contract for
federal income tax purposes, Section 72(s) of the Code requires any
Non-Qualified Contract to provide that:
- if any owner dies on or after the retirement date but before the
interest in the contract has been fully distributed, the remaining
portion of such interest will be distributed at least as rapidly as
under the method of distribution being used as of the date of that
owner's death; and
- if any owner dies prior to the date annuity payments begin, the
interest in the Contract will be distributed within five years after
the date of the owner's death.
These requirements will be considered satisfied as to any portion of the
owner's interest which is payable to or for the benefit of a designated
beneficiary and which is distributed over the life of such beneficiary or
over a period not extending beyond the life expectancy of that beneficiary,
provided that such distributions begin within one year of that owner's
death. The owner's designated beneficiary is the person designated by such
owner as a beneficiary and to whom ownership of the contract passes by
reason of death and must be a natural person. However, if the designated
beneficiary is the surviving spouse of the owner, the Contract may be
continued with the surviving spouse as the new owner.
Non-Qualified Contracts contain provisions which are intended to comply with
the requirements of Section 72(s) of the Code, although no regulations
interpreting these requirements have yet been issued. The Company intends to
review such provisions and modify them if necessary to assure that they
comply with the requirements of Code Section 72(s) when clarified by
regulation or otherwise.
Other rules may apply to Qualified Contracts.
- --------------------------------------------------------------------------------
TAXATION OF ANNUITIES
THE FOLLOWING DISCUSSION ASSUMES THAT THE CONTRACTS WILL QUALIFY AS ANNUITY
CONTRACTS FOR FEDERAL INCOME TAX PURPOSES.
IN GENERAL. Section 72 of the Code governs taxation of annuities in general.
The Company believes that an owner who is a natural person is not taxed on
increases in the value of a Contract until distribution occurs through a
partial withdrawal, surrender or annuity payment. For this purpose, the
assignment, pledge, or agreement to assign or pledge any portion of the
Accumulated Value (and in the case of a Qualified Contract, any portion of
an interest in the qualified plan) generally will be treated as a
distribution. The taxable portion of a distribution (in the form of a single
sum payment or payment option) is taxable as ordinary income.
NON-NATURAL OWNER. A non-natural owner of an annuity contract generally must
include any excess of cash value over the "investment in the contract" as
income during the taxable year. However, there are some exceptions to this
rule. Certain Contracts will generally be treated as held by a natural
person if:
- the nominal owner is a trust or other entity which holds the
contract as an agent for a natural person (but not in the case of
certain non-qualified deferred compensation arrangements);
- the Contract is acquired by an estate of a decedent by reason of the
death of the decedent;
- the Contract is issued in connection with certain Qualified Plans;
- the Contract is purchased by an employer upon the termination of
certain Qualified Plans;
- the Contract is used in connection with a structured settlement
agreement; or
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<PAGE>
- the Contract is purchased with a single payment within a year of the
annuity starting date and substantially equal periodic payments are
made, not less frequently than annually, during the annuity period.
A prospective owner that is not a natural person should discuss these
exceptions with their tax adviser.
THE FOLLOWING DISCUSSION GENERALLY APPLIES TO CONTRACTS OWNED BY NATURAL
PERSONS.
PARTIAL WITHDRAWALS. Under Section 72(e) of the Code, if a partial
withdrawal is taken from a Qualified Contract, a ratable portion of the
amount received is taxable, generally based on the ratio of the investment
in the contract to the participant's total accrued benefit or balance under
the retirement plan. The "investment in the contract" generally equals the
portion, if any, of any premium payments paid by or on behalf of the
individual under a Contract which was not excluded from the individual's
gross income. For Contracts issued in connection with qualified plans, the
investment in the contract can be zero. Special tax rules may be available
for certain distributions from Qualified Contracts, and special rules apply
to distributions from Roth IRAs.
Under Section 72(e) of the Code, if a partial withdrawal is taken from a
Non-Qualified Contract, amounts received are generally first treated as
taxable income to the extent that the Accumulated Value immediately before
the partial withdrawal exceeds the investment in the contract at that time.
Any additional amount withdrawn is not taxable.
In the case of a surrender under a Qualified or Non-Qualified Contract, the
amount received generally will be taxable only to the extent it exceeds the
investment in the contract.
Section 1035 of the Code provides that no gain or loss shall be recognized
on the exchange of one annuity contract for another and the contract
received is treated as a new contract for purposes of the penalty and
distribution-at-death rules. Special rules and procedures apply to Section
1035 transactions and prospective owners wishing to take advantage of
Section 1035 should consult their tax adviser.
ANNUITY PAYMENTS. Although tax consequences may vary depending on the
payment option elected under an annuity contract, under Code Section 72(b),
generally (prior to recovery of the investment in the contract) gross income
does not include that part of any amount received as an annuity under an
annuity contract that bears the same ratio to such amount as the investment
in the contract bears to the expected return at the annuity starting date.
Stated differently, prior to recovery of the investment in the contract,
generally, there is no tax on the amount of each payment which represents
the same ratio that the investment in the contract bears to the total
expected value of the annuity payments for the term of the payment; however,
the remainder of each income payment is taxable. After the investment in the
contract is recovered, the full amount of any additional annuity payments is
taxable. Special rules apply to distributions from Roth IRAs.
TAXATION OF DEATH BENEFIT PROCEEDS. Amounts may be distributed from a
Contract because of the death of the owner. Generally, such amounts are
includible in the income of the recipient as follows:
- if distributed in a lump sum, they are taxed in the same manner as a
surrender of the contract, or
- if distributed under a payment option, they are taxed in the same
way as annuity payments.
For these purposes, the investment in the Contract remains the amount of any
purchase payments which were not excluded from gross income.
PENALTY TAX ON CERTAIN WITHDRAWALS. In the case of a distribution from a
Non-Qualified Contract, a 10% federal tax penalty may be imposed. However,
generally, there is no penalty applied on distributions:
- made on or after the taxpayer reaches age 59 1/2;
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<PAGE>
- made on or after the death of the holder (or if the holder is not an
individual, the death of the primary annuitant);
- attributable to the taxpayer becoming disabled;
- as part of a series of substantially equal periodic payments (not
less frequently than annually) for the life (or life expectancy) of
the taxpayer or the joint lives (or joint life expectancies) of the
taxpayer and his or her designated beneficiary;
- made under certain annuities issued in connection with structured
settlement agreements;
- made under an annuity contract that is purchased with a single
premium when the retirement date is no later than a year from
purchase of the annuity and substantially equal periodic payments
are made, not less frequently than annually, during the annuity
payment period; and
- any payment allocable to an investment (including earnings thereon)
made before August 14, 1982 in a contract issued before that date.
Other tax penalties may apply to certain distributions under a Qualified
Contract. Contract owners should consult their tax adviser.
- --------------------------------------------------------------------------------
TRANSFERS, ASSIGNMENTS OR EXCHANGES OF A CONTRACT
Certain tax consequences may result upon:
- a transfer of ownership of a Contract,
- the designation of an annuitant, payee or other beneficiary who is
not also the owner,
- the selection of certain retirement dates, or
- the exchange of a Contract.
An owner contemplating any of these actions should consult their tax
adviser.
- --------------------------------------------------------------------------------
WITHHOLDING
Generally, distributions from a Contract are subject to withholding of
federal income tax at a rate which varies according to the type of
distribution and the owner's tax status.
Eligible rollover distributions from section 401(a) plans and section 403(b)
tax-sheltered annuities are subject to a mandatory federal income tax
withholding of 20%. An "eligible rollover distribution" is the taxable
portion of any distribution from such a plan, except certain distributions
such as distributions required by the Code or distributions in a specified
annuity form. The 20% withholding does not apply, however, if the owner
chooses a "direct rollover" from the plan to another tax-qualified plan or
IRA.
- --------------------------------------------------------------------------------
MULTIPLE CONTRACTS
All non-qualified deferred annuity contracts entered into after October 21,
1988 that are issued by the Company (or its affiliates) to the same owner
during any calendar year are treated as one annuity Contract for purposes of
determining the amount includible in gross income under Section 72(e). This
rule could affect the time when income is taxable and the amount that might
be subject to the 10% penalty tax described above. In addition, the Treasury
Department has specific authority to issue regulations that prevent the
avoidance of Section 72(e) through the serial purchase of annuity contracts
or otherwise. There may also be other situations in which the Treasury may
conclude that it would be appropriate to aggregate two or more annuity
contracts purchased by the same owner. Accordingly, a Contract owner should
consult a competent tax adviser before purchasing more than one annuity
contract.
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TAXATION OF QUALIFIED PLANS
The Contracts are designed for use with several types of qualified plans.
The tax rules applicable to participants in these qualified plans vary
according to the type of plan and the terms and conditions of the plan
itself. Special favorable tax treatment may be available for certain types
of contributions and distributions. Adverse tax consequences may result
from:
- contributions in excess of specified limits;
- distributions prior to age 59 1/2 (subject to certain exceptions);
- distributions that do not conform to specified commencement and
minimum distribution rules; and
- other specified circumstances.
Therefore, no attempt is made to provide more than general information about
the use of the Contracts with the various types of qualified retirement
plans. Contract owners, the annuitants, and beneficiaries are cautioned that
the rights of any person to any benefits under these qualified retirement
plans may be subject to the terms and conditions of the plans themselves,
regardless of the terms and conditions of the Contract, but the Company
shall not be bound by the terms and conditions of such plans to the extent
such terms contradict the Contract, unless the Company consents. Some
retirement plans are subject to distribution and other requirements that are
not incorporated into our Contract administration procedures. Owners,
participants and beneficiaries are responsible for determining that
contributions, distributions and other transactions with respect to the
Contracts comply with applicable law. For qualified plans under Section
401(a), 403(a), 403(b) and 457, the Code requires that distributions
generally must commence no later than April 1 of the calendar year following
the calendar year in which the owner (or plan participant) (i) reaches age
70 1/2 or (ii) retires, and must be made in a specified form or manner. If
the plan participant is a "5 percent owner" (as defined in the Code),
distributions generally must begin no later than April 1 of the calendar
year following the calendar year in which the owner (or plan participant)
reaches age 70 1/2. For IRAs described in Section 408, distributions
generally must commence no later than April 1 of the calendar year following
the calendar year in which the owner (or plan participant) reaches age
70 1/2. For Roth IRAs under Section 408A, distributions are not required
during the owner's (or plan participant's) lifetime. Brief descriptions
follow of the various types of qualified retirement plans available in
connection with a Contract. The Company will amend the Contract as necessary
to conform it to the requirements of the Code.
CORPORATE PENSION AND PROFIT SHARING PLANS AND H.R. 10 PLANS. Section 401(a)
of the Code permits corporate employers to establish various types of
retirement plans for employees, and permits self-employed individuals to
establish these plans for themselves and their employees. These retirement
plans may permit the purchase of the Contracts to accumulate retirement
savings under the plans. Adverse tax or other legal consequences to the
plan, to the participant or both may result if this Contract is assigned or
transferred to any individual as a means to provide benefit payments, unless
the plan complies with all legal requirements applicable to such benefits
prior to transfer of the Contract. Employers intending to use the Contract
with such plans should seek competent advice.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
"Individual Retirement Annuity" or "IRA". These IRAs are subject to limits
on the amount that may be contributed, the persons who may be eligible and
on the time when distributions may commence. Also, distributions from
certain other types of qualified retirement plans may be "rolled over" on a
tax-deferred basis into an IRA. Sales of the Contract for use with IRAs may
be subject to special requirements of the Internal Revenue Service. Earnings
in an IRA are not taxed until distribution. IRA contributions are limited
each year to the lesser of $2,000 or 100% of the owner's adjusted gross
income and may be deductible in whole or in part depending on the
individual's income. The limit on the amount contributed to an IRA does not
apply to distributions from certain other types of qualified plans that are
"rolled over" on a tax-
34
<PAGE>
deferred basis into an IRA. Amounts in the IRA (other than nondeductible
contributions) are taxed when distributed from the IRA. Distributions prior
to age 59 1/2 (unless certain exceptions apply) are subject to a 10% penalty
tax.
Employers may establish Simplified Employee Pension (SEP) Plans to provide
IRA contributions on behalf of their employees. In addition to all of the
general Code rules governing IRAs, such plans are subject to certain Code
requirements regarding participation and amounts of contributions.
SIMPLE IRAS. Section 408(p) of the Code permits small employers to establish
SIMPLE IRAs under which employees may elect to defer a percentage of their
compensation up to $6,000 (as increased for cost of living adjustments). The
sponsoring employer is required to make a matching contribution on behalf of
contributing employees. Distributions from a SIMPLE IRA are subject to the
same restrictions that apply to IRA distributions and are taxed as ordinary
income. Subject to certain exceptions, premature distributions prior to age
59 1/2 are subject to a 10% penalty tax, which is increased to 25% if the
distribution occurs within the first two years after the commencement of the
employee's participation in the plan.
ROTH IRAS. Section 408A of the Code permits certain eligible individuals to
contribute to a Roth IRA. Contributions to a Roth IRA, which are subject to
certain limitations, are not deductible and must be made in cash or as a
rollover or transfer from another Roth IRA or other IRA. A rollover from or
conversion of an IRA to a Roth IRA may be subject to tax and other special
rules may apply. You should consult a tax adviser before combining any
converted amounts with any other Roth IRA contributions, including any other
conversion amounts from other tax years. Distributions from a Roth IRA
generally are not taxed, except that, once aggregate distributions exceed
contributions to the Roth IRA, income tax and a 10% penalty tax may apply to
distributions made:
- before age 59 1/2 (subject to certain exceptions), or
- during the five taxable years starting with the year in which the
first contribution is made to any Roth IRA.
TAX SHELTERED ANNUITIES. Section 403(b) of the Code allows employees of
certain Section 501(c)(3) organizations and public schools to exclude from
their gross income the premiums paid, within certain limits, on a Contract
that will provide an annuity for the employee's retirement. These premiums
may be subject to FICA (social security) tax. Code section 403(b)(11)
restricts the distribution under Code section 403(b) annuity contracts of:
- elective contributions made in years beginning after December 31,
1988;
- earnings on those contributions; and
- earnings in such years on amounts held as of the last year beginning
before January 1, 1989.
Distribution of those amounts may only occur upon:
- death of the employee,
- attainment of age 59 1/2,
- separation from service,
- disability, or
- financial hardship.
In addition, income attributable to elective contributions may not be
distributed in the case of hardship.
RESTRICTIONS UNDER QUALIFIED CONTRACTS. Other restrictions with respect to
the election, commencement or distribution of benefits may apply under
Qualified Contracts or under the terms of the plans in respect of which
Qualified Contracts are issued.
35
<PAGE>
- --------------------------------------------------------------------------------
POSSIBLE CHARGE FOR THE COMPANY'S TAXES
The Company currently makes no charge to the Subaccounts for any Federal,
state or local taxes that the Company incurs which may be attributable to
such Subaccounts or the Contracts. We reserve the right in the future to
make a charge for any such tax or other economic burden resulting from the
application of the tax laws that it determines to be properly attributable
to the Subaccounts or to the Contracts.
- --------------------------------------------------------------------------------
OTHER TAX CONSEQUENCES
As noted above, the foregoing comments about the Federal tax consequences
under these Contracts are not exhaustive, and special rules are provided
with respect to other tax situations not discussed in the Prospectus.
Further, the Federal income tax consequences discussed herein reflect our
understanding of current law. Although the likelihood of legislative changes
is uncertain, there is always the possibility that the tax treatment of the
Contract could change by legislation or otherwise. Federal estate and state
and local estate, inheritance and other tax consequences of ownership or
receipt of distributions under a Contract depend on the individual
circumstances of each owner or recipient of the distribution. You should
consult your tax adviser for further information.
- --------------------------------------------------------------------------------
DISTRIBUTION OF THE CONTRACTS
- --------------------------------------------------------------------------------
The Contracts will be offered to the public on a continuous basis. We do not
anticipate discontinuing the offering of the Contracts, but reserve the
right to do so. Applications for Contracts are solicited by agents, who in
addition to being licensed by applicable state insurance authorities to sell
the variable annuity contracts and variable life insurance policies for the
Company, are also registered representatives of broker-dealers having
selling agreements with American Equity Capital, Inc., distributor and
principal underwriter of the Contracts, or broker-dealers having selling
agreements with such broker-dealers. The broker-dealers are registered with
the SEC under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc.
