<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 1, 2000
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. 3
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 4
---------------------
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):
/ / IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (b) OF RULE 485;
/X/ ON MAY 1, 2000 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
AMERICAN EQUITY LIFE ANNUITY ACCOUNT
INDIVIDUAL FLEXIBLE PREMIUM DEFERRED
VARIABLE ANNUITY CONTRACT
------------------------------------------------------------------------
PROSPECTUS
May 1, 2000
American Equity Investment Life Insurance Company (the "Company") is offering
the individual flexible premium deferred variable annuity contract (the
"Contract") described in this prospectus. It provides for growth of Accumulated
Value and annuity payments on a fixed and variable basis. 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
Appreciation Portfolio Disciplined Stock Portfolio
Growth and 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.
Please note that the Contracts and Investment Options are not bank deposits, are
not federally insured, are not guaranteed to achieve their goals and are subject
to risks, including loss of the amount invested.
You may find additional information about your Contract and the Account in the
Statement of Additional Information, dated the same as this prospectus. To
obtain a copy of this document, please contact us at the address or phone number
shown on the cover of this prospectus. The Statement of Additional Information
(SAI) has been filed with the Securities and Exchange Commission and is
incorporated herein by reference. The SEC maintains a website
(http://www.sec.gov) that contains the SAI, material incorporated by reference
into this prospectus, and other information filed electronically with the SEC.
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
REPRESENTATION 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
- --------------------------------------------------------------------------------
<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.................................... 13
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........................................... 26
PAYMENT OPTIONS............................................. 27
Description of Payment Options........................ 27
Election of Payment Options and Annuity Payments...... 28
YIELDS AND TOTAL RETURNS.................................... 31
FEDERAL TAX MATTERS......................................... 32
Introduction.......................................... 32
Tax Status of the Contract............................ 33
Taxation of Annuities................................. 34
Transfers, Assignments or Exchanges of a Contract..... 36
Withholding........................................... 36
Multiple Contracts.................................... 36
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Taxation of Qualified Contracts....................... 36
Possible Charge for the Company's Taxes............... 38
Other Tax Consequences................................ 38
DISTRIBUTION OF THE CONTRACTS............................... 39
LEGAL PROCEEDINGS........................................... 39
VOTING RIGHTS............................................... 39
FINANCIAL STATEMENTS........................................ 40
CALCULATING VARIABLE ANNUITY PAYMENTS....................... Appendix A
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS....... SAI-TOC
</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>
- --------------------------------------------------------------------------------
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: (1) any period when the Securities and Exchange Commission determines
that an emergency exists which makes it impracticable for a Fund to dispose of
its securities or to fairly determine the value of its net assets; or (2) such
other periods as the Securities and Exchange Commission may permit for the
protection of security holders of a Fund.
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, any supplemental
applications and any endorsements or additional benefit riders or agreements.
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(a),
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>
- --------------------------------------------------------------------------------
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>
* You may annually withdraw a maximum of 10% of the Accumulated Value
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.
Under certain circumstances, a Surrender Charge may apply on the
Retirement Date. (See "CHARGES AND DEDUCTIONS--Surrender Charge
(Contingent Deferred Sales Charge)--SURRENDER CHARGE AT THE RETIREMENT
DATE.")
<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
Annual Account Expenses (as a percentage of average net
assets)
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 after
waivers or reimbursements)
<TABLE>
<CAPTION>
ADVISORY OTHER TOTAL
INVESTMENT OPTION FEE EXPENSES EXPENSES
<S> <C> <C> <C>
EquiTrust Variable Insurance Series Fund
Value Growth 0.45% 0.12% 0.57%
High Grade Bond 0.30% 0.18% 0.48%
High Yield Bond 0.45% 0.15% 0.60%
Money Market 0.25% 0.30% 0.55%
Blue Chip 0.20% 0.10% 0.30%
T. Rowe Price Equity Series, Inc.
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)
T. Rowe Price International Series, Inc.
International Stock 1.05% 0.00% 1.05%(1)
Dreyfus Variable Investment Fund
Appreciation Portfolio 0.75% 0.03% 0.78%
Disciplined Stock Portfolio 0.75% 0.06% 0.81%
Growth and Income Portfolio 0.75% 0.04% 0.79%
International Equity Portfolio 0.75% 0.27% 1.02%
Small Cap Portfolio 0.75% 0.03% 0.78%
</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 1999 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
<S> <C> <C> <C> <C>
EquiTrust Variable Insurance Series Fund
Value Growth $152 $277 $403 $674
High Grade Bond 151 275 400 665
High Yield Bond 152 278 405 677
Money Market 152 277 403 672
Blue Chip 150 270 391 646
T. Rowe Price Equity Series, Inc.
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
T. Rowe Price International Series, Inc.
International Stock 157 291 426 722
Dreyfus Variable Investment Fund
Appreciation Portfolio 154 283 414 696
Disciplined Stock Portfolio 154 284 415 699
Growth and Income Portfolio 154 283 414 697
International Equity Portfolio 156 290 425 719
Small Cap Portfolio 154 283 414 696
</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
<S> <C> <C> <C> <C>
EquiTrust Variable Insurance Series Fund
Value Growth $65 $196 $330 $674
High Grade Bond 64 194 325 665
High Yield Bond 65 197 332 677
Money Market 65 196 329 672
Blue Chip 62 188 316 646
T. Rowe Price Equity Series, Inc.
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
T. Rowe Price International Series, Inc.
International Stock 70 211 354 722
Dreyfus Variable Investment Fund
Appreciation Portfolio 67 203 341 696
Disciplined Stock Portfolio 67 204 342 699
Growth and Income Portfolio 67 203 341 697
International Equity Portfolio 69 210 353 719
Small Cap Portfolio 67 203 341 696
</TABLE>
Expenses assume that current fee waivers and expense reimbursement arrangements
for the Funds continue for the periods shown.
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 not a representation
of past or future annual returns, which may be greater or less than this assumed
rate.
8
<PAGE>
- --------------------------------------------------------------------------------
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/or 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
any other 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 from the Contract Date.
- 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 or Declared Interest Option, 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"). A
Partial Withdrawal may have tax consequences. (See "FEDERAL TAX MATTERS.")
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"). A Surrender may have tax consequences. (See
"FEDERAL TAX MATTERS.")
9
<PAGE>
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 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>
You may annually withdraw a maximum of 10% of the Accumulated Value without
incurring 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 deduct 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 greater, or
- if you have a Net Accumulated Value of $50,000 or greater on your
Contract Anniversary.
We may terminate this waiver at any time.
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").
10
<PAGE>
FEDERAL TAX MATTERS
The Contract's earnings are generally not taxed until you take a distribution.
If you are under age 59 1/2 when you take a distribution, the earnings may
also be subject to a penalty tax. Different tax consequences apply to
distributions from Qualified Contracts. (See "FEDERAL TAX MATTERS.")
- --------------------------------------------------------------------------------
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,
1999.
<TABLE>
<CAPTION>
ACCUMULATION ACCUMULATION
UNIT VALUE AT UNIT VALUE AT NUMBER OF UNITS AT
SUBACCOUNT BEGINNING OF YEAR END OF YEAR END OF YEAR
<S> <C> <C> <C>
Value Growth
1998 $10.000000 $10.000000 0.000000
1999 10.000000 8.963638 906.749000
High Grade Bond
1998 $10.000000 $10.216450 5,001.148000
1999 10.216450 10.030807 5,147.564821
High Yield Bond
1998 $10.000000 $10.156478 5,001.147000
1999 10.156478 9.940766 5,001.147000
Money Market
1998 $10.000000 $10.012353 4,950.136990
1999 10.012353 10.079893 0.000000
Blue Chip
1998 $10.000000 $10.000000 0.000000
1999 10.000000 11.244734 4,686.889920
Appreciation
1998 $10.000000 $10.000000 0.000000
1999 10.000000 10.668918 4,419.138022
Disciplined Stock
1998 $10.000000 $10.000000 0.000000
1999 10.000000 11.387477 2,592.882489
Growth & Income
1998 $10.000000 $10.000000 0.000000
1999 10.000000 11.511224 2,663.570748
International Equity
1998 $10.000000 $10.000000 0.000000
1999 10.000000 11.291372 499.011968
Small Cap
1998 $10.000000 $10.000000 0.000000
1999 10.000000 10.663211 3,290.426367
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
ACCUMULATION ACCUMULATION
UNIT VALUE AT UNIT VALUE AT NUMBER OF UNITS AT
SUBACCOUNT BEGINNING OF YEAR END OF YEAR END OF YEAR
<S> <C> <C> <C>
Equity Income
1998 $10.000000 $10.000000 0.000000
1999 10.000000 10.217649 2,566.930987
Mid-Cap Growth
1998 $10.000000 $10.000000 0.000000
1999 10.000000 11.264699 1,338.170684
New America Growth
1998 $10.000000 $10.000000 0.000000
1999 10.000000 11.426304 1,297.934149
Personal Strategy Balanced
1998 $10.000000 $10.000000 0.000000
1999 10.000000 10.519260 148.923974
International Stock
1998 $10.000000 $10.000000 0.000000
1999 10.000000 10.833490 263.768180
</TABLE>
- --------------------------------------------------------------------------------
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
18,400 independent agents in the states of Alabama, Alaska, Arizona,
Arkansas, California, Colorado, Delaware, Florida, Georgia, Hawaii, Idaho,
Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland,
Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New
Mexico, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina,
South Dakota, Tennessee, Texas, Utah, Virginia, 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.
12
<PAGE>
- --------------------------------------------------------------------------------
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.
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 Standard & 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 F.D.I.C. OR ANY GOVERNMENT AGENCY. THERE CAN BE NO
ASSURANCE THAT THE PORTFOLIO WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
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>
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 to provide long-term capital
appreciation by investing primarily in mid-cap common
stocks with the potential for above-average earnings
growth. The investment adviser defines mid-cap companies
as those whose market capitalization falls within the
range of companies in the Standard & Poor's Mid-Cap 400
Index.
New America Growth Portfolio - This Portfolio seeks growth of capital by investing
primarily in the common stocks of companies operating in
sectors the investment adviser believes will be the
fastest growing in the U.S. Fast-growing companies can be
found across an array of industries in today's "new
America."
Personal Strategy Balanced Portfolio - This Portfolio seeks the highest total return over time
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: Appreciation
Portfolio. The following Fund portfolios are available under the Contract.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
Dreyfus Variable Investment Fund: - This Portfolio primarily seeks long-term capital growth,
Appreciation Portfolio consistent with the preservation of capital; current
income is a secondary investment objective. This
Portfolio invests primarily in the common stocks of
domestic and foreign issuers.
Dreyfus Variable Investment Fund: - This Portfolio seeks to provide investment results that
Disciplined Stock Portfolio are greater than the total return performance of
publicly-traded 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 Fund: - This Portfolio seeks to provide long-term capital growth,
Growth and Income Portfolio current income and growth of income, consistent with
reasonable investment risk by investing primarily in
equity securities, debt securities and money market
instruments of domestic and foreign issuers.
Dreyfus Variable Investment Fund: - This Portfolio seeks to maximize capital growth through
International Equity Portfolio investments in equity securities of foreign issuers
located throughout the world.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
Dreyfus Variable Investment Fund: - This Portfolio seeks maximum capital appreciation by
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 Funds 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,
- 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.
15
<PAGE>
- --------------------------------------------------------------------------------
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. (Certain
states may provide for a 30 day free-look period in a replacement
situation.) 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 any
other 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.
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 from the Contract date.
- 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.
16
<PAGE>
- 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.
- You may change your allocation schedule at any time by sending
written notice to the Administrative Office. If you change your
allocation percentages, we will allocate subsequent premium payments
in accordance with the allocation schedule in effect. Changing your
allocation schedule will not alter the allocation of your existing
Accumulated Values among the Subaccounts or the Declared Interest
Option.
- You may, however, direct individual payments to a specific
Subaccount, the Declared Interest Option, or any combination
thereof, without changing the existing allocation schedule.
Because the Accumulated Values in each Subaccount will vary with that
Subaccount's investment experience, you bear the entire investment risk for
amounts allocated to the Subaccount. 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 or the Declared
Interest Option.
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 and capital gains, realized or
unrealized, credited to the Subaccount during the current
valuation period; minus
17
<PAGE>
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 operation or maintenance of 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 based on the net asset value
next determined after we receive your written request at the Administrative
Office.
- The minimum amount of each transfer is $100 or the entire amount in
that Subaccount or Declared Interest Option, 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.
- 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 may be treated as a full surrender of the
Contract.
We will process your partial withdrawal based on the net asset value next
determined after we receive your written request at the Administrative
Office. You may annually withdraw a maximum of 10% of the Accumulated Value
without incurring a Surrender Charge. You may elect to have any applicable
18
<PAGE>
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 or the Declared Interest Option
based on the proportion that these values bear 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 based on
the net asset value next determined after we receive your written request
and your Contract at the Administrative Office. 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 "FEDERAL TAX MATTERS--Taxation of Annuities" and "--Taxation
of Qualified Contracts.")
RESTRICTIONS ON DISTRIBUTIONS FROM CERTAIN TYPES OF CONTRACTS. Surrenders
and partial withdrawals of Qualified Contracts are subject to certain
restrictions. (See "FEDERAL TAX MATTERS--Taxation of Qualified Contracts.")
- --------------------------------------------------------------------------------
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 each year to return
your Accumulated Value to your most recent premium allocation percentages.
- 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.
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.
19
<PAGE>
- 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 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.
20
<PAGE>
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, we will determine the death benefit as of the date we receive due
proof of death and the death benefit will equal the greatest of:
- the sum of the premiums paid, less the sum of all partial withdrawal
reductions (including applicable surrender charges);
- the Accumulated Value; or
- the Performance Enhanced Death Benefit (PEDB) amount.
The PEDB amount is equal to zero on the Contract Date. The PEDB amount
increases by the amount of each premium payment (including the initial
premium), and decreases by the amount of any partial withdrawal reduction.
