Retirement and Share-based Compensation Plans

We have adopted a contributory defined contribution plan which is qualified under Section 401(k) of the Internal Revenue Code. The plan covers substantially all of our full-time employees subject to minimum eligibility requirements. Employees can contribute a percentage of their annual salary (up to a maximum contribution of $17,500 in 2014, $17,500 in 2013 and $17,000 in 2012) to the plan. We contribute an additional amount, subject to limitations, based on the voluntary contribution of the employee. Further, the plan provides for additional employer contributions based on the discretion of the Board of Directors. Plan contributions charged to expense were $423,000, $391,000 and $370,000 for the years ended December 31, 2014, 2013 and 2012, respectively.

We have deferred compensation arrangements with certain officers, directors, and consultants, whereby these individuals agreed to take our common stock at a future date in lieu of cash payments at the time of service. The common stock is to be issued in conjunction with a "trigger event," as that term is defined in the individual agreements. At December 31, 2014 and 2013, these individuals have earned, and we have reserved for future issuance, 362,287 and 356,897 shares of common stock, respectively, pursuant to these arrangements. We have incurred expense of $127,000, $162,000 and $200,000 for the years ended December 31, 2014, 2013 and 2012, respectively, under these arrangements.

We have deferred compensation agreements with certain officers whereby these individuals may defer certain salary and bonus compensation which is deposited into the American Equity Officer Rabbi Trust (Officer Rabbi Trust). The amounts deferred for certain employees are invested in assets at the direction of the employee. The assets of the Officer Rabbi Trust are included in our assets and a corresponding deferred compensation liability is recorded. The deferred compensation liability is recorded at the fair market value of the assets in the Officer Rabbi Trust with the change in fair value included as a component of compensation expense. The deferred compensation liability related to these agreements was $3.9 million and $3.1 million at December 31, 2014 and 2013, respectively. The Officer Rabbi Trust held 102,551 shares and 103,551 shares of our common stock at December 31, 2014 and 2013, respectively, which are treated as treasury shares.

During 1997, we established the American Equity Investment NMO Deferred Compensation Plan ("NMO Deferred Compensation Plan") whereby agents can earn common stock in addition to their normal commissions. The NMO Deferred Compensation Plan was effective until December 31, 2006 at which time it was suspended. Awards were calculated using formulas determined annually by our Board of Directors. These shares are being distributed at the end of the vesting and deferral period of nine years. We recognize commission expense and an increase to additional paid-in capital as share-based compensation when the awards vest. All outstanding shares issued under this plan were fully vested at December 31, 2010. At December 31, 2014 and 2013, the total number of undistributed vested shares under the NMO Deferred Compensation Plan was 543,120 and 892,688, respectively. These shares are included in the computation of earnings per share and earnings per share—assuming dilution.

We have a Rabbi Trust, the NMO Deferred Compensation Trust (the "NMO Trust"), which has purchased shares of our common stock to fund the amount of vested shares under the NMO Deferred Compensation Plan. The common stock held in the NMO Trust is treated as treasury stock. The NMO Trust distributed 349,568, 249,644 and 489,216 shares during 2014, 2013 and 2012, respectively. The number of shares held by the NMO Trust at December 31, 2014 and 2013, was 543,120 and 892,688, respectively.

The following table summarizes compensation expense recognized for employees, directors and consultants as a result of share-based compensation:



	Year Ended December 31,
	2014		2013		2012
	(Dollars in thousands)
ESOP	$	2,486	$	3,464	$	1,112
2009 Employee Incentive Plan	1,306		1,294		1,558
2013 Director Equity and Incentive Plan	603		380		—
2011 Director Stock Option Plan	186		304		912
	$	4,581	$	5,442	$	3,582

We established the American Equity Investment Employee Stock Ownership Plan ("ESOP") effective July 1, 2007. The principal purpose of the ESOP is to provide each eligible employee with an equity interest in us. Employees become eligible once they have completed a minimum of six months of service. Employees become 100% vested after two years of service. Our contribution to the ESOP is determined by the Board of Directors.

In August 2007, we issued a loan to the ESOP in the amount of $7.0 million to purchase 650,000 shares of our common stock from David J. Noble, our Executive Chairman. The loan was to be repaid over a period of 20 years with annual interest payments due on December 31 of each year. However, this loan was repaid in full as of December 31, 2014. The loan is eliminated in the consolidated financial statements. The shares purchased by the ESOP were pledged as collateral for this debt and were reported as unallocated common stock held by the ESOP, a contra-equity account in stockholders' equity. When shares were committed for release, the shares become outstanding for earnings per share computations. For each plan year in which a payment or prepayment of principal or interest was made, we released from the pledge the number of shares determined under the principal and interest method. Dividends on allocated ESOP shares were recorded as a reduction in retained earnings and were credited to employee accounts. Dividends on unallocated shares held by the ESOP were used to repay indebtedness.