American Equity Capital, Inc. serves as the Principal Underwriter, as
defined in the 1940 Act, of the Contracts for the Account pursuant to an
Underwriting Agreement between the Company and American Equity Capital, Inc.
and is not obligated to sell any specific number of Contracts. American
Equity Capital, Inc.'s principal business address is the same as that of the
Company.
The Company may pay broker-dealers with selling agreements up to an amount
equal to 9% of the premiums paid under a Contract during the first Contract
year, 3% of the premiums paid in the second through ninth Contract years and
1% of the premiums paid in the tenth and subsequent Contract years, as well
as other distribution expenses such as production incentive bonuses, agent's
insurance and pension benefits, and agency expense allowances. These
distribution expenses do not result in any additional charges against the
Contracts that are not described under "Charges and Deductions."
- --------------------------------------------------------------------------------
LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
The Company, like other life insurance companies, is involved in lawsuits.
Currently, there are no class action lawsuits naming the Company as a
defendant or involving the Account. In some lawsuits involving other
insurers, substantial damages have been sought and/or material settlement
payments have been made. Although the outcome of any litigation cannot be
predicted with certainty, the Company believes that at the present time,
there are no pending or threatened lawsuits that are reasonably likely to
have a material adverse impact on the Account or the Company.
36
<PAGE>
- --------------------------------------------------------------------------------
VOTING RIGHTS
- --------------------------------------------------------------------------------
To the extent required by law, the Company will vote the Fund shares held in
the Account at regular and special shareholder meetings of the Funds, in
accordance with instructions received from persons having voting interests
in the corresponding Subaccounts. If, however, the 1940 Act or any
regulation thereunder should be amended, or if the present interpretation
thereof should change, and, as a result, the Company determines that it is
permitted to vote the Fund shares in its own right, it may elect to do so.
The number of votes you have the right to instruct will be calculated
separately for each Subaccount to which you have Accumulated Value, and may
include fractional votes. (You only have voting interest prior to the
retirement date.) The number of votes attributable to a Subaccount is
determined by dividing your Accumulated Value in that Subaccount by the net
asset value per share of the Investment Option of the corresponding
Subaccount.
The number of votes of an Investment Option which are available to you is
determined as of the date coincident with the date established by that
Investment Option for determining shareholders eligible to vote at the
relevant meeting for that Fund. Voting instructions will be solicited by
written communication prior to such meeting in accordance with procedures
established by each Fund. For each Subaccount in which you have a voting
interest, you will receive proxy materials and reports relating to any
meeting of shareholders of the Investment Option in which that Subaccount
invests.
The Company will vote Fund shares attributable to Contracts as to which no
timely instructions are received (as well as any Fund shares held in the
Account which are not attributable to Contracts) in proportion to the voting
instructions received with respect to all Contracts participating in each
Investment Option. Voting instructions to abstain on any item to be voted
upon will be applied on a pro rata basis to reduce the votes eligible to be
cast on a matter.
- --------------------------------------------------------------------------------
YEAR 2000
- --------------------------------------------------------------------------------
Like other investment funds, financial and business organizations and
individuals around the world, the Account could be adversely affected if the
computer systems used by the Company and other service providers do not
properly process and calculate date-related information and data from and
after January 1, 2000. We have completed a comprehensive assessment of the
Year 2000 issue and developed a plan to address the issue in a timely
manner. We have and will utilize both internal and external resources to
reprogram, or replace, and test the software for Year 2000 modifications. We
anticipate completing the Year 2000 project prior to any anticipated impact
on our operating systems.
The Company believes it will complete the Year 2000 modifications based on
management's best estimates, which were derived utilizing numerous
assumptions of future events. We also recognize there are outside influences
and dependencies relative to its Year 2000 effort, over which we have little
or no control. However, we are putting effort into ensuring these
considerations will have minimal impact. These would include the continued
availability of certain resources, third party modification plans and many
other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ from those anticipated.
37
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The audited balance sheets of the Company as of December 31, 1998 and 1997,
and the related statements of operations, changes in stockholder's equity
and cash flows for each of the three years in the period ended December 31,
1998, as well as the related Report of Independent Auditors are contained in
the Statement of Additional Information. Likewise, the audited statement of
net assets for the Account as of December 31, 1998 and the related
statements of operations and changes in net assets for the period from
August 1, 1998 (date operations commenced) through December 31, 1998, as
well as the related Report of Independent Auditors, are contained in the
Statement of Additional Information.
38
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
GENERAL INFORMATION ABOUT THE COMPANY.................................... 1
ADDITIONAL CONTRACT PROVISIONS........................................... 1
The Contract....................................................... 1
Incontestability................................................... 1
Misstatement of Age or Sex......................................... 1
Non-Participation.................................................. 1
CALCULATION OF YIELDS AND TOTAL RETURNS.................................. 1
Money Market Subaccount Yields..................................... 1
Other Subaccount Yields............................................ 3
Average Annual Total Returns....................................... 3
Other Total Returns................................................ 5
Effect of the Administrative Charge on Performance Data............ 5
LEGAL MATTERS............................................................ 5
EXPERTS.................................................................. 6
OTHER INFORMATION........................................................ 6
FINANCIAL STATEMENTS..................................................... 6
</TABLE>
39
<PAGE>
If you would like a copy of the Statement of Additional Information, please
complete the information below and detach and mail this card to the Company at
the address shown on the cover of this prospectus.
Name
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
City, State, Zip
- -------------------------------------------------------------------------------
40
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
5400 University Avenue
West Des Moines, Iowa 50266
1-888-349-4656
AMERICAN EQUITY LIFE ANNUITY ACCOUNT
INDIVIDUAL FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT
This Statement of Additional Information contains additional information to the
Prospectus for the flexible premium deferred variable annuity contract (the
"Contract") offered by American Equity Investment Life Insurance Company (the
"Company"). This Statement of Additional Information is not a Prospectus, and it
should be read only in conjunction with the Prospectuses for the Contract, and
the selected Investment Options of EquiTrust Variable Insurance Series Fund, T.
Rowe Price Equity Series, Inc., T. Rowe Price International Series, Inc. and
Dreyfus Variable Investment Fund. The Prospectus for the Contract is dated the
same as this Statement of Additional information. You may obtain a copy of the
Prospectuses by writing or calling us at our address or phone number shown
above.
May 1, 1999
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
GENERAL INFORMATION ABOUT THE COMPANY...................................... 1
ADDITIONAL CONTRACT PROVISIONS............................................. 1
The Contract......................................................... 1
Incontestability..................................................... 1
Misstatement of Age or Sex........................................... 1
Non-Participation.................................................... 1
CALCULATION OF YIELDS AND TOTAL RETURNS.................................... 1
Money Market Subaccount Yields....................................... 1
Other Subaccount Yields.............................................. 3
Average Annual Total Returns......................................... 3
Other Total Returns.................................................. 5
Effect of the Administrative Fee On Performance Data................. 5
LEGAL MATTERS.............................................................. 5
EXPERTS.................................................................... 6
OTHER INFORMATION.......................................................... 6
FINANCIAL STATEMENTS....................................................... 6
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE COMPANY
- --------------------------------------------------------------------------------
One hundred percent of Company's outstanding Common Stock, par value $1 per
share, is owned by American Equity Investment Life Holding Company (the
"Holding Company"). As of January 15, 1998, no persons or entities
beneficially owned more than 34.1% of the Common Stock, par value $1 per
share, of the Holding Company. The Holding Company develops, markets, issues
and administers annuity contracts and life insurance policies through the
Company. Our principal office, and those of the Holding Company, are at 5000
Westown Parkway, Suite 440, West Des Moines, Iowa 50266.
- --------------------------------------------------------------------------------
ADDITIONAL CONTRACT PROVISIONS
- --------------------------------------------------------------------------------
THE CONTRACT
The Contract includes the application and all other attached papers. The
statements made in the application are deemed representations and not
warranties. We will not use any statement in defense of a claim or to void
the Contract unless it is contained in the application.
- --------------------------------------------------------------------------------
INCONTESTABILITY
We will not contest the Contract from its Contract Date.
- --------------------------------------------------------------------------------
MISSTATEMENT OF AGE OR SEX
If the age or sex of the annuitant has been misstated, we will pay that
amount which the proceeds would have purchased at the correct age and sex.
- --------------------------------------------------------------------------------
NON-PARTICIPATION
The Contracts are not eligible for dividends and will not participate in the
Company's divisible surplus.
- --------------------------------------------------------------------------------
CALCULATION OF YIELDS AND TOTAL RETURNS
- --------------------------------------------------------------------------------
The Company may disclose yields, total returns and other performance data
for a Subaccount. Such performance data will be computed, or accompanied by
performance data computed, in accordance with the standards defined by the
SEC.
- --------------------------------------------------------------------------------
MONEY MARKET SUBACCOUNT YIELDS
Advertisements and sales literature may quote the current annualized yield
of the Money Market Subaccount for a seven-day period. This figure is
computed by determining the net change (exclusive or realized gains and
losses on the sale of securities, unrealized appreciation and depreciation
and income other than investment income) at the end of the seven-day period
in the value of a hypothetical account under a Contract with a balance of 1
unit at the beginning of the period, dividing this net change by the value
of the hypothetical account at the beginning of the period to determine the
base period return, and annualizing this quotient on a 365-day basis.
The net change in account value reflects:
- net income from the Investment Option attributable to the
hypothetical account; and
1
<PAGE>
- charges and deductions imposed under the Contract attributable to
the hypothetical account.
The charges and deductions include per unit charges for the hypothetical
account for:
- the annual administrative fee and
- the mortality and expense risk charge.
For purposes of calculating current yields for a Contract, an average per
unit administrative fee is used based on the $45 administrative fee deducted
at the beginning of each Contract Year. Current yield will be calculated
according to the following formula:
<TABLE>
<S> <C><C>
Current Yield = ((NCS - ES)/UV) X (365/7)
Where:
NCS = the net change in the value of the Investment Option (exclusive of
realized gains or losses on the sale of securities and unrealized
appreciation and depreciation and income other than investment income)
for the seven-day period attributable to a hypothetical account having a
balance of 1 subaccount unit.
ES = per unit expenses attributable to the hypothetical account for the
seven-day period.
UV = the unit value for the first day of the seven-day period.
Effective Yield = (1 + ((NCS - ES)/UV))365/7 - 1
Where:
NCS = the net change in the value of the Investment Option (exclusive of
realized gains or losses on the sale of securities and unrealized
appreciation and depreciation and income other than investment income)
for the seven-day period attributable to a hypothetical account having a
balance of 1 subaccount unit.
ES = per unit expenses attributable to the hypothetical account for the
seven-day period.
UV = the unit value for the first day of the seven-day period.
</TABLE>
The yield for the Money Market Subaccount will be lower than the yield for
the Money Market Investment Option due to the charges and deductions imposed
under the Contract.
The current and effective yields of the Money Market Subaccount normally
fluctuate on a daily basis and SHOULD NOT ACT AS AN INDICATION OR
REPRESENTATION OF FUTURE YIELDS OR RATES OF RETURN. The actual yield is
affected by:
- changes in interest rates on money market securities,
- the average portfolio maturity of the Money Market Investment
Option,
- the quality of portfolio securities held by this Investment Option,
and
- the operating expenses of the Money Market Investment Option.
Yields may also be presented for other periods of time.
2
<PAGE>
- --------------------------------------------------------------------------------
OTHER SUBACCOUNT YIELDS
Advertisements and sales literature may quote the current annualized yield
of one or more of the subaccounts (except the Money Market Subaccount) for a
Contract for 30-day or one month periods. The annualized yield of a
Subaccount refers to income generated by that Subaccount during a 30-day or
one-month period which is assumed to be generated each period over a
12-month period.
The yield is computed by:
1) dividing net investment income of the Investment Option attributable
to the subaccount units less subaccount expenses for the period; by
2) the maximum offering price per unit on the last day of the period
times the daily average number of units outstanding for the period;
by
3) compounding that yield for a six-month period; and by
4) multiplying that result by 2.
The annual administrative fee (deducted at the beginning of each Contract
Year) and mortality and expense risk charge are included in expenses of the
Subaccounts. For purposes of calculating the 30-day or one-month yield, an
average administrative fee per dollar of Contract value is used to determine
the amount of the charge attributable to the Subaccount for the 30-day or
one-month period. The 30-day or one-month yield is calculated according to
the following formula:
<TABLE>
<S> <C><C>
Yield = 2 X ((NI - ES)/(U X UV)) + 1) (to the power of "6") - 1
Where:
NI = net income of the Investment Option for the 30-day or one-month period
attributable to the subaccount's units.
ES = expenses of the subaccount for the 30-day or one-month period.
U = the average number of units outstanding.
UV = the unit value at the close of the last day in the 30-day one-month
period.
</TABLE>
The yield for each Subaccount will be lower than the yield for the
corresponding Investment Option due to the various charges and deductions
imposed under the Contract.
The yield for each Subaccount normally will fluctuate over time and SHOULD
NOT ACT AS AN INDICATION OR REPRESENTATION OF FUTURE YIELDS OR RATES OF
RETURN. A Subaccount's actual yield is affected by the quality of portfolio
securities held by the corresponding Investment Option and its operating
expenses.
The Surrender Charge is not considered in the yield calculation.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
Advertisements and sales literature may also quote average annual total
returns for the Subaccounts for various periods of time, including periods
before the Subaccounts were in existence. Total return figures are provided
for each Subaccount for one, five and ten year periods. Average annual total
returns may also be disclosed for other periods of time.
Adjusted historic average annual total return quotations represent the
average annual compounded rates of return that would equate an initial
investment of $1,000 to the redemption value of that investment as of the
last day of each of the periods for which total return quotations are
provided. The last date of each period is the most recent month-end
practicable.
Adjusted historic average annual total returns for each Subaccount are
calculated based on the assumption that they were in existence during the
stated periods with the level of Contract charges
3
<PAGE>
which were in effect at the inception of each Subaccount. For purposes of
calculating average annual total return, an average annual administrative
fee per dollar of Contract value is used. The calculation also assumes
surrender of the Contract at the end of the period. The total return will
then be calculated according to the following formula:
<TABLE>
<S> <C><C>
TR = ((ERV/P)/N) - 1
Where:
TR = the average annual total return net of subaccount recurring charges.
ERV = the ending redeemable value (net of any applicable surrender charge) of
the hypothetical account at the end of the period.
P = a hypothetical initial payment of $1,000.
N = the number of years in the period.
</TABLE>
The adjusted historic average annual total return information for the
Subaccounts is as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE FOR THE PERIOD
1-YEAR 5-YEAR 10-YEAR FROM DATE OF
PERIOD PERIOD PERIOD INCEPTION OF
ENDED ENDED ENDED INVESTMENT OPTION
SUBACCOUNT 12/31/98 12/31/98 12/31/98 TO 12/31/98
EquiTrust Variable Insurance Series Fund
<S> <C> <C> <C> <C>
Value Growth(1) (32.55)% (0.60)% 5.99% 3.83%
High Grade Bond(1) (2.84) 4.17 7.34 7.57
High Yield Bond(1) (3.47) 5.82 9.02 9.31
Money Market(2) (5.35) 1.60 -- 2.80
Blue Chip(3) 8.56 17.46 -- 17.31
<CAPTION>
T. Rowe Price Equity Series, Inc.
<S> <C> <C> <C> <C>
Equity Income(4) (1.28) -- -- 17.75
Mid-Cap Growth(5) 11.73 -- -- 14.95
New America Growth(4) 8.16 -- -- 19.90
Personal Strategy Balanced(6) 3.97 -- -- 15.45
<CAPTION>
T. Rowe Price International Series, Inc.
<S> <C> <C> <C> <C>
International Stock(4) 5.51 -- -- 6.44
<CAPTION>
Dreyfus Variable Investment Fund
<S> <C> <C> <C> <C>
Capital Appreciation Portfolio(7) 19.87 20.93 -- 19.19
Disciplined Stock Portfolio(8) 16.37 -- -- 25.48
Growth and Income Portfolio(9) 1.46 -- -- 19.07
International Equity Portfolio(9) (5.86) -- -- 3.22
Small Cap Portfolio(10) (13.34) 9.89 -- 35.44
</TABLE>
4
<PAGE>
(1) The Value Growth, High Grade Bond and High Yield Bond Portfolios
commenced operations on October 17, 1987.