We will calculate the PEDB amount: (1) on each Contract Anniversary; (2) at
the time you make any premium payment or partial withdrawal; and (3) on the
annuitant's date of death. The PEDB amount on each calculation date is equal
to the greater of (a) the previous PEDB amount or (b) the Accumulated Value.
We will continue to recalculate the PEDB amount until the Contract
Anniversary immediately prior to the oldest annuitant's 91st birthday. All
subsequent PEDB amounts will be recalculated for additional premium payments
or partial withdrawals only.
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
21
<PAGE>
will be distributed at least as quickly as under the method of distribution
being used as of the date of death.
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
You may modify your Contract only if one of our officers agrees in writing
to such 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.
24
<PAGE>
- --------------------------------------------------------------------------------
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 and 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. You may annually withdraw a maximum
of 10% of the Accumulated Value without incurring 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. We may assess a Surrender Charge
against your Accumulated Value at the retirement date. We do not apply a
Surrender Charge if you elect to receive a life contingent payment option.
If you select fixed annuity payments under 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 age of 76 or below.) We must receive
written notification, before the retirement date, at the Administrative
Office in order to activate this waiver.
25
<PAGE>
- --------------------------------------------------------------------------------
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 greater, or
- upon a Net Accumulated Value of $50,000 or greater 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.
- --------------------------------------------------------------------------------
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.
26
<PAGE>
- --------------------------------------------------------------------------------
PAYMENT OPTIONS
- --------------------------------------------------------------------------------
The accumulation phase of your Contract ends on the retirement date you
select (see "DESCRIPTION OF ANNUITY CONTRACT--Proceeds on Retirement Date").
At that time, your proceeds 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. The proceeds are the
amount you apply to a payment option. The amount of proceeds will equal
either: (1) the Net Accumulated Value if you are surrendering the Contract;
or (2) the death benefit if the annuitant dies; or (3) the amount of any
partial withdrawal you apply to a payment option.
Prior to the retirement date, you may elect to have your proceeds 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 agreement to be issued for
the payment option.
You can choose whether to apply any portion of your proceeds to provide
either fixed annuity payments (available under all payment options),
variable annuity payments (available under options 3 and 7 only), or a
combination of both. If you elect to receive variable annuity payments, then
you also must select the Subaccounts to which we will apply your proceeds.
The annuity payment date is the date you select as of which we compute
annuity payments. If you elect to receive variable annuity payments, the
annuity payment date may not be the 29th, 30th or 31st day of any month. We
compute the first annuity payment as of the initial annuity payment date you
select. All subsequent annuity payments are computed as of annuity payment
dates. These dates will be the same day of the month as the initial annuity
payment date.
Monthly annuity payments will be computed as of the same day each month as
the initial annuity payment date. Quarterly annuity payments will be
computed as of the same day in the 3rd, 6th, 9th, and 12th month following
the initial annuity payment date and on the same days of such months in each
successive year. Semi-annual annuity payment dates will be computed as of
the same day in the 6th and 12th month following the initial annuity payment
date and on the same days of such months in each successive year. Annual
annuity payments will be computed as of the same day in each year as the
initial annuity payment date. If you do not select a payment frequency, we
will make monthly payments.
- --------------------------------------------------------------------------------
DESCRIPTION OF PAYMENT 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.
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.
27
<PAGE>
OPTION 6--JOINT AND ONE-HALF TO SURVIVING SPOUSE. The proceeds are paid in
equal monthly installments while two payees live. When the principal payee
dies, the payment to the surviving spouse is reduced by 50%. If the spouse
of the principal payee dies first, the payment to the principal payee is not
reduced.
OPTION 7--JOINT AND 100% TO SURVIVOR MONTHLY LIFE INCOME OPTION. The
proceeds are paid in monthly installments while two joint payees live. When
one payee dies, future proceeds will be made to the survivor for their
lifetime.
ALTERNATE PAYMENT OPTION. The Company may make available alternative payment
options.
- --------------------------------------------------------------------------------
ELECTION OF PAYMENT OPTIONS AND ANNUITY PAYMENTS
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 have provided a description of the available payment options above. The
term "effective date" means the date as of which the proceeds are applied to
a payment option. The term "payee" means a person who is entitled to receive
payment under a payment option.
FIXED ANNUITY PAYMENTS. Fixed annuity payments are periodic payments we make
to the designated payee. The dollar amount of each payment does not change.
We calculate the amount of each fixed annuity payment based on:
- the form and duration of the payment option chosen;
- the annuitant's age and sex;
- the amount of proceeds applied to purchase the fixed annuity
payments, and
- the applicable annuity purchase rates.
We use a minimum annual interest rate of 3% to compute fixed annuity
payments. We may, in our sole discretion, make fixed annuity payments based
on a higher annual interest rate.
The payee may elect to receive fixed annuity payments under each of the
payment options. We reserve the right to refuse the election of a payment
option, and to make a lump sum payment to the payee if:
(1) the total payments would be less than $2,000;
(2) the amount of each payment would be less than $20; or
(3) the payee is an assignee, estate, trustee, partnership,
corporation, or association.
Under Option 1 (Interest Income), the proceeds earn a set interest rate and
the payee may elect to receive some or all of the interest in equal periodic
payments. Under Option 4 (Income for Fixed Amount), proceeds are paid in
amounts and at intervals specified by the payee. For each other payment
option, we determine the dollar amount of the first fixed annuity payment by
multiplying the dollar amount of proceeds being applied to purchase fixed
annuity payments by the annuity purchase rate for the selected payment
option. Subsequent fixed annuity payments are of the same dollar amount
unless we make payments based on an interest rate different from the
interest rate we use to compute the first payment.
VARIABLE ANNUITY PAYMENTS. Variable annuity payments are periodic payments
we make to the designated payee, the amount of which varies from one annuity
payment date to the next as a function of the investment performance of the
Subaccounts selected to support such payments. The
28
<PAGE>
payee may elect to receive variable annuity payments only under Option 3
(Life Income Option with Term Certain) and Option 7 (Joint and 100% to
Survivor Monthly Life Income Option). We determine the dollar amount of the
first variable annuity payment by multiplying the dollar amount of proceeds
being applied to purchase variable annuity payments on the effective date by
the annuity purchase rate in the Contract for the selected payment option.
Therefore, the dollar amount of the first variable annuity payment will
depend on:
- the dollar amount of proceeds being applied to a payment option;
- the payment option selected;
- the age and sex of the annuitant; and
- the assumed interest rate used in the variable payment option tables
(5% per year).
We calculate the dollar amount of the initial variable annuity payment
attributable to each Subaccount by multiplying the dollar amount of proceeds
to be allocated to that Subaccount on the effective date by the annuity
purchase rate for the selected payment option. The dollar value of the total
initial variable annuity payment is equal to the sum of the payments
attributable to each Subaccount.
An "annuity unit" is a measuring unit we use to monitor the value of the
variable annuity payments. We determine the number of annuity units
attributable to a Subaccount by dividing the initial variable annuity
payment attributable to that Subaccount by the annuity unit value (described
below) for that Subaccount for the Valuation Period ending on the effective
date or during which the effective date falls if the Valuation Period does
not end on such date. The number of annuity units attributable to each
Subaccount remains constant unless there is an exchange of annuity units
(see "EXCHANGING ANNUITY UNITS" below).
We calculate the dollar amount of each subsequent variable annuity payment
attributable to each Subaccount by multiplying the number of annuity units
of that Subaccount by the annuity unit value for that Subaccount for the
Valuation Period ending as of the annuity payment date. The dollar value of
each subsequent variable annuity payment is equal to the sum of the payments
attributable to each Subaccount.
The annuity unit value for each Valuation Period is equal to (a) multiplied
by (b) multiplied by (c) where:
(a) is the annuity unit value for the immediately preceding Valuation
Period;
(b) is the net investment factor for that Valuation Period (described
below); and
(c) is the daily assumed interest factor for each day in that
Valuation Period. The assumed interest rate we use for variable
annuity payment options is 5% per year. The daily assumed
interest factor derived from an assumed interest rate of 5% per
year is 0.9998663.
We calculate the net investment factor for each Subaccount for each
Valuation Period by dividing (x) by (y) and subtracting (z) from the result
where:
(x) is the net result of:
1. the value of the net assets in the Subaccount as of the end
of the current Valuation Period; PLUS
2. the amount of investment income and capital gains, realized
or unrealized, credited to the net assets of the Subaccount
during the current Valuation Period; MINUS
3. the amount of capital losses, realized or unrealized, charged
against the net assets of the Subaccount during the current
Valuation Period; PLUS or MINUS
29
<PAGE>
4. any amount charged against or credited to the Subaccount for
taxes, or any amount set aside during the Valuation Period as
a provision for taxes attributable to the operation or
maintenance of the Subaccount.
(y) is the net asset value of the Subaccount for the immediately
preceding Valuation Period
(z) is the daily amount charged for mortality and expense risks for
each day of the current Valuation Period.
If the annualized net investment return of a Subaccount for an annuity
payment period is equal to the assumed interest rate, then the variable
annuity payment attributable to that Subaccount for that period will equal
the payment for the prior period. If the annualized net investment return of
a Subaccount for an annuity payment period exceeds the assumed interest
rate, then the variable annuity payment attributable to that Subaccount for
that period will be greater than the payment for the prior period. To the
extent that such annualized net investment return is less than the assumed
interest rate, the payment for that period will be less than the payment for
the prior period.
For variable annuity payments, we reserve the right to:
(1) refuse the election of a payment option if total payments would
be less than $5,000;
(2) refuse to make payments of less than $50 each; or
(3) make payments at less frequent intervals if payments will be less
than $50 each.
EXCHANGING ANNUITY UNITS. By making a written or telephone request to us at
any time after the effective date, the payee may exchange the dollar value
of a designated number of annuity units of a particular Subaccount for an
equivalent dollar amount of annuity units of another Subaccount. The
exchange request will take effect as of the end of the Valuation Period when
we receive the request. On the date of the exchange, the dollar amount of a
variable annuity payment generated from the annuity units of either
Subaccount would be the same. The payee may exchange annuity units of one
Subaccount for annuity units of another Subaccount an unlimited number of
times. We only permit exchanges of annuity units between the Subaccounts.
SURRENDERS. By written request, a payee may make a full surrender of the
payments remaining in a payment option and receive the surrender value. We
do not allow any partial withdrawals of the dollar amounts allocated to a
payment option. The surrender value is equal to:
(a) the commuted value of remaining payments in a payment option;
MINUS
(b) a commutation fee that varies by year since the retirement date.
The commuted value is the present value of the remaining stream of payments
in a payment option, computed using the assumed interest rate and the
annuity unit value(s) calculated as of the date we receive your surrender
request. We assume that each payment under a variable payment option would
be equal to the sum of the number of annuity units in each Subaccount
multiplied by the applicable annuity unit value for each Subaccount.
We will deduct a commutation fee (surrender charge) on any full surrenders
requested during the first six years of a payment option. We assess the
commutation fee as a percentage of the original proceeds. The commutation
fee begins at 6% during the first year of a payment option and declines by
1% in each of the next five years. Full surrenders requested after the sixth
year of a payment option are not subject to a commutation fee. In addition,
if you elect to receive variable annuity payments, then we do not assess a
Surrender Charge against the proceeds applied to a variable payment option
on the retirement date, and we will calculate any commutation fee based on
the Contract Date. See "FEDERAL TAX MATTERS" for a discussion on the tax
consequences of Surrenders.
Please refer to APPENDIX A for more information on variable annuity
payments.
30
<PAGE>
- --------------------------------------------------------------------------------
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 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
31
<PAGE>
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
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.
32
<PAGE>
- --------------------------------------------------------------------------------
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 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
33
<PAGE>
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
- 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.
34
<PAGE>
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 payout
option elected under an annuity contract, a portion of each annuity payment
is generally not taxed and the remainder is taxed as ordinary income. The
non-taxable portion of an annuity payment is generally determined in a
manner that is designed to allow you to recover your investment in the
contract ratably on a tax-free basis over the expected stream of annuity
payments, as determined when annuity payments start. Once your investment in
the contract has been fully recovered, however, the full amount of each
annuity payment is subject to tax as ordinary income.
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;
- 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.
35
<PAGE>
- --------------------------------------------------------------------------------
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. The Owner generally can elect not
to have withholding apply.
Eligible rollover distributions from section 401(a) plans, section 403(a)
annuities 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.
- --------------------------------------------------------------------------------
TAXATION OF QUALIFIED CONTRACTS
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
36
<PAGE>
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) and 403(b), 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 amount of compensation
included in the owner's 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-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.
37
<PAGE>
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 conversion 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. Such conversions are subject to a 10% penalty tax
if they are distributed before five years have passed since the year of the
conversion. 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.
- --------------------------------------------------------------------------------
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 the Company 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
38
<PAGE>
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. ("NASD").
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."
Under the Public Disclosure Program, NASD Regulation ("NASDR") provides
certain information regarding the disciplinary history of NASD member
broker-dealers and their associated persons in response to written,
electronic or telephonic inquiries. NASDR's toll-free Public Disclosure
Program Hotline telephone number is 1-800-289-9999 and their Web site
address is www.nasdr.com. An investor brochure that includes information
describing the Public Disclosure Program is available from NASDR.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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,
39
<PAGE>
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.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The audited balance sheets of the Company as of December 31, 1999 and 1998,
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,
1999, as well as the related Report of Independent Auditors are contained in
the Statement of Additional Information. Likewise, the audited statements of
net assets for the Account as of December 31, 1999 and the related
statements of operations for the year then ended and changes in net assets
for the periods disclosed in the financial statements, as well as the
related Report of Independent Auditors, are contained in the Statement of
Additional Information.
