Notes Payable and Amounts Due Under Repurchase Agreements

On July 17, 2013, we issued $400 million aggregate principal amount of senior unsecured notes due 2021 which bear interest at 6.625% per year and will mature on July 15, 2021. The initial transaction fees and expenses totaling $9.0 million were capitalized as deferred financing costs and are being amortized over the term of the notes due 2021 using the effective interest method. We used $15 million of the net proceeds from the issuance to repay the entire amount outstanding under our revolving credit facility and the remainder of the net proceeds was used to pay the cash consideration portion of the convertible notes tender, exchange offers and redemption discussed below.

In September 2010, we issued $200.0 million principal amount of 2015 notes. The 2015 notes have a coupon interest rate of 3.5% per year, mature on September 15, 2015, and are intended to be settled in cash; however, in certain limited circumstances we have the discretion to settle in shares of our common stock or a combination of cash and shares of our common stock. Contractual interest payable on the 2015 notes began accruing in September 2010 and is payable semi-annually in arrears each March 15th and September 15th. The initial transaction fees and expenses totaling $6.8 million were capitalized as deferred financing costs and are being amortized over the term of the 2015 notes using the effective interest method.

Upon occurrence of any of the conditions described below, holders may convert their 2015 notes at the applicable conversion rate at any time prior to June 15, 2015. On or after June 15, 2015 through the maturity date of September 15, 2015, holders may convert each of their 2015 notes at the applicable conversion rate regardless of the following conditions:


•	during the 5 business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of notes was less than 98% of the product of the last reported sale price of our common stock and the applicable conversion rate on such trading day;

•

during any calendar quarter commencing after December 31, 2010, the Notes may be converted if the last reported price of the common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day. The “last reported sale price” means the closing sale price per share (or if no closing sale price is reported, the average of the bid and ask prices or, if more than one in either case, the average of the average bid and the average ask prices) on that date as reported in composite transactions for the New York Stock Exchange; or


•	upon the occurrence of specified corporate transactions.

The initial conversion rate for the 2015 notes was 80 shares of our common stock per $1,000 principal amount of 2015 notes, equivalent to a conversion price of approximately $12.50 per share of our common stock, with the amount due on conversion. Upon conversion, a holder will receive the sum of the daily settlement amounts, calculated on a proportionate basis for each day, during a specified observation period following the conversion date. The conversion rate for the 2015 notes was adjusted to 80.9486 shares in December 2012, equivalent to a conversion price of approximately $12.35 per share. The conversion rate and conversion price have not been adjusted for cash dividends paid in December 2013 and December 2014 because the adjustments created by these cash dividend payments have been carried forward because they do not change the conversion rate by at least 1%.

If a fundamental change, as defined in the indenture, occurs prior to maturity and our stock price is at least $10.00 per share at that time, the conversion rate will increase by an additional amount of up to 20 shares of our common stock per $1,000 principal amount of 2015 notes, which amount would be paid to each holder that elects to convert its 2015 notes at that time.

The conversion option of the 2015 notes (the "2015 notes embedded conversion derivative") is an embedded derivative that requires bifurcation from the 2015 notes and is accounted for as a derivative liability, which is included in Other liabilities in our Consolidated Balance Sheets. The fair value of the 2015 notes embedded conversion derivative at the time of issuance of the 2015 notes was $37.0 million, and was recorded as the original debt discount for purposes of accounting for the debt component of the 2015 notes. This discount is being recognized as interest expense using the effective interest method over the term of the 2015 notes.

In December 2009, we issued $115.8 million of contingent convertible senior notes due December 15, 2029 (the "2029 notes"), of which $15.6 million was assigned to the equity component (net of income tax of $11.0 million). The 2029 notes had a coupon interest rate of 5.25% per annum. Interest was payable semi-annually in arrears on June 6 and December 6 of each year.

Our convertible notes are senior unsecured obligations and rank equally in right of payment with all existing and future senior indebtedness and senior to any existing and future subordinated indebtedness. Our convertible notes effectively rank junior in right of payment to any existing and future secured indebtedness to the extent of the value of the assets securing such secured indebtedness. Our convertible notes are structurally subordinated to all liabilities of our subsidiaries.

We are required to include the dilutive effect of the 2029 notes in our diluted earnings per share calculation. Because these notes include a mandatory cash settlement feature for the principal amount, incremental dilutive shares will only exist when the fair value of our common stock at the end of the reporting period exceeds the conversion price per share. The conversion premium of the 2029 notes was dilutive and the effect has been included in diluted earnings per share for the years ended December 31, 2014, 2013 and 2012. The 2015 notes are excluded from the dilutive effect in our diluted earnings per share calculation as they are intended to be settled only in cash.

In 2014, we extinguished $69.6 million principal amount of our 2015 notes and $36.2 million principal amount of our 2029 notes pursuant to private exchange offers with holders of our outstanding convertible debt instruments. Total consideration paid to holders of the 2015 notes consisted of $82.9 million in cash and $48.2 million in shares of our common stock (2,115,055 shares). Total consideration paid to holders of the 2029 notes consisted of $66.7 million in cash and $23.2 million in shares of our common stock (946,793 shares). Total consideration paid to the holders of the 2015 notes and 2029 notes excludes the accrued interest through the settlement date that was also paid. The carrying value of the convertible notes at extinguishment was $66.0 million and $34.6 million for the 2015 notes and the 2029 notes, respectively, and losses net of tax of $4.8 million for the 2015 notes and $2.5 million for the 2029 notes were recognized.