(2) The Money Market Portfolio commenced operations on February 20,
1990.
(3) The Blue Chip Portfolio commenced operations on October 15, 1990.
(4) The Equity Income, New America Growth and International Stock
Portfolios commenced operations on March 31, 1994.
(5) The Mid-Cap Growth Portfolio commenced operations on December 31,
1996.
(6) The Personal Strategy Balanced Portfolio commenced operations on
December 30, 1994.
(7) The Capital Appreciation Portfolio commenced operations on April
5, 1993.
(8) The Disciplined Stock Portfolio commenced operations on April 30,
1996.
(9) The Growth and Income and International Equity Portfolios
commenced operations on May 2, 1994.
(10) The Small Cap Portfolio commenced operations on August 31, 1990.
- --------------------------------------------------------------------------------
OTHER TOTAL RETURNS
Advertisements and sales literature may also quote average annual total
returns which do not reflect the Surrender Charge. These figures are
calculated in the same manner as average annual total returns described
above, however, the Surrender Charge is not taken into account at the end of
the period.
We may disclose cumulative total returns in conjunction with the standard
formats described above. The cumulative total returns will be calculated
using the following formula:
<TABLE>
<S> <C><C>
CTR = (ERV/P) - 1
Where:
CTR = The cumulative total return net of subaccount recurring charges for the
period.
ERV = The ending redeemable value of the hypothetical investment at the end of
the period.
P = A hypothetical single payment of $1,000.
</TABLE>
- --------------------------------------------------------------------------------
EFFECT OF THE ADMINISTRATIVE FEE ON PERFORMANCE DATA
We apply an annual administrative charge of $45 on the Contract Date and on
each Contract Anniversary prior to the retirement date. This charge is
deducted from each Subaccount and the Declared Interest Option based on the
proportion that each Subaccount's value bears to the total Accumulated
Value. For purposes of reflecting the administrative fee in yield and total
return quotations, this annual charge is converted into a per-dollar per-day
charge based on the average value of all contracts in the Account on the
last day of the period for which quotations are provided. The per-dollar
per-day average charge is then adjusted to reflect the basis upon which the
particular quotation is calculated.
- --------------------------------------------------------------------------------
LEGAL MATTERS
- --------------------------------------------------------------------------------
All matters relating to Iowa law pertaining to the Contracts, including the
validity of the Contracts and the Company's authority to issue the
Contracts, have been passed upon by Whitfield & Eddy, P.L.C., Des Moines,
Iowa. Sutherland Asbill & Brennan LLP, Washington D.C. has provided advice
on certain matters relating to the federal securities laws.
5
<PAGE>
- --------------------------------------------------------------------------------
EXPERTS
- --------------------------------------------------------------------------------
The Account's statement of net assets as of December 31, 1998 and the
related statements of operations and changes in net assets for the period
from August 1, 1998 (date operations commenced) through December 31, 1998
and the balance sheets of the Company at December 31, 1998 and 1997 and the
related statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998,
appearing herein, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their respective reports thereon appearing
elsewhere herein, and are included in reliance upon such reports given upon
the authority of such firm as experts in accounting and auditing.
- --------------------------------------------------------------------------------
OTHER INFORMATION
- --------------------------------------------------------------------------------
A registration statement has been filed with the SEC under the Securities
Act of 1933 as amended, with respect to the Contract discussed in this
Statement of Additional Information. Not all the information set forth in
the registration statement, amendments and exhibits thereto has been
included in this Statement of Additional Information. Statements contained
in this Statement of Additional Information as to the contents of the
Contract and other legal instruments are summaries. For a complete statement
of the terms of these documents, reference is made to such instruments as
filed.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company's financial statements included in this Statement of Additional
Information should be considered only as bearing on the Company's ability to
meet its obligations under the Contracts. They should not be considered as
bearing on the investment performance of the assets held in the Account.
6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Participants
American Equity Investment Life Insurance Company
We have audited the accompanying statement of net assets of American Equity Life
Annuity Account (comprised of the High Grade Bond, High Yield Bond and Money
Market Subaccounts) as of December 31, 1998, and the related statements of
operations and changes in net assets for the period August 1, 1998 (date
operations commenced) through December 31, 1998. These financial statements are
the responsibility of the Account's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1998, by correspondence with
the transfer agent. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Equity Life Annuity
Account at December 31, 1998, and the results of its operations and changes in
its net assets for the period August 1, 1998 through December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Des Moines, Iowa
March 5, 1999
1
<PAGE>
AMERICAN EQUITY LIFE ANNUITY ACCOUNT
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Investments in EquiTrust Variable Insurance Series
Fund:
High Grade Bond Subaccount:
High Grade Bond Portfolio, 5,014 shares at net
asset value of $10.19 per share (cost:
$50,999) $ 51,093
High Yield Bond Subaccount:
High Yield Bond Portfolio, 4,994 shares at net
asset value of $10.17 per share (cost:
$51,087) 50,794
Money Market Subaccount:
Money Market Portfolio, 49,563 shares at net
asset value of $1.00 per share (cost:
$49,563) 49,563
-------------
Total investments (cost: $151,649) 151,450
LIABILITIES --
-------------
NET ASSETS $ 151,450
-------------
-------------
</TABLE>
<TABLE>
<CAPTION>
EXTENDED
UNITS UNIT VALUE VALUE
-------------- ------------ ----------
<S> <C> <C> <C>
Net assets are represented by:
High Grade Bond Subaccount 5,001.148000 $ 10.216450 $ 51,093
High Yield Bond Subaccount 5,001.147000 10.156478 50,794
Money Market Subaccount 4,950.136990 10.012353 49,563
----------
Total net assets $ 151,450
----------
----------
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
AMERICAN EQUITY LIFE ANNUITY ACCOUNT
STATEMENT OF OPERATIONS
PERIOD FROM AUGUST 1, 1998 (DATE OPERATIONS
COMMENCED) THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
HIGH GRADE HIGH YIELD MONEY
BOND BOND MARKET
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Net investment income:
Dividend income $ 2,762 $ 1,265 $ 1,353 $ 144
Mortality and expense risk charges (594) (278) (275) (41)
----------- ----------- ----------- -----
Net investment income 2,168 987 1,078 103
Net realized and unrealized gain (loss) on investments:
Net realized gain (loss) from investment transactions (1) 1 (2) --
Change in unrealized appreciation/depreciation of investments (199) 94 (293) --
----------- ----------- ----------- -----
Net gain (loss) on investments (200) 95 (295) --
----------- ----------- ----------- -----
Net increase in net assets resulting from operations $ 1,968 $ 1,082 $ 783 $ 103
----------- ----------- ----------- -----
----------- ----------- ----------- -----
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
AMERICAN EQUITY LIFE ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
PERIOD FROM AUGUST 1, 1998 (DATE OPERATIONS
COMMENCED) THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
HIGH GRADE HIGH YIELD MONEY
BOND BOND MARKET
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 2,168 $ 987 $ 1,078 $ 103
Net realized gain (loss) from investment transactions (1) 1 (2) --
Change in unrealized appreciation/depreciation of investments (199) 94 (293) --
---------- ----------- ----------- -----------
Net increase in net assets resulting from operations 1,968 1,082 783 103
Capital share transactions:
Transfers of net premiums 149,513 -- -- 149,513
Transfers between subaccounts, including fixed interest
subaccount (31) 50,011 50,011 (100,053)
---------- ----------- ----------- -----------
Net increase in net assets resulting from capital share
transactions 149,482 50,011 50,011 49,460
---------- ----------- ----------- -----------
Total increase in net assets 151,450 51,093 50,794 49,563
Net assets at beginning of period -- -- -- --
---------- ----------- ----------- -----------
Net assets at end of period $ 151,450 $ 51,093 $ 50,794 $ 49,563
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
AMERICAN EQUITY LIFE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES
American Equity Life Annuity Account (the Account) is a unit investment trust
registered under the Investment Company Act of 1940. The Account was established
as a separate investment account within American Equity Investment Life
Insurance Company (the Company) to fund flexible premium deferred variable
annuity insurance policies. The Account commenced operations on August 1, 1998.
The Account has available fifteen separate subaccounts, each of which invests
solely, as directed by contract owners, in a different portfolio of EquiTrust
Variable Insurance Series Fund, Dreyfus Variable Insurance Series Fund, T. Rowe
Price Equity Series, Inc. and T. Rowe Price International Series, Inc. (the
Funds). At December 31, 1998, three portfolios of EquiTrust Variable Insurance
Series Fund had been utilized by contract owners. Contract owners also may
direct investments to a fixed interest subaccount held in the general assets of
the Company.
Investments in shares of the Funds are stated at market value, which is the
closing net asset value per share as determined by the Funds. The average cost
basis has been used in determining the net realized gain or loss from investment
transactions and unrealized appreciation or depreciation on investments.
Dividends paid to the Account are automatically reinvested in shares of the
Funds on the payable date.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of the Account's financial statements and accompanying notes
requires management to make estimates and assumptions that affect the amounts
reported and disclosed. These estimates and assumptions could change in the
future as more information becomes known, which could impact the amounts
reported and disclosed in the financial statements and accompanying notes.
2. EXPENSE CHARGES
The Account pays the Company certain amounts relating to the distribution and
administration of the policies funded by the Account and as reimbursement for
certain mortality and other risks assumed by the Company. The following
summarizes those amounts.
MORTALITY AND EXPENSE RISK CHARGES: The Company deducts a daily mortality and
expense risk charge from the Account at an effective annual rate of 1.40% of the
average daily net asset value of the Account. These charges are assessed in
return for the Company's assumption of risks associated with adverse mortality
experience or excess administrative expenses in connection with policies issued.
ADMINISTRATIVE CHARGE: Prior to the annuity payment period, the Company will
deduct an annual administrative charge of $45 to reimburse it for administrative
expenses related to the contract. A portion of this charge may be deducted from
funds held in the fixed interest subaccount.
SURRENDER CHARGE: A surrender charge is imposed in the event of a full or
partial surrender during the first nine contract years. During the second
through ninth contract years, this charge is not assessed on the first 10% of
cash value surrendered. The amount charged is 8.5% of the amount surrendered
during the first contract year and declines by .5% in each of the next five
contract years, by 1% in the sixth year and by 2% for the next three contract
years. No surrender charge is deducted if the partial surrender or surrender
occurs after nine full contract years.
TRANSFER PROCESSING CHARGES: A transfer charge of $25 may be imposed for the
thirteenth and each subsequent transfer between subaccounts in any one policy
year.
3. FEDERAL INCOME TAXES
The operations of the Account form a part of, and are taxed with, operations of
the Company, which is taxed as a life insurance company under the Internal
Revenue Code. Under current law, no federal
5
<PAGE>
AMERICAN EQUITY LIFE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. FEDERAL INCOME TAXES (CONTINUED)
income taxes are payable with respect to the Account's net investment income or
net realized gain on investments. Accordingly, no charge for income tax is
currently being made to the Account. If such taxes are incurred by the Company
in the future, a charge to the Account may be assessed.
4. INVESTMENT TRANSACTIONS
The aggregate cost of investment securities purchased and proceeds from
investment securities sold by subaccount for the period from August 1, 1998
(date operations commenced) through December 31, 1998 are as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
----------------------
<S> <C> <C>
High Grade Bond Subaccount $ 51,276 $ 278
High Yield Bond Subaccount 51,364 275
Money Market Subaccount 149,656 100,093
----------------------
Combined $ 252,296 $ 100,646
----------------------
----------------------
</TABLE>
5. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS
Transactions in units of each subaccount for the period from August 1, 1998
(date operations commenced) through December 31, 1998 were as follows:
<TABLE>
<CAPTION>
UNITS SOLD UNITS REDEEMED NET INCREASE
--------------------- --------------------- ---------------------
UNITS AMOUNT UNITS AMOUNT UNITS AMOUNT
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
High Grade Bond Subaccount 5,001 $ 50,011 -- $ -- 5,001 $ 50,011
High Yield Bond Subaccount 5,001 50,011 -- -- 5,001 50,011
Money Market Subaccount 14,946 149,513 9,996 100,053 4,950 49,460
-------------------------------------------------------------------
Combined 24,948 $ 249,535 9,996 $ 100,053 14,952 $ 149,482
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
6. NET ASSETS
The Account has an unlimited number of units of beneficial interest authorized
with no par value. Net assets as of December 31, 1998 consisted of:
<TABLE>
<CAPTION>
HIGH GRADE HIGH YIELD MONEY
BOND BOND MARKET
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT
-------------------------------------------------
<S> <C> <C> <C> <C>
Paid-in capital $ 149,482 $ 50,011 $ 50,011 $ 49,460
Accumulated undistributed net investment
income 2,168 987 1,078 103
Accumulated undistributed net realized
gain (loss) from investment transactions (1) 1 (2) --
Net unrealized appreciation
(depreciation) of investments (199) 94 (293) --
-------------------------------------------------
Net assets $ 151,450 $ 51,093 $ 50,794 $ 49,563
-------------------------------------------------
-------------------------------------------------
</TABLE>
6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
American Equity Investment Life Insurance Company
We have audited the accompanying balance sheets of American Equity Investment
Life Insurance Company (the Company, a wholly-owned subsidiary of American
Equity Investment Life Holding Company) as of December 31, 1998 and 1997, and
the related statements of operations, changes in stockholder's equity, and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Equity Investment Life
Insurance Company at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Des Moines, Iowa
March 2, 1999
1
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
Cash and investments:
Available-for-sale fixed maturity securities, at market (amortized cost:
1998--$600,300,562; 1997--$201,624,365) $ 601,897,562 $ 202,315,960
Mortgage loans on real estate -- 700,000
Derivative instruments 16,171,621 2,065,549
Policy loans 192,184 183,353
Cash and cash equivalents 12,421,353 4,125,117
-------------- --------------
Total cash and investments 630,682,720 209,389,979
Receivable from other insurance companies 616,737 622,094
Premiums due and uncollected 1,684,698 1,336,336
Accrued investment income 2,946,796 1,820,376
Property, furniture and equipment, less accumulated
depreciation of $405,158 in 1998 and $159,306 in 1997 724,147 540,550
Value of insurance in force acquired 1,068,906 1,343,000
Deferred policy acquisition costs 32,005,772 4,282,491
Goodwill, less accumulated amortization of $157,500
in 1998 and $87,500 in 1997 542,500 612,500
Deferred income tax asset 8,288,049 3,845,497
Receivable from affiliates 64,427 142,983
Other assets 89,336 138,041
Assets held in separate account 151,450 --
-------------- --------------
Total assets $ 678,865,538 $ 224,073,847
-------------- --------------
-------------- --------------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy benefit reserves:
Traditional life insurance and accident and health products $ 11,317,156 $ 9,687,379
Annuity products 529,765,023 146,310,889
Other policy funds and contract claims 6,315,598 2,355,156
Provision for experience rating refunds 833,679 535,655
Amounts due under repurchase agreements 49,000,000 --
Note payable to parent 8,000,000 2,500,000
Federal income taxes payable 1,648,822 2,562,742
Other liabilities 6,403,193 2,687,604
Liabilities related to separate account 151,450 --
-------------- --------------
Total liabilities 613,434,921 166,639,425
Commitments and contingencies (NOTES 6, 9 AND 11)
Stockholder's equity:
Series Preferred Stock, par value $1.00 per share--
authorized 500,000 shares -- --
Common stock, par value $1.00 per share--
authorized 4,000,000 shares, issued and outstanding 2,500,000 shares (all owned
by American Equity Investment Life Holding Company) 2,500,000 2,500,000
Additional paid-in capital 62,900,235 56,400,235
Accumulated other comprehensive income 420,035 210,300
Retained-earnings deficit (389,653) (1,676,113)
-------------- --------------
Total stockholder's equity 65,430,617 57,434,422
-------------- --------------
Total liabilities and stockholder's equity $ 678,865,538 $ 224,073,847
-------------- --------------
-------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
-------------------------------------------
Revenues:
Traditional life and accident and health insurance premiums $ 10,528,108 $ 11,424,907 $ 14,540,707
Annuity product charges 642,547 11,896 14,007
Net investment income 26,235,923 4,028,628 857,015
Realized gains on investments 151,750 -- --
-------------------------------------------
Total revenues 37,558,328 15,465,431 15,411,729
Benefits and expenses:
Insurance policy benefits and change in future policy benefits 6,084,893 7,440,080 8,787,700
Interest credited to account balances 15,837,912 2,129,686 77,831
Interest expense on notes payable 200,000 134,077 41,266
Interest expense on amounts due under repurchase agreements 1,528,718 291,547 --
Amortization of deferred policy acquisition costs and value of
insurance in force acquired 3,946,133 1,143,032 879,916
Amortization of goodwill 70,000 70,000 17,500
Other operating costs and expenses 7,843,729 6,804,652 6,124,343
-------------------------------------------