40
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX A
- --------------------------------------------------------------------------------
CALCULATING VARIABLE ANNUITY PAYMENTS
The following chart has been prepared to show how investment performance
could affect variable annuity payments over time. It illustrates the
variable annuity payments under a supplemental agreement issued in
consideration of proceeds from a non-qualified Contract. The chart
illustrates certain variable annuity payments under five hypothetical rate
of return scenarios. Of course, the illustrations merely represent what such
payments might be under a HYPOTHETICAL supplemental agreement issued for
proceeds from a HYPOTHETICAL Contract.
WHAT THE CHART ILLUSTRATES. The chart illustrates the first monthly
payment in each of 25 years under a hypothetical variable payment
supplemental agreement issued in consideration of proceeds from a
hypothetical non-qualified Contract assuming a different hypothetical rate
of return for a single Subaccount supporting the agreement. The chart
assumes that the first monthly payment in the initial year shown is $1,000.
HYPOTHETICAL RATES OF RETURN. The variable annuity payments reflect
five different assumptions for a constant investment return before fees and
expenses: 0.00%, 3.57%, 7.14%, 9.57%, and 12.00%. Net of all expenses, these
constant returns are: -2.14%, 1.43%, 5.00%, 7.43%, and 9.86%. The first
variable annuity payment for each year reflects the 5% Assumed Interest Rate
net of all expenses for the Subaccount (and the underlying Funds) pro-rated
for the month shown. Fund management fees and operating expenses are assumed
to be at an annual rate of 0.74% of their average daily net assets. This is
the average of Fund expenses shown in the Annual Investment Option Expenses
table on page 6. The mortality and expense risk charge is assumed to be at
an annual rate of 1.40% of the illustrated Subaccount's average daily net
assets.
THE FIRST MONTHLY VARIABLE ANNUITY PAYMENTS DEPICTED IN THE CHART ARE BASED
ON HYPOTHETICAL SUPPLEMENTAL AGREEMENTS AND HYPOTHETICAL INVESTMENT RESULTS
AND ARE NOT PROJECTIONS OR INDICATIONS OF FUTURE RESULTS. THE COMPANY DOES
NOT GUARANTEE OR EVEN SUGGEST THAT ANY SUBACCOUNT, CONTRACT OR AGREEMENT
ISSUED BY IT WOULD GENERATE THESE OR SIMILAR MONTHLY PAYMENTS FOR ANY PERIOD
OF TIME. THE CHART IS FOR ILLUSTRATION PURPOSES ONLY AND DOES NOT REPRESENT
FUTURE VARIABLE ANNUITY PAYMENTS OR FUTURE INVESTMENT RETURNS. The first
variable annuity payment in each year under an actual agreement issued in
connection with an actual Contract may be more or less than those shown if
the actual returns of the Subaccount(s) selected by an owner are different
from the hypothetical returns. Because it is likely that a Subaccount's
investment return will fluctuate over time, variable annuity payments
actually received by a payee may be more or less than those shown in this
illustration. Also, in an actual case, the total amount of variable annuity
payments ultimately received will depend upon the payment option selected,
and, for the life contingent options, upon the life of the payee. See the
prospectus section titled "PAYMENT OPTIONS--Election of Payment Options and
Annuity Payments."
ASSUMPTIONS ON WHICH THE HYPOTHETICAL AGREEMENT AND CONTRACT ARE
BASED. The chart reflects a hypothetical supplemental agreement and
Contract. These, in turn, are based on the following assumptions:
- The hypothetical Contract is a Non-Qualified Contract
- The supplemental agreement is issued in consideration of proceeds
from the hypothetical Contract
- The proceeds applied under the agreement represents the entire Net
Accumulated Value of the Contract and is allocated to a single
Subaccount
A-1
<PAGE>
- The single Subaccount has annual constant rates of return before
fees and expenses of 0.00%, 3.57%, 7.14%, 9.57%, and 12.00%
- Assumed Interest Rate is 5% per year
- The payee elects to receive monthly variable annuity payments
- The proceeds applied to the purchase of annuity units as of the
effective date of the agreement under the annuity payment option
selected results in an initial variable annuity payment of $1,000
For a discussion of how a Contract Owner or payee may elect to receive
monthly, quarterly, semi-annual or annual variable annuity payments, see
"PAYMENT OPTIONS."
ASSUMED INTEREST RATE. Among the most important factors that determines
the amount of each variable annuity payment is the Assumed Interest Rate.
Under supplemental agreements available as of the date of this prospectus,
the Assumed Interest Rate is 5%. Variable annuity payments will increase in
size from one annuity payment date to the next if the annualized net rate of
return during that time is greater than the Assumed Interest Rate, and will
decrease if the annualized net rate of return over the same period is less
than the Assumed Interest Rate. (The Assumed Interest Rate is an important
component of the net investment factor.) For a detailed discussion of the
Assumed Interest Rate and net investment factor, see "PAYMENT OPTIONS."
THE $1,000 INITIAL MONTHLY VARIABLE ANNUITY PAYMENT. The hypothetical
supplemental agreement has an initial monthly variable annuity payment of
$1,000. The dollar amount of the first variable annuity payment under an
actual agreement will depend upon:
- the amount of proceeds applied
- the annuity payment option selected
- the annuity purchase rates in the agreement on the effective date
- the Assumed Interest Rate under the agreement on the effective date
- the age of the annuitant
- in most cases, the sex of the annuitant
For each column in the chart, the entire proceeds is allocated to a
Subaccount having a constant rate of return as shown at the top of the
column. However, under an actual agreement, proceeds are often allocated
among several Subaccounts. The dollar amount of the first variable annuity
payment attributable to each Subaccount is determined under an actual
agreement by dividing the dollar value of the proceeds applied to that
Subaccount as of the effective date by $1,000, and multiplying the result by
the annuity purchase rate in the agreement for the payment option selected.
The amount of the first variable annuity payment is the sum of the first
payments attributable to each Subaccount to which proceeds were allocated.
For a detailed discussion of how the first variable annuity payment is
determined, see "PAYMENT OPTIONS." For comparison purposes, hypothetical
monthly fixed annuity payments are shown in the column using a 5% net
Assumed Interest Rate.
A-2
<PAGE>
INITIAL MONTHLY PAYMENTS FOR EACH YEAR SHOWN,
ASSUMING A CONSTANT RATE OF RETURN
<TABLE>
<CAPTION>
CONTRACT 0.00% GROSS 3.57% GROSS 7.14% GROSS 9.57% GROSS 12.00% GROSS
YEAR -2.14% NET 1.43% NET 5.00% NET 7.43% NET 9.86% NET
<S> <C> <C> <C> <C> <C>
1 $1,000 $1,000 $1,000 $1,000 $1,000
2 932 966 1,000 1,023 1,046
3 869 933 1,000 1,047 1,095
4 810 901 1,000 1,071 1,145
5 755 871 1,000 1,096 1,198
6 703 841 1,000 1,121 1,254
7 655 813 1,000 1,147 1,312
8 611 785 1,000 1,174 1,373
9 569 758 1,000 1,201 1,436
10 531 732 1,000 1,229 1,503
11 494 708 1,000 1,257 1,572
12 461 684 1,000 1,286 1,645
13 430 660 1,000 1,316 1,721
14 400 638 1,000 1,346 1,801
15 373 616 1,000 1,378 1,884
16 348 595 1,000 1,409 1,971
17 324 575 1,000 1,442 2,063
18 302 555 1,000 1,475 2,158
19 282 537 1,000 1,510 2,258
20 262 518 1,000 1,545 2,362
21 245 501 1,000 1,580 2,472
22 228 484 1,000 1,617 2,586
23 212 467 1,000 1,654 2,706
24 198 198 1,000 1,693 2,831
25 184 436 1,000 1,732 2,962
</TABLE>
A-3
<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>
SAI-TOC
<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
- -------------------------------------------------------------------------------
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
5000 Westown Parkway, Suite 440
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, 2000
<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 December 31, 1999, no persons or entities
beneficially owned more than 33.2% 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>
6
Yield = 2 X ((NI - ES)/(U X UV)) + 1) - 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 or 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 the Subaccounts were in existence
during the stated periods with the level of
3
<PAGE>
Contract charges which were in effect at the inception of each Subaccount
(see four columns under "Investment Option" heading below). 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>
1/N
TR = (ERV/P) - 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 following chart provides the adjusted historic average annual total
return information for the Subaccounts. When a Subaccount has been in
existence for at least one year, the chart below provides the actual
adjusted average annual total return for the Subaccount as of the end of the
period indicated or from the date of inception (i.e., since the first dollar
was funded to the Subaccount) calculated according to the formula described
above (see the two columns to the right of the chart under the heading
"Subaccount").
<TABLE>
<CAPTION>
INVESTMENT OPTION SUBACCOUNT
FOR THE FOR THE FOR THE FOR THE PERIOD FOR THE FOR THE PERIOD
1-YEAR 5-YEAR 10-YEAR FROM DATE OF 1-YEAR FROM DATE OF
PERIOD PERIOD PERIOD INCEPTION OF PERIOD INCEPTION OF
ENDED ENDED ENDED INVESTMENT OPTION ENDED SUBACCOUNT
SUBACCOUNT (INCEPTION DATE) 12/31/99 12/31/99 12/31/99 TO 12/31/99 12/31/99 TO 12/31/99
<S> <C> <C> <C> <C> <C> <C>
EquiTrust Variable Insurance Series Fund
Value Growth(1) (8/10/99) (15.99)% (1.00)% 4.16% 2.79% -- (18.35)%
High Grade Bond(1) (8/11/98) (10.61) 4.13 5.99 6.73 (10.57)% (6.23)
High Yield Bond(1) (8/11/98) (10.88) 5.88 8.08 8.28 (10.85) (6.84)
Money Market(2) (8/1/98) (5.82) 1.76 -- 2.89 (8.30) (5.79)
Blue Chip(3) (3/29/99) 10.50 21.56 -- 17.65 -- 2.43
T. Rowe Price Equity Series, Inc.
Equity Income(4) (3/29/99) (6.63) 15.84 -- 14.84 -- (6.93)
Mid-Cap Growth(5) (6/8/99) 13.38 -- -- 17.68 -- 2.61
New America Growth(4) (9/20/99) 2.40 21.42 -- 18.36 -- 4.08
Personal Strategy Balanced(6) (1/8/99) (1.94) 13.69 -- 13.71 -- (4.18)
T. Rowe Price International Series, Inc.
International Stock(4) (12/7/99) 22.97 12.32 -- 10.73 -- (1.32)
Dreyfus Variable Investment Fund
Appreciation Portfolio(7) (1/8/99) 1.11 22.93 -- 17.76 -- (2.82)
Disciplined Stock Portfolio(8)
(1/8/99) 8.10 -- -- 23.64 -- 3.73
Growth and Income Portfolio(9)
(3/10/99) 6.53 21.69 -- 18.45 -- 4.85
International Equity Portfolio(9)
(12/6/99) 49.41 14.18 -- 11.75 -- 2.85
Small Cap Portfolio(10) (6/8/99) 12.80 13.06 -- 33.86 -- (2.87)
</TABLE>
4
<PAGE>
The actual Subaccount total return information and the Investment Option
total return information will vary because of the method used to deduct the
mortality and expense risk charge from the returns. For Subaccount total
return information, the mortality and expense risk charge is calculated
based on the daily net assets multiplied by a daily factor and reduced on a
daily basis. For Investment Option total return information, the mortality
and expense risk charge is calculated as a single charge applied at the end
of the period on an annualized basis.
(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 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.
5
<PAGE>
- --------------------------------------------------------------------------------
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 the Company's general counsel.
Sutherland Asbill & Brennan LLP, Washington D.C. has provided advice on
certain matters relating to the federal securities laws.
- --------------------------------------------------------------------------------
EXPERTS
- --------------------------------------------------------------------------------
The Account's statements of net assets as of December 31, 1999 and the
related statements of operations for the year ended and changes in net
assets for the periods disclosed in the financial statements and the balance
sheets of the Company at December 31, 1999 and 1998 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, 1999, 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>
FINANCIAL STATEMENTS
AMERICAN EQUITY LIFE ANNUITY ACCOUNT
YEAR ENDED DECEMBER 31, 1999
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
American Equity Life Annuity Account
Financial Statements
Year ended December 31, 1999
CONTENTS
Report of Independent Auditors................................................1
Financial Statements
Statements of Net Assets......................................................2
Statements of Operations......................................................4
Statements of Changes in Net Assets...........................................8
Notes to Financial Statements................................................13
<PAGE>
Report of Independent Auditors
The Board of Directors and Participants
American Equity Investment Life Insurance Company
We have audited the accompanying individual and combined statements of net
assets of American Equity Life Annuity Account (comprised of the Value Growth,
High Grade Bond, High Yield Bond, Money Market, Blue Chip, Capital Appreciation,
Disciplined Stock, Growth and Income, International Equity, Small Cap, Equity
Income, Mid-Cap Growth, New America Growth, Personal Strategy Balanced and
International Stock Subaccounts) as of December 31, 1999, and the related
statements of operations for the year then ended, and changes in net assets for
the periods disclosed in the financial statements. 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, 1999, by
correspondence with the mutual funds' transfer agents. 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 individual and combined financial position of the
respective subaccounts of American Equity Life Annuity Account at December 31,
1999, and the individual and combined results of their operations and changes in
their net assets for the periods described above, in conformity with accounting
principles generally accepted in the United States.
