10-K 1 a2015-12x31_ael10k.htm 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________
FORM 10-K

(Mark One) |  |
x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
or
o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number: 001-31911
______________________________________________
American Equity Investment Life Holding Company
(Exact name of registrant as specified in its charter)

Iowa (State or other jurisdiction of Incorporation) |  | 42-1447959 (I.R.S. Employer Identification No.)
6000 Westown Parkway West Des Moines, Iowa (Address of principal executive offices) |  | 50266 (Zip Code)
Registrant's telephone number, including area code: (515) 221-0002
Securities registered pursuant to Section 12(b) of the Act:

Title of each class |  | Name of each exchange on which registered
Common stock, par value $1 |  | New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer x | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes o No x
Aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $2,006,048,446 based on the closing price of $26.98 per share, the closing price of the common stock on the New York Stock Exchange on June 30, 2015.
Shares of common stock outstanding as of February 25, 2016: 81,863,945
Documents incorporated by reference: Portions of the registrant's definitive proxy statement for the annual meeting of shareholders to be held June 2, 2016, which will be filed within 120 days after December 31, 2015, are incorporated by reference into Part III of this report.

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2015
TABLE OF CONTENTS

PART I. |
Item 1. | Business | 1
Item 1A. | Risk Factors | 8
Item 1B. | Unresolved Staff Comments | 16
Item 2. | Properties | 16
Item 3. | Legal Proceedings | 16
Item 4. | Mine Safety Disclosures | 16
PART II. |
Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 16
Item 6. | Selected Consolidated Financial Data | 17
Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 19
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 45
Item 8. | Consolidated Financial Statements and Supplementary Data | 47
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 47
Item 9A. | Controls and Procedures | 47
Item 9B. | Other Information | 48
PART III. |
| The information required by Items 10 through 14 is incorporated by reference from our definitive proxy statement to be filed with the Commission pursuant to Regulation 14A within 120 days after December 31, 2015. | 48
PART IV. |
Item 15. | Exhibits, Financial Statement Schedules | 48
SIGNATURES | 49
Index to Consolidated Financial Statements and Schedules | F-1
Exhibit Index |
Exhibit 12.1 | Ratio of Earnings to Fixed Charges |
Exhibit 21.2 | Subsidiaries of American Equity Investment Life Holding Company |
Exhibit 23.1 | Consent of Independent Registered Public Accounting Firm |
Exhibit 31.1 | Certification |
Exhibit 31.2 | Certification |
Exhibit 32.1 | Certification |
Exhibit 32.2 | Certification |

Table of Contents
PART I
Item 1. Business
Introduction
We are a leader in the development and sale of fixed index and fixed rate annuity products. We were incorporated in the state of Iowa on December 15, 1995. We issue fixed annuity and life insurance products through our wholly-owned life insurance subsidiaries, American Equity Investment Life Insurance Company ("American Equity Life"), American Equity Investment Life Insurance Company of New York and Eagle Life Insurance Company ("Eagle Life"). We have one business segment which represents our core business comprised of the sale of fixed index and fixed rate annuities. Our business strategy is focused on growing our policyholder funds and earning predictable returns by managing investment spreads and investment risk. We are licensed to sell our products in 50 states and the District of Columbia. Throughout this report, unless otherwise specified or the context otherwise requires, all references to "American Equity", the "Company", "we", "our" and similar references are to American Equity Investment Life Holding Company and its consolidated subsidiaries.
Investor related information, including periodic reports filed on Forms 10-K, 10-Q and 8-K and all amendments to such reports may be found on our internet website at www.american-equity.com as soon as reasonably practicable after such reports are filed with the Securities and Exchange Commission ("SEC"). In addition, we have available on our website our: (i) code of business conduct and ethics; (ii) audit committee charter; (iii) compensation committee charter; (iv) nominating and corporate governance committee charter and (v) corporate governance guidelines. The information incorporated herein by reference is also electronically accessible from the SEC's website at www.sec.gov.
Annuity Market Overview
Our target market includes the group of individuals ages 45-75 who are seeking to accumulate tax-deferred savings or create guaranteed lifetime income. We believe that significant growth opportunities exist for annuity products because of favorable demographic and economic trends. According to the U.S. Census Bureau, there were approximately 39 million Americans age 65 and older in 2010, representing 13% of the U.S. population and this group has grown to 44.7 million in 2013. By 2030, this sector of the population is expected to increase to 20% of the total population. Our fixed index and fixed rate annuity products are particularly attractive to this group due to their principal protection, competitive rates of credited interest, tax-deferred growth, guaranteed lifetime income and alternative payout options. Our competitive fixed index and fixed rate annuity products have enabled us to enjoy favorable growth in recent years and since our formation.
According to Wink's Sales and Market Report published by Wink, Inc., total industry sales of fixed index annuities increased 7.4% to $37.5 billion for the first three quarters of 2015 from $34.9 billion for the first three quarters of 2014, and increased 21.4% to $46.9 billion in 2014 from $38.6 billion in 2013. Total industry sales of fixed index annuities have increased 56% over the five year period from 2009 to 2014, which we believe is attributable to more Americans reaching retirement age and seeking products that will provide principal protection and guaranteed lifetime income.
Strategy
Key elements of executing our strategy include the following:
Enhance our Current Independent Agency Network. We believe that our successful relationships with approximately 35 national marketing organizations, through which we have 35,000 independent agents under contract, represent a significant competitive advantage. Our objective is to improve the productivity and efficiency of our core distribution channel by focusing our marketing and recruiting efforts on those independent agents capable of selling $1 million or more of annuity premium annually. This level of production qualifies them for our Gold Eagle program which was introduced at the beginning of 2007. We believe the Gold Eagle program has been effective as evidenced by the number of qualified Gold Eagle agents ranging from 991 to as many as 1,377 during the last three calendar years. Our Gold Eagle agents accounted for 65% of total production in 2015, 63% of total production in 2014 and 61% of total production in 2013. Agents who produce at least $1 million in annuity premium in a year qualify for Gold Eagle status and receive benefits such as express mail discounts. Agents who produce at least $2 million in annuity premium in a year earn cash and equity-based compensation. The equity-based compensation component of our Gold Eagle program is unique in our industry and distinguishes us from our competitors. We will also be alert for opportunities to establish relationships with national marketing organizations and agents not presently associated with us and will strive to provide all of our marketers with the highest quality service possible.
Continue to Introduce Innovative and Competitive Products. We intend to be at the forefront of the fixed index and fixed rate annuity industry in developing and introducing innovative and new competitive products. We were one of the first companies to offer a fixed index annuity that allows a choice among interest crediting strategies including both equity and bond indices as well as a traditional fixed rate strategy. We were one of the first companies to include a lifetime income benefit rider with our fixed index annuities and first to have a lifetime income benefit rider with gender-based income payments. We believe that our continued focus on anticipating and being responsive to the product needs of our independent agents and policyholders will lead to increased customer loyalty, revenues and profitability.
Use our Expertise to Achieve Targeted Spreads on Annuity Products. We have had a successful track record in achieving the targeted spreads on our annuity products. This historical success has been challenged in the current extended low interest rate environment. However, we intend to continue to leverage our experience and expertise in managing the investment spread during a range of interest rate environments to achieve, or work towards achieving, our targeted spreads.
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Maintain our Profitability Focus and Improve Operating Efficiency. We are committed to improving our profitability by advancing the scope and sophistication of our investment management and spread capabilities and continuously seeking out efficiencies within our operations. We have implemented competitive incentive programs for our national marketing organizations, agents and employees to stimulate performance.
Take Advantage of the Growing Popularity of Index Products. We believe that the growing popularity of fixed index annuity products that allow equity and bond market participation without the risk of loss of the premium deposit presents an attractive opportunity to grow our business. The popularity of fixed index annuity products has increased in recent years with the availability of lifetime income benefit riders that provide an attractive alternative for converting accumulated retirement savings into lifetime income. We intend to capitalize on our reputation as a leading provider of fixed index annuities in this expanding segment of the annuity market.
Focus on High Quality Service to Agents and Policyholders. We have maintained high quality personal service as one of our highest priorities since the inception of our company and continue to strive for an unprecedented level of timely and accurate service to both our agents and policyholders. Examples of our high quality service include answering our phone calls by a live person and issuing policies within 24 hours of receiving the application if the paperwork is in good order. We believe high quality service is one of our strongest competitive advantages and intend to continue enhancing our digital customer service experience for agents and policyholders.
Expand our Distribution Channels. We formed Eagle Life with the vision of developing a network of broker/dealers, banks and registered investment advisors that have the ability to distribute fixed index and fixed rate annuity products in large volume. According to Wink's Sales and Market Report published by Wink, Inc., sales of fixed index annuities through broker/dealers and banks have been growing and represented almost 36% of industry sales in the third quarter of 2015 compared to 16% in the third quarter of 2014. In 2015, we introduced broker/dealer and bank friendly products for American Equity Life for those broker/dealers and banks who choose to associate with us through American Equity Life.
Products
Annuities offer our policyholders a tax-deferred means of accumulating retirement savings, as well as a reliable source of income during the payout period. When our policyholders deposit cash to annuities, we account for these receipts as policy benefit reserves in the liability section of our consolidated balance sheet. The annuity deposits collected, by product type, during the three most recent fiscal years are as follows:

|  | Year Ended December 31,
|  | 2015 |  | 2014 |  | 2013
Product Type |  | Deposits Collected |  | Deposits as a % of Total |  | Deposits Collected |  | Deposits as a % of Total |  | Deposits Collected |  | Deposits as a % of Total
|  | (Dollars in thousands)
Fixed index annuities |  | $ | 6,791,689 |  |  | 96 | % |  | $ | 3,999,439 |  |  | 96 | % |  | $ | 3,882,424 |  |  | 92 | %
Annual reset fixed rate annuities |  | 45,182 |  |  | 1 | % |  | 57,273 |  |  | 1 | % |  | 71,944 |  |  | 2 | %
Multi-year fixed rate annuities |  | 214,356 |  |  | 3 | % |  | 103,293 |  |  | 2 | % |  | 205,978 |  |  | 5 | %
Single premium immediate annuities |  | 32,752 |  |  | — | % |  | 24,580 |  |  | 1 | % |  | 52,142 |  |  | 1 | %
|  | $ | 7,083,979 |  |  | 100 | % |  | $ | 4,184,585 |  |  | 100 | % |  | $ | 4,212,488 |  |  | 100 | %

Fixed Index Annuities
Fixed index annuities allow policyholders to earn index credits based on the performance of a particular index without the risk of loss of their principal. Most of these products allow policyholders to transfer funds once a year among several different crediting strategies, including one or more index based strategies and a traditional fixed rate strategy. Approximately 86%, 95% and 97% of our fixed index annuity sales for the years ended December 31, 2015, 2014 and 2013, respectively, were "premium bonus" products. The initial annuity deposit on these policies is increased at issuance by a specified premium bonus ranging from 3% to 10%. Generally, the surrender charge and bonus vesting provisions of our policies are structured such that we have comparable protection from early termination between bonus and non-bonus products.
The annuity contract value is equal to the sum of premiums paid, premium bonuses and interest credited ("index credits" for funds allocated to an index based strategy), which is based upon an overall limit (or "cap") or a percentage (the "participation rate") of the annual appreciation (based in certain situations on monthly averages or monthly point-to-point calculations) in a recognized index or benchmark. Caps and participation rates limit the amount of annual interest the policyholder may earn in any one contract year and may be adjusted by us annually subject to stated minimums. Caps generally range from 1% to 12% and participation rates range from 10% to 100%. In addition, some products have a spread or "asset fee" generally ranging from 0.75% to 3.5%, which is deducted from annual interest to be credited. For products with asset fees, if the annual appreciation in the index does not exceed the asset fee, the policyholder's index credit is zero. The minimum guaranteed surrender values are equal to no less than 87.5% of the premium collected plus interest credited at an annual rate ranging from 1% to 3%.
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Fixed Rate Annuities
Fixed rate deferred annuities include annual reset and multi-year rate guaranteed products. Our annual reset fixed rate annuities have an annual interest rate (the "crediting rate") that is guaranteed for the first policy year. After the first policy year, we have the discretionary ability to change the crediting rate once annually to any rate at or above a guaranteed minimum rate. Our multi-year rate guaranteed annuities are similar to our annual reset products except that the initial crediting rate is guaranteed for up to seven years before it may be changed at our discretion. The minimum guaranteed rate on our annual reset fixed rate deferred annuities ranges from 1% to 4% and the initial guaranteed rate on our multi-year rate guaranteed policies ranges from 1.7% to 4.1%.
The initial crediting rate is largely a function of the interest rate we can earn on invested assets acquired with new annuity deposits and the rates offered on similar products by our competitors. For subsequent adjustments to crediting rates, we take into account the yield on our investment portfolio, annuity surrender and withdrawal assumptions and crediting rate history for particular groups of annuity policies with similar characteristics. As of December 31, 2015, crediting rates on our outstanding fixed rate deferred annuities generally ranged from 1.0% to 4.1%. The average crediting rates on our outstanding annual reset and multi-year rate guaranteed fixed rate deferred annuities at December 31, 2015 were 2.14% and 2.82%, respectively.
We also sell single premium immediate annuities ("SPIAs"). Our SPIAs are designed to provide a series of periodic payments for a fixed period of time or for life, according to the policyholder's choice at the time of issue. The amounts, frequency and length of time of the payments are fixed at the outset of the annuity contract. SPIAs are often purchased by persons at or near retirement age who desire a steady stream of payments over a future period of years. The implicit interest rate on SPIAs is based on market conditions when the policy is issued. The implicit interest rate on our outstanding SPIAs averaged 2.37% at December 31, 2015.
Withdrawal Options—Fixed Index and Fixed Rate Annuities
Policyholders are typically permitted penalty-free withdrawals up to 10% of the contract value in each year after the first year, subject to limitations. Withdrawals in excess of allowable penalty-free amounts are assessed a surrender charge during a penalty period which ranges from 6 to 17 years for fixed index annuities and 5 to 15 years for fixed rate annuities from the date the policy is issued. This surrender charge initially ranges from 7% to 20% for fixed index annuities and 8% to 20% for fixed rate annuities of the contract value and generally decreases by approximately one-half to two percentage points per year during the surrender charge period. For certain policies, the premium bonus is considered in the establishment of the surrender charge percentages. For other policies, there is a vesting schedule ranging from 10 to 14 years that applies to the premium bonus and any interest earned on that premium bonus. Surrender charges and bonus vesting are set at levels aimed at protecting us from loss on early terminations and reducing the likelihood of policyholders terminating their policies during periods of increasing interest rates. This practice enhances our ability to maintain profitability on such policies. Policyholders may elect to take the proceeds of the annuity either in a single payment or in a series of payments for life, for a fixed number of years or a combination of these payment options.
Beginning in July 2007, substantially all of our fixed index annuity policies and many of our annual reset fixed rate deferred annuities were issued with a lifetime income benefit rider. This rider provides an additional liquidity option to policyholders. With the lifetime income benefit rider, a policyholder can elect to receive guaranteed payments for life from their contract without requiring them to annuitize their contract value. The amount of the living income benefit available is determined by the growth in the policy's income account value as defined in the rider (4.0% to 8.0%), which is selected by the policyholder at the time of purchase, and the policyholder's age at the time the policyholder elects to begin receiving living income benefit payments. As discussed above, in 2014, we modified our lifetime income benefit rider with gender-based income payouts. Lifetime income benefit payments may be stopped and restarted at the election of the policyholder. During 2013, we introduced new versions of our lifetime income benefit rider that had an optional wellbeing benefit or optional death benefit. Policyholders have the choice of selecting a rider with a base level of benefit for no explicit fee or paying a fee for a rider that has a higher level of benefits, and beginning in 2013 we introduced products where the addition of a rider to the policy is completely optional. Rider fees range from 0.30% to 1.00%.