Total benefits and expenses 35,511,385 18,013,074 15,928,556
-------------------------------------------
Income (loss) before income taxes 2,046,943 (2,547,643) (516,827)
Income tax benefit (expense):
Current (5,311,080) (2,565,057) --
Deferred 4,550,597 3,953,833 --
-------------------------------------------
(760,483) 1,388,776 --
-------------------------------------------
Net income (loss) $ 1,286,460 $ (1,158,867) $ (516,827)
-------------------------------------------
-------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER RETAINED- TOTAL
COMMON PAID-IN COMPREHENSIVE EARNINGS STOCKHOLDER'S
STOCK CAPITAL INCOME (LOSS) DEFICIT EQUITY
---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $2,500,000 $ 4,499,000 $ -- $ (419) $ 6,998,581
Comprehensive loss:
Net loss for year -- -- -- (516,827) (516,827)
Change in net unrealized
depreciation of
available-for-sale fixed
maturity securities -- -- (201,556) -- (201,556)
-------------------------------------------------------------------
Total comprehensive loss (718,383)
Cash contributions from American
Equity Investment Life Holding
Company -- 9,401,235 -- -- 9,401,235
-------------------------------------------------------------------
Balance at December 31, 1996 2,500,000 13,900,235 (201,556) (517,246) 15,681,433
Comprehensive loss:
Net loss for year -- -- -- (1,158,867) (1,158,867)
Change in net unrealized
appreciation of
available-for-sale fixed
maturity securities -- -- 411,856 -- 411,856
-------------------------------------------------------------------
Total comprehensive loss (747,011)
Cash contributions from American
Equity Investment Life Holding
Company -- 42,500,000 -- -- 42,500,000
-------------------------------------------------------------------
Balance at December 31, 1997 2,500,000 56,400,235 210,300 (1,676,113) 57,434,422
Comprehensive income:
Net income for year -- -- -- 1,286,460 1,286,460
Change in net unrealized
appreciation of
available-for-sale fixed
maturity securities -- -- 209,735 -- 209,735
-------------------------------------------------------------------
Total comprehensive income 1,496,195
Cash contributions from American
Equity Investment Life Holding
Company -- 6,500,000 -- -- 6,500,000
-------------------------------------------------------------------
Balance at December 31, 1998 $2,500,000 $62,900,235 $ 420,035 $ (389,653) $ 65,430,617
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,286,460 $ (1,158,867) $ (516,827)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Adjustments related to interest sensitive
products:
Interest credited to account balances 15,837,912 2,129,686 77,831
Charges for mortality and administration (642,547) (11,896) (14,007)
Increase in traditional life insurance and
accident and health reserves 1,629,777 287,197 439,216
Policy acquisition costs deferred (26,073,266) (4,142,926) (245,226)
Amortization of deferred policy acquisition
costs 3,672,039 761,032 6,995
Amortization of discount and premiums on
available-for-sale fixed maturity securities
and derivative instruments (12,975,476) (997,853) 36,148
Provisions for depreciation and other
amortization 589,946 591,461 910,266
Realized gains on investments (151,750) -- --
Deferred income taxes (4,550,597) (3,953,833) --
Change in other operating assets and
liabilities:
Federal income taxes payable (913,920) 2,562,742 --
Accrued investment income (1,126,420) (1,405,521) (345,194)
Other policy funds and contract claims 3,960,442 1,279,542 225,000
Other liabilities 3,715,589 2,193,458 363,707
Other 120,889 331,342 (685,162)
------------- ------------- -------------
Net cash provided by (used in) operating
activities (15,620,922) (1,534,436) 252,747
INVESTING ACTIVITIES
Maturities or repayments of investments:
Available-for-sale fixed maturity securities 222,745,031 22,591,487 3,779,185
Mortgage loan on real estate 700,000 -- --
Policy loans -- -- 12,580
------------- ------------- -------------
223,445,031 22,591,487 3,791,765
Acquisitions of investments:
Available-for-sale fixed maturity securities (602,830,456) (200,181,267) (19,223,611)
Mortgage loan on real estate -- -- (700,000)
Derivative instruments (11,539,179) (1,815,674) --
Policy loans (8,831) (26,830) (169,103)
------------- ------------- -------------
(614,378,466) (202,023,771) (20,092,714)
Cash received pursuant to reinsurance assumption
agreements -- -- 3,805,969
Purchases of property, furniture and equipment (429,449) (490,887) (208,969)
Acquisition of Century Life Insurance Company, net
of cash equivalents received -- -- (885,837)
------------- ------------- -------------
Net cash used in investing activities (391,362,884) (179,923,171) (13,589,786)
</TABLE>
6
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Receipts from interest sensitive products credited
to policyholder account balances $ 377,917,332 $ 141,853,600 $ 2,456,054
Return of policyholder account balances on
interest sensitive products (23,637,290) (2,419,197) (217,532)
Proceeds from note payable to parent 5,500,000 -- 2,500,000
Change in amounts due under repurchase agreements 49,000,000 -- --
Cash contributions by parent 6,500,000 42,500,000 9,401,235
------------- ------------- -------------
Net cash provided by financing activities 415,280,042 181,934,403 14,139,757
------------- ------------- -------------
Increase in cash and cash equivalents 8,296,236 476,796 802,718
Cash and cash equivalents at beginning of year 4,125,117 3,648,321 2,845,603
------------- ------------- -------------
Cash and cash equivalents at end of year $ 12,421,353 $ 4,125,117 $ 3,648,321
------------- ------------- -------------
------------- ------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during year for:
Interest $ 1,728,718 $ 425,624 $ --
Federal income taxes 6,225,000 2,315 --
Non-cash financing and investing activities:
Bonus interest deferred as policy acquisition
costs 5,909,679 1,035,325 --
Assets and liabilities acquired pursuant to
reinsurance assumption agreements:
Premiums due and uncollected (41,284)
Value of insurance in force acquired (1,097,921)
Universal life and annuity policy reserves 871,580
Traditional life and accident and health
policy reserves 3,982,118
Policy and contract claims 91,476
-------------
Cash received pursuant to reinsurance assumption
agreements 3,805,969
</TABLE>
SEE ACCOMPANYING NOTES.
7
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
American Equity Investment Life Insurance Company (the Company) is a
wholly-owned subsidiary of American Equity Investment Life Holding Company. The
Company is licensed to sell insurance products in 39 states and the District of
Columbia at December 31, 1998. The Company offers a broad array of insurance
products including single premium deferred annuities, flexible premium deferred
annuities, interest-sensitive life insurance products and traditional life
insurance products. In 1998, the Company began offering variable life and
variable annuity products.
BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally accepted
accounting principles 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 financial statements and
the reported amounts of revenues and expenses during the reporting period.
Significant estimates and assumptions are utilized in the calculation of value
of insurance in force acquired, deferred policy acquisition costs, policyholder
liabilities and accruals and valuation allowances on investments. It is
reasonably possible that actual experience could differ from the estimates and
assumptions utilized.
Certain amounts in the 1997 and 1996 financial statements have been reclassified
to conform to the 1998 financial statement presentation.
INVESTMENTS
The Company has classified all of its fixed maturity securities (bonds) as
available-for-sale. Available-for-sale securities are reported at market value
and unrealized gains and losses, if any, on these securities are included
directly in a special component of stockholder's equity, net of certain
adjustments. Premiums and discounts are amortized/accrued using methods which
result in a constant yield over the securities' expected lives.
Amortization/accrual of premiums and discounts on mortgage and asset-backed
securities incorporate prepayment assumptions to estimate the securities'
expected lives. Mortgage loans on real estate are stated at the aggregate unpaid
principal balance.
The carrying amounts of all the Company's investments are reviewed on an ongoing
basis for credit deterioration, and if this review indicates a decline in market
value that is other than temporary, the Company's carrying amount in the
investment is reduced to its estimated realizable value and a specific writedown
is taken. Such reductions in carrying amounts are recognized as realized losses
and charged to income. Realized gains and losses on sales are determined on the
basis of specific identification of investments.
Market values, as reported herein, of publicly-traded fixed maturity securities
are based on the latest quoted market prices, or for those not readily
marketable, at values which are representative of the market values of issues of
comparable yield and quality.
DERIVATIVE INSTRUMENTS
The Company sells deferred annuity products with an additional benefit provision
based on the increase, if any, in the Standard & Poor's 500 Index. The Company
has analyzed the characteristics of these benefits and has purchased one-year
option contracts with similar characteristics to hedge these risks. The
underlying cost of the option is amortized over the life of the contracts and is
recorded, net of proceeds received upon expiration, as a component of net
investment income.
These options are reported at fair value in the balance sheets. The options are
purchased at the time the related annuity policies are issued, with similar
maturity dates and benefit features that fluctuate as the
8
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
value of the options change. Accordingly, changes in the unrealized appreciation
of the options ($8,061,627 and $839,359 during the years ended December 31, 1998
and 1997, respectively) are offset by changes to the policy benefit liabilities
in the statements of operations.
The Company's hedging strategy attempts to mitigate any potential risk of loss
under these agreements through a regular monitoring process which evaluates the
program's effectiveness. The Company is exposed to risk of loss in the event of
nonperformance by the counterparties and, accordingly, the Company purchases its
option contracts from multiple counterparties and evaluates the creditworthiness
of all counterparties prior to purchase of the contracts.
POLICY LOANS
Policy loans are reported at unpaid principal.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
DEFERRED POLICY ACQUISITION COSTS AND VALUE OF INSURANCE IN FORCE ACQUIRED
To the extent recoverable from future policy revenues and gross profits, certain
costs of acquiring new insurance business, principally commissions, first-year
bonus interest and other expenses related to the production of new business,
have been deferred. The value of insurance in force acquired is an asset that
arose with the acquisition of two blocks of business discussed in Note 3. The
initial values are determined by an actuarial study using expected future
profits as a measurement of the net present value of the insurance acquired.
Interest accrues on the unamortized balance at a rate of 6%.
For annuity products, these costs are being amortized generally in proportion to
expected gross profits from surrender charges and investment, mortality, and
expense margins. That amortization is adjusted retrospectively when estimates of
current future gross profits/margins (including the impact of investment gains
and losses) to be realized from a group of products are revised. For traditional
life and accident and health insurance, such costs are being amortized over the
premium-paying period of the related policies in proportion to premium revenues
recognized, principally using the same assumptions for interest, mortality and
withdrawals that are used for computing liabilities for future policy benefits
subject to traditional "lock-in" concepts.
GOODWILL
Goodwill consists of the excess of the purchase price paid over net assets
acquired in connection with the purchase of Century Life Insurance Company (see
Note 3), and is being amortized over 10 years using a straight-line method.
PROPERTY, FURNITURE AND EQUIPMENT
Property and furniture and equipment, comprised primarily of office furniture
and equipment, data processing equipment and capitalized software costs, are
reported at cost less allowances for depreciation. Depreciation expense is
compiled primarily using the straight-line method over the estimated useful
lives of the assets.
SEPARATE ACCOUNTS
The separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered, principally for the
benefit of variable life and variable annuity policyholders who bear the
underlying investment risk. The separate account assets and liabilities are
carried at fair value. Revenues and expenses related to the separate account
assets and liabilities, to the extent of benefits paid or provided to the
separate account policyholders, are excluded from the amounts
9
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported in the statements of operations. The Company receives various fees that
are included in the statements of operations.
FUTURE POLICY BENEFITS
Future policy benefit reserves for annuity products are computed using the
retrospective deposit method and represent policy account balances before
applicable surrender charges. Policy benefits and claims that are charged to
expense include benefit claims incurred in the period in excess of related
policy account balances. Interest crediting rates for annuity products ranged
from 3.0% to 12.0% in 1998, from 3.0% to 12.4% in 1997 and from 3.0% to 8.4% in
1996. A portion of this amount ($5,909,679 and $1,035,325 during the years ended
December 31, 1998 and 1997, respectively) represents an additional interest
credit on first-year premiums payable until the first contract anniversary date
(first-year bonus interest). Such amounts have been offset against interest
credited to account balances and deferred as policy acquisitions costs.
The liability for future policy benefits for traditional life insurance is based
on net level premium reserves, including assumptions as to interest, mortality,
and other assumptions underlying the guaranteed policy cash values. Reserve
interest assumptions are level and range from 3.0% to 6.0%. The liabilities for
future policy benefits for accident and health insurance are computed using a
net level premium method, including assumptions as to morbidity and other
assumptions based on the Company's experience, modified as necessary to give
effect to anticipated trends and to include provisions for possible unfavorable
deviations. Policy benefit claims are charged to expense in the period that the
claims are incurred.
Unpaid claims include amounts for losses and related adjustment expenses and are
determined using individual claim evaluations and statistical analysis. Unpaid
claims represent estimates of the ultimate net costs of all losses, reported and
unreported, which remain unpaid at December 31 of each year. These estimates are
necessarily subject to the impact of future changes in claim severity, frequency
and other factors. In spite of the variability inherent in such situations,
management believes that the unpaid claim amounts are adequate. The estimates
are continuously reviewed and as adjustments to these amounts become necessary,
such adjustments are reflected in current operations.
Certain policies of the Company include provisions for refunds of premiums based
upon annual experience of the underlying business. The Company has recorded a
liability for expected refunds based on experience.
DEFERRED INCOME TAXES
Deferred income tax assets or liabilities are computed based on the difference
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.
RECOGNITION OF PREMIUM REVENUES AND COSTS
Revenues for annuity and separate account products consist of surrender charges
assessed against policyholder account balances during the period. Expenses
related to these products include interest credited to policyholder account
balances (annuity products only) and benefit claims incurred in excess of
policyholder account balances.
Life and accident and health premiums are recognized as revenues over the
premium-paying period. Future policy benefits and policy acquisition costs are
recognized as expenses over the life of the policy by means of the provision for
future policy benefits and amortization of deferred policy acquisition costs.
All insurance-related revenues, benefits, losses and expenses are reported net
of reinsurance ceded.
10
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 130, REPORTING COMPREHENSIVE INCOME, and restated prior
years' financial statements to conform to the new reporting standard. SFAS No.
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this Statement had no impact on the
Company's net income or stockholder's equity. Comprehensive income includes all
changes in stockholder's 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 $35,886 in 1998. Such amounts,
which have been measured through the date of sale, are net of adjustments to
deferred policy acquisition costs and income taxes totaling $115,864 in 1998.
PENDING ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Accounting for gains or losses resulting
from changes in the values of those derivatives is dependent on the use of the
derivative and whether it qualifies for hedge accounting. The Statement is
effective for the Company in the year 2000, with earlier adoption encouraged.
The Company has not yet estimated the effect that this new Statement will have
on earnings or the financial position of the Company.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS NO. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires
disclosure of fair value information about financial instruments, whether or not
recognized in the balance sheets, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instruments. SFAS No. 107 also excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements and allows companies
to forego the disclosures when those estimates can only be made at excessive
cost. Accordingly, the aggregate fair value amounts presented herein are limited
by each of these factors and do not purport to represent the underlying value of
the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
FIXED MATURITY SECURITIES: Fair values for fixed maturity securities are
based on quoted market prices, when available, or price matrices for
securities which are not actively traded, developed using yield data and
other factors relating to instruments or securities with similar
characteristics.
MORTGAGE LOANS ON REAL ESTATE: Fair values are estimated by discounting
expected cash flows using interest rates currently being offered for
similar loans.
DERIVATIVE INSTRUMENTS: Fair values for derivative instruments are based
on quoted market prices from related counterparties.
POLICY LOANS: The Company has not attempted to determine the fair values
associated with its policy loans, as management believes any differences
between the Company's carrying amount
11
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
and the fair values afforded these instruments are immaterial to the
Company's financial position and, accordingly, the cost to provide such
disclosure is not worth the benefit to be derived.