Des Moines, Iowa
March 10, 2000
1
<PAGE>
American Equity Life Annuity Account
Statements of Net Assets
December 31, 1999
<TABLE>
<S> <C>
ASSETS
Investments in EquiTrust Variable Insurance Series Fund:
Value Growth Subaccount:
Value Growth Portfolio, 935.30 shares at net asset value
of $8.69 per share (cost: $9,017) $ 8,128
High Grade Bond Subaccount:
High Grade Bond Portfolio, 5,440.91 shares at net asset
value of $9.49 per share (cost: $55,196) 51,633
High Yield Bond Subaccount:
High Yield Bond Portfolio, 5,345.72 shares at net asset value
of $9.30 per share (cost: $54,447) 49,714
Money Market Subaccount:
Money Market Portfolio, 0 shares at net asset value
of $1.00 per share (cost: $0) -
Blue Chip Subaccount:
Blue Chip Portfolio, 1,198.34 shares at net asset value of
$43.98 per share (cost: $50,187) 52,702
Investments in Dreyfus Variable Investment Fund:
Capital Appreciation Subaccount:
Capital Appreciation Portfolio, 1,184.01 shares at net asset
value of $39.82 per share (cost: $45,126) 47,146
Disciplined Stock Subaccount:
Disciplined Stock Portfolio, 1,100.91 shares at net asset value
of $26.82 per share (cost: $26,220) 29,525
Growth and Income Subaccount:
Growth and Income Portfolio, 1,210.94 shares at net asset value
of $25.32 per share (cost: $29,319) 30,661
International Equity Subaccount:
International Equity Portfolio, 253.69 shares at net asset value
of $22.21 per share (cost: $5,184) 5,634
Small Cap Subaccount:
Small Cap Portfolio, 539.54 shares at net asset value of $65.03
per share (cost: $30,479) 35,086
Investments in T. Rowe Price Equity Series, Inc.:
Equity Income Subaccount:
Equity Income Portfolio, 1,408.59 shares at net asset
value of $18.62 per share (cost: $27,796) 26,228
Mid-Cap Growth Subaccount:
Mid-Cap Growth Portfolio, 874.37 shares at net asset
value of $17.24 per share (cost: $13,573) 15,074
New America Growth Subaccount:
New America Growth Portfolio, 569.75 shares at net
asset value of $26.03 per share (cost: $14,269) 14,831
</TABLE>
2
<PAGE>
American Equity Life Annuity Account
Statements of Net Assets (continued)
<TABLE>
<S> <C>
ASSETS (CONTINUED)
Investments in T. Rowe Price Equity Series, Inc. (continued):
Personal Strategy Balanced Subaccount:
Personal Strategy Balanced Portfolio, 98.28 shares at
net asset value of $15.94 per share (cost: $1,604) $ 1,567
Investment in T. Rowe Price International Series, Inc.:
International Stock Subaccount:
International Stock Portfolio, 150.56 shares at net asset
value of $18.98 per share (cost: $2,801) 2,858
--------------
Total investments (cost: $365,218) 370,787
LIABILITIES -
--------------
COMBINED NET ASSETS $370,787
==============
</TABLE>
<TABLE>
<CAPTION>
EXTENDED
UNITS UNIT VALUE VALUE
--------------------------------------------------------
<S> <C> <C> <C>
Net assets are represented by:
Value Growth Subaccount 906.749000 $ 8.963638 $ 8,128
High Grade Bond Subaccount 5,147.564821 10.030807 51,633
High Yield Bond Subaccount 5,001.147000 9.940766 49,714
Money Market Subaccount 0.000000 10.079893 -
Blue Chip Subaccount 4,686.889920 11.244734 52,702
Capital Appreciation Subaccount 4,419.138022 10.668918 47,146
Disciplined Stock Subaccount 2,592.882489 11.387477 29,525
Growth and Income Subaccount 2,663.570748 11.511224 30,661
International Equity Subaccount 499.011968 11.291372 5,634
Small Cap Subaccount 3,290.426367 10.663211 35,086
Equity Income Subaccount 2,566.930987 10.217649 26,228
Mid-Cap Growth Subaccount 1,338.170684 11.264699 15,074
New America Growth Subaccount 1,297.934149 11.426304 14,831
Personal Strategy Balanced Subaccount 148.923974 10.519260 1,567
International Stock Subaccount 263.768180 10.833490 2,858
---------------
Total combined net assets $370,787
===============
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
American Equity Life Annuity Account
Statements of Operations
Year ended December 31, 1999
<TABLE>
<CAPTION>
VALUE GROWTH HIGH GRADE BOND
COMBINED SUBACCOUNT SUBACCOUNT
-----------------------------------------------------
<S> <C> <C> <C>
Net investment income (operating loss):
Dividend income $11,795 $ - $3,481
Mortality and expense risk charges (2,768) (46) (722)
-----------------------------------------------------
Net investment income (operating loss) 9,027 (46) 2,759
Net realized and unrealized gain (loss) on
investments:
Net realized (loss) gain from investment
transactions 539 (5) (53)
Change in unrealized appreciation/
depreciation of investments 5,768 (889) (3,657)
-----------------------------------------------------
Net gain (loss) on investments 6,307 (894) (3,710)
-----------------------------------------------------
Net increase (decrease) in net assets
resulting from operations $15,334 $(940) $ (951)
=====================================================
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
HIGH YIELD BOND MONEY MARKET BLUE CHIP
SUBACCOUNT SUBACCOUNT SUBACCOUNT
-----------------------------------------------------
<S> <C> <C> <C>
Net investment income (operating loss):
Dividend income $ 4,128 $194 $ -
Mortality and expense risk charges (698) (58) (161)
-----------------------------------------------------
Net investment income (operating loss) 3,430 136 (161)
Net realized and unrealized gain (loss) on
investments:
Net realized (loss) gain from investment
transactions (70) - 134
Change in unrealized appreciation/
depreciation of investments (4,440) - 2,515
-----------------------------------------------------
Net gain (loss) on investments (4,510) - 2,649
-----------------------------------------------------
Net increase (decrease) in net assets
resulting from operations $(1,080) $136 $2,488
=====================================================
<CAPTION>
CAPITAL GROWTH AND
APPRECIATION DISCIPLINED INCOME
SUBACCOUNT STOCK SUBACCOUNT SUBACCOUNT
------------------------------------------------------
<S> <C> <C> <C>
Net investment income (operating loss):
Dividend income $ 439 $ 290 $ 959
Mortality and expense risk charges (393) (321) (78)
------------------------------------------------------
Net investment income (operating loss) 46 (31) 881
Net realized and unrealized gain (loss) on
investments:
Net realized (loss) gain from investment
transactions 224 66 9
Change in unrealized appreciation/
depreciation of investments 2,020 3,305 1,342
------------------------------------------------------
Net gain (loss) on investments 2,244 3,371 1,351
------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations $ 2,290 $3,340 $2,232
======================================================
</TABLE>
5
<PAGE>
American Equity Life Annuity Account
Statements of Operations (continued)
<TABLE>
<CAPTION>
INTERNATIONAL SMALL CAP
EQUITY SUBACCOUNT SUBACCOUNT
------------------------------------
<S> <C> <C>
Net investment income:
Dividend income $194 $ -
Mortality and expense risk charges (5) (109)
------------------------------------
Net investment income (operating loss) 189 (109)
Net realized and unrealized gain (loss) on investments:
Net realized gain (loss) from investment transactions - 7
Change in unrealized appreciation/depreciation of investments 450 4,607
------------------------------------
Net gain (loss) on investments 450 4,614
------------------------------------
Net increase (decrease) in net assets resulting from operations $639 $4,505
====================================
</TABLE>
SEE ACCOMPANYING NOTES.
6
<PAGE>
<TABLE>
<CAPTION>
EQUITY INCOME MID-CAP GROWTH NEW AMERICA GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT
--------------------------------------------------------
<S> <C> <C> <C>
Net investment income:
Dividend income $ 1,032 $ 142 $ 797
Mortality and expense risk charges (60) (62) (33)
--------------------------------------------------------
Net investment income (operating loss) 972 80 764
Net realized and unrealized gain (loss) on investments:
Net realized gain (loss) from investment transactions 15 211 2
Change in unrealized appreciation/depreciation of investments (1,568) 1,501 562
--------------------------------------------------------
Net gain (loss) on investments (1,553) 1,712 564
--------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ (581) $ 1,792 $1,328
========================================================
<CAPTION>
PERSONAL STRATEGY INTERNATIONAL
BALANCED SUBACCOUNT STOCK SUBACCOUNT
-----------------------------------------------
<S> <C> <C>
Net investment income:
Dividend income $ 136 $ 3
Mortality and expense risk charges (21) (1)
-----------------------------------------------
Net investment income (operating loss) 115 2
Net realized and unrealized gain (loss) on investments:
Net realized gain (loss) from investment transactions (1) -
Change in unrealized appreciation/depreciation of investments (37) 57
-----------------------------------------------
Net gain (loss) on investments (38) 57
-----------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 77 $ 59
===============================================
</TABLE>
7
<PAGE>
American Equity Life Annuity Account
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
VALUE GROWTH
COMBINED SUBACCOUNT
---------------------------------------- -----------------
PERIOD FROM
AUGUST 1, 1998
(DATE OPERATIONS
YEAR ENDED COMMENCED) YEAR ENDED
DECEMBER 31 THROUGH DECEMBER 31
1999 DECEMBER 31, 1998 1999
---------------------------------------- -----------------
<S> <C> <C> <C>
Operations:
Net investment income (operating loss) $ 9,027 $ 2,168 $ (46)
Net realized gain (loss) from investment
transactions 539 (1) (5)
Change in unrealized appreciation/depreciation
of investments 5,768 (199) (889)
---------------------------------------- -----------------
Net increase (decrease) in net assets resulting
from operations 15,334 1,968 (940)
Capital share transactions:
Transfers of net premiums 202,358 149,482 9,068
Transfer of administrative charges (449) - -
Transfers between subaccounts, including fixed
interest subaccount 2,094 (31) -
---------------------------------------- -----------------
Net increase in net assets resulting from capital
share transactions 204,003 149,482 9,068
---------------------------------------- -----------------
Total increase (decrease) in net assets 219,337 151,450 8,128
Net assets at beginning of period 151,450 - -
---------------------------------------- -----------------
Net assets at end of period $370,787 $151,450 $8,128
======================================== =================
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
HIGH GRADE BOND SUBACCOUNT
-----------------------------------------
PERIOD FROM
AUGUST 1, 1998
(DATE OPERATIONS
YEAR ENDED COMMENCED)
DECEMBER 31 THROUGH
1999 DECEMBER 31, 1998
-----------------------------------------
<S> <C> <C>
Operations:
Net investment income (operating loss) $ 2,759 $ 987
Net realized gain (loss) from investment
transactions (53) 1
Change in unrealized appreciation/depreciation
of investments (3,657) 94
-----------------------------------------
Net increase (decrease) in net assets resulting
from operations (951) 1,082
Capital share transactions:
Transfers of net premiums 15 -
Transfer of administrative charges (13) -
Transfers between subaccounts, including fixed
interest subaccount 1,489 50,011
-----------------------------------------
Net increase in net assets resulting from capital
share transactions 1,491 50,011
-----------------------------------------
Total increase (decrease) in net assets 540 51,093
Net assets at beginning of period 51,093 -
=========================================
Net assets at end of period $51,633 $51,093
=========================================
<CAPTION>
HIGH YIELD BOND SUBACCOUNT
----------------------------------------
PERIOD FROM
AUGUST 1, 1998
(DATE OPERATIONS
YEAR ENDED COMMENCED)
DECEMBER 31 THROUGH
1999 DECEMBER 31, 1998
----------------------------------------
<S> <C> <C>
Operations:
Net investment income (operating loss) $ 3,430 $ 1,078
Net realized gain (loss) from investment
transactions (70) (2)
Change in unrealized appreciation/depreciation
of investments (4,440) (293)
----------------------------------------
Net increase (decrease) in net assets resulting
from operations (1,080) 783
Capital share transactions:
Transfers of net premiums - -
Transfer of administrative charges - -
Transfers between subaccounts, including fixed
interest subaccount - 50,011
----------------------------------------
Net increase in net assets resulting from capital
share transactions - 50,011
----------------------------------------
Total increase (decrease) in net assets (1,080) 50,794
Net assets at beginning of period 50,794 -
========================================
Net assets at end of period $49,714 $50,794
========================================
</TABLE>
9
<PAGE>
American Equity Life Annuity Account
Statements of Changes in Net Assets (continued)
<TABLE>
<CAPTION>
BLUE CHIP
MONEY MARKET SUBACCOUNT SUBACCOUNT
---------------------------------------------- -----------------
PERIOD FROM
AUGUST 1, 1998
(DATE OPERATIONS
YEAR ENDED COMMENCED) YEAR ENDED
DECEMBER 31 THROUGH DECEMBER 31
1999 DECEMBER 31, 1998 1999
---------------------------------------------- -----------------
<S> <C> <C> <C>
Operations:
Net investment income (operating loss) $ 136 $ 103 $ (161)
Net realized gain from investment transactions - - 134
Change in unrealized appreciation/depreciation of
investments - - 2,515
---------------------------------------------- -----------------
Net increase (decrease) in net assets resulting from
operations 136 103 2,488
Capital share transactions:
Transfers of net premiums 132,824 149,513 16,118
Transfer of administrative charges - - -
Transfers between subaccounts, including fixed
interest subaccount (182,523) (100,053) 34,096
---------------------------------------------- -----------------
Net increase (decrease) in net assets resulting from
capital share transactions (49,699) 49,460 50,214
---------------------------------------------- -----------------
Total increase (decrease) in net assets (49,563) 49,563 52,702
Net assets at beginning of period 49,563 - -
---------------------------------------------- -----------------
Net assets at end of period $ - $ 49,563 $52,702
============================================== =================
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1999 1999
-------------- -------------- -------------
<S> <C> <C> <C>
Operations:
Net investment income (operating loss) $ 46 $ (31) $ 881
Net realized gain from investment transactions 224 66 9
Change in unrealized appreciation/depreciation of
investments 2,020 3,305 1,342
-------------- -------------- -------------
Net increase (decrease) in net assets resulting from
operations 2,290 3,340 2,232
Capital share transactions:
Transfers of net premiums 8,701 450 1,609
Transfer of administrative charges (213) (202) (8)
Transfers between subaccounts, including fixed
interest subaccount 36,368 25,937 26,828
-------------- -------------- -------------
Net increase (decrease) in net assets resulting from
capital share transactions 44,856 26,185 28,429
-------------- -------------- -------------
Total increase (decrease) in net assets 47,146 29,525 30,661
Net assets at beginning of period - - -
-------------- -------------- -------------
Net assets at end of period $47,146 $29,525 $30,661
============== ============== =============
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1999 1999
-------------- --------------- ----------------
<S> <C> <C> <C>
Operations:
Net investment income (operating loss) $ 189 $ (109) $ 972
Net realized gain from investment transactions - 7 15
Change in unrealized appreciation/depreciation of
investments 450 4,607 (1,568)
-------------- --------------- ----------------
Net increase (decrease) in net assets resulting from
operations 639 4,505 (581)
Capital share transactions:
Transfers of net premiums 4,745 9,410 2,261
Transfer of administrative charges - - -
Transfers between subaccounts, including fixed
interest subaccount 250 21,171 24,548
-------------- --------------- ----------------
Net increase (decrease) in net assets resulting from
capital share transactions 4,995 30,581 26,809
-------------- --------------- ----------------
Total increase (decrease) in net assets 5,634 35,086 26,228
Net assets at beginning of period - - -
-------------- --------------- ----------------
Net assets at end of period $5,634 $35,086 $26,228
============== =============== ================
</TABLE>
11
<PAGE>
American Equity Life Annuity Account
Statements of Changes in Net Assets (continued)
<TABLE>
<CAPTION>
PERSONAL
STRATEGY
MID-CAP GROWTH NEW AMERICA BALANCED INTERNATIONAL
SUBACCOUNT GROWTH SUBACCOUNT SUBACCOUNT STOCK SUBACCOUNT
------------------ ------------------ ------------------ -----------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1999 1999 1999
------------------ ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 80 $ 764 $ 115 $ 2
Net realized gain (loss) from
investment transactions 211 2 (1) -
Change in unrealized appreciation/
depreciation of investments 1,501 562 (37) 57
------------------ ------------------ ------------------ -----------------
Net increase in net assets resulting from
operations 1,792 1,328 77 59
Capital share transactions:
Transfers of net premiums 12,397 4,745 15 -
Transfer of administrative charges - - (13) -
Transfers between subaccounts,
including fixed interest subaccount 885 8,758 1,488 2,799
------------------ ------------------ ------------------ -----------------
Net increase in net assets resulting from
capital share transactions 13,282 13,503 1,490 2,799
------------------ ------------------ ------------------ -----------------
Total increase in net assets 15,074 14,831 1,567 2,858
Net assets at beginning of period - - - -
------------------ ------------------ ------------------ -----------------
Net assets at end of period $15,074 $14,831 $1,567 $2,858
================== ================== ================== =================
</TABLE>
SEE ACCOMPANYING NOTES.