Life Insurance
These products include traditional ordinary and term, universal life and other interest-sensitive life insurance products. We have approximately $2.1 billion of life insurance in force as of December 31, 2015. Premiums related to this business accounted for less than 1% of revenues for the years ended December 31, 2015, 2014 and 2013.
Investments/Spread Management
Investment activities are an integral part of our business, and net investment income is a significant component of our total revenues. Profitability of our annuity products is significantly affected by spreads between interest yields on investments, the cost of options to fund the annual index credits on our fixed index annuities and rates credited on our fixed rate annuities and the fixed rate strategy in our fixed index annuities. We manage the index-based risk component of our fixed index annuities by purchasing call options on the applicable indices to fund the annual index credits on these annuities and by adjusting the caps, participation rates and asset fees on policy anniversary dates to reflect the change in the cost of such options which varies based on market conditions. All options are purchased on the respective policy anniversary dates, and new options are purchased on each of the anniversary dates to fund the next annual index credits. All credited rates on annual reset fixed rate deferred annuities and the fixed rate strategy in fixed index annuities may be changed annually, subject to minimum guarantees. Changes in caps, participation rates and asset fees on fixed index annuities and crediting rates on fixed rate and fixed index annuities may not be sufficient to maintain targeted investment spreads in all economic and market environments. In addition, competition and other factors, including the potential for increases in surrenders and withdrawals, may limit our ability to adjust or to maintain caps, participation rates, asset fees and crediting rates at levels necessary to avoid narrowing of spreads under certain market conditions.
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For additional information regarding the composition of our investment portfolio and our interest rate risk management, see Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Investments, Quantitative and Qualitative Disclosures About Market Risk and Note 3 to our audited consolidated financial statements.
Marketing
We market our products through a variable cost brokerage distribution network of independent agents through national marketing organizations. We emphasize high quality service to our agents and policyholders along with the prompt payment of commissions to our agents. We believe this has been significant in building excellent relationships with our independent agency force.
Our independent agents and agencies range in profile from national sales organizations to personal producing general agents. We actively recruit new agents and terminate those agents who have not produced business for us in recent periods and are unlikely to sell our products in the future. In our recruitment efforts, we emphasize that agents have direct access to our executive officers, giving us an edge in recruiting over larger and foreign-owned competitors. We also emphasize our products, service and our Gold Eagle program which provides unique cash and equity-based incentives to those agents that reach certain benchmarks of annuity premium annually. Agents who produce at least $1 million in annuity premium in a year qualify for Gold Eagle status and receive benefits such as express mail discounts. Agents who produce at least $2 million in annuity premium in a year earn cash and equity-based compensation. We also have favorable relationships with our national marketing organizations, which have enabled us to efficiently sell through an expanded number of independent agents.
The insurance distribution system is comprised of insurance brokers and marketing organizations. We are pursuing a strategy to increase the efficiency of our distribution network by strengthening our relationships with key national and regional marketing organizations and are alert for opportunities to establish relationships with organizations not presently associated with us. These organizations typically recruit agents for us by advertising our products and our commission structure through direct mail advertising or seminars for insurance agents and brokers. These organizations bear most of the cost incurred in marketing our products. We compensate marketing organizations by paying them a percentage of the commissions earned on new annuity policy sales generated by the agents recruited by such organizations. We also conduct incentive programs for marketing organizations and agents from time to time, including equity-based programs for our leading national marketers and those agents qualifying for our Gold Eagle program. For additional information regarding our equity-based programs for our leading national marketers and independent agents, see Note 11 to our audited consolidated financial statements. We generally do not enter into exclusive arrangements with these marketing organizations.
Eagle Life's fixed index and fixed rate annuities are distributed pursuant to selling agreements with the applicable broker/dealers, banks and registered investment advisors. Relationships with these firms are facilitated by wholesalers who promote Eagle Life and are compensated based upon the sales of the firms that they have contracted with Eagle Life. At December 31, 2015, we had 42 selling agreements in place with broker/dealers. Five of these selling agreements are with broker/dealers affiliated with banks.
Agents contracted with us through one national marketing organization which markets our products accounted for more than 10% of the annuity deposits and insurance premiums collected during 2015 representing 24% of the annuity deposits and insurance premiums collected, and we expect this organization to continue as marketers for American Equity Life with a focus on selling our products. The states with the largest share of direct premiums collected during 2015 were: Florida (10.7%), California (9.2%), Texas (7.2%), Pennsylvania (5.1%) and Illinois (5.0%).
Competition and Ratings
We operate in a highly competitive industry. Our annuity products compete with fixed index, fixed rate and variable annuities sold by other insurance companies and also with mutual fund products, traditional bank products and other investment and retirement funding alternatives offered by asset managers, banks, and broker/dealers. Our insurance products compete with products of other insurance companies, financial intermediaries and other institutions based on a number of features, including crediting rates, index options, policy terms and conditions, service provided to distribution channels and policyholders, ratings, reputation and distributor compensation.
The sales agents for our products use the ratings assigned to an insurer by independent rating agencies as one factor in determining which insurer's annuity to market. The degree to which ratings adjustments have affected and will affect our sales and persistency is unknown. Following is a summary of American Equity Life's financial strength ratings:

| Financial Strength Rating |  | Outlook Statement
A.M. Best Company |  |  |
January 2011—current | A- |  | Stable
November 2008—January 2011 | A- |  | Negative
Standard & Poor's |  |  |
August 2015—current | A- |  | Stable
June 2013—August 2015 | BBB+ |  | Positive
October 2011—June 2013 | BBB+ |  | Stable
Fitch Ratings |  |  |
May 2013—Current | BBB+ |  | Stable