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the balance
sheets for these instruments approximate their fair values.
SEPARATE ACCOUNT ASSETS AND LIABILITIES: Separate account assets and
liabilities are reported at estimated fair value in the Company's balance
sheets.
ANNUITY POLICY RESERVES: Fair values of the Company's liabilities under
contracts not involving significant mortality or morbidity risks
(principally deferred annuities), are stated at the cost the Company
would incur to extinguish the liability (i.e., the cash surrender value).
The Company is not required to and has not estimated the fair value of
its liabilities under other contracts.
NOTES PAYABLE TO PARENT AND AMOUNTS DUE UNDER REPURCHASE AGREEMENTS: As
all agreements carry variable interest rate provisions, the carrying
amounts reported in the balance sheets for these instruments approximate
their fair values.
The following sets forth a comparison of the fair values and carrying amounts of
the Company's financial instruments:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------------------------
1998 1997
----------------------------- -----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Available-for-sale fixed maturity
securities $ 601,897,562 $ 601,897,562 $ 202,315,960 $ 202,315,960
Mortgage loans on real estate -- -- 700,000 700,000
Derivative instruments 16,171,621 16,171,621 2,065,549 2,065,549
Policy loans 192,184 192,184 183,353 183,353
Cash and cash equivalents 12,421,353 12,421,353 4,125,117 4,125,177
Separate account assets 151,450 151,450 -- --
LIABILITIES
Annuity policy reserves 529,765,023 458,253,796 146,310,889 129,660,303
Amounts due under repurchase agreements 49,000,000 49,000,000 -- --
Notes payable to parent 8,000,000 8,000,000 2,500,000 2,500,000
Separate account liabilities 151,450 151,450 -- --
</TABLE>
12
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PURCHASE OF BUSINESS AND REINSURANCE ASSUMPTION AGREEMENTS
On September 30, 1996, the Company purchased Century Life Insurance Company, an
inactive life insurance company licensed to transact business in 22 states and
the District of Columbia for $5,900,047. The transaction was accounted for as a
purchase and the excess of the purchase price over the fair value of the net
assets received, generally attributed to the licenses received and other
intangibles, aggregated $700,000 and has been allocated to goodwill. Goodwill
will be amortized on the straight-line method over ten years. The following
summarizes the assets and liabilities received in connection with the purchase:
<TABLE>
<S> <C>
Available-for-sale fixed maturity securities $ 155,837
Cash equivalents 5,014,210
Accrued investments income 30,000
Intangibles 700,000
Other assets 6,785
Other liabilities (6,785)
-----------
Net purchase price $ 5,900,047
-----------
-----------
</TABLE>
On December 31, 1995, the Company acquired a block of individual and group
insurance policies from American Life and Casualty Insurance Company, pursuant
to a reinsurance agreement. Under the agreement, the Company received cash of
$3,132,880, of which $2,746,767 had been received prior to December 31, 1995,
and assumed the related assets and liabilities, including the value of insurance
in force acquired in the amount of $1,500,000.
On January 2, 1996, the Company acquired an additional block of individual life
business from American Life and Casualty Insurance Company pursuant to a second
reinsurance agreement. Under this agreement, the Company received cash of
$3,805,969, and assumed the related assets and liabilities, including the value
of insurance in force acquired in the amount of $1,097,921.
The statements of operations includes results of the acquired company and for
the acquired blocks of business subsequent to their purchase dates.
13
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS
FIXED MATURITY SECURITIES
The following table contains amortized cost and market value information on
available-for-sale fixed maturities at December 31, 1998:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------------------------------------------------------
<S> <C> <C> <C> <C>
Bonds:
United States Government and agencies $ 385,393,461 $ 854,292 $ (23,637) $ 386,224,116
State, municipal and other governments 4,227,231 -- (3,231) 4,224,000
Public utilities 9,869,720 194,810 -- 10,064,530
Corporate securities 191,393,819 1,036,268 (525,097) 191,904,990
Mortgage and asset-backed securities 9,416,331 64,400 (805) 9,479,926
----------------------------------------------------------
$ 600,300,562 $2,149,770 $ (552,770) $ 601,897,562
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
At December 31, 1997, available-for-sale fixed maturity securities, which
consisted entirely of bonds, were comprised entirely of United States Government
and agencies obligations. Net unrealized appreciation on bonds of $691,595
included gross unrealized appreciation of $736,523 and gross unrealized
depreciation of $44,928 at December 31, 1997.
The carrying value and estimated fair value of available-for-sale fixed maturity
securities at December 31, 1998, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
-------------- --------------
<S> <C> <C>
Due after one year through five years $ 111,095,370 $ 111,096,900
Due after five years through ten years 6,174,732 6,241,955
Due after ten years through twenty years 208,864,193 209,270,079
Due after twenty years 264,749,936 265,808,702
------------------------------
590,884,231 592,417,636
Mortgage-backed and asset-backed securities 9,416,331 9,479,926
------------------------------
Total $ 600,300,562 $ 601,897,562
------------------------------
------------------------------
</TABLE>
The unrealized appreciation or depreciation on available-for-sale fixed maturity
securities is reported as a separate component of stockholder's equity, reduced
by adjustments to deferred policy acquisition costs that would have been
required as a charge or credit to income had such amounts been realized, and a
14
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
provision for deferred income taxes. Net unrealized appreciation of
available-for-sale fixed maturity securities as reported were comprised of the
following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1998 1997
------------ -----------
<S> <C> <C>
Unrealized appreciation on available-for-sale fixed maturity securities $ 1,597,000 $ 691,595
Adjustments for assumed changes in amortization pattern of deferred policy
acquisition costs (960,583) (372,959)
Related deferred income taxes (216,382) (108,336)
-------------------------
Net unrealized appreciation of available-for-sale fixed maturity securities $ 420,035 $ 210,300
-------------------------
-------------------------
</TABLE>
NET INVESTMENT INCOME
Components of net investment income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1998 1997 1996
------------- ------------ -----------
<S> <C> <C> <C>
Available-for-sale fixed maturity securities $ 28,304,437 $ 5,131,361 $ 913,636
Derivative instruments (1,767,580) (589,484) --
Policy loans 8,338 12,281 9,849
Cash and cash equivalents 210,981 73,047 62,302
Other invested assets 55,109 61,357 --
----------------------------------------
26,811,285 4,688,562 985,787
Less investments expenses (575,362) (659,934) (128,772)
----------------------------------------
Net investment income $ 26,235,923 $ 4,028,628 $ 857,015
----------------------------------------
----------------------------------------
</TABLE>
REALIZED AND UNREALIZED GAINS AND LOSSES
An analysis of sales, maturities, and principal repayments of the Company's
fixed maturities portfolio for the year ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED REALIZED REALIZED PROCEEDS
COST GAINS LOSSES FROM SALE
-------------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
Scheduled principal repayments, calls
and tenders $ 157,731,977 $ -- $ -- $ 157,731,977
Sales 64,861,304 163,865 (12,115) 65,013,054
-------------------------------------------------------
Total $ 222,593,281 $ 163,865 $ (12,115) $ 222,745,031
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
The changes in unrealized appreciation/depreciation on investments, which are
entirely attributable to available-for-sale fixed maturity securities,
aggregated $905,405, $893,151 and $(201,556) for the years ended December 31,
1998, 1997 and 1996, respectively. The change in net unrealized appreciation/
depreciation is recorded net of adjustments to deferred policy acquisition costs
and deferred income taxes totaling $695,670 in 1998 and $481,295 in 1997.
REPURCHASE AGREEMENTS
As part of its investment strategy, the Company enters into securities lending
programs to increase its return on investments and improve liquidity. These
transactions are accounted for as amounts due under repurchase agreements. These
amounts are collateralized by investment securities with fair values
15
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
approximately equal to the amount due. At December 31, 1998, amounts outstanding
aggregated $49,000,000. At December 31, 1997, no amounts were outstanding.
OTHER
At December 31, 1998, affidavits of deposits covering fixed maturity securities
and short-term investments with a carrying value of $602,089,746
(1997--$201,494,229) were on deposit with state agencies to meet regulatory
requirements.
At December 31, 1998, the following investments in any person or its affiliates
(other than bonds issued by agencies of the United States Government) exceeded
10% of stockholders' equity: corporate bonds with carrying values of $12,161,587
issued by Nationsbank and $6,860,000 issued by Unocal Corp.
5. VALUE OF INSURANCE IN FORCE ACQUIRED
The value of insurance in force acquired is an asset that represents the present
value of future profits on business acquired. An analysis of the value of
insurance in force acquired for the years ended December 31, 1998, 1997 and 1996
is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 1,343,000 $ 1,725,000 $ 1,500,000
Acquired during the year -- -- 1,097,921
Accretion of interest during the year 71,000 91,000 130,000
Amortization of asset (345,094) (473,000) (1,002,921)
-------------------------------------------
Balance at end of year $ 1,068,906 $ 1,343,000 $ 1,725,000
-------------------------------------------
-------------------------------------------
</TABLE>
Amortization of the value of insurance in force acquired for the next five years
ending December 31 is expected to be as follows: 1999--$318,000; 2000--$232,000;
2001--$104,000; 2002--$104,000; and 2003-- $103,000.
6. REINSURANCE AND POLICY PROVISIONS
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
reinsurance to other insurance enterprises or reinsurers. Reinsurance coverages
for life insurance vary according to the age and risk classification of the
insured. The Company does not use financial or surplus relief reinsurance.
Reinsurance contracts do not relieve the Company of its obligations to its
policyholders. To the extent that reinsuring companies are later unable to meet
obligations under reinsurance agreements, the Company would be liable for these
obligations, and payment of these obligations could result in losses to the
Company. To limit the possibility of such losses, the Company evaluates the
financial condition of its reinsurers, and monitors concentrations of credit
risk. Insurance premiums have been reduced by $567,027, $722,545 and $742,088
and insurance benefits have been reduced by $375,592, $503,154 and $455,472
during the years ended December 31, 1998, 1997 and 1996, respectively, as a
result of cession agreements.
No allowance for uncollectible amounts has been established against the
Company's asset for amounts due from other insurance companies since none of the
receivables are deemed by management to be uncollectible.
During 1998, the Company entered into a modified coinsurance agreement to cede
70% of its variable life and variable annuity business to an insurance company
that has an equity position in the Company's parent. Amounts paid pursuant to
this arrangement were immaterial during 1998.
16
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. REINSURANCE AND POLICY PROVISIONS (CONTINUED)
Unpaid claims on accident and health insurance include amounts for losses and
related adjustment expense and are estimates of the ultimate net costs of all
losses, reported and unreported. These estimates are subject to the impact of
future changes in claim severity, frequency and other factors. The activity in
the liability for unpaid claims and related adjustment expense for the years
ended December 31, 1998, 1997 and 1996, net of reinsurance, is summarized as
follows:
<TABLE>
<CAPTION>
UNPAID UNPAID
CLAIMS CLAIMS
LIABILITY AT CLAIMS LIABILITY AT
BEGINNING OF RESERVE CLAIMS CLAIMS END OF
YEAR ASSUMED INCURRED PAID YEAR
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
1998 $ -- $ -- $ 580,845 $ 318,507 $ 262,338
1997 and prior 667,287 -- (133,100) 123,864 410,323
---------------------------------------------------------------
667,287 $ -- $ 447,745 $ 442,371 672,661
---------------------------------------------------------------
---------------------------------------------------------------
Active life reserve 1,406,694 1,518,222
---------------------------------------------------------------
Total accident and health reserves $ 2,073,981 $ 2,190,883
---------------------------------------------------------------
---------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
1997 $ -- $ -- $ 556,302 $ 296,060 $ 260,242
1996 and prior 629,651 -- (107,471) 115,135 407,045
---------------------------------------------------------------
629,651 $ -- $ 448,831 $ 411,195 667,287
---------------------------------------------------------------
---------------------------------------------------------------
Active life reserve 1,350,132 1,406,694
---------------------------------------------------------------
Total accident and health reserves $ 1,979,783 $ 2,073,981
---------------------------------------------------------------
---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
UNPAID UNPAID
CLAIMS CLAIMS
LIABILITY AT CLAIMS LIABILITY AT
BEGINNING OF RESERVE CLAIMS CLAIMS END OF
YEAR ASSUMED INCURRED PAID YEAR
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
1996 $ -- $ -- $ 421,841 $ 90,844 $ 330,997
1995 and prior -- 501,589 44,347 247,282 298,654
--------------------------------------------------------------
-- $ 501,589 $ 466,188 $ 338,126 629,651
--------------------------------------------------------------
--------------------------------------------------------------
Active life reserve -- 1,350,132
--------------------------------------------------------------
Total accident and health reserves $ -- $ 1,979,783
--------------------------------------------------------------
--------------------------------------------------------------
</TABLE>
7. INCOME TAXES
The Company files a separate federal income tax return.
Deferred income taxes are established by the Company based upon the temporary
differences among financial reporting and tax bases of assets and liabilities,
the reversal of which will result in taxable or deductible amounts in future
years when the related asset or liability is recovered or settled, measured
using the enacted tax rates. Prior to 1997, no deferred taxes were provided
since timing differences were not sufficient to offset operating loss
carryforwards.
17
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The effective tax rate on income (loss) before income taxes is different than
the prevailing federal income tax rate, as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Income (loss) before income taxes $ 2,046,943 $ (2,547,643) $ (516,827)
----------------------------------------
----------------------------------------
Tax effect at federal statutory rate (34%) $ (695,961) $ 866,199 $ 175,721
Tax effect (decrease) of:
Small company deduction -- 331,000 --
Change in valuation allowance -- 171,000 (171,000)
Other (64,522) 20,577 (4,721)
----------------------------------------
Income tax benefit (expense) $ (760,483) $ 1,388,776 $ --
----------------------------------------
----------------------------------------
</TABLE>
The tax effect of individual temporary differences giving rise to the Company's
deferred tax assets at December 31, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1998 1997
----------------------------
<S> <C> <C>
Deferred income tax assets:
Policy benefit reserves $ 17,810,000 $ 5,239,000
Provision for experience rating refunds 283,000 182,000
Other 57,000 52,000
----------------------------
18,150,000 5,473,000
Deferred income tax liabilities:
Unrealized appreciation of fixed maturity securities (216,382) (108,336)
Deferred policy acquisition costs (8,939,000) (727,000)
Value of insurance in force acquired (363,000) (457,000)
Other (343,569) (335,167)
----------------------------
(9,861,951) (1,627,503)
----------------------------
Deferred income tax asset $ 8,288,049 $ 3,845,497
----------------------------
----------------------------
</TABLE>
The Company regularly reviews its needs for a valuation allowance against its
deferred income tax assets. During the year ended December 31, 1997, the Company
became taxable and it is expected that it will continue to pay federal income
taxes in the foreseeable future. As a result, the valuation allowance pertaining
to deferred income tax assets was removed at December 31, 1997.
8. NOTE PAYABLE TO PARENT
On December 31, 1998 and October 18, 1996, the Company borrowed $5,500,000 and
$2,500,000, respectively, from its parent, American Equity Investment Life
Holding Company, in the form of surplus notes. The notes call for the Company to
pay the principal amount of the note and interest at an 8% annual rate. Any
scheduled payment of interest or repayment of principal may be paid only out of
the Company's earnings, subject to approval by the Insurance Division,
Department of Commerce, of the State of Iowa.
18
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. RETIREMENT PLAN AND STOCK COMPENSATION PLAN
During 1996, the Company adopted a contributory defined contribution plan which
is qualified under Section 401(k) of the Internal Revenue Service Code. The plan
covers substantially all full-time employees of the Company, subject to minimum
eligibility requirements. Employees can contribute up to 15% of their annual
salary (with a maximum contribution of $10,000 in 1998 and $9,500 in 1997) to
the plan. The Company contributes an additional amount, subject to limitations,
based on the voluntary contribution of the employee. Further, the plan provides
for additional employer contributions based on the discretion of the Board of
Directors. The Company's related expenses were $25,231 and $19,434 with respect
to this plan during the years ended December 31, 1998 and 1997, respectively. No
contributions were made during 1996 to the plan.