12
<PAGE>
American Equity Life Annuity Account
Notes to Financial Statements
December 31, 1999
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 Investment Fund, T. Rowe Price
Equity Series, Inc. and T. Rowe Price International Series, Inc. (the Funds),
which are open-end, diversified management investment companies. 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 first-in,
first-out cost basis has been used in determining the net realized gain or loss
from investment transactions and unrealized appreciation or depreciation on
investments. On January 1, 1999, the Account adjusted the cost basis from the
average cost method to the first-in, first-out method. This change had no effect
on the cost basis of the Account's 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.
13
<PAGE>
American Equity Life Annuity Account
Notes to Financial Statements (continued)
2. EXPENSE CHARGES (CONTINUED)
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 CHARGE: A transfer charge of $25 will 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 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.
14
<PAGE>
American Equity Life Annuity Account
Notes to Financial Statements (continued)
4. INVESTMENT TRANSACTIONS
The aggregate cost of investment securities purchased and proceeds from
investment securities sold by subaccount are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 1, 1998
YEAR ENDED (DATE OPERATIONS COMMENCED)
DECEMBER 31, 1999 THROUGH DECEMBER 31, 1998
-------------------------------------------------------------
PURCHASES SALES PURCHASES SALES
------------------------------------------------------------
<S> <C> <C> <C> <C>
Value Growth Subaccount $ 9,068 $ 46 $ - $ -
High Grade Bond Subaccount 4,985 735 51,276 278
High Yield Bond Subaccount 4,128 698 51,364 275
Money Market Subaccount 133,017 182,580 149,656 100,093
Blue Chip Subaccount 52,194 2,141 - -
Capital Appreciation Subaccount 48,490 3,588 - -
Disciplined Stock Subaccount 26,678 524 - -
Growth and Income Subaccount 29,388 78 - -
International Equity Subaccount 5,189 5 - -
Small Cap Subaccount 30,581 109 - -
Equity Income Subaccount 29,759 1,978 - -
Mid-Cap Growth Subaccount 16,470 3,108 - -
New America Growth Subaccount 14,300 33 - -
Personal Strategy Balanced Subaccount 1,640 35 - -
International Stock Subaccount 2,801 - - -
------------------------------------------------------------
Combined $408,688 $195,658 $252,296 $100,646
============================================================
</TABLE>
15
<PAGE>
American Equity Life Annuity Account
Notes to Financial Statements (continued)
5. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS
Transactions in units of each subaccount were as follows:
<TABLE>
<CAPTION>
NET INCREASE
UNITS SOLD UNITS REDEEMED (DECREASE)
----------------------- ---------------------- ----------------------
UNITS AMOUNT UNITS AMOUNT UNITS AMOUNT
----------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Value Growth Subaccount 907 $ 9,068 - $ - 907 $ 9,068
High Grade Bond Subaccount 148 1,504 1 13 147 1,491
High Yield Bond Subaccount - - - - - -
Money Market Subaccount 13,218 132,824 18,168 182,523 (4,950) (49,699)
Blue Chip Subaccount 4,866 52,194 179 1,980 4,687 50,214
Capital Appreciation Subaccount 4,722 48,051 303 3,195 4,419 44,856
Disciplined Stock Subaccount 2,611 26,387 18 202 2,593 26,185
Growth and Income Subaccount 2,664 28,429 - - 2,664 28,429
International Equity Subaccount 499 4,995 - - 499 4,995
Small Cap Subaccount 3,290 30,581 - - 3,290 30,581
Equity Income Subaccount 2,752 28,727 185 1,918 2,567 26,809
Mid-Cap Growth Subaccount 1,626 16,328 288 3,046 1,338 13,282
New America Growth Subaccount 1,298 13,503 - - 1,298 13,503
Personal Strategy Balanced
Subaccount 150 1,504 1 14 149 1,490
International Stock Subaccount 264 2,799 - - 264 2,799
---------------------------------------------------------------------------
Combined 39,015 $396,894 19,143 $192,891 19,872 $204,003
===========================================================================
PERIOD FROM AUGUST 1, 1998
(DATE OPERATIONS COMMENCED)
THROUGH DECEMBER 31, 1998
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>
16
<PAGE>
American Equity Life Annuity Account
Notes to Financial Statements (continued)
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, 1999 consisted of:
<TABLE>
<CAPTION>
HIGH YIELD
VALUE GROWTH HIGH GRADE BOND
COMBINED SUBACCOUNT BOND SUBACCOUNT SUBACCOUNT
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Paid-in capital $353,724 $9,068 $51,502 $50,011
Accumulated undistributed net investment income
(loss) 10,956 (46) 3,746 4,508
Accumulated undistributed net realized gain
(loss) from investment transactions 538 (5) (52) (72)
Net unrealized appreciation (depreciation) of
investments 5,569 (889) (3,563) (4,733)
-----------------------------------------------------------
Net assets $370,787 $8,128 $51,633 $49,714
===========================================================
<CAPTION>
CAPITAL DISCIPLINED
MONEY MARKET BLUE CHIP APPRECIATION STOCK
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------------------------------------------------------
<S> <C> <C> <C> <C>
Paid-in capital $ - $50,214 $44,856 $26,185
Accumulated undistributed net investment income
(loss) - (161) 46 (31)
Accumulated undistributed net realized gain from
investment transactions - 134 224 66
Net unrealized appreciation of investments - 2,515 2,020 3,305
------------------------------------------------------------
Net assets $ - $52,702 $47,146 $29,525
============================================================
<CAPTION>
GROWTH AND INTERNATIONAL
INCOME EQUITY SMALL CAP EQUITY INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Paid-in capital $28,429 $4,995 $30,587 $26,809
Accumulated undistributed net investment
income (loss) 881 189 (109) 972
Accumulated undistributed net realized gain
from investment transactions 9 - 7 15
Net unrealized appreciation (depreciation)
of investments 1,342 450 4,607 (1,568)
---------------------------------------------------------------
Net assets $30,661 $5,634 $35,086 $26,228
===============================================================
</TABLE>
17
<PAGE>
American Equity Life Annuity Account
Notes to Financial Statements (continued)
6. NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
PERSONAL
MID-CAP NEW AMERICA STRATEGY INTERNATIONAL
GROWTH GROWTH BALANCED STOCK
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Paid-in capital $13,282 $13,503 $1,490 $2,799
Accumulated undistributed net investment
income 80 764 115 2
Accumulated undistributed net realized gain
(loss) from investment transactions 211 2 (1) -
Net unrealized appreciation (depreciation)
of investments 1,501 562 (37) 57
---------------------------------------------------------------
Net assets $15,074 $14,831 $1,567 $2,858
===============================================================
</TABLE>
18
<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 (a wholly-owned subsidiary of American Equity Investment
Life Holding Company) as of December 31, 1999 and 1998, 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, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
Des Moines, Iowa
March 1, 2000
19
<PAGE>
American Equity Investment Life Insurance Company
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
--------------------------------------
<S> <C> <C>
ASSETS
Cash and investments:
Fixed maturity securities:
Available-for-sale, at market (amortized cost:
1999 - $1,070,465,367; 1998 - $600,300,562) $997,019,819 $601,897,562
Held for investment, at amortized cost
(market: 1999 - $272,961,050) 351,799,694 -
Equity securities, at market
(cost: 1999 - $7,920,000) 7,513,490 -
Derivative instruments 44,209,883 16,171,621
Policy loans 231,068 192,184
Cash and cash equivalents 4,322,902 12,421,353
--------------------------------------
Total cash and investments 1,405,096,856 630,682,720
Receivable from other insurance companies 597,956 616,737
Premiums due and uncollected 1,097,105 1,684,698
Accrued investment income 13,636,720 2,946,796
Receivable from affiliates 114,402 64,427
Property, furniture and equipment, less accumulated depreciation
of $871,055 in 1999 and $405,158 in 1998
1,135,275 724,147
Value of insurance in force acquired 752,427 1,068,906
Deferred policy acquisition costs 126,684,495 32,005,772
Goodwill, less accumulated amortization of $227,500 in 1999 and
$157,500 in 1998 472,500 542,500
Deferred income tax asset 41,073,656 8,288,049
Federal income taxes recoverable 1,662,522 -
Other assets 952,677 89,336
Assets held in separate account 370,787 151,450
--------------------------------------
Total assets $1,593,647,378 $678,865,538
=======================================
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
----------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy benefit reserves:
Traditional life insurance and accident and health products $ 15,059,895 $ 11,317,156
Annuity and single premium universal life products 1,343,815,953 529,765,023
Other policy funds and contract claims 11,553,574 6,315,598
Provision for experience rating refunds 544,610 833,679
Amounts due to related parties 10,776,018 2,438,600
Note payable to parent 25,000,000 8,000,000
Amounts due under repurchase agreements 86,968,750 49,000,000
Amounts due on securities purchased 29,713,749 -
Federal income taxes payable - 1,648,822
Other liabilities 12,214,544 3,964,593
Liabilities related to separate account 370,787 151,450
----------------------------------------
Total liabilities 1,536,017,880 613,434,921
Commitments and contingencies
Stockholder's equity:
Series Preferred Stock, par value $1 per share - authorized
500,000 shares - -
Common stock, par value $1 per share - 4,000,000 shares
authorized; issued and outstanding 2,500,000 2,500,000 2,500,000
Additional paid-in capital 92,056,435 62,900,235
Accumulated other comprehensive income (loss) (35,234,635) 420,035
Retained-earnings deficit (1,692,302) (389,653)
----------------------------------------
Total stockholder's equity 57,629,498 65,430,617
----------------------------------------
Total liabilities and stockholder's equity $1,593,647,378 $678,865,538
========================================
</TABLE>
SEE ACCOMPANYING NOTES.
21
<PAGE>
American Equity Investment Life Insurance Company
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
-------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Traditional life and accident and health
insurance premiums $ 10,294,437 $ 10,528,108 $ 11,424,907
Annuity and single premium universal life
product charges 3,452,095 642,547 11,896
Net investment income 62,917,023 26,235,923 4,028,628
Realized gains on investments 1,454,417 151,750 -
-----------------------------------------------------
Total revenues 78,117,972 37,558,328 15,465,431
Benefits and expenses:
Insurance policy benefits and change in future policy
benefits 7,231,895 6,084,893 7,440,080
Interest credited to account balances 41,726,895 15,837,912 2,129,686
Interest expense on notes payable 1,036,914 200,000 134,077
Interest expense on amounts due under
repurchase agreements 3,490,849 1,528,718 291,547
Amortization of deferred policy acquisition costs and
value of insurance in force acquired 11,240,271 3,946,133 1,143,032
Amortization of goodwill 70,000 70,000 70,000
Other operating costs and expenses 11,031,870 7,843,729 6,804,652
-----------------------------------------------------
Total benefits and expenses 75,828,694 35,511,385 18,013,074
-----------------------------------------------------
Income (loss) before income taxes 2,289,278 2,046,943 (2,547,643)
Income tax benefit (expense):
Current (14,188,656) (5,311,080) (2,565,057)
Deferred 13,596,729 4,550,597 3,953,833
-----------------------------------------------------
(591,927) (760,483) 1,388,776
-----------------------------------------------------
Net income (loss) $ 1,697,351 $ 1,286,460 $ (1,158,867)
=====================================================
</TABLE>
SEE ACCOMPANYING NOTES.