Also in 2014, we issued a notice of mandatory redemption of all of the 2029 notes that were outstanding at the time the notice was issued and amended the terms of the indenture governing the 2029 notes to provide the holders with the option of receiving the conversion value of their notes entirely in cash rather than cash for the principal amount and net shares for the portion of the conversion value that exceeds the principal amount. As a result of this mandatory redemption and the change in terms, $32.1 million principal amount of the 2029 notes was converted into $69.4 million in cash and $24.6 million in shares of our common stock (897,548 shares). The amendment to the conversion terms resulted in a reclassification of the fair value of the conversion premium for the 2029 notes from equity to an embedded conversion derivative liability. The fair value of the conversion premium on the date of reclassification was $58.1 million. We applied fair value accounting to the embedded derivative liability from the date of reclassification to the dates of settlement of the conversions of the 2029 notes and recognized as expense the $3.8 million increase in the fair value of the embedded conversion derivative liability.

In 2013, we extinguished $108.0 million principal amount of our 2015 notes and $47.5 million principal amount of our 2029 notes pursuant to public and private exchange offers with holders of our outstanding convertible debt instruments. Total consideration paid to holders of the 2015 notes consisted of $116.1 million in cash and $79.2 million in shares of our common stock (3,643,402 shares). Total consideration paid to holders of the 2029 notes consisted of $74.8 million in cash and $34.9 million in shares of our common stock (1,629,677 shares). Total consideration paid to the holders of the 2015 notes and 2029 notes excludes the accrued interest through the settlement date that was also paid. The carrying value of the convertible notes at extinguishment was $99.6 million and $44.5 million for the 2015 notes and 2029 notes, respectively, and losses net of tax of $15.2 million for the 2015 notes and $5.2 million for the 2029 notes were recognized.

The convertible senior notes included in notes payable are accounted for separately as a liability component and an equity component in the consolidated balance sheets. The liability component and equity component are as follows:



	December 31, 2014			December 31, 2013
	September 2015 Notes			September 2015 Notes			December 2029 Notes
	(Dollars in thousands)
Notes payable:
Principal amount of liability component	$	22,377		$	91,951		$	68,373
Unamortized discount	(698		)	(6,623		)	(3,743		)
Net carrying amount of liability component	$	21,679		$	85,328		$	64,630
Additional paid-in capital:
Carrying amount of equity component							$	15,586
Amount by which the if-converted value exceeds principal	$	30,497		$	104,403		$	113,169

The discount is being amortized over the expected lives of the notes, which was December 15, 2014 for the 2029 notes and is September 15, 2015 for the 2015 notes. The effective interest rates during the discount amortization periods are 8.9% and 11.9% on the 2015 notes and 2029 notes, respectively. The interest cost recognized in operations for the convertible notes, inclusive of the coupon and amortization of the discount and debt issue costs was $9.0 million, $26.4 million, and $28.5 million for the years ended December 31, 2014, 2013 and 2012, respectively.

We have a $140 million unsecured revolving line of credit agreement with five banks that terminates on November 22, 2017. The interest rate is floating at a rate based on our election that will be equal to the alternate base rate (as defined in the credit agreement) plus the applicable margin or the adjusted LIBOR rate (as defined in the credit agreement) plus the applicable margin. We also pay a commitment fee based on the available unused portion of the credit facility. The applicable margin and commitment fee rate are based on our credit rating and can change throughout the period of the credit facility. Based upon our current credit rating, the applicable margin is 1.00% for alternate base rate borrowings and 2.00% for adjusted LIBOR rate borrowings, and the commitment fee is 0.35%. Under this agreement, we are required to maintain a minimum risk-based capital ratio at American Equity Life of 275%, a maximum ratio of adjusted debt to total adjusted capital of 0.35, and a minimum level of statutory surplus at American Equity Life equal to the sum of 1) 80% of statutory surplus at September 30, 2013, 2) 50% of the statutory net income for each fiscal quarter ending after September 30, 2013, and 3) 50% of all capital contributed to American Equity Life after September 30, 2013. The agreement contains an accordion feature that allows us, on up to three occasions and subject to credit availability, to increase the credit facility by an additional $50 million in the aggregate. We also have the ability to extend the maturity date by an additional one year past the initial maturity date of November 22, 2017 with the consent of the extending banks. There are currently no guarantors of the credit facility, but certain of our subsidiaries must guarantee our obligations under the credit agreement if such subsidiaries guarantee other material amounts of our debt. No amounts were outstanding at December 31, 2014 and 2013. As of December 31, 2014, $518.2 million is unrestricted and could be distributed to shareholders and still be in compliance with all covenants under this credit agreement.

As part of our investment strategy, we enter into securities repurchase agreements (short-term collateralized borrowings). The maximum amount borrowed during 2014 and 2013 was $138.7 million and $258.6 million, respectively. When we do borrow cash on these repurchase agreements, we pledge collateral in the form of debt securities with fair values approximately equal to the amount due and we use the cash to purchase debt securities ahead of the time we collect the cash from selling annuity policies to avoid a lag between the investment of funds and the obligation to credit interest to policyholders. We earn investment income on the securities purchased with these borrowings at a rate in excess of the cost of these borrowings. Such borrowings averaged $9.2 million and $68.3 million for the years ended December 31, 2014 and 2013. We had no borrowings under repurchase agreements during 2012. The weighted average interest rate on amounts due under repurchase agreements was 0.19% and 0.20% for the years ended December 31, 2014 and 2013.