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Financial strength ratings generally involve quantitative and qualitative evaluations by rating agencies of a company's financial condition and operating performance. Generally, rating agencies base their ratings upon information furnished to them by the insurer and upon their own investigations, studies and assumptions. Ratings are based upon factors of concern to policyholders, agents and intermediaries and are not directed toward the protection of investors and are not recommendations to buy, sell or hold securities.
In addition to the financial strength ratings, rating agencies use an "outlook statement" to indicate a medium or long-term trend which, if continued, may lead to a rating change. A positive outlook indicates a rating may be raised and a negative outlook indicates a rating may be lowered. A stable outlook is assigned when ratings are not likely to be changed. Outlook statements should not be confused with expected stability of the insurer's financial or economic performance. A rating may have a "stable" outlook to indicate that the rating is not expected to change, but a "stable" outlook does not preclude a rating agency from changing a rating at any time without notice.
In January 2016, A.M. Best affirmed its rating outlook on the U.S. life/annuity sector as stable, which has been A.M. Best's outlook on our industry since 2010. In January 2016, Standard & Poor's affirmed its outlook on the U.S. life insurance sector as stable. The rating agencies have heightened the level of scrutiny they apply to insurance companies, increased the frequency and scope of their credit reviews and may adjust upward the capital and other requirements employed in the rating agency models for maintenance of certain ratings levels.
A.M. Best Company ratings currently range from "A++" (Superior) to "F" (In Liquidation), and include 16 separate ratings categories. Within these categories, "A++" (Superior) and "A+" (Superior) are the highest, followed by "A" (Excellent) and "A-" (Excellent) then followed by "B++" (Good) and "B+" (Good). Publications of A.M. Best Company indicate that the "A-" rating is assigned to those companies that, in A.M. Best Company's opinion, have demonstrated an excellent ability to meet their ongoing obligations to policyholders.
Standard & Poor's insurer financial strength ratings currently range from "AAA (extremely strong)" to "R (under regulatory supervision)", and include 21 separate ratings categories, while "NR" indicates that Standard & Poor's has no opinion about the insurer's financial strength. Within these categories, "AAA" and "AA" are the highest, followed by "A" and "BBB". Publications of Standard & Poor's indicate that an insurer rated "A-" is regarded as having strong financial security characteristics, but is somewhat more likely to be affected by adverse business conditions than are higher rated insurers.
FitchRating's insurer financial strength ratings currently range from "AAA (exceptionally strong)" to "C (distressed)." Ratings of "BBB-" and higher are considered to be "secure," and those of "BB+" and lower are considered to be "vulnerable."
A.M. Best Company, Standard & Poor's and Fitch review their ratings of insurance companies from time to time. There can be no assurance that any particular rating will continue for any given period of time or that it will not be changed or withdrawn entirely if, in their judgment, circumstances so warrant. If our ratings were to be negatively adjusted for any reason, we could experience a material decline in the sales of our products and the persistency of our existing business.
Reinsurance
Coinsurance
American Equity Life has two coinsurance agreements with EquiTrust Life Insurance Company ("EquiTrust"), covering 70% of certain of American Equity Life's fixed index and fixed rate annuities issued from August 1, 2001 through December 31, 2001, 40% of those contracts issued during 2002 and 2003, and 20% of those contracts issued from January 1, 2004 to July 31, 2004. The business reinsured under these agreements may not be recaptured. Coinsurance deposits (aggregate policy benefit reserves transferred to EquiTrust under these agreements) were $0.8 billion at December 31, 2015 and $0.9 billion at December 31, 2014. We remain liable to policyholders with respect to the policy liabilities ceded to EquiTrust should EquiTrust fail to meet the obligations it has coinsured. EquiTrust has received a financial strength rating of "B++" (Good) with a stable outlook from A.M. Best Company. None of the coinsurance deposits with EquiTrust are deemed by management to be uncollectible.
American Equity Life has three coinsurance agreements with Athene Life Re Ltd. ("Athene"), an unauthorized life reinsurer domiciled in Bermuda. One agreement ceded 20% of certain of American Equity Life's fixed index annuities issued from January 1, 2009 through March 31, 2010. The business reinsured under this agreement is not eligible for recapture until the end of the month following seven years after the date of issuance of the policy. The second agreement cedes 80% of American Equity Life's multi-year rate guaranteed annuities issued from July 1, 2009 through December 31, 2013 and 80% of Eagle Life's multi-year rate guaranteed annuities issued from November 20, 2013 through December 31, 2013. The business reinsured under this agreement may not be recaptured. The third agreement cedes 80% of American Equity Life's and Eagle Life's multi-year rate guaranteed annuities issued on or after January 1, 2014 and 80% of Eagle Life's fixed index annuities. The reinsurance agreement specifies that the coinsurance percentage for Eagle Life's fixed index annuities decreases to 50% for policies issued between January 1, 2017 and December 31, 2018, and to 20% for policies issued on or after January 1, 2019. The business reinsured under this agreement may not be recaptured. Coinsurance deposits (aggregate policy benefit reserves transferred to Athene under these agreements) were $2.4 billion and $2.2 billion at December 31, 2015 and 2014, respectively. American Equity Life is an intermediary for reinsurance of Eagle Life's business ceded to Athene. American Equity Life and Eagle Life remain liable to policyholders with respect to the policy liabilities ceded to Athene should Athene fail to meet the obligations it has coinsured. The annuity deposits that have been ceded to Athene are held in trusts and American Equity Life is named as the sole beneficiary of the trusts. The assets in the trusts are required to remain at a value that is sufficient to support the current balance of policy benefit liabilities of the ceded business on a statutory basis. If the value of the trust accounts would ever be less than the amount of the ceded policy benefit liabilities on a statutory basis, Athene is required to either establish a letter of credit or deposit securities in the trusts for the amount of any shortfall. None of the coinsurance deposits with Athene are deemed by management to be uncollectible.
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Financing Arrangements
American Equity Life has a reinsurance transaction with Hannover Life Reassurance Company of America, ("Hannover"), which is treated as reinsurance under statutory accounting practices and as a financing arrangement under U.S. generally accepted accounting principles ("GAAP"). The statutory surplus benefit under this agreement is eliminated under GAAP and the associated charges are recorded as risk charges and included in other operating costs and expenses in the consolidated statements of operations. The transaction became effective July 1, 2013 and is a yearly renewable term reinsurance agreement for statutory purposes covering 45.6% of waived surrender charges related to penalty free withdrawals, deaths and lifetime income benefit rider payments as well as lifetime income benefit rider payments in excess of policy fund values on certain business. We may recapture the risks reinsured under this agreement as of the end of any quarter after June 30, 2016. However, the agreement, as amended, makes it punitive to us if we do not recapture the business ceded no later than the first quarter of 2018. The reserve credit recorded on a statutory basis by American Equity Life was $480.7 million and $322.5 million at December 31, 2015 and 2014, respectively. We pay quarterly reinsurance premiums under this agreement with an experience refund calculated on a quarterly basis and a risk charge equal to 1.25% of the pretax statutory surplus benefit as of the end of each calendar quarter.
Indemnity Reinsurance
Consistent with the general practice of the life insurance industry, American Equity Life enters into agreements of indemnity reinsurance with other insurance companies in order to reinsure portions of the coverage provided by its annuity, life and accident and health insurance products. Indemnity reinsurance agreements are intended to limit a life insurer's maximum loss on a large or unusually hazardous risk or to diversify its risks. Indemnity reinsurance does not discharge the original insurer's primary liability to the insured.
The maximum loss retained by us on any one life insurance policy we have issued was $0.1 million or less as of December 31, 2015. American Equity Life's reinsured business under indemnity reinsurance agreements is primarily ceded to two reinsurers. Reinsurance related to life and accident and health insurance that was ceded by us to these reinsurers was immaterial.
We believe the assuming companies will be able to honor all contractual commitments, based on our periodic review of their financial statements, insurance industry reports and reports filed with state insurance departments.
Regulation
Life insurance companies are subject to regulation and supervision by the states in which they transact business. State insurance laws establish supervisory agencies with broad regulatory authority, including the power to:

• | grant and revoke licenses to transact business;

• | regulate and supervise trade practices and market conduct;

• | establish guaranty associations;

• | license agents;

• | approve policy forms;

• | approve premium rates for some lines of business;

• | establish reserve requirements;

• | prescribe the form and content of required financial statements and reports;

• | determine the reasonableness and adequacy of statutory capital and surplus;

• | perform financial, market conduct and other examinations;

• | define acceptable accounting principles for statutory reporting;

• | regulate the type and amount of permitted investments; and

• | limit the amount of dividends and surplus note payments that can be paid without obtaining regulatory approval.

Our life subsidiaries are subject to periodic examinations by state regulatory authorities. In 2015, the Iowa Insurance Division completed financial examinations of American Equity Life and Eagle Life for the five year period ending December 31, 2013. There were no adjustments to American Equity Life's or Eagle Life's statutory financial statements as a result of these examinations. The New York Insurance Department is currently conducting a financial examination of American Equity Investment Life Insurance Company of New York for the three year period ending December 31, 2013.
The payment of dividends or the distributions, including surplus note payments, by our life subsidiaries is subject to regulation by each subsidiary's state of domicile's insurance department. Currently, American Equity Life may pay dividends or make other distributions without the prior approval of the Iowa Insurance Commissioner, unless such payments, together with all other such payments within the preceding twelve months, exceed the greater of (1) American Equity Life's statutory net gain from operations for the preceding calendar year, or (2) 10% of American Equity Life's statutory surplus at the preceding December 31. For 2016, up to $241.3 million can be distributed as dividends by American Equity Life without prior approval of the Iowa Insurance Commissioner. In addition, dividends and surplus note payments may be made only out of earned surplus, and all surplus note payments are subject to prior approval by regulatory authorities. American Equity Life had $1.3 billion of statutory earned surplus at December 31, 2015.
Most states have also enacted regulations on the activities of insurance holding company systems, including acquisitions, extraordinary dividends, the terms of surplus notes, the terms of affiliate transactions and other related matters. We are registered pursuant to such legislation in Iowa. A number of state legislatures have also considered or have enacted legislative proposals that alter and, in many cases, increase the authority of state agencies to regulate insurance companies and holding company systems.
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Most states, including Iowa and New York where our life subsidiaries are domiciled, have enacted legislation or adopted administrative regulations affecting the acquisition of control of insurance companies as well as transactions between insurance companies and persons controlling them. The nature and extent of such legislation and regulations currently in effect vary from state to state. However, most states require administrative approval of the direct or indirect acquisition of 10% or more of the outstanding voting securities of an insurance company incorporated in the state. The acquisition of 10% of such securities is generally deemed to be the acquisition of "control" for the purpose of the holding company statutes and requires not only the filing of detailed information concerning the acquiring parties and the plan of acquisition, but also administrative approval prior to the acquisition. In many states, the insurance authority may find that "control" in fact does not exist in circumstances in which a person owns or controls more than 10% of the voting securities.
Historically, the federal government has not directly regulated the business of insurance. However, federal legislation and administrative policies in several areas, including pension regulation, age and sex discrimination, financial services regulation, securities regulation and federal taxation can significantly affect the insurance business. Additionally, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") generally provides for enhanced federal supervision of financial institutions, including insurance companies in certain circumstances, and financial activities that represent a systemic risk to financial stability or the U.S. economy. Under the Dodd-Frank Act, a Federal Insurance Office has been established within the U.S. Treasury Department to monitor all aspects of the insurance industry and its authority may extend to our business, although the Federal Insurance Office is not empowered with any general regulatory authority over insurers. The director of the Federal Insurance Office serves in an advisory capacity to the Financial Stability Oversight Council ("FSOC") and has the ability to recommend that an insurance company be subject to heightened prudential standards by the Federal Reserve, if it is determined that financial distress at the company could pose a threat to financial stability in the U.S. The Dodd-Frank Act also provides for the preemption of state laws when inconsistent with certain international agreements.
In April, 2015, the U.S. Department of Labor re-proposed a regulation which, if finalized in current form, substantially expands the range of activities that would be considered to be fiduciary advice under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. If finalized as proposed, agents who sell annuities to policyholders for their 401(k) plans and individual retirement accounts (“IRAs”) would be considered fiduciaries and subject to additional conflict of interest disclosure requirements. A significant portion of our annuity sales are to IRAs.
State insurance regulators and the National Association of Insurance Commissioners ("NAIC") are continually reexamining existing laws and regulations and developing new legislation for passage by state legislatures and new regulations for adoption by insurance authorities. Proposed laws and regulations or those still under development pertain to insurer solvency and market conduct and in recent years have focused on:

• | insurance company investments;

• | risk-based capital ("RBC") guidelines, which consist of regulatory targeted surplus levels based on the relationship of statutory capital and surplus, with prescribed adjustments, to the sum of stated percentages of each element of a specified list of company risk exposures;

• | the implementation of non-statutory guidelines and the circumstances under which dividends may be paid;

• | principles-based reserving;

• | own risk solvency and enterprise risk management assessment;

• | cybersecurity assessments;

• | product approvals;

• | agent licensing;

• | underwriting and suitability practices; and

• | life insurance and annuity sales practices.