22
<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, 1997 $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
investment gains/losses - - 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
investment gains/losses - - 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
Comprehensive loss:
Net income for year - - - 1,697,351 1,697,351
Change in net unrealized
investment gains/losses - - (35,654,670) - (35,654,670)
---------------
Total comprehensive loss (33,957,319)
Cash contributions from American
Equity Investment Life Holding
Company - 3,000,000 - - 3,000,000
Contribution of held for investment
fixed maturity securities from
American Equity Investment Life
Holding Company
- 26,156,200 - - 26,156,200
Dividend to American Equity
Investment Life Holding Company
- - - (3,000,000) (3,000,000)
======================================================================================
Balance at December 31, 1999 $2,500,000 $92,056,435 $(35,234,635) $(1,692,302) $57,629,498
======================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
23
<PAGE>
American Equity Investment Life Insurance Company
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
--------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) $ 1,697,351 $ 1,286,460 $ (1,158,867)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Adjustments related to interest sensitive products:
Interest credited to account balances 41,726,895 15,837,912 2,129,686
Annuity and single premium universal life product
charges (3,452,095) (642,547) (11,896)
Increase in traditional life and accident and health
insurance reserves 3,742,739 1,629,777 287,197
Policy acquisition costs deferred:
Commissions paid to related party (73,804,373) (24,164,726) (3,353,491)
Other (3,590,628) (1,908,540) (789,435)
Amortization of deferred policy acquisition costs 10,923,792 3,672,039 761,032
Amortization of discount and premiums on fixed maturity
securities and derivative instruments (10,952,751) (12,975,476) (997,853)
Provision for depreciation and other amortization 852,376 589,946 591,461
Realized gains on investments (1,454,417) (151,750) -
Deferred income taxes (13,596,729) (4,550,597) (3,953,833)
Change in other operating assets and liabilities:
Federal income taxes recoverable (1,662,522) - -
Federal income taxes payable (1,648,822) (913,920) 2,562,742
Accrued investment income (10,689,924) (1,126,420) (1,405,521)
Other policy funds and contract claims 5,237,976 3,960,442 1,279,542
Amounts due to related parties 8,337,418 - -
Other liabilities 8,249,951 3,715,589 2,193,458
Other (466,429) 120,889 331,342
--------------------------------------------------------
Net cash used in operating activities (40,550,192) (15,620,922) (1,534,436)
INVESTING ACTIVITIES
Maturities or repayments of investments:
Fixed maturity securities-available-for-sale 308,669,843 222,745,031 22,591,487
Derivative instruments 1,541,669 - -
Mortgage loan on real estate - 700,000 -
--------------------------------------------------------
310,211,512 223,445,031 22,591,487
Acquisitions of investments:
Fixed maturity securities-available-for-sale (734,248,023) (602,830,456) (200,181,267)
Fixed maturity securities-held for investment (310,499,557) - -
Equity securities (7,920,000) - -
Derivative instruments (39,396,518) (11,539,179) (1,815,674)
Proceeds received from futures contract 4,969,781 - -
Policy loans (38,884) (8,831) (26,830)
--------------------------------------------------------
(1,087,133,201) (614,378,466) (202,023,771)
Purchases of property, furniture and equipment (877,023) (429,449) (490,887)
--------------------------------------------------------
Net cash used in investing activities (777,798,712) (391,362,884) (179,923,171)
</TABLE>
24
<PAGE>
American Equity Investment Life Insurance Company
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
------------------------------------------------------
FINANCING ACTIVITIES
<S> <C> <C> <C>
Receipts credited to annuity and single premium universal
life policyholder account balances $816,126,324 $377,917,332 $141,853,600
Return of annuity and single premium universal life
policyholder account balances (60,844,621) (23,637,290) (2,419,197)
Proceeds from note payable to American Equity Investment
Life Holding Company 17,000,000 5,500,000 -
Increase in amounts due under repurchase agreements 37,968,750 49,000,000 -
Cash contributions by American Equity Investment Life
Holding Company 3,000,000 6,500,000 42,500,000
Dividend paid to American Equity Investment Life Holding
Company (3,000,000) - -
------------------------------------------------------
Net cash provided by financing activities 810,250,453 415,280,042 181,934,403
------------------------------------------------------
Increase (decrease) in cash and cash equivalents (8,098,451) 8,296,236 476,796
Cash and cash equivalents at beginning of year 12,421,353 4,125,117 3,648,321
------------------------------------------------------
Cash and cash equivalents at end of year 4,322,902 $ 12,421,353 $ 4,125,117
======================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during year for:
Interest $ 1,879,198 $ 1,728,718 $ 425,624
Income taxes 17,500,000 6,225,000 2,315
Non-cash financing and investing activities:
Bonus interest deferred as policy acquisition costs 7,602,004 5,909,679 1,035,325
Contribution of held for investment fixed maturity
securities from American Equity Investment Life Holding
Company 26,156,200 - -
</TABLE>
SEE ACCOMPANYING NOTES.
25
<PAGE>
American Equity Investment Life Insurance Company
Notes to Financial Statements
December 31, 1999
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 42 states and the District of
Columbia at December 31, 1999. The Company offers a broad array of annuity and
insurance products. In 1998, the Company began offering variable annuity
products. The Company operates solely in the life insurance business.
BASIS OF PRESENTATION
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 1998 and 1997 financial statements have been reclassified
to conform to the 1999 financial statement presentation.
INVESTMENTS
Fixed maturity securities (bonds and redeemable preferred stocks that mature
more than one year after issuance) that may be sold prior to maturity are
classified as available-for-sale. Available-for-sale securities are reported at
estimated fair value and unrealized gains and losses, if any, on these
securities are included directly in a separate component of stockholder's
equity, net of income taxes and 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.
Fixed maturity securities that the Company has the positive intent and ability
to hold to maturity are designated as held for investment. Held for investment
securities are reported at cost adjusted for amortization of premiums and
discounts. Changes in the market value of these securities, except for declines
that are other than temporary, are not reflected in the Company's financial
statements. Premiums and discounts are amortized/accrued using methods which
result in a constant yield over the securities expected lives.
26
<PAGE>
American Equity Investment Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Equity securities, comprised of common and non-redeemable preferred stocks, are
reported at market value. Unrealized gains and losses are included directly in a
separate component of stockholder's equity, net of income taxes.
The Company sells deferred annuity products with an additional benefit provision
based on the increase, if any, in specified equity market indexes or benchmarks.
The Company has purchased one-year option contracts with characteristics similar
to the additional benefit provisions to hedge potential increases to
policyholder benefits resulting from these additional benefit provisions. The
cost of the options 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 value of the options
change. Changes in the unrealized appreciation of the options ($12,762,839,
$8,061,627 and $839,359 during the years ended December 31, 1999, 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. At December 31, 1999,
all of these options had been purchased from nationally recognized investment
banking institutions with a Standard and Poor's credit rating of BBB+ or higher.
Policy loans are reported at unpaid principal.
The carrying values of all the Company's investments are reviewed on an ongoing
basis for credit deterioration. If this review indicates a decline in market
value that is other than temporary, the Company's carrying value in the
investment is reduced to its estimated realizable value and a specific writedown
is taken. Such reductions in carrying value 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 fixed maturity and equity securities are
based on the latest quoted market prices, or for those fixed maturity securities
not readily marketable, at values which are representative of the market values
of issues of comparable yield and quality.
27
<PAGE>
American Equity Investment Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
To the extent recoverable from future policy revenues and gross profits, certain
costs of producing new insurance business, principally commissions, first-year
bonus interest and certain costs of policy issuance (including policy issue
costs of $2,949,107 in 1999, $1,908,540 in 1998 and $789,435 in 1997) have been
deferred. For annuity and single premium universal life 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 future gross
profits/margins (including the impact of realized investment gains and losses)
to be realized from a group of products are revised. Deferred policy acquisition
costs are also adjusted for the change in amortization that would have occurred
if available-for-sale fixed maturity securities had been sold at their aggregate
market value and the proceeds reinvested at current yield. The impact of this
adjustment is included in accumulated other comprehensive income (loss) within
stockholder's equity.
For traditional life and accident and health insurance, deferred policy
acquisition 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.
VALUE OF INSURANCE IN FORCE ACQUIRED
The value of insurance in force acquired represents that actuarially determined
present value of the projected future cash flows from the insurance contracts
that were acquired pursuant to two reinsurance agreements. This balance is
amortized, evaluated for recovery and adjusted for the impact of unrealized
gains and losses in the same manner as deferred policy acquisition costs
described above.
GOODWILL
Goodwill consists of the excess of the purchase price paid over net assets
acquired in connection with the purchase of an inactive life insurance company
in 1996, and is being amortized over 10 years using a straight-line method.
28
<PAGE>
American Equity Investment Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
determined primarily using the straight-line method over the estimated useful
lives of the assets.
SEPARATE ACCOUNTS
The separate account assets and liabilities represent funds that are separately
administered for the benefit of 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 premiums received from and benefits
paid or provided to the separate account policyholders, are excluded from the
amounts reported in the statements of operations. The Company receives various
fees (mortality, expense and surrender charges assessed against policyholder
account balances) that are included as revenues in the statements of operations.
FUTURE POLICY BENEFITS
Future policy benefit reserves for annuity and single premium universal life
products are computed under a 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 these
products ranged from 3% to 12% in 1999 and in 1998, and from 3.0% to 12.4% in
1997. A portion of this amount ($7,602,004, $5,909,679 and $1,035,325 during the
years ended December 31, 1999, 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
acquisition 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.
29
<PAGE>
American Equity Investment Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 equal to net premiums received
less a 16% administrative fee and less claims incurred. Such amounts (1999 -
$1,206,348; 1998 - $523,807; and 1997 - $711,129) are reported as a reduction of
traditional life and accident and health insurance premiums reflected in the
statements of operations.
DEFERRED INCOME TAXES
Deferred income tax assets or liabilities are computed based on the temporary
differences between the financial statement and income tax bases of assets and
liabilities using the enacted marginal tax rate. Deferred income tax expenses or
credits are based on the changes in the asset or liability from period to
period. Deferred income tax assets are subject to ongoing evaluation of whether
such assets will be realized. The ultimate realization of deferred income tax
assets depends on generating future taxable income during the periods in which
temporary differences become deductible. If future income is not generated as
expected, deferred income tax assets may need to be written off.
RECOGNITION OF PREMIUM REVENUES AND COSTS
Revenues for annuity and single premium universal life products consist of
surrender charges assessed against policyholder account balances and mortality
and expense charges (single premium universal life products only) 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 (single premium universal
life policies only).
Traditional 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.
30
<PAGE>
American Equity Investment Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes all changes in stockholder's equity during
a period except those resulting from investments by and distributions to
stockholders. Other comprehensive income (loss) excludes net realized investment
gains (losses) included in net income (loss) which merely represent transfers
from unrealized to realized gains and losses. These amounts totaled $983,264 in
1999 and $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 $471,153 in 1999 and $115,864 in 1998.
PENDING ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 requires companies to record
derivative instruments on the balance sheet at fair value. Accounting for gains
or losses resulting from changes in the fair values of derivative instruments 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 2001, with
earlier adoption encouraged. The Company has not yet determined the effect that
this new statement will have on its operations or financial position.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating the
fair values of financial instruments:
FIXED MATURITY SECURITIES: 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.
EQUITY SECURITIES: Quoted market prices, where available. For equity
securities that are not actively traded, estimated fair values are based on
values of comparable issues.
DERIVATIVE INSTRUMENTS: 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 value 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: Amounts reported in the balance sheets for these
instruments approximate their fair values.
31
<PAGE>
American Equity Investment Life Insurance Company
Notes to Financial Statements (continued)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
SEPARATE ACCOUNT ASSETS AND LIABILITIES: Reported at estimated fair value
in the balance sheets.
ANNUITY AND SINGLE PREMIUM UNIVERSAL LIFE 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.