During 2010, we established the American Equity Investment Life Holding Company Short-Term Performance Incentive Plan. Under this plan, certain members of our senior management may receive incentive awards comprised of a cash component and a restricted stock component. In April 2013, the Short-Term Performance Incentive Plan was amended and restated to provide for only cash bonuses for awards made with respect to 2013 and following years. Shares of restricted stock received were granted pursuant to the 2009 Employee Incentive Plan and vest on the date three years following the date the Committee approved the payment of the incentive award provided that the participant remains employed by us. Compensation expense is recognized over the three year vesting period. Shares vested immediately for participants 65 years of age with 10 years of service with us, and compensation expense under this plan for these participants was recognized upon approval of the incentive award by the compensation committee. During 2013 and 2012, we issued 33,489 and 51,810 shares of common stock (23,681 and 37,369 shares were restricted stock), respectively.

During 2013, we established a long-term performance incentive plan utilizing restricted stock units granted pursuant to the 2009 Employee Incentive Plan. During 2014 and 2013, we granted 54,718 and 78,260 restricted stock units under this plan, respectively. Vesting is tied to threshold and target performance goals for the three year period ending December 31, 2016 and December 31, 2015, respectively. Fifty percent of the restricted stock units will vest if we meet threshold goals and 100% of the restricted stock units will vest if we meet target performance goals. Compensation expense is recognized over the three year vesting period based on the likelihood of meeting threshold and target goals. Restricted stock units that ultimately vest are payable in an equal number of shares of our common stock. Restricted stock units are accounted for as equity awards and the estimated fair value of restricted stock units is based upon the closing price of our common stock on the date of grant.

During 2014 and 2013, we issued 18,239 and 26,087 (14,869 and 20,889 shares were restricted stock), respectively, shares of common stock under the 2009 Employee Incentive Plan to certain employees. These shares will vest on the date three years following the grant date provided the participant remains employed with us. Compensation expense is recognized over the three year vesting period. Shares vest immediately for participants over 65 years of age with 10 years of service with us.

In 2013, we adopted the 2013 Director Equity and Incentive Plan which authorized the grant of options, stock appreciation rights, restricted stock awards and restricted stock units convertible into or based upon our common stock of up to 250,000 shares to our Directors. During 2014 and 2013, we issued 24,000 and 40,000 shares of common stock, respectively, all of which are restricted stock, and which vest one year from the grant date provided the individual remains a Director during that time period. At December 31, 2014, we had 186,000 shares of common stock available for future grant under the 2013 Director and Equity Incentive Plan.

Our 1996 Stock Option Plan, 2000 Employee Stock Option Plan, 2000 Directors Stock Option Plan and 2011 Director Stock Option Plan authorized grants of options to officers, directors and employees for an aggregate of up to 3,475,000 shares of our common stock. All options granted under these plans have ten year terms and a six month or three year vesting period after which they become fully exercisable immediately. At December 31, 2014, we had 18,000 shares of common stock available for future grant under the 2011 Director Stock Option Plan. In 2009, we adopted the 2009 Employee Incentive Plan which authorizes the grant of options, stock appreciation rights, restricted stock awards and restricted stock units convertible into or based upon our common stock up to 2,500,000 shares. All options granted under this plan have six or ten year terms and a three year vesting period after which they become fully exercisable immediately. At December 31, 2014, we had 1,623,928 shares of common stock available for future grant under the 2009 Employee Incentive Plan.

The fair value for each stock option granted to officers, directors and employees during the year ended December 31, 2012 was estimated at the date of grant using a Black-Scholes option valuation model with the following assumptions:



	Year Ended December 31,
	2012
	Directors and Retirement Eligible Employees		Non-Retirement Eligible Employees
Average risk-free interest rate	0.76	%	1.36	%
Dividend yield	1.1	%	1.3	%
Average expected life (years)	5		8
Volatility	62.5	%	50.9	%

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. We use the historical realized volatility of our stock for the expected volatility assumption within the valuation model. For options granted since 2007, the weighted average expected term for the majority of our options were calculated using average historical behavior.