The NAIC's RBC requirements are intended to be used by insurance regulators as an early warning tool to identify deteriorating or weakly capitalized insurance companies for the purpose of initiating regulatory action. The RBC formula defines a minimum capital standard which supplements low, fixed minimum capital and surplus requirements previously implemented on a state-by-state basis. Such requirements are not designed as a ranking mechanism for adequately capitalized companies.
The NAIC's RBC requirements provide for four levels of regulatory attention depending on the ratio of a company's total adjusted capital to its RBC. Adjusted capital is defined as the total of statutory capital and surplus, asset valuation reserve and certain other adjustments. Calculations using the NAIC formula at December 31, 2015, indicated that American Equity Life's ratio of total adjusted capital to the highest level at which regulatory action might be initiated was 336%.
Our life subsidiaries also may be required, under the solvency or guaranty laws of most states in which they do business, to pay assessments up to certain prescribed limits to fund policyholder losses or liabilities of insolvent insurance companies. These assessments may be deferred or forgiven under most guaranty laws if they would threaten an insurer's financial strength and, in certain instances, may be offset against future premium taxes.
Federal Income Tax
The annuity and life insurance products that we market generally provide the policyholder with a federal income tax advantage, as compared to certain other savings investments such as certificates of deposit and taxable bonds, in that federal income taxation on any increases in the contract values (i.e., the "inside build-up") of these products is deferred until it is received by the policyholder. With other savings investments, the increase in value is generally taxed each year as it is realized. Additionally, life insurance death benefits are generally exempt from income tax.
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From time to time, various tax law changes have been proposed that could have an adverse effect on our business, including the elimination of all or a portion of the income tax advantage described above for annuities and life insurance. If legislation were enacted to eliminate the tax deferral for annuities, such a change would have an adverse effect on our ability to sell non-qualified annuities. Non-qualified annuities are annuities that are not sold to an individual retirement account or other qualified retirement plan.
Since 2013, distributions from non-qualified annuity policies are considered "investment income" for purposes of the Medicare tax on investment income contained in the Health Care and Education Reconciliation Act of 2010. As a result, in certain circumstances a 3.8% tax ("Medicare Tax") may be applied to some or the entire taxable portion of distributions from non-qualified annuities to individuals whose income exceeds certain threshold amounts. This tax may have an adverse effect on our ability to sell non-qualified annuities to individuals whose income exceeds these threshold amounts.
Employees
As of December 31, 2015, we had 490 full-time employees. We have experienced no work stoppages or strikes and consider our relations with our employees to be excellent. None of our employees are represented by a union.
Item 1A. Risk Factors
We are exposed to significant financial and capital risk, including changing interest rates and credit spreads which may have an adverse effect on sales of our products, profitability, investment portfolio and reported book value per share.
Future changes in interest rates and credit spreads may result in fluctuations in the income derived from our investments. These and other factors could have a material adverse effect on our financial condition, results of operations or cash flows.
Interest rate and credit spread risk. Our interest rate risk is related to market price and changes in cash flow. Substantial and sustained increases and decreases in market interest rates can materially and adversely affect the profitability of our products, our ability to earn predictable returns, the fair value of our investments and the reported value of stockholders' equity. A rise in interest rates, in the absence of other countervailing changes, will decrease the unrealized gain position of our investment portfolio and may result in an unrealized loss position. With respect to our available for sale fixed maturity securities, such declines in value (net of income taxes and certain adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements) reduce our reported stockholders' equity and book value per share.
If interest rates rise dramatically within a short period of time, our business may be exposed to disintermediation risk. Disintermediation risk is the risk that our policyholders may surrender all or part of their contracts in a rising interest rate environment, which may require us to sell assets in an unrealized loss position. Alternatively, we may increase crediting rates to retain business and reduce the level of assets that may need to be sold at a loss. However, such action would reduce our investment spread and net income.
Due to the long-term nature of our annuity liabilities, sustained declines in long-term interest rates may result in increased redemptions of our fixed maturity securities that are subject to call redemption prior to maturity by the issuer or prepayments of commercial mortgage loans and expose us to reinvestment risk. If we are unable to reinvest the proceeds from such redemptions into investments with credit quality and yield characteristics of the redeemed or prepaid investments, our net income and overall financial performance may be adversely affected. We have a certain ability to mitigate this risk by lowering crediting rates on our products subject to certain restrictions as discussed below.
Our exposure to credit spreads is related to market price and changes in cash flows related to changes in credit spreads. If credit spreads widen significantly it could result in greater investment income on new investments but would also indicate growing concern about the ability of credit issuers to service their debt which could result in additional other than temporary impairments. If credit spreads tighten significantly it could result in reduced net investment income from new purchases of fixed maturity securities or fundings of commercial mortgage loans.
Credit risk. We are subject to the risk that the issuers of our fixed maturity securities and other debt securities and borrowers on our commercial mortgages, will default on principal and interest payments, particularly if a major downturn in economic activity occurs. An increase in defaults on our fixed maturity securities and commercial mortgage loan portfolios could harm our financial strength and reduce our profitability.
Credit and cash flow assumption risk is the risk that issuers of securities, mortgagees on mortgage loans or other parties, including derivatives counterparties, default on their contractual obligations or experience adverse changes to their contractual cash flow streams. We attempt to minimize the adverse impact of this risk by monitoring portfolio diversification and exposure by asset class, creditor, industry, and by complying with investment limitations governed by state insurance laws and regulations as applicable. We also consider all relevant objective information available in estimating the cash flows related to residential and commercial mortgage backed securities.
We use derivative instruments to fund the annual credits on our fixed index annuities. We purchase derivative instruments, consisting primarily of one-year call options, from a number of counterparties. Our policy is to acquire such options only from counterparties rated "A-"or better by a nationally recognized rating agency and the maximum credit exposure to any single counterparty is subject to concentration limits. In addition, we have entered into credit support agreements with our counterparties which allow us to require our counterparties to post collateral to secure their obligations to us under the derivative instruments. If our counterparties fail to honor their obligations under the derivative instruments, our revenues may not be sufficient to fund the annual index credits on our fixed index annuities. Any such failure could harm our financial strength and reduce our profitability.
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Liquidity risk. We could have difficulty selling our private placement securities and commercial mortgage loans because they are less liquid than our publicly traded securities. If we require significant amounts of cash on short notice, we may have difficulty selling these securities and loans at attractive prices or in a timely manner, or both.
Fluctuations in interest rates and investment spread could adversely affect our financial condition, results of operations and cash flows.
A key component of our net income is the investment spread. A narrowing of investment spreads may adversely affect operating results. Although we have the right to adjust interest crediting rates (cap, participation or asset fee rates for fixed index annuities) on most products, changes to crediting rates may not be sufficient to maintain targeted investment spreads in all economic and market environments. In general, our ability to lower crediting rates is subject to minimum crediting rates filed with and approved by state regulators. In addition, competition and other factors, including the potential for increases in surrenders and withdrawals, may limit our ability to adjust or maintain crediting rates at levels necessary to avoid the narrowing of spreads under certain market conditions. Our policy structure generally provides for resetting of policy crediting rates at least annually and imposes withdrawal penalties for withdrawals during the first 5 to 17 years a policy is in force.
Managing the investment spread on our fixed index annuities is more complex than it is for fixed rate annuity products. We manage the index-based risk component of our fixed index annuities by purchasing call options on the applicable indices to fund the annual index credits on these annuities and by adjusting the caps, participation rates and asset fees on policy anniversary dates to reflect changes in the cost of such options which varies based on market conditions. The price of such options generally increases with increases in the volatility in both the indices and interest rates, which may either narrow the spread or cause us to lower caps or participation rates. Thus, the volatility of the cost of the indices adds an additional degree of uncertainty to the profitability of the index products. We attempt to mitigate this risk by resetting caps, participation rates and asset fees annually on the policy anniversaries.
Persistent environment of low interest rates affects and may continue to negatively affect our results of operations and financial condition.
Prolonged periods of low interest rates may have a negative impact on our ability to sell our fixed index annuities as consumers look for other financial instruments with potentially higher yields to fund retirement. In times of low interest rates, such as we have been experiencing since 2010 and which we may continue to experience in 2016, it is difficult to offer attractive rates and benefits to customers while maintaining profitability, which may limit sales growth of interest sensitive products.
Sustained declines in interest rates may subject us to lower returns on our invested assets, and we have had to and may have to continue to invest the cash we receive from premiums and interest or return of principal on our investments in instruments with yields less than those we currently own. This may reduce our future net investment income and compress the spread on our annuity products. Further, borrowers may prepay fixed maturity securities and commercial mortgage loans in order to borrow at lower market rates. Any related prepayment fees are recorded in net investment income and may create income statement volatility.
An environment of rising interest rates may materially affect our liquidity and financial condition.
Periods of rising interest rates may cause increased policy surrenders and withdrawals as policyholders seek financial instruments with higher returns, commonly referred to as disintermediation. This may lead to net cash outflows and the resulting liquidity demands may require us to sell investment assets when the prices of those assets are adversely affected by the increase in interest rates, which may result in realized investment losses. Further, a portion of our investment portfolio consists of commercial mortgage loans and privately placed securities, which are relatively illiquid, thus increasing our liquidity risk in the event of disintermediation. We may also be required to accelerate the amortization of deferred policy acquisition costs and deferred sales inducements related to surrendered contracts, which would adversely affect our results of operations.
During such times, we may offer higher crediting rates on new sales of annuity products and increase crediting rates on existing annuity products to maintain or enhance product competitiveness. We may not be able to purchase enough higher yielding assets necessary to fund higher crediting rates and maintain our desired spread, which could result in lower profitability on our business. Alternatively, if we seek to maintain profitability of our products in rising interest rate environments it may be difficult to position our products to offer attractive rates and benefits to customers which may limit sales growth of interest sensitive products.
Our valuation of fixed maturity securities may include methodologies, estimates and assumptions which are subject to differing interpretations and could result in changes to investment valuations that may materially adversely affect our results of operations or financial condition.
Fixed maturity securities are reported at fair value in our consolidated balance sheets. During periods of market disruption including periods of significantly rising or high interest rates, rapidly widening credit spreads or illiquidity, it may be difficult to value certain of our securities if trading becomes less frequent and/or market data becomes less observable. Prices provided by independent broker quotes or independent pricing services that are used in the determination of fair value can vary significantly for a particular security. There may be certain asset classes that were in active markets with significant observable data that become illiquid due to the current financial environment. As such, valuations may include inputs and assumptions that are less observable or require greater judgment as well as valuation methods that require greater judgment. Further, rapidly changing and unprecedented credit conditions could materially impact the valuation of securities as reported in our consolidated financial statements and the period-to-period changes in value could vary significantly. Decreases in value may have a material adverse effect on our results of operations or financial condition.
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Defaults on commercial mortgage loans and volatility in performance may adversely affect our business, financial condition and results of operations.
Commercial mortgage loans have the potential to face heightened delinquency and default risk depending on economic conditions which could have had a negative impact on the performance of the underlying collateral, resulting in declining values and an adverse impact on the obligors of such instruments. An increase in the default rate of our commercial mortgage loan investments could have an adverse effect on our business, financial condition and results of operations.
In addition, the carrying value of commercial mortgage loans is negatively impacted by such factors. The carrying value of commercial mortgage loans is stated at outstanding principal less any loan loss allowances recognized. Considerations in determining allowances include, but are not limited to, the following: (i) declining debt service coverage ratios and increasing loan to value ratios; (ii) bankruptcy filings of major tenants or affiliates of the borrower on the property; (iii) catastrophic events at the property; and (iv) other subjective events or factors, including whether the terms of the debt will be restructured. There can be no assurance that management's assessment of loan loss allowances on commercial mortgage loans will not change in future periods, which could lead to investment losses.
Conditions in the U.S. and global capital markets and economies could deteriorate in the near future and affect our financial position and our level of earnings from our operations.
The U.S. government has continued to keep interest rates low and has increased the supply of United States dollars as strategies to stimulate the economy. While these strategies have appeared to be successful, any future economic downturn or market disruption could negatively impact our ability to invest funds. Specifically, if market conditions deteriorate in 2016 or beyond:

• | our investment portfolio could incur additional other than temporary impairments;

• | our commercial mortgage loans could experience a greater amount of loss;

• | due to potential downgrades in our investment portfolio, we could be required to raise additional capital to sustain our current business in force and new sales of our annuity products, which may be difficult in a distressed market. If capital would be available, it may be at terms that are not favorable to us;

• | we may be required to limit growth in sales of our annuity products; and/or

• | our liquidity could be negatively affected and we could be forced to limit our operations and our business could suffer, as we need liquidity to pay our policyholder benefits, operating expenses, dividends on our capital stock, and to service our debt obligations.

The principal sources of our liquidity are annuity deposits, investment income and proceeds from the sale, maturity and call of investments. Sources of additional capital in normal markets include the issuance by us of a variety of short and long-term instruments, including equity, debt or other types of securities.
Governmental initiatives intended to improve global and local economies may be accompanied by other initiatives, including new capital requirements or other regulations, that could materially affect our business, results of operations, financial condition and liquidity in ways that we cannot predict.
We are subject to extensive laws and regulations that are administered and enforced by a number of different regulatory authorities including state insurance regulators, the NAIC, the SEC and the New York Stock Exchange. Some of these authorities are or may in the future consider enhanced or new regulatory requirements intended to prevent future economic crises or otherwise assure the stability of institutions under their supervision. These authorities may also seek to exercise their supervisory or enforcement authority in new or more robust ways. All of these possibilities, if they occurred, could affect the way we conduct our business and manage our capital, and may require us to satisfy increased capital requirements, any of which in turn could materially affect our results of operations, financial condition and liquidity.
We face competition from companies that have greater financial resources, broader arrays of products and higher ratings, which may impair our ability to retain existing customers, attract new customers and maintain our profitability and financial strength.
We operate in a highly competitive industry. Many of our competitors are substantially larger and enjoy substantially greater financial resources, higher ratings by rating agencies, broader and more diversified product lines and more widespread agency relationships. Our annuity products compete with index, fixed rate and variable annuities sold by other insurance companies and also with mutual fund products, traditional bank products and other retirement funding alternatives offered by asset managers, banks and broker/dealers. Our insurance products compete with those of other insurance companies, financial intermediaries and other institutions based on a number of factors, including premium rates, policy terms and conditions, service provided to distribution channels and policyholders, ratings by rating agencies, reputation and distributor compensation.
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While we compete with numerous other companies, we view the following as our most significant competitors:

• | Allianz Life Insurance Company of North America;

• | Security Benefit Life;

• | Great American Life Insurance Company;

• | AIG Companies;

• | Athene USA Corp; and

• | Midland National Life Insurance Company.