During 1997, the Company established the American Equity Investment NMO Deferred
Compensation Plan whereby agents can earn common stock of the Company's parent,
American Equity Investment Life Holding Company, in addition to their normal
commissions. Awards are calculated using formulas determined annually by the
Company's Board of Directors and are generally based upon new annuity deposits.
For the years ended December 31, 1998 and 1997, agents earned the right to
receive 83,861 and 13,131 shares, respectively. These shares will be awarded at
the end of the vesting period, 4 years for the 1998 program and 3 years for the
1997 program. A portion of the awards may be subject to forfeiture if certain
production levels are not met over the remaining vesting period. The Company
recognizes commission expense as the awards vest. For the year ended December
31, 1998, agents vested 25,342 shares of common stock and the Company recorded
commission expense (which was subsequently capitalized as deferred policy
acquisition costs) of $295,354 with respect to this plan. Amounts accrued are
reported as other liabilities until the stock has been issued.
10. STATUTORY FINANCIAL INFORMATION
CAPITAL RESTRICTIONS
Iowa Insurance Laws require domestic insurers to maintain a minimum of $5.0
million capital and surplus.
Prior approval of statutory authorities is required for the payment of dividends
to the Company's stockholder which exceed an annual limitation. During 1999, the
Company could pay dividends to its parent of approximately $7,845,000 without
prior approval from regulatory authorities.
STATUTORY ACCOUNTING POLICIES
The financial statements of the Company included herein differ from related
statutory-basis principally as follows: (a) the bond portfolio is segregated
into held-for-investment (carried at amortized cost), available-for-sale
(carried at fair value), and trading (reported at fair value) classifications
rather than generally being carried at amortized cost; (b) acquisition costs of
acquiring new business are deferred and amortized over the life of the policies
rather than charged to operations as incurred; (c) the excess of purchase price
over net assets acquired in business combinations is allocated to identifiable
intangibles such as value of insurance in force acquired, rather than being
entirely attributable to goodwill (a portion of which may be non-admitted); (d)
policy reserves on traditional life and accident and health products are based
on reasonable assumptions of expected mortality, morbidity, interest and
withdrawals which include a provision for possible adverse deviation from such
assumptions which may differ from reserves based on statutory mortality rates
and interest; (e) future policy benefit reserves on certain universal life and
annuity products are based on full account values, rather than discounting
methodologies utilizing statutory interest rates; (f) reinsurance amounts are
shown as gross amounts, net of an allowance for uncollectible amounts, on the
balance sheet rather than netted against the corresponding receivable or
payable; (g) deferred income taxes are provided for the difference between the
financial statement and income tax bases of assets and liabilities; (h) net
realized gains or losses attributed to changes in the level of interest rates in
the market are recognized as gains or losses in the statement of operations when
the
19
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STATUTORY FINANCIAL INFORMATION (CONTINUED)
sale is completed rather than deferred and amortized over the remaining life of
the fixed maturity security or mortgage loan; (i) declines in the estimated
realizable value of investments are charged to the statement of operations for
declines in value, when such declines in value are judged to be other than
temporary rather than through the establishment of a formula-determined
statutory investment reserve (carried as a liability), changes in which are
charged directly to surplus, (j) agents' balances and certain other assets
designated as "non-admitted assets" for statutory purposes are reported as
assets rather than being charged to surplus; (k) revenues for universal life and
annuity products consist of policy charges for the cost of insurance, policy
administration charges, amortization of policy initiation fees and surrender
charges assessed rather than premiums received; and (l) pension income or
expense is recognized in accordance with SFAS No. 87, EMPLOYERS' ACCOUNTING FOR
PENSIONS, rather than in accordance with rules and regulations permitted by the
Employee Retirement Income Security Act of 1974; (m) surplus notes are reported
as a liability rather than as a component of capital and surplus; and (n) assets
and liabilities are restated to fair values when a change in ownership occurs,
rather than continuing to be presented at historical cost.
Net income for the Company as determined in accordance with statutory accounting
practices was $4,803,545, $4,470,284 and $1,174,811 in 1998, 1997 and 1996,
respectively, and total statutory capital and surplus of the Company was
$80,947,913 and $64,709,809 at December 31, 1998 and 1997, respectively.
In 1998, the NAIC adopted codified statutory accounting principles
(Codification). Codification will likely change, to some extent, prescribed
statutory accounting practices and may result in changes to the accounting
practices that the Company uses to prepare its statutory-basis financial
statements. Codification will require adoption by the various states before it
becomes the prescribed statutory basis of accounting for insurance companies
domesticated within those states. Accordingly, before Codification becomes
effective for the Company, the State of Iowa must adopt Codification as the
prescribed basis of accounting on which domestic insurers must report their
statutory-basis results to the Insurance Division, Department of Commerce, of
the State of Iowa. At this time it is unclear whether the State of Iowa will
adopt Codification. However, based on current guidance, management believes that
the impact of Codification will not be material to the Company's statutory-basis
financial statements.
11. COMMITMENTS AND CONTINGENCIES
The Company has a General Agency Commission and Servicing Agreement with
American Equity Investment Service Company (the Service Company), wholly-owned
by the Company's chairman, whereby, the Service Company acts as a national
supervisory agent with responsibility for paying commissions to agents of the
Company. Under the terms of the original agreement, the Service Company was
required to pay the greater of (a) 5% of the premiums collected by the Company
on the sale of certain annuity products, or (b) 50% of the agent's commissions
payable by the Company on the sale of those same policies. In return, the
Company agreed to pay quarterly renewal commissions to the Service Company equal
to .3875% of the premiums received by the Company on policies that still remain
inforce. In addition, the Company has agreed to pay supplemental commissions
should lapses in any quarter exceed 1.88%, or certain other circumstances arise.
The Agreement terminates on January 31, 2005.
On December 31, 1997, the Service Company and the Company amended the Agreement
to provide for the payment of 100% of the agents' commissions by the Service
Company for policies issued from July 1, 1997 through December 31, 1997. In
return, the Company agreed to pay the Service Company quarterly renewal
commissions of .7% of the premiums received by the Company before January 1,
1998 that still remain inforce, and .325% for inforce amounts received
thereafter. The revised quarterly renewal commission schedule commenced December
31, 1997.
20
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
During the years ended December 31, 1998 and 1997, the Service Company paid
$19,933,480 and $11,470,576, respectively, to agents of the Company and the
Company paid renewal commissions to the Service Company of $6,781,288 and
$1,360,410, respectively. At December 31, 1998 and 1997, accounts payable to the
Service Company aggregated $2,438,600 and $985,194, respectively, and is
included in other liabilities.
The Company leases its home office space and certain other equipment under
operating leases which expire through June 2004. During the years ended December
31, 1998, 1997 and 1996, rent expense totaled $335,382, $341,982 and $147,662,
respectively. At December 31, 1998, minimum rental payments due under all
noncancelable operating leases with initial terms of one year or more are:
<TABLE>
<S> <C>
Year ending December 31:
1999 $ 434,000
2000 422,000
2001 420,000
2002 413,000
2003 405,000
Thereafter, through June 2004 189,000
-----------
$ 2,283,000
-----------
-----------
</TABLE>
Assessments are, from time to time, levied on the Company by life and health
guaranty associations by most states in which the Company is licensed to cover
losses to policyholders of insolvent or rehabilitated companies. In some states,
these assessments can be partially recovered through a reduction in future
premium taxes. Given the short period since inception, management believes that
assessments against the Company for failure known to date will be minimal.
12. IMPACT OF YEAR 2000 (UNAUDITED)
The Company has developed a plan to assess its information technology needs to
be ready for the Year 2000. During 1996, the Company purchased a new policy
administration system which the vendor has represented and have tested it to be
Year 2000 compliant. Additionally, the Company has begun converting any
remaining non-compliant data processing systems. The Company currently expects
the project to be substantially completed by early 1999 and does not expect the
cost to modify systems used in the normal course of business to be significant.
While additional testing will be conducted on its systems through the Year 2000,
the Company does not expect this project to have a significant effect on
operating activities.
The Company also recognizes there are outside influences and dependencies
relative to its Year 2000 effort, over which it has little or no control. The
Company is putting effort into ensuring these considerations will have minimal
impact. This includes the continued availability of certain resources, assessing
third-party modification plans and developing contingency/recovery plans aimed
at ensuring the continuity of critical business functions before and after
December 31, 1999. However, there can be no assurances that these steps will be
sufficient to avoid any adverse impact to the Company's business or its
consolidated financial statements.
21
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a)(1) All Financial Statements are included in either the Prospectus or the
Statement of Additional Information as indicated therein.
(2) *Schedules I, III, IV.
All required financial statements are included in Part B.
(b) Exhibits
<TABLE>
<C> <S>
(1) Certified resolution of the board of directors of American Equity
Investment Life Insurance Company (the "Company") establishing American
Equity Life Annuity Account (the "Account").(1)
(2) Not Applicable.
(3) *(a) Form of Underwriting agreement among the Company, the Account and
American Equity Capital, Inc.
(b) Form of Sales Agreement.(2)
(c) Form of Wholesaling Agreement.(2)
(4) Contract Form.(1)
(5) Contract Application.(2)
(6) (a) Articles of Incorporation of the Company.(1)
(b) By-Laws of the Company.(1)
(7) Not Applicable.
(8) (a) Participation agreement relating to EquiTrust Variable Insurance
Series Fund.(2)
(b) Participation agreement relating to Dreyfus Variable Investment
Fund.(2)
(c) Participation agreement relating to T. Rowe Price Equity Series, Inc.
and T. Rowe Price International Series, Inc.(2)
(9) *Opinion and Consent of Whitfield & Eddy, P.L.C.
(10) *(a) Consent of Sutherland Asbill & Brennan LLP.
*(b) Consent of Ernst & Young LLP.
*(c) Opinion and Consent of Christopher G. Daniels, FSA, MSAA, Life
Product Development and Pricing Vice President.
(11) Not Applicable.
(12) Not Applicable.
(13) Not Applicable.
(14) Powers of Attorney.(1)
</TABLE>
- ------------------------
* Attached as an exhibit.
(1) Incorporated herein by reference to the initial filing of this Registration
Statement (File No. 333-08663) on February 19, 1998.
(2) Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-4 (File No. 333-08663) filed on June 9,
1998.
ITEM 25. DIRECTORS AND OFFICERS OF THE COMPANY
Incorporated herein by reference to the prospectus in the Form S-6 registration
statement (File No. 333-45815) for certain variable life insurance contracts
issued by the Company and filed with the Commission on April 30, 1999.
<PAGE>
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
The registrant is a segregated asset account of the Company and is therefore
owned and controlled by the Company. All of the Company's outstanding voting
common stock is owned by American Equity Investment Life Holding Company. This
Company and its affiliates are described more fully in the prospectus included
in this registration statement. An organizational chart is set forth below.
<PAGE>
FBL FINANCIAL GROUP, INC.
OWNERSHIP CHART
01/01/98
<TABLE>
<S> <C> <C>
American Equity Investment
Life Holding Company
/
/
- ----------------------------------------------
/ / /
/ / /
American American American
Equity Equity Equity
Investment Investment Investment
Capital Life Real
Company Insurance Estate
Company Company
</TABLE>
<PAGE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of April 1, 1999, there were 12 contract owners.
ITEM 28. INDEMNIFICATION
Article XII of the Company's By-Laws provides for the indemnification by the
Company of any person who is a party or who is threatened to be made a party to
any threatened, pending, or completed action, suit or proceeding, whether civil,
criminal, administrative, or investigative (other than an action by or in the
right of the Company) by reason of the fact that he is or was a director or
officer of the Company, or is or was serving at the request of the Company as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust or enterprise, against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding, if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. Article
XII also provides for the indemnification by the Company of any person who was
or is a party or is threatened to be made a party to any threatened, pending, or
completed action or suit by or in the right of the Company to procure a judgment
in its favor by reason of the fact that he is or was a director or officer of
the Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or another enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company, except that no indemnification will be made in respect of any claim,
issue, or matter as to which such person shall have been adjudged to be liable
for negligence or misconduct in the performance of his duty to the Company
unless and only to the extent that the court in which such action or suit was
brought determines upon application that, despite the adjudication of liability
but in view of all circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which such court shall deem
proper.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 29. PRINCIPAL UNDERWRITER
(a) American Equity Capital, Inc. is the registrant's principal underwriter and
also serves as the principal underwriter of a variable life insurance policy
issued by the Company.
<PAGE>
(b) Officers and Directors of American Equity Capital, Inc.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL BUSINESS
ADDRESS* POSITIONS AND OFFICES
<S> <C>
C. Richard Brown Self-Employed.
Chief Executive Officer and
Director
Terry A. Reimer Executive Vice President, Chief Operating Officer, Treasurer and
Chief Financial Officer, Director, American Equity Investment Life Insurance Company.
Treasurer and Director
Ronald Grensteiner Vice President, American Equity Investment Life Insurance Company.
Vice President--Marketing
Kevin Wingert Vice President, American Equity Investment Life Insurance Company.
Vice President--Marketing
Harley A. Whitfield, Jr. Market Conduct Officer, American Equity Investment Life Insurance
Chief Compliance Officer, Company.
Secretary and Director
Judith Z. Karcher Compliance Officer, American Equity Investment Life Insurance
Assistant Compliance Officer Company.
Brent Mardis Vice President and Chief Actuary, American Equity Investment Life
Chief Actuary Insurance Company.
Wendy L. Carlson Attorney, Whitfield & Eddy, P.L.C.
Assistant Secretary
</TABLE>
* The principal business address of all of the persons listed above is 5000
Westown Parkway, Suite 440, West Des Moines, Iowa 50266.
ITEM 30. LOCATION BOOKS AND RECORDS
All of the accounts, books, records or other documents required to be kept by
Section 31(a) of the Investment Company Act of 1940 and rules thereunder, are
maintained by the Company at 5000 Westown Parkway, Suite 440, West Des Moines,
Iowa 50266 or 5400 University Avenue, West Des Moines, Iowa 50266.
ITEM 31. MANAGEMENT SERVICES
All management contracts are discussed in Part A or Part B of this registration
statement.
<PAGE>
ITEM 32. UNDERTAKINGS AND REPRESENTATIONS
(a) The registrant undertakes that it will file a post-effective amendment to
this registration statement as frequently as is necessary to ensure that the
audited financial statements in the registration statement are never more than
16 months old for as long as purchase payments under the contracts offered
herein are being accepted.
(b) The registrant undertakes that it will include either as part of any
application to purchase a contract offered by the prospectus, a post card or
similar written communication affixed to or included in the prospectus that the
applicant can remove and send to the Company for a statement of additional
information.
(c) The registrant undertakes to deliver any statement of additional information
and any financial statements required to be made available under this Form N-4
promptly upon written or oral request to the Company at the address or phone
number listed in the prospectus.
(d) The Company represents that in connection with its offering of the contracts
as funding vehicles for retirement plans meeting the requirements of Section
403(b) of the Internal Revenue Code of 1986, it is relying on a no-action letter
dated November 28, 1988, to the American Council of Life Insurance (Ref. No.
IP-6-88) regarding Sections 22(e), 27(c)(1), and 27(d) of the Investment Company
Act of 1940, and that paragraphs numbered (1) through (4) of that letter will be
complied with.
(e) The Company represents that the aggregate charges under the Contracts are
reasonable in relation to the services rendered, the expenses expected to be
incurred and the risks assumed by the Company.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant, American Equity Life Annuity Account certifies that it
meets the requirements of Securities Act Rule 485(b) for effectiveness of this
Registration Statement and has duly caused this Registration Statement to be
signed on its behalf by the undersigned thereunto duly authorized in the City of
West Des Moines, State of Iowa, on the 22nd day of April, 1999.