During 2014 we established the 2014 Independent Insurance Agent Restricted Stock and Restricted Stock Unit Plan. Under this plan, agents of American Equity Life may receive grants of restricted stock and restricted stock units based upon their individual sales. The plan authorizes grants of up to 1,000,000 shares of our common stock. We recognize commission expense and an increase to additional paid-in capital as share-based compensation equal to the fair value of the restricted stock and restricted stock units as they are earned.

In January 2015, American Equity Life's agents were granted 27,985 shares of restricted stock and 221,489 restricted stock units based on their production during 2014, and we recorded commission expense (capitalized as deferred policy acquisition costs) of $1.9 million in 2014. The restricted stock was granted to retirement eligible individuals and vested immediately upon grant. 20% of the restricted stock units will vest one year from the grant date if the agent is in good standing with American Equity Life at that date.The remaining 80% of the restricted stock units granted will vest based on the agent's individual sales and continued service as an independent agent to American Equity Life over a period of time not to exceed five years.

During 2007, 2010 and 2012 we established Independent Insurance Agent Stock Option plans. Under these plans, agents of American Equity Life may receive grants of options to acquire shares of our common stock based upon their individual sales. The plans authorize grants of options to agents for an aggregate of up to 8,000,000 shares of our common stock. We recognize commission expense and an increase to additional paid-in capital as share-based compensation equal to the fair value of the options as they are earned.

The fair value for each stock option granted to agents during the years ended December 31, 2013 and 2012 was estimated using a Black-Scholes option valuation model until the grant date, at which time the options are included as permanent equity, with the following assumptions:



	Year Ended December 31,
	2013		2012
Average risk-free interest rate	1.21	%	0.51	%
Dividend yield	0.7	%	1.2	%
Average expected life (years)	3.75		3.75
Volatility	31.2	%	41.1	%

American Equity Life's agents earned 1,284,950 options during 2013, which were granted in January 2014, and we recorded commission expense (capitalized as deferred policy acquisition costs) of $8.1 million in 2013. American Equity Life's agents earned 1,125,100 options during 2012, which were granted in January 2013, and we recorded commission expense (capitalized as deferred policy acquisition costs) of $3.9 million in 2012. All options granted have seven year terms and a six month vesting period after which they become exercisable immediately.

Changes in the number of stock options outstanding during the years ended December 31, 2014, 2013 and 2012 are as follows:



	Number of Shares		Weighted-Average Exercise Price per Share		Total Exercise Price
	(Dollars in thousands, except per share data)
Outstanding at January 1, 2012	4,844,850		$	10.13	$	49,097
Granted	1,558,900		10.40		16,216
Canceled	(28,050	)	8.97		(251		)
Exercised	(643,250	)	8.93		(5,741		)
Outstanding at December 31, 2012	5,732,450		10.35		59,321
Granted	1,210,950		13.13		15,899
Canceled	(29,400	)	9.96		(293		)
Exercised	(2,937,275	)	10.81		(31,756		)
Outstanding at December 31, 2013	3,976,725		10.86		43,171
Granted	1,277,650		24.79		31,673
Canceled	(35,400	)	11.64		(412		)
Exercised	(1,174,800	)	11.64		(13,672		)
Outstanding at December 31, 2014	4,044,175		15.02		$	60,760

The following table summarizes information about stock options outstanding at December 31, 2014:



	Stock Options Outstanding				Stock Options Vested
Range of Exercise Prices	Number of Awards	Remaining Life (yrs)	Weighted-Average Exercise Price Per Share		Number of Awards	Remaining Life (yrs)	Weighted-Average Exercise Price Per Share
$5.07 - $8.02	506,000	2.73	$	7.39	506,000	2.73	$	7.39
$9.27 - $11.35	1,220,550	3.94	10.23		1,136,550	3.69	10.21
$11.87 - $24.79	2,317,625	5.23	19.22		2,297,625	5.18	19.22
$5.07 - $24.79	4,044,175	4.53	15.02		3,940,175	4.43	15.10

The aggregate intrinsic value for stock options outstanding and vested awards was $57.3 million and $50.0 million, respectively, at December 31, 2014. For the years ended December 31, 2014, 2013 and 2012, the total intrinsic value of options exercised by officers, directors and employees was $5.4 million, $10.4 million and $0.9 million, respectively. Intrinsic value for stock options is calculated as the difference between the exercise price of the underlying awards and the price of our common stock as of the reporting date. Cash received from stock options exercised for the years ended December 31, 2014, 2013 and 2012 was $13.7 million, $31.8 million and $5.7 million, respectively. The tax benefit realized for the tax deduction from the exercise of stock options by officers, directors, employees and agents for the years ended December 31, 2014, 2013 and 2012, was $1.0 million, $1.0 million and $0.1 million, respectively.