NOTE PAYABLE TO PARENT AND AMOUNTS DUE UNDER REPURCHASE AGREEMENTS: As the
note payable to parent and short-term indebtedness under repurchase
agreements have variable interest rates, the 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
1999 1998
------------------------------------ ----------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------------------------------ ----------------------------------
ASSETS
<S> <C> <C> <C> <C>
Fixed maturity securities:
Available-for-sale $997,019,819 $997,019,819 $601,897,562 $601,897,562
Held for investment 351,799,694 272,961,050 - -
Equity securities 7,513,490 7,513,490 - -
Derivative instruments 44,209,883 44,209,883 16,171,621 16,171,621
Policy loans 231,068 231,068 192,184 192,184
Cash and cash equivalents 4,322,902 4,322,902 12,421,353 12,421,353
Separate account assets 370,787 370,787 151,450 151,450
LIABILITIES
Annuity and single premium
universal life reserves 1,343,815,953 1,149,271,147 529,765,023 458,253,796
Notes payable to parent 25,000,000 25,000,000 8,000,000 8,000,000
Amounts due under repurchase
agreements 86,968,750 86,968,750 49,000,000 49,000,000
Separate account liabilities 370,787 370,787 151,450 151,450
</TABLE>
32
<PAGE>
American Equity Investment Life Insurance Company
Notes to Financial Statements (continued)
3. INVESTMENTS
At December 31, 1999 and 1998, the amortized cost and estimated fair value of
fixed maturity securities and equity securities were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------------------------------------------------------------------
DECEMBER 31, 1999
FIXED MATURITY SECURITIES:
AVAILABLE-FOR-SALE
<S> <C> <C> <C> <C>
United States Government and agencies $ 642,115,817 $ 111,819 $ (39,229,308) $ 602,998,328
State, municipal and other governments 4,539,257 -- (379,607) 4,159,650
Public utilities 12,201,799 -- (1,362,599) 10,839,200
Corporate securities 300,422,046 408,652 (28,539,013) 272,291,685
Redeemable preferred stocks 9,240,340 -- (824,220) 8,416,120
Mortgage and asset-backed securities 101,946,108 642,075 (4,273,347) 98,314,836
--------------------------------------------------------------------
$1,070,465,367 $ 1,162,546 $ (74,608,094) $ 997,019,819
====================================================================
HELD FOR INVESTMENT
United States Government and
agencies $ 323,311,715 $ -- $ (74,631,915) $ 248,679,800
Redeemable preferred stocks 28,487,979 -- (4,206,729) 24,281,250
--------------------------------------------------------------------
$ 351,799,694 $ -- $ (78,838,644) $ 272,961,050
====================================================================
EQUITY SECURITIES
Non-redeemable preferred stocks $ 6,850,000 $ -- $ (227,160) $ 6,622,840
Common stocks 1,070,000 -- (179,350) 890,650
--------------------------------------------------------------------
$ 7,920,000 $ -- $ (406,510) $ 7,513,490
====================================================================
DECEMBER 31,1998
FIXED MATURITY SECURITIES:
AVAILABLE-FOR-SALE
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>
33
<PAGE>
American Equity Investment Life Insurance Company
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of fixed maturity securities at
December 31, 1999, by contractual maturity, are shown below. Actual maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties. All of
the Company's mortgage-backed and asset-backed securities provide for periodic
payments throughout their lives, and are shown below as a separate line.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD FOR INVESTMENT
------------------------------------------------------------------------------
AMORTIZED ESTIMATED FAIR AMORTIZED ESTIMATED FAIR
COST VALUE COST VALUE
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due after one year through
five years $ 13,815,639 $ 13,480,248 $ $
- -
Due after five years through
ten years 148,996,868 144,701,650 - -
Due after ten years through
twenty years 492,734,730 469,617,702 - -
Due after twenty years 312,972,022 270,905,383 351,799,694 272,961,050
------------------------------------------------------------------------------
968,519,259 898,704,983 351,799,694 272,961,050
Mortgage-backed and asset
backed securities 101,946,108 98,314,836 - -
------------------------------------------------------------------------------
Total $1,070,465,367 $997,019,819 $351,799,694 $272,961,050
==============================================================================
</TABLE>
Net unrealized gains (losses) on available-for-sale fixed maturity securities
and equity securities reported as a separate component of stockholder's equity,
were comprised of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------------------------------
<S> <C> <C>
Net unrealized gain (losses) on available-for-sale fixed
maturity and equity securities $(73,852,058) $1,597,000
Adjustments for assumed changes in amortization of deferred policy
acquisition costs 19,644,927 (960,583)
Deferred income tax benefit (expense) 18,972,496 (216,382)
-------------------------------------
Net unrealized gains (losses) reported as accumulated other
comprehensive income (loss) $(35,234,635) $ 420,035
=====================================
</TABLE>
34
<PAGE>
American Equity Investment Life Insurance Company
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
Components of net investment income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
--------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturity securities $68,996,759 $28,304,437 $5,131,361
Equity securities 456,000 - -
Derivative instruments (6,151,600) (1,767,580) (589,484)
Policy loans 19,722 8,338 12,281
Cash and cash equivalents 310,287 210,981 73,047
Other invested assets 315,832 55,109 61,357
--------------------------------------------------------------------
63,947,000 26,811,285 4,688,562
Less investments expenses (1,029,977) (575,362) (659,934)
--------------------------------------------------------------------
Net investment income $62,917,023 $26,235,923 $4,028,628
====================================================================
</TABLE>
An analysis of sales, maturities, and principal repayments of the Company's
available-for-sale fixed maturity securities for the years ended December 31,
1999 and 1998 is as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED REALIZED REALIZED PROCEEDS FROM
COST GAINS LOSSES SALE
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1999:
Scheduled principal repayments,
calls and tenders $195,837,799 $ - $ - $195,837,799
Sales 112,919,296 322,454 (409,706) 112,832,044
-------------------------------------------------------------------
Total $308,757,095 $ 322,454 $ (409,706) $308,669,843
===================================================================
Year ended December 31, 1998:
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>
For the year ended December 31, 1999, realized gains on investments consisted of
net losses of $87,252 on the sale of available-for-sale fixed maturity
securities and a gain of $1,541,669 on the termination of a total return swap.
For the year ended December 31, 1998, realized gains consisted entirely of net
gains on the sales of fixed maturities. The Company did not have any realized
gains for the year ended December 31, 1997.
35
<PAGE>
American Equity Investment Life Insurance Company
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
The change in unrealized appreciation/depreciation on investments for the year
ended December 31, 1999 aggregated $(75,449,058), and consisted of unrealized
depreciation on available-for sale fixed maturity securities and equity
securities of $75,042,548 and $406,510, respectively. The changes in unrealized
appreciation/depreciation on investments aggregated $905,405 and $893,151 for
the years ended December 31, 1998 and 1997, respectively, and were entirely
attributable to available-for-sale fixed maturity securities. The change in net
unrealized appreciation/depreciation is recorded net of adjustments to deferred
policy acquisition costs and deferred income taxes totaling $39,794,388 in 1999,
$695,670 in 1998 and $481,295 in 1997.
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
approximately equal to the amount due. At December 31, 1999, amounts outstanding
aggregated $86,968,750 (1998 - $49,000,000).
As a part of its asset-liability management activities, the Company from time to
time purchases financial futures instruments and total return exchange
agreements. The operations of the Company are subject to risk of interest rate
fluctuations to the extent that there is a difference between the amount of the
Company's interest-earning assets and interest-bearing liabilities that mature
in specified periods. The principal objective of the Company's asset-liability
management activities is to provide maximum levels of net investment income
while maintaining acceptable levels of interest rate and liquidity risk, and
facilitating the funding needs of the Company. Financial futures contracts are
commitments to either purchase or sell a financial instrument at a specific
future date for a specified price and may be settled in cash or through delivery
of the financial instrument. Total return exchange agreements generally involve
the exchange of the total return or yield on a referenced security for a
specified interest rate.
If a financial futures contract used to manage interest rate risk is terminated
early or results in payments based on the change in value of the underlying
asset, any resulting gain or loss is deferred and amortized as an adjustment to
the yield of the designated asset over its remaining life as long as the
transaction qualifies for hedge accounting. The effectiveness of the hedge is
measured by a historical and probable future high correlation of changes in the
fair value of the hedging instruments with changes in value of the hedged item.
If correlation ceases to exist, hedge accounting will be terminated and gains or
losses recorded in income. To date, high correlation has been achieved. Deferred
gains totaling $4,969,781 for 1999 ($0 in 1998) are included in held for
investment fixed maturities and will be amortized as an adjustment to interest
income over the life of the hedged instrument. The notional amount of
outstanding agreements to sell securities was $204,600,000 at December 31, 1999.
A fixed maturity security with an amortized cost of $14,932,303 has been
deposited with a broker dealer to establish a margin account for the futures
contracts.
36
<PAGE>
American Equity Investment Life Insurance Company
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
For total return exchange agreements, the differential of the total return yield
or interest to be paid or received on a settlement date is recognized as an
adjustment to investment income. If a total return swap agreement is terminated
early any resulting gain or loss is recognized as realized gain or loss. In
1999, the Company recognized net investment expense of $2,069,355 related to
payments made on settlement dates, and realized a gain of $1,541,669 on the
termination of one total return swap agreement. The notional amount of
outstanding agreements was $332,000,000 at December 31, 1999.
At December 31, 1999, affidavits of deposits covering fixed maturity securities
and short-term investments with an amortized cost of $1,388,740,914 (1998 -
$602,089,746) were on deposit with state agencies to meet regulatory
requirements.
At December 31, 1999, the following investments in any person or its affiliates
(other than bonds issued by agencies of the United States Government) exceed 10%
of stockholder's equity:
<TABLE>
<CAPTION>
ESTIMATED AMORT
ISSUER FAIR VALUE COST
- ------------------------------------------------------------------------------------
<S> <C> <C>
FBL Capital Trust I $ 24,281,250 $ 28,487,979
AIG Global Trust 19,000,000 19,000,008
Knight Funding, Ltd. 19,053,000 18,430,348
Northwest Airlines 10,135,483 10,123,774
Sutter CBO 10,353,000 10,000,000
South Street CBO 9,520,839 9,737,000
FMR Corp 9,662,600 10,084,411
Nations Bank 9,890,000 13,059,307
Evaluated Loan Collateral 9,108,000 9,108,000
M&I Capital Trust 9,125,000 10,406,323
American Financial Group 8,793,200 9,357,988
Genamerica Capital I 8,586,000 9,593,719
Jet Equipment Trust 8,250,000 8,214,878
Ikon Capital, Inc. 7,841,120 7,975,587
JPM Capital Trust 7,700,000 8,473,156
Bear Stearns M.T. Notes 7,680,000 7,930,144
Commercial Net I 7,388,480 7,699,283
Land O' Lake Capital Tr. 6,837,432 8,078,789
New Plan Excel Realty Tr. 6,622,840 6,850,000
</TABLE>
37
<PAGE>
American Equity Investment Life Insurance Company
Notes to Financial Statements (continued)
4. VALUE OF INSURANCE IN FORCE ACQUIRED
An analysis of the value of insurance in force acquired for the years ended
December 31, 1999, 1998 and 1997 is a follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $1,068,906 $1,343,000 $1,725,000
Accretion of interest during the year 55,000 71,000 91,000
Amortization of asset (371,479) (345,094) (473,000)
-----------------------------------------------------
Balance at end of year $ 752,427 $1,068,906 $1,343,000
=====================================================
</TABLE>
Amortization of the value of insurance in force acquired for the next five years
is expected to be as follows: 2000-$232,000; 2001-$104,000; 2002-$104,000;
2003-$103,000; and 2004-$104,000.
5. 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 $1,110,871, $567,027 and $722,545
and insurance benefits have been reduced by $335,558, $375,592 and $503,154
during the years ended December 31, 1999, 1998 and 1997, 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 annuity business to Equitrust Life Insurance Company
("Equitrust"). Equitrust is an affiliate of Farm Bureau Life Insurance Company
which beneficially owns 33.27% of the common stock of American Equity Investment
Life Holding Company. Under this agreement and related administrative services
agreements, the Company paid
38
<PAGE>
American Equity Investment Life Insurance Company
Notes to Financial Statements (continued)
5. REINSURANCE AND POLICY PROVISIONS (CONTINUED)
Equitrust $155,908 and $77,954 for the years ended December 31, 1999 and 1998,
respectfully. The modified coinsurance agreement has an initial term of four
years and will continue thereafter until termination by written notice at the
election of either party. Any such termination will apply to the submission or
acceptance of new policies, and business reinsured under the agreement prior to
any such termination is not eligible for recapture before the expiration of 10
years. Equitrust (or one of its affiliates) provides the administrative support
necessary to manage this business.
The activity in the liability for unpaid claims and related adjustment expense
for the years ended December 31, 1999, 1998 and 1997, net of reinsurance, is
summarized as follows:
<TABLE>
<CAPTION>
UNPAID CLAIMS UNPAID
LIABILITY AT CLAIMS
BEGINNING OF CLAIMS CLAIMS LIABILITY AT
YEAR INCURRED PAID END OF YEAR
--------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999
<S> <C> <C> <C> <C>
1999 $ - $550,877 $319,145 $ 231,732
1998 and prior 672,661 (186,097) 124,112 362,452
--------------------------------------------------------
672,661 $364,780 $443,257 594,184
Active life reserve 1,518,222 ========================= 1,575,828
--------------- --------------
Total accident and health reserves $2,190,883 $2,170,012
=============== ==============
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>
39
<PAGE>
American Equity Investment Life Insurance Company
Notes to Financial Statements (continued)
6. 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.
Income tax benefit (expense) differed from that computed at the applicable
statutory federal income tax rate (35% in 1999, 34% in 1998 and 1997).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
Income (loss) before income taxes $ 2,289,278 $ 2,046,943 $ (2,547,643)
=====================================================
Income tax benefit (expense) on income (loss)
before income taxes at statutory rate $ (801,247) $ (695,961) $ 866,199
Tax effect of:
Small company deduction - - 331,000
Change in valuation allowance - - 171,000
Other 209,320 (64,522) 20,577
-----------------------------------------------------
Income tax benefit (expense) $ (591,927) $ (760,483) $1,388,776
=====================================================
</TABLE>
The tax effect of individual temporary differences at December 31, 1999 and
1998, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
---------------------------------------
Deferred income tax assets:
<S> <C> <C>
Policy benefit reserves $55,066,000 $17,810,000
Provision for experience rating refunds 191,000 283,000
Unrealized depreciation of fixed maturity securities 18,972,496 -
Other 53,000 57,000
---------------------------------------
74,282,496 18,150,000
Deferred income tax liabilities:
Unrealized appreciation of fixed maturity securities - (216,382)
Accrued discount on fixed maturity securities (800,000) -
Deferred policy acquisition costs (31,861,000) (8,939,000)
Value of insurance in force acquired (263,000) (363,000)
Other (284,840) (343,569)
---------------------------------------
(33,208,840) (9,861,951)
---------------------------------------
Deferred income tax asset $41,073,656 $ 8,288,049
=======================================
</TABLE>
40
<PAGE>
American Equity Investment Life Insurance Company
Notes to Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
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.
7. NOTE PAYABLE TO PARENT
In 1999, 1998 and 1996, the Company borrowed $17,000,000, $5,500,000 and
$2,500,000, respectively, from its parent 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.
8. RETIREMENT PLAN AND STOCK COMPENSATION PLAN
The Company has 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 1999, $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. Plan contributions charged to expense were
$41,703, $25,231 and $19,434 for the years ended December 31, 1999, 1998, and
1997, respectively.
The Company's parent has entered into deferred compensation arrangements with
certain officers, directors, and consultants, whereby these individuals have
agreed to take common stock of American Equity Investment Life Holding Company
at a future date in lieu of current cash payments. The common stock is to be
issued in conjunction with a "trigger event", as that term is defined in the
individual agreements. To the extent that services rendered are for the benefit
of the Company, the Company will record the related compensation expense
associated with the arrangements. The Company has accrued $125,000 as an other
liability at December 31, 1999 representing the value associated with the shares
earned for services rendered to the Company.