<TABLE>
<S> <C> <C>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE
COMPANY
AMERICAN EQUITY LIFE ANNUITY ACCOUNT
By: /s/ D. J. NOBLE
-----------------------------------------
D. J. Noble
CHAIRMAN
American Equity Investment Life Insurance
Company
Attest: /s/ TERRY A. REIMER
-----------------------------------------
Terry A. Reimer
CHIEF FINANCIAL OFFICER
American Equity Investment Life Insurance
Company
</TABLE>
As required by the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities indicated on the dates set
forth below.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ D. J. NOBLE Chairman and Director
- ------------------------------ [Principal Executive April 22, 1999
D. J. Noble Officer]
Chief Financial Officer
/s/ TERRY A. REIMER and Director [Principal
- ------------------------------ Financial Officer] April 22, 1999
Terry A. Reimer [Principal Accounting
Officer]
*
- ------------------------------ Director April 22, 1999
James M. Gerlach
*
- ------------------------------ Director April 22, 1999
David S. Mulcahy
*
- ------------------------------ Director April 22, 1999
William J. Oddy
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ Director April 22, 1999
Debra J. Richardson
*
- ------------------------------ Director April 22, 1999
Jack W. Schroeder
</TABLE>
<TABLE>
<S> <C>
*By: /s/ DEBRA J. RICHARDSON
---------------------------------
Debra J. Richardson
Pursuant to Power of Attorney
</TABLE>
<PAGE>
The following consolidated financial statement schedules are included as
part of this Form N-4:
Schedule I - Summary of Investment - Other than Investment in Related
Parties
Schedule III - Supplementary Insurance Information
Schedule IV - Reinsurance
All other schedules to the consolidated financial statements required by
Article 7 of Regulation S-X are omitted because they are not applicable or
because the information is included elsewhere in the consolidated financial
statements or notes thereto.
<PAGE>
American Equity Investment Life Insurance Company
Schedule I
Summary of Investments -- Other Than Investments in Related Parties
December 31, 1998
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
- -----------------------------------------------------------------------------------------------
AMOUNT AT
WHICH SHOWN
IN THE
TYPE OF INVESTMENT COST(1) VALUE BALANCE SHEET
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities, available for sale:
Bonds:
United States Government and
agencies $385,393,461 $386,224,116 $386,224,116
State, municipal and other
governments 4,227,231 4,224,000 4,224,000
Public utilities 9,869,720 10,064,530 10,064,530
Corporate securities 191,393,819 191,904,990 191,904,990
Mortgage and asset-backed
securities 9,416,331 9,479,926 9,479,926
---------------------------------------------------
Total fixed maturities, available for
sale 600,300,562 $601,897,562 601,897,562
---------------
---------------
Derivative financial instruments 7,270,635 16,171,621
Policy loans 192,184 192,184
Short-term investments 45,000 45,000
---------------- ----------------
Total investments $607,808,381 $618,306,367
---------------- ----------------
---------------- ----------------
</TABLE>
(1) On the basis of cost adjusted for repayments and amortization of premiums
and accrual of discounts for fixed maturities.
<PAGE>
American Equity Investment Life Insurance Company
Schedule III
Supplementary Insurance Information
December 31, 1998
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ---------------------------------------------------------------------------------------------------
FUTURE POLICY
DEFERRED BENEFITS, OTHER POLICY
POLICY LOSSES, UNEARNED CLAIMS AND INSURANCE
ACQUISITION CLAIMS AND REVENUE BENEFITS PREMIUMS
SEGMENT COSTS LOSS EXPENSES RESERVE PAYABLE AND CHARGES
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Life Insurance $32,005,772 $531,082,179 $- $6,315,598 $11,170,655
Year ended December 31, 1997:
Life Insurance 4,282,491 155,998,268 - 2,355,156 11,436,803
Year ended December 31, 1996:
Life Insurance 238,231 11,846,566 - 1,075,614 14,554,714
<CAPTION>
COLUMN A COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
- ---------------------------------------------------------------------------------------------------
BENEFITS AMORTIZATION
CLAIMS, OF DEFERRED
NET LOSSES AND POLICY OTHER
INVESTMENT SETTLEMENT ACQUISITION OPERATING PREMIUM
SEGMENT INCOME EXPENSES COSTS EXPENSES WRITTEN
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Life Insurance $26,235,923 $21,922,805 $3,672,039 $9,916,541 $-
Year ended December 31, 1997:
Life Insurance 4,028,628 9,569,766 761,032 7,682,276 -
Year ended December 31, 1996:
Life Insurance 857,015 8,865,531 6,995 7,056,030 -
</TABLE>
<PAGE>
American Equity Investment Life Insurance Company
Schedule IV
Reinsurance
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ---------------------------------------------------------------------------------------------------------------------
PERCENTAGE
CEDED ASSUMED FROM OF AMOUNT
GROSS TO OTHER OTHER ASSUMED
AMOUNT COMPANIES COMPANIES NET AMOUNT TO NET
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
At December 31, 1998:
Life insurance in force $1,407,000 $ - $2,398,544,000 $2,399,951,000 99.9%
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
Insurance premiums and
other considerations:
Annuity product charges $ 642,547 $ - $ - $ 642,547 -%
Traditional life and
accident and health
insurance premiums 19,174 567,027 11,075,961 10,528,108 105.2%
------------------------------------------------------------------------------------
$ 661,721 $567,027 $ 11,075,961 $ 11,170,655 99.2%
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
At December 31, 1997:
Life insurance in force $ - $ - $2,427,796,000 $2,427,796,000 100.0%
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
Insurance premiums and
other considerations:
Annuity product charges $ 11,896 $ - $ - $ 11,896 -%
Traditional life and
accident and health
insurance premiums - 722,545 12,147,452 11,424,907 106.3%
------------------------------------------------------------------------------------
$ 11,896 $722,545 $ 12,147,452 $ 11,436,803 106.2%
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
At December 31, 1996:
Life insurance in force $ - $ - $2,912,219,000 $2,912,219,000 100.0%
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
Insurance premiums and
other considerations:
Annuity product charges $ 14,007 $ - $ - $ 14,007 -%
Traditional life and
accident and health
insurance premiums 98,722 742,088 15,184,073 14,540,707 104.4%
------------------------------------------------------------------------------------
$ 112,729 $742,088 $ 15,184,073 $ 14,554,714 104.3%
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</TABLE>
<PAGE>
UNDERWRITING AGREEMENT
AGREEMENT dated as of this 1st day of May, 1999, by and
between American Equity Investment Life Insurance Company, an
Iowa corporation ("INSURER"), on its behalf and on behalf of
American Equity Life Variable Account and American Equity Life
Annuity Account (the "SEPARATE ACCOUNTS"); and American Equity
Capital, Inc., ("DISTRIBUTOR"), an Iowa corporation which is a
registered broker-dealer with the Securities and Exchange
Commission (the "SEC") under the Securities Exchange Act of 1934
(the "1934 ACT") and a member of the National Association of
Securities Dealers, Inc. ("NASD").
RECITALS
A. Distributor is a broker-dealer that engages in the
distribution of variable insurance products and other investment
products; and
B. Insurer desires to issue certain variable insurance
products described more fully below to the public through
Distributor acting as principal underwriter;
NOW, THEREFORE, in consideration of the premises and of the
mutual promises and covenants hereinafter set forth, the parties
agree as follows:
1. DEFINITIONS
A. CONTRACTS -- The class or classes of variable
insurance products set forth on Schedule 1 to this
Agreement as in effect at the time this Agreement is
executed, and such other classes of variable products
that may be added to Schedule 1 from time to time in
accordance with Section 11.b of this Agreement, and
including any riders to such contracts and any other
contracts offered in connection therewith. For the
purpose of this Agreement, a "CLASS OF CONTRACTS" shall
mean those Contracts issued by Insurer on the same
policy form or forms and covered by the same
registration statement.
B. REGISTRATION STATEMENT -- With respect to each Class of
Contracts, the most recent post-effective registration
statement filed with the SEC or the most recent
effective post-effective amendment thereto, including
financial statements included therein and all exhibits
thereto. For purposes of Section 9 of this Agreement,
the term "Registration Statement" means any document
which is or at any time was a Registration Statement
within the meaning of this Section 1.B.
C. PROSPECTUS -- With respect to each Class of Contracts,
the prospectus for such Class of Contracts included
within the Registration Statement for such Class of
Contracts; provided, however, that if the most recently
filed prospectus filed pursuant to Rule 497 under the
1933 Act subsequent to the date on which the
Registration Statement became effective differs from
the prospectus on file at the time the Registration
Statement became
<PAGE>
effective, the term "Prospectus" shall refer to the
most recently filed prospectus filed under Rule 497
from and after the date on which it shall have been
filed. For purposes of Section 9 the term "any
Prospectus" means any document which is or at any time
was a Prospectus within the meaning of this Section
1.C.
D. FUNDS -- The registered investment companies in which
the Separate Accounts invest.
E. VARIABLE ACCOUNTS -- The separate accounts supporting
any Class of Contracts and specified in Schedule 1 as
in effect at the time this Agreement is executed, or as
it may be amended from time to time in accordance with
Section 11.B of this Agreement.
F. 1933 ACT -- The Securities Act of 1933, as amended.
G. 1934 ACT -- The Securities Exchange Act of 1934, as
amended.
H. 1940 Act -- The Investment Company Act of 1940, as
amended.
I. SEC -- The Securities and Exchange Commission.
J. NASD -- The National Association of Securities Dealers,
Inc. and any affiliates.
K. REGULATIONS -- The rules and regulations promulgated by
the SEC under the 1933 Act, the 1934 Act and the 1940
Act as in effect at the time this Agreement is executed
or thereafter promulgated.
L. SELLING BROKER-DEALER -- A person registered as a
broker-dealer and licensed as a life insurance agent or
affiliated with a person so licensed, and authorized to
distribute the Contracts pursuant to a sales agreement
as provided for in Section 4 of this Agreement.
M. REPRESENTATIVE -- When used with reference to
Distributor or a Selling Broker-Dealer, an individual
who is an associated person, as that term is defined in
the 1934 Act, thereof.
N. APPLICATION - An application for a Contract.
O. PREMIUM -- A payment made under a Contract to purchase
benefits under the Contract.
P. ADMINISTRATIVE OFFICE -- The administrative office of
the Insurer identified in the most recently filed
prospectus filed pursuant to Rule 497.
<PAGE>
2. AUTHORIZATION AND APPOINTMENT OF DISTRIBUTOR.
A. SCOPE AND AUTHORITY. Insurer hereby authorizes
Distributor on an exclusive basis, and Distributor
accepts such authority, subject to the requirements and
provisions of the 1933 Act, the 1934 Act and the 1940
Act, as well as all terms and conditions of this
Agreement, to be the distributor and principal
underwriter for the sale of the Contracts to the public
in each state and other jurisdiction in which the
Contracts may lawfully be sold during the term of this
Agreement. Insurer hereby authorizes Distributor to
grant authority to Selling Broker-Dealers to solicit
Applications and Premiums to the extent the Distributor
deems appropriate and consistent with the marketing
program for the Contracts or a Class of Contracts,
subject to the conditions set forth in Section 4 of
this Agreement. The Contracts shall be offered for
sale and distribution at premium rates set from time to
time by Insurer. Distributor shall use its best
efforts to market the Contracts actively through
Selling Broker-Dealers in accordance with Section 4 of
this Agreement, subject to compliance with applicable
laws, including rules of the NASD.
B. LIMITS ON AUTHORITY. Distributor shall act as an
independent contractor and nothing herein contained
shall constitute Distributor or its agents, officers,
or employees as agents, officers or employees of
Insurer solely by virtue of their activities in
connection with the sale of Contracts hereunder.
Distributor and its Representatives shall not have
authority, on behalf of Insurer to make, alter, or
discharge any Contract or other insurance policy or
annuity entered into pursuant to a Contract; to waive
any Contract forfeiture provision; to extend due date
for payment of any Premium; or to receive monies or
Premiums (except for the sole purpose of forwarding
monies or Premiums to Insurer). Distributor shall not
expend, nor contract for the expenditure of, funds of
the Insurer. Distributor shall not possess or exercise
any authority on behalf of Insurer other than that
expressly conferred on Distributor by this Agreement.
3. SOLICITATION ACTIVITIES.
A. NO SALES BY DISTRIBUTOR REPRESENTATIVES. The
Distributor will not solicit applications from the
public for Contracts through Distributor
Representatives.
B. REPRESENTATIONS AND WARRANTIES OF DISTRIBUTOR.
Distributor represents and warrants to Insurer that
Distributor is and shall remain during the term of this
Agreement (i) registered as a broker-dealer under the
1934 Act; (ii) a member of the NASD; (iii) duly
registered under applicable state securities laws; and
(iv) in compliance with Section 9(a) of the 1940 Act.
4. SELLING BROKER-DEALERS. Insurer and Distributor shall
insure that sales of the contracts by Selling Broker-Dealers
comply with the following conditions, and any additional
conditions Insurer may specify from time to time.
<PAGE>
A. DUAL REGISTRATION/LICENSING. Every Selling
Broker-Dealer shall be (i) registered as a
broker-dealer with the SEC; (ii) a member of the NASD;
and (iii) if required, licensed as an insurance agent
with authority to sell variable products or associated
with an insurance agent so licensed. Any individuals
to be authorized to act on behalf of Selling
Broker-Dealer shall be (i) duly registered with the
NASD as representatives of Selling Broker-Dealer with
authority to sell variable products; and (ii) licensed
as insurance agents with authority to sell variable
products. Insurer shall verify that Selling
Broker-Dealer and its Representatives are duly licensed
under applicable state insurance law to sell the
Contracts or, if Broker-Dealer is not so licensed, that
it is associated with an entity so licensed.
B. APPOINTMENT OF REPRESENTATIVES. Every Selling
Broker-Dealer (or, if applicable, its associated
insurance agency) and each of its Representatives shall
have been appointed by Insurer; provided that Insurer
reserves the right to refuse to appoint any proposed
person, or once appointed, to terminate such
appointment.
C. WRITTEN SALES AGREEMENT. Every Selling Broker-Dealer
must enter into a written sales agreement with
Distributor and Insurer which sales agreement, among
other things, will require such Selling Broker-Dealer
to use its best efforts to solicit Applications for the
Contracts and to comply with applicable laws and
regulations, including the Insurer's rules and
regulations as reflected in any written rules,
regulations and procedures provided by Insurer to
insurance agents appointed to sell its insurance
contracts, as revised from time to time.
D. SUITABILITY. In view of the fact that Insurer and
Distributor want to ensure that Contracts will be sold
to purchasers for whom the Contracts will be suitable,
the written Sales Agreement shall require that Selling
Broker-Dealers and their Representatives not make
recommendations to an applicant to purchase a Contract
in the absence of reasonable grounds to believe that
the purchase of the Contract is suitable for the
applicant. While not limited to the following, a
determination of suitability shall be based on
information supplied by an applicant after reasonable
inquiry concerning the applicant's other security
holdings, insurance and investment objectives,
financial situation and needs, and the likelihood that
the applicant will continue to make premium payments
contemplated by the Contract applied for and will keep
the Contract in force for a sufficient period of time
so that Insurer's acquisition costs are amortized over
a reasonable period of time.
<PAGE>
5. MARKETING MATERIALS
A. PREPARATION AND FILING. Subject to Section 11.J below,
Insurer shall be primarily responsible for the design
and preparation of all promotional, sales and
advertising material related to the Contracts.
Distributor shall be responsible for filing such
material as required, with the NASD and any state
securities regulatory authorities at Insurer's expense.
Insurer shall be responsible for filing all
promotional, sales or advertising material, as
required, with any state insurance regulatory
authorities. Insurer shall be responsible for
preparing the Contract forms and filing them with
applicable state insurance regulatory authorities, and
for preparing the Prospectuses and Registration
Statements and filing them with the SEC and state
regulatory authorities, to the extent required. The
parties shall notify each other expeditiously of any
comments provided by the SEC, NASD or any securities or
insurance regulatory authority on such material, and
will cooperate expeditiously in resolving and
implementing any comments, as applicable.
B. USE IN SOLICITATION ACTIVITIES. Subject to Section
11.J below, Insurer shall be responsible for furnishing
Distributor with such Applications, Prospectuses and
other materials for use by Distributor and Selling
Broker-Dealers in their solicitation activities with
respect to the Contracts. Insurer shall notify
Distributor of those states or jurisdictions which
require delivery of a statement of additional
information with a prospectus to a prospective
purchaser.
6. COMPENSATION AND EXPENSES.
A. COMPENSATION. Subject to Section 11.J below, Insurer
shall pay compensation for sales of the Contracts in
accordance with Schedule 2 hereto. Upon Distributor's
request, Insurer shall pay compensation directly to
Selling-Broker-Dealers, on Distributor's behalf,
subject to the provisions of Section 7 of this
Agreement.
B. EXPENSES. Subject to Section 11.J below, Insurer shall
pay all expenses in connection with:
(1) the preparation and filing of each registration
statement (including each pre-effective and
post-effective amendment thereto) and the
preparation and filing of each Prospectus
(including any preliminary and each definitive
Prospectus);
(2) the preparation, underwriting, issuance and
administration of the Contracts;
(3) any registration, qualification or approval or
other filing of the Contracts or Contract forms
required under the securities or insurance laws of
the states in which the Contracts will be offered;
<PAGE>
(4) all registration fees for the Contracts payable to
the SEC;
(5) the printing of promotional materials, definitive
Prospectuses for the Contracts and any supplements
thereto for distribution;
(6) any applicable postage costs; and
(7) any out-of-pocket expenses incurred by Distributor
in carrying out its obligations under this
Agreement.
7. COMPLIANCE.
A. MAINTAINING REGISTRATION AND APPROVALS. Subject to
Section 11.J below, Insurer shall be responsible for
maintaining the registration of the Contracts with the
SEC and any state securities regulatory authority with
which such registration is required, and for gaining
and maintaining the approval of the Contract forms
where required under the insurance laws and regulations
of each state or other jurisdiction in which the
Contracts are to be offered.
B. CONFIRMATIONS AND THE 1934 ACT COMPLIANCE.
Distributor, shall confirm to each applicant for and
purchaser of a Contract in accordance with Rule 10b-10
under the 1934 Act acceptance of premiums and such
other transactions as are required by Rule 10b-10 or
administrative interpretations thereunder. Distributor
shall maintain and preserve such books and records with
respect to such confirmations in conformity with the
requirements of Rules 17a-3 and 17a-4 under the 1934
Act to the extent such requirements apply. Distributor
acknowledges that such books and records are at all
times subject to inspection by the SEC in accordance
with Section 17(a) of the 1934 Act.
C. ISSUANCE AND ADMINISTRATION OF CONTRACTS. Insurer
shall be responsible for issuing the Contracts and
administering the Contracts and the Variable Account,
provided, however, that Distributor shall have full
responsibility for the securities activities of all
persons employed by the Insurer, engaged directly or
indirectly in the Contract operations, and for the
training, supervision and control of such persons to
the extent of such activities.
8. INVESTIGATIONS AND PROCEEDINGS.
A. COOPERATION. Distributor and Insurer shall cooperate
fully in any securities or insurance regulatory
investigation or proceeding or judicial proceeding
arising in connection with the offering, sale or
distribution of the Contracts distributed under this
Agreement. Without limiting the forgoing, Insurer and
Distributor shall notify each other promptly of any
customer complaint or notice of any regulatory
investigation or proceeding or judicial proceeding
received by either party with respect to the Contracts.
<PAGE>
B. CUSTOMER COMPLAINTS. In the case of any customer
complaints, Distributor and Insurer will cooperate in
investigating such complaint and any response by
Distributor or Insurer to such complaint will be sent
to the other party for review and approval not less
than five business days prior to its being sent to the
customer or regulatory authority, except that if a more
prompt response is required, the response shall be
communicated by telephone or electronic mail.
9. INDEMNIFICATION.
A. BY INSURER. Insurer shall indemnify and hold harmless
Distributor and each person who controls or is
associated with Distributor within the meaning of such
terms under the federal securities laws, and any
officer, director, employee or agent of the foregoing,
against any and all losses, claims, damages or
liabilities, joint or several (including any
investigative, legal and other expenses reasonably
incurred in connection with, and any amounts paid in
settlement of, any action, suit or proceeding or any
claim asserted), to which Distributor and/or any such
person may become subject, under any statute or
regulation, any NASD rule or interpretation, at common
law or otherwise, insofar as such losses, claims,
damages or liabilities:
(1) arise out of or are based upon any untrue
statement or alleged untrue statement of a
material fact or omission or alleged omission to
state a material fact required to be stated
therein or necessary to make the statements
therein not misleading, in light of the
circumstances in which they were made, contained
in any (i) Registration Statement or in any
Prospectus or (ii) blue sky application or other
document executed by Insurer specifically for the
purpose of qualifying any or all of the Contracts
for sale under the securities laws of any
jurisdiction; provided that Insurer shall not be
liable in any such case to the extent that such
loss, claim, damage or liability arises out of, or
is based upon, an untrue statement or alleged
untrue statement or omission or alleged omission
made in reliance upon information furnished in
writing to Insurer by Distributor specifically for
use in the preparation of any such Registration
Statement or any such blue sky application or any
amendment thereof or supplement thereto;
(2) result from any breach by Insurer of any provision
of this Agreement.
This indemnification agreement shall be in addition to
any liability that Insurer may otherwise have;
provided, however, that no person shall be entitled to
indemnification pursuant to this provision if such
loss, claim, damage or liability is due to the willful
misfeasance, bad faith, gross negligence or reckless
disregard of duty by the person seeking
indemnification.
<PAGE>
B. BY DISTRIBUTOR. Distributor shall indemnify and hold
harmless Insurer and each person who controls or is
associated with the Insurer within the meaning of such
terms under the federal securities laws, and any
officer, director, employee or agent of the foregoing,
against any and all losses, claims, damages or
liabilities, joint or several (including any
investigative, legal and other expenses reasonably
incurred in connection with, and any amounts paid in
settlement of, any action, suit or proceeding or any
claim asserted), to which Insurer and/or any such
person may become subject under any statute or
regulation, any NASD rule or interpretation, at common
law or otherwise, insofar as such losses, claims,
damages or liabilities:
(1) arise out of or are based upon any untrue
statement or alleged untrue statement of a
material fact or omission or alleged omission to
state a material fact required to be stated
therein or necessary to make the statements
therein not misleading, in light of the
circumstances in which they were made, contained
in any (i) Registration Statement or in any
Prospectus or (ii) blue sky application or other
document executed by Insurer specifically for the
purpose of qualifying any or all of the Contracts
for sale under the securities laws of any
jurisdiction; in each case to the extent, but only
to the extent, that such untrue statement or
alleged untrue statement or omission or alleged
omission was made in reliance upon information
furnished in writing by Distributor to Insurer
specifically for use in the preparation of any
such Registration Statement or any such blue sky
application or any amendment thereof or supplement
thereto;
(2) result from any breach by Distributor of any
provision of this Agreement.
This indemnification shall be in addition to any
liability that Distributor may otherwise have;
provided, however, that no person shall be entitled to
indemnification pursuant to this provision if such
loss, claim, damage or liability is due to the willful
misfeasance, bad faith, gross negligence or reckless
disregard of duty by the person seeking
indemnification.
C. GENERAL. Promptly after receipt by a party entitled to
indemnification ("Indemnified Person") under this
Section 9 of notice of the commencement of any action
as to which a claim will be made against any person
obligated to provide indemnification under this Section
9 ("Indemnifying Party"), such indemnified person shall
notify the indemnifying party in writing of the
commencement thereof as soon as practicable thereafter,
but failure to so notify the indemnifying party shall
not relieve the indemnifying party from any liability
which it may have to the indemnified person otherwise
than on account of this Section 9. The indemnifying
party will be entitled to participate in the defense of
the indemnified person but such participation will not
relieve such
<PAGE>
indemnifying party of the obligation to reimburse the
indemnified person for reasonable legal and other
expense incurred by such indemnified person in
defending himself or herself.
The indemnification provisions contained in this
Section 9 shall remain operative in full force and
effect, regardless of any termination of this
Agreement. A successor by law of Distributor or
Insurer, as the case may be, shall be entitled to the
benefits of the indemnification provisions contained in
this Section 9.
10. TERMINATION. This Agreement shall terminate automatically
if it is assigned by a party without the prior written
consent of the other party. (The term "assigned" shall not
include any transaction exempted from Section 15(b)(2) of
the 1940 Act.) This Agreement may be terminated at any time
for any reason by either party upon 90 days' written notice
to the other party, without payment of any penalty. This
Agreement may be terminated at the option of either party to
this Agreement upon the other party's material breach of any
provision of this Agreement or of any representation or
warranty made in this Agreement, unless such breach has been
cured within 30 days after receipt of notice of breach from
the non-breaching party. Upon termination of this Agreement
all authorizations, rights and obligations shall cease
except the obligation to settle accounts hereunder,
including commissions on Premiums subsequently received for
Contracts in effect at the time of termination or issued
pursuant to Applications received by Insurer prior to
termination.
11. MISCELLANEOUS.
A. BINDING EFFECT. This Agreement shall be binding on and
shall inure to the benefit of the respective successors
and assigns of the parties hereto provided that neither
party shall assign this Agreement or any rights or
obligations hereunder without the prior written consent
of the other party.
B. SCHEDULES. The parties to this Agreement may amend
Schedule 1 to this Agreement from time to time to
reflect the addition of any class of Contracts and
Variable Accounts. The provisions of this Agreement
shall be equally applicable to each such class of
Contracts and each Variable Account that may be added
to the Schedule, unless the context otherwise requires.
Insurer may amend Schedule 2 unilaterally, from time to
time. Any other change in the terms or provisions of
this Agreement shall be by written agreement between
Insurer and Distributor.
C. RIGHTS, REMEDIES, ETC. ARE CUMULATIVE. The rights,
remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all
rights, remedies and obligations, at law or in equity,
which the parties hereto are entitled to under state
and federal laws. Failure of either party to insist
upon strict compliance with any conditions of this
Agreement shall not be construed as a waiver of any of
the conditions, but the same shall remain in full force
and effect. No waiver of any of the provisions of this
Agreement shall be deemed, or shall constitute, a
waiver
<PAGE>
of any other provisions, whether or not similar, nor
shall any waiver constitute a continuing waiver.
D. NOTICES. All notices hereunder are to be made in
writing and shall be given to the address set forth
below or to such other address as such party may
hereafter specify by a notice complying with this
Section. Each such notice to a party shall be either
hand delivered, sent by fax with written confirmation
of transmission or sent by registered or certified
United States mail with return receipt requested, or by
overnight mail by a nationally recognized courier, and
shall be effective upon delivery.
<PAGE>
1.) If to Insurer, to:
American Equity Investment Life Insurance Company
5000 Westown Parkway, Suite 440
West Des Moines, Iowa 50266
Fax No. 515-221-9989
2.). If to Distributor, to:
American Equity Capital, Inc.
5000 Westown Parkway, Suite 440
West Des Moines, Iowa 50266
Fax No. 515-221-9989
E. INTERPRETATION; JURISDICTION. Except as set forth in
Section 11.J below, this Agreement constitutes the
whole Agreement between the parties hereto with respect
to the subject matter hereof, and supersedes all prior
written or oral understandings, agreements or
negotiations between the parties with respect to such
subject matter. No prior writings by or between the
parties with respect to the subject matter hereof shall
be used by either party in connection with the
interpretation of any provision of this Agreement.
This Agreement shall be construed and its provisions
interpreted under and in accordance with the laws of
the state of Iowa without giving effect to principles
of conflict of laws.
F. SEVERABILITY. In the event that any provision of this
Agreement would require a party to take action
prohibited by applicable federal or state law or
prohibit a party from taking action required by
applicable federal or state law, then it is the
intention of the parties hereto that such provision
shall be enforced to the extent permitted under the
law, and, in any event, that all other provisions of
this Agreement shall remain valid and duly enforceable
as if the provision at issue had never been a part
hereof.
G. SECTION AND OTHER HEADINGS. The headings in this
Agreement are included for convenience of reference
only and in no way define or delineate any of the
provisions hereof or otherwise affect their
construction or effect.
H. COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which taken together shall
constitute one and the same instrument.
I. REGULATION. This Agreement shall be subject to the
provisions of the 1933 Act, 1934 Act and the 1940 Act
and the rules and regulations of the NASD, from time to
time in effect, including such exemptions from the 1940
Act as the SEC may grant, and the terms hereof shall be
interpreted
<PAGE>
and construed in accordance therewith.
J. Any obligation of Insurer pursuant to this Agreement
may be performed by Insurer or Insurer may contract
with qualified third parties to provide those services
or assume those responsibilities necessary to satisfy
Insurer's obligations under this Agreement. Insurer
has entered into agreements with EquiTrust Marketing
Services, Inc., EquiTrust Investment Management
Services, Inc. and EquiTrust Life Insurance Company, to
provide all or part of the services and meet certain
obligations of Insurer under this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by such authorized officers on the
date specified below.
INSURER:
AMERICAN EQUITY INVESTMENT
LIFE INSURANCE COMPANY
By: /s/ D.J. Noble, President Date: May 1, 1999
DISTRIBUTOR:
AMERICAN EQUITY CAPITAL, INC.
By: /s/ Terry A. Reimer, CFO Date: May 1, 1999
<PAGE>
SCHEDULE 1
Separate Accounts
Effective __________________
American Equity Life Variable Account
American Equity Life Annuity Account
<PAGE>
SCHEDULE 2
Compensation
Effective ___________________
NONE
<PAGE>
Whitfield & Eddy, P.L.C. letterhead
April 27, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlemen,
With reference to the Registration Statement on Form N-4 filed by American
Equity Investment Life Insurance Company ("Company") and its American Equity
Life Annuity Account with the Securities and Exchange Commission covering
certain variable annuity contracts, I have examined such documents and such law
as I considered necessary and appropriate, and on the basis of such
examinations, it is my opinion that:
(1) Company is duly organized and validly existing under the laws of the State
of Iowa.
(2) The variable annuity contracts, when issued as contemplated by the said
Form N-4 Registration Statement will constitute legal, validly issued and
binding obligations of American Equity Investment Life Insurance Company.
I hereby consent to the filing of this opinion as an exhibit to the said Form
N-4 Registration Statement and to the reference to my name under the caption
"Legal Matters" in the Prospectus contained in the said Registration Statement.
In giving this consent, I am not admitting that I am in the category of persons
whose consent is required under Section 7 of the Securities Act of 1933.
Very truly yours,
/s/ Wendy L. Carlson
Wendy L. Carlson
Whitfield & Eddy, P.L.C.
<PAGE>
Sutherland, Asbill & Brennan LLP letterhead
April 26, 1999
American Equity Investment Life Insurance Company
5000 Westown Parkway, Suite 440
West Des Moines, Iowa 50266
Gentlemen:
We hereby consent to the reference to our name under the caption "Legal Matters"
in the statement of additional information filed as part of the registration
statement on Form N-4 for American Equity Life Annuity Account (File No.
333-46593). In giving this consent, we do not admit that we are in the category
of persons whose consent is required under Section 7 of the Securities Act of
1933.
Sincerely,
SUTHERLAND, ASBILL & BRENNAN LLP
/s/ Stephen E. Roth
Stephen E. Roth, Esq.
<PAGE>
We consent to the reference to our firm under the captions "Financial
Statements" in the Prospectus and "Experts" in Part B and to the use of our
reports dated March 5, 1999 with respect to financial statements of American
Equity Life Annuity Account and March 2, 1999 with respect to the financial
statements of American Equity Investment Life Insurance Company, in
Post-Effective Amendment No. 1 to the Registration Statement
(Form N-4 No. 333-46593) and related Prospectus of American Equity
Life Annuity Account dated May 1, 1999.
Our audits also included the financial statement schedules of American Equity
Investment Life Insurance Company included in Item 24(a)(2). These schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, the financial
statement schedules referred to above, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
Des Moines, Iowa
April 26, 1999
<PAGE>
American Equity letterhead
April 27, 1999
American Equity Investment Life Insurance Company
5000 Westown Parkway; Suite 440
West Des Moines, Iowa 50266
Gentlemen:
This opinion is furnished in connection with the registration by American Equity
Investment Life Insurance Company of a flexible premium deferred variable
annuity contract ("Contract") under the Securities Act of 1933, as amended. The
prospectus included in Post-Effective Amendment No. 1 to the Registration
Statement on Form N-4 (File No. 333-46593) describes the Contract. I have
provided actuarial advice concerning the preparation of the contract form
described in the Registration Statement, and I am familiar with the Registration
Statement and exhibits thereto.
It is my professional opinion that the fees and charges deducted under the
Contract, in the aggregate, are reasonable in relation to the services rendered,
the expenses expected to be incurred and the risks assumed by the insurance
company.
I hereby consent to the use of this opinion as an exhibit to Post-Effective
Amendment No. 1 to the Registration Statement.
Sincerely,
/s/ Christopher G. Daniels
Christopher G. Daniels, FSA, MSAA
Consulting Actuary
American Equity Investment Life Insurance Company