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, 1999, 1998 and 1997, agents earned the right to
receive
41
<PAGE>
American Equity Investment Life Insurance Company
Notes to Financial Statements (continued)
8. RETIREMENT PLAN AND STOCK COMPENSATION PLAN (CONTINUED)
112,596, 83,861 and 13,131 shares, respectively. These shares will be awarded at
the end of the vesting period of 4 years for the 1999 and 1998 programs, 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 years ended
December 31, 1999 and 1998, agents vested in 53,042 and 25,342 shares of common
stock, respectively, and the Company recorded commission expense (which was
subsequently capitalized as deferred policy acquisition costs) of $1,379,092 and
$295,354, respectively, under these plans. Amounts accrued are reported as other
liabilities until stock has been issued. Two national marketing organizations
accounted for more than 10% of the annuity deposits and insurance premium
collections during 1999.
American Equity Investment Life Holding Company has an incentive stock option
plan whereby employees may be granted options to purchase shares of its common
stock. All options granted have 10 year terms, and vest and become fully
exercisable immediately. The Company has elected to follow Accounting Principles
Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25) and
related Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires use of option
valuation models that were not developed for use in valuing employee stock
options. To the extent that options are issued to employees of the Company, any
compensation expense related to the options would be recognized by the company.
Under APB 25, because the exercise price of the Company's employee stock options
equals the fair value of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income is required by SAFS No. 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of that statement. The fair value for these options
was estimated at the date of grant using a minimum value option pricing model
(which is used for non-public companies) with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
-----------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 4.73% 5.40% 6.50%
Dividend yield 0% 0% 0%
Weighted-average expected life 3 years 3 years 3 years
</TABLE>
The minimum value option pricing model is similar to the Black-Scholes option
valuation model (which is primarily used for public companies) except that it
excludes an assumption for the expected volatility of market price. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. Because the Company's employee stock options have characteristics
significantly different from those of traded
42
<PAGE>
American Equity Investment Life Insurance Company
Notes to Financial Statements (continued)
8. RETIREMENT PLAN AND STOCK COMPENSATION PLAN (CONTINUED)
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma net earnings were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
Net income (loss), as reported $1,697,351 $1,286,460 $(1,158,867)
Net income (loss), pro forma 1,516,000 1,231,000 (1,423,000)
</TABLE>
9. STATUTORY FINANCIAL INFORMATION
Iowa Insurance Laws require domestic insurers to maintain a minimum of $5.0
million capital and surplus.
Prior approval of regulatory authorities is required for the payment of
dividends to the Company's parent which exceed an annual limitation. During
2000, the Company could pay dividends to its parent of approximately $16,326,000
without prior approval from regulatory authorities.
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
43
<PAGE>
of operations when
American Equity Investment Life Insurance Company
Notes to Financial Statements (continued)
9. STATUTORY FINANCIAL INFORMATION (CONTINUED)
the 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; (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 $17,837,476, $4,803,545 and $4,470,284 in 1999, 1998 and 1997,
respectively, and total statutory capital and surplus of the Company was
$139,855,053 and $80,947,913 at December 31, 1999 and 1998, 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, to be effective January 1, 2001. 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
anticipated that 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.
10. 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,
44
<PAGE>
or (b) 50% of the agent's commissions payable by the Company on the sale of
those same
American Equity Investment Life Insurance Company
Notes to Financial Statements (continued)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
policies. In return, the Company agreed to pay quarterly renewal commissions to
the Service Company equal to .3275% 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 June 30, 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. For policies issued from January 1, 1998 through August 31, 1999, the
original agreement remains in effect and, accordingly, the Company pays renewal
commissions of .325% of the premiums received on such policies which remain in
force.
On June 30, 1999, the Service Company and the Company further amended the
Agreement to provide for the payment of 30% of agents' commissions by the
Service Company for policies issued on or after September 1, 1999, and the
Company agreed to pay the Service Company quarterly renewal commissions of .25%
for inforce amounts received thereafter.
During the years ended December 31, 1999, 1998 and 1997, the Service Company
paid $37,722,852, $19,933,480, and $11,470,576, respectively, to agents of the
Company and the Company paid renewal commissions to the Service Company of
$14,566,020, $6,781,288 and $1,360,410, respectively. At December 31, 1999 and
1998, accounts payable to the Service Company aggregated $10,003,258 and
$2,438,600, respectively, and is included in amounts due to related parties.
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, 1999, 1998 and 1997, rent expense totaled $451,748, $350,174 and
$334,627, respectively. At December 31, 1999, minimum rental payments due under
all noncancelable operating leases with initial terms of one year or more are:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
2000 $ 538,000
2001 535,000
2002 528,000
2003 520,000
2004 265,000
---------------------
45
<PAGE>
$2,386,000
=====================
</TABLE>
American Equity Investment Life Insurance Company
Notes to Financial Statements (continued)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 reduction in future premium
taxes. Given the short period since inception, management believes that
assessments against the Company for failures known to date will be minimal.
46
<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.(3)
(b) Form of Sales Agreement.(2)
(c) Form of Wholesaling Agreement.(2)
(4) (a) Contract Form.(1)
(b) Variable Settlement Agreement.(4)
(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, Consulting
Actuary.
(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.
(3) Incorporated herein by reference to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-4 (File No. 333-08663) filed on April 30,
1999.
(4) Incorporated herein by reference to Post-Effective Amendment No. 2 to the
Registration Statement on Form N-4 (File No. 333-08663) filed on
February 25, 2000.
<PAGE>
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.
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>
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
OWNERSHIP CHART
01/01/99
<TABLE>
<S> <C> <C> <C> <C> <C>
American Equity Investment
Life Holding Company
(an Iowa corporation)
/
/
- ----------------------------------------------------------------------------------------------------------------
/ / / / / /
/ / / / / /
American Equity American Equity American Equity American Equity American Equity American Equity
Capital Trust I Capital Trust Capital Inc. Investment Life Investment of Hawaii, Inc.
(a Delaware II (an Iowa Insurance Properties, L.C. (a Hawaii
business trust) (a Delaware corporation) Company (an Iowa limited corporation)
business trust) (an Iowa corporation) liability company)
</TABLE>
<PAGE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of April 1, 2000, there were 30 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.
(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,
Chief Financial Officer, Treasurer and Treasurer and Director, American Equity Investment Life
Director Insurance Company.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAME AND PRINCIPAL BUSINESS
ADDRESS* POSITIONS AND OFFICES
<S> <C>
Ronald Grensteiner Vice President, American Equity Investment Life Insurance
Vice President--Marketing Company.
Kevin Wingert Vice President, American Equity Investment Life Insurance
Vice President--Marketing Company.
Harley A. Whitfield, Jr. Assistant Vice President--Market Conduct, American Equity
Chief Compliance Officer and Director Investment Life Insurance Company.
Judith Z. Karcher Vice President--Compliance, American Equity Investment
Assistant Compliance Officer Life Insurance Company.
Brent Mardis Vice President and Chief Actuary, American Equity
Chief Actuary Investment Life Insurance Company.
Wendy L. Carlson Attorney, Whitfield & Eddy, P.L.C.; General Counsel and
Secretary Chief Financial Officer, American Equity Investment Life
Holding Company
</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.
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 all the requirements for effectiveness of the Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 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
25th day of April, 2000.
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
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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ D. J. NOBLE Chairman and Director
- ------------------------------ [Principal Executive April 25, 2000
D. J. Noble Officer]
Chief Financial Officer
/s/ TERRY A. REIMER and Director [Principal
- ------------------------------ Financial Officer] April 25, 2000
Terry A. Reimer [Principal Accounting
Officer]
*
- ------------------------------ Director April 25, 2000
James M. Gerlach
*
- ------------------------------ Director April 25, 2000
David S. Mulcahy
*
- ------------------------------ Director April 25, 2000
William J. Oddy
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
*
- ------------------------------ Director April 25, 2000
Debra J. Richardson
*
- ------------------------------ Director April 25, 2000
Jack W. Schroeder
*By: /s/ DEBRA J. RICHARDSON
---------------------------------
Debra J. Richardson
Pursuant to Power of Attorney
<PAGE>
[American Equity letterhead]
April 26, 2000
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 Statement of Additional Information 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
General Counsel & Chief Financial Officer
American Equity Investment Life Holding
Company
<PAGE>
[SUTHERLAND ASBILL & BRENNAN LLP]
April 25, 2000
American Equity Investment Life Insurance Company
5400 University Avenue
West Des Moines, Iowa 50266
Re: American Equity Life Annuity Account (File No. 333-46593)
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
Post-Effective Amendment Number 3 to 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
By: /s/ STEPHEN E. ROTH
----------------------------
Stephen E. Roth, Esq.
<PAGE>
[Ernst & Young Letterhead]
Consent of Independent Auditors
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 10, 2000 with respect to the financial statements of
American Equity Life Annuity Account and March 1, 2000 with respect to the
financial statements and schedules of American Equity Investment Life Insurance
Company, in Post-Effective Amendment No. 3 to the Registration Statement (Form
N-4 No. 333-46593) and related Prospectus of American Equity Life Annuity
Account dated May 1, 2000.
/s/ Ernst & Young LLP
Des Moines, Iowa
April 24, 2000
<PAGE>
[American Equity letterhead]
April 26, 2000
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. 3 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. 3 to the Registration Statement.
Sincerely,
/s/ Christopher G. Daniels
Christopher G. Daniels, FSA, MSAA
Consulting Actuary
American Equity Investment Life Insurance
Company
<PAGE>
Report of Independent Auditors on Schedules
The Board of Directors and Stockholders
American Equity Investment Life Insurance Company
We have audited the balance sheets of American Equity Investment Life Insurance
Company as of December 31, 1999 and 1998, 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, 1999, and have issued our report thereon
dated March 1, 2000 (included elsewhere in this Form N-4). Our audits also
included the financial statement schedules listed in Item 24(a)(2) of this Form
N-4. 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.
Des Moines, Iowa /s/ Ernst & Young LLP
March 1, 2000
<PAGE>
Schedule I
Summary of Investments - Other Than Investments in Related Parties
American Equity Investment Life Insurance Company
December 31, 1999
<TABLE>
<CAPTION>
Amount at Which
Shown in Balance
Type of Investment Cost (1) Value Sheet
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturity securities:
Available for sale:
United States Government and agencies $ 642,115,817 $ 602,998,328 $ 602,998,328
State, municipal and other governments 4,539,257 4,159,650 4,159,650
Public utilities 12,201,799 10,839,200 10,839,200
Corporate securities 300,422,046 272,291,685 272,291,685
Redeemable preferred stocks 9,240,340 8,416,120 8,416,120
Mortgage and asset-backed securities 101,946,108 98,314,836 98,314,836
-----------------------------------------------------------------
1,070,465,367 997,019,819 997,019,819
Held for investment:
United States Government and agencies 323,311,715 248,679,800 323,311,715
Redeemable preferred stocks 28,487,979 24,281,250 28,487,979
-----------------------------------------------------------------
351,799,694 272,961,050 351,799,694
-----------------------------------------------------------------
Total fixed maturity securities 1,422,265,061 1,269,980,869 1,348,819,513
Equity securities:
Non-redeemable preferred stocks 6,850,000 6,622,840 6,622,840
Common stocks 1,070,000 890,650 890,650
-----------------------------------------------------------------
Total equity securities 7,920,000 7,513,490 7,513,490
Derivative instruments 22,546,058 44,209,883
Policy loans 231,068 231,068
Short-term investments 45,000 45,000
---------------------- ----------------------
$1,453,007,187 $1,400,818,954
---------------------- ----------------------
---------------------- ----------------------
</TABLE>
(1) On the basis of cost adjusted for repayments and amortization of premiums
and accrual of discounts for fixed maturity securities and derivative
instruments.
<PAGE>
Schedule III
Supplementary Insurance Information
American Equity Investment Life Insurance Company
December 31, 1999
<TABLE>
<CAPTION>
Future Policy
Deferred Benefits, Other Policy
Policy Losses, Claims Claims and Insurance
Acquisition and Loss Unearned Benefits Premiums
Segment Costs Expenses Premiums Payable and Charges
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1999:
Life insurance $126,684,495 $1,358,875,848 $ - $11,553,574 $13,746,532
Year ended December 31,
1998:
Life insurance 32,005,772 541,082,179 - 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
<CAPTION>
Amortization
Benefits of Deferred
Net Claims, Losses Policy Other
Investment and Settlement Acquisition Operating Premiums
Segment Income Expenses Costs Expenses Written
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1999:
Life insurance $62,917,023 $48,958,790 $10,923,792 $15,946,112 $ -
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 -
</TABLE>
<PAGE>
Schedule IV
Reinsurance
American Equity Investment Life Insurance Company
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed from of Amount
Other Other Assumed to
Segment Gross Amount Companies Companies Net Amount Net
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1999:
Life insurance in force $1,555,677,000 $1,268,000 $ 990,516,000 $2,544,925,000 38.9%
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Insurance premiums and
other considerations:
Annuity and single
premium universal life
product charges $ 3,452,095 $ - $ - $ 3,452,095 -%
Traditional life
insurance and accident
and health insurance
premiums 7,444,448 1,110,871 3,960,860 10,294,437 38.5%
---------------------------------------------------------------------------------------
$ 10,896,543 $1,110,871 $ 3,960,860 $ 13,746,532 28.8%
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
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 and single
premium universal life
product charges $ 642,547 $ - $ - $ 642,547 -%
Traditional life
insurance 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%
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
December 31, 1997:
Life insurance in force $ - $ - $ 2,427,796,000 $2,427,796,000 100.0%
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Insurance premiums and
other considerations:
Annuity and single
premium universal life
product charges $ 11,896 $ - $ - $ 11,896 -%
Traditional life
insurance 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%
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
</TABLE>