Our ability to compete depends in part on returns and other benefits we make available to our policyholders through our annuity contracts. We will not be able to accumulate and retain assets under management for our products if our investment results underperform the market or the competition, since such underperformance likely would result in lower rates to policyholders which could lead to withdrawals and reduced sales.
We compete for distribution sources for our products. We believe that our success in competing for distributors depends on our financial strength, the services we provide to and the relationships we develop with these distributors, as well as offering competitive commission structures. Our distributors are generally free to sell products from whichever providers they wish, which makes it important for us to continually offer distributors products and services they find attractive. If our products or services fall short of distributors' needs, we may not be able to establish and maintain satisfactory relationships with distributors of our products. Our ability to compete in the past has also depended in part on our ability to develop innovative new products and bring them to market more quickly than our competitors. In order for us to compete in the future, we will need to continue to bring innovative products to market in a timely fashion. Otherwise, our revenues and profitability could suffer.
Our reinsurance program involves risks because we remain liable with respect to the liabilities ceded to reinsurers if the reinsurers fail to meet the obligations assumed by them.
Our life insurance subsidiaries cede certain policies to other insurance companies through reinsurance agreements. American Equity Life has entered into two coinsurance agreements with EquiTrust covering $0.8 billion of policy benefit reserves at December 31, 2015 and American Equity Life has three coinsurance agreements with Athene covering $2.4 billion of policy benefit reserves at December 31, 2015. Since Athene is an unauthorized reinsurer, the annuity deposits that have been ceded to Athene are held in trusts and American Equity Life is named as the sole beneficiary of the trusts. The assets in the trusts are required to remain at a value that is sufficient to support the current balance of policy benefit liabilities of the ceded business on a statutory basis. If the value of the assets in the trusts would ever be less than the amount of the ceded policy benefit liabilities on a statutory basis, Athene is required to either establish a letter of credit or deposit securities in the trusts for the amount of any shortfall. We remain liable with respect to the policy liabilities ceded to EquiTrust and Athene should either fail to meet the obligations assumed by them.
In addition, we have entered into other types of reinsurance contracts including indemnity reinsurance and financing arrangements. Should any of these reinsurers fail to meet the obligations assumed under such contracts, we remain liable with respect to the liabilities ceded.
Any disruption in our ability to maintain our reinsurance program may hinder our ability to manage our regulatory capital.
No assurances can be made that reinsurance will remain continuously available to us to the same extent and on the same terms as are currently available. If we were unable to maintain our current level of reinsurance or purchase new reinsurance protection in amounts that we consider sufficient and at prices that we consider acceptable, we would have to accept an increase in our net liability exposure or a decrease in our statutory surplus, reduce the amount of business we write or develop other alternatives to reinsurance.
We may experience volatility in net income due to the application of fair value accounting to our derivative instruments.
All of our derivative instruments, including certain derivative instruments embedded in other contracts, are recognized in the balance sheet at their fair values and changes in fair value are recognized immediately in earnings. This impacts certain revenues and expenses we report for our fixed index annuity business as follows:

• | We must present the call options purchased to fund the annual index credits on our fixed index annuity products at fair value. The fair value of the call options is based upon the amount of cash that would be required to settle the call options obtained from the counterparties adjusted for the nonperformance risk of the counterparty. We record the change in fair value of these options as a component of our revenues. The change in fair value of derivatives includes the gains or losses recognized at expiration of the option term or upon early termination and changes in fair value for open positions.

• | The contractual obligations for future annual index credits are treated as a "series of embedded derivatives" over the expected life of the applicable contracts. Increases or decreases in the fair value of embedded derivatives generally correspond to increases or decreases in equity market performance and changes in the interest rates used to discount the excess of the projected policy contract values over the projected minimum guaranteed contract values. We record the change in fair value of these embedded derivatives as a component of our benefits and expenses in our consolidated statements of operations.

The application of fair value accounting for derivatives and embedded derivatives in future periods to our fixed index annuity business may cause substantial volatility in our reported net income.
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Our results of operations and financial condition depend on the accuracy of management assumptions and estimates.
Assumptions and estimates are made regarding expenses and interest rates, tax liability, contingent liabilities, investment performance and other factors related to our business and anticipated results. We rely on these assumptions and estimates when determining period end accruals, future earnings and various components of our consolidated balance sheet. All assumptions and estimates utilized incorporate many factors, none of which can be predicted with certainty. Our actual experiences, as well as changes in estimates, are used to prepare our consolidated statement of operations. To the extent our actual experience and changes in estimates differ from original estimates, our results of operations and financial condition could be materially adversely affected.
The calculations we use to estimate various components of our consolidated balance sheet and consolidated statement of operations are necessarily complex and involve analyzing and interpreting large quantities of data. The assumptions and estimates required for these calculations involve judgment and by their nature are imprecise and subject to changes and revisions over time. Accordingly, our results may be adversely affected from time to time by actual results differing from assumptions, by changes in estimates and by changes resulting from implementing more sophisticated administrative systems and procedures that facilitate the calculation of more precise estimates.
We may face unanticipated losses if there are significant deviations from our assumptions regarding the probabilities that our annuity contracts will remain in force from one period to the next and our assumptions regarding policyholders' utilization of lifetime income benefit riders.
The expected future profitability of our annuity products is based in part upon expected patterns of premiums, expenses and benefits using a number of assumptions, including those related to the probability that a policy or contract will remain in force, or persistency, and mortality. Since no insurer can precisely determine persistency or mortality, actual results could differ significantly from assumptions, and deviations from estimates and assumptions could have a material adverse effect on our business, financial condition or results of operations. For example, actual persistency that is lower than our assumptions could have an adverse impact on future profitability, especially in the early years of a policy or contract primarily because we would be required to accelerate the amortization of expenses we deferred in connection with the acquisition of the policy.
In addition, we set initial crediting rates for our annuity products based upon expected claims and payment patterns, using assumptions for, among other factors, mortality rates of our policyholders. The long-term profitability of these products depends upon how our actual experience compares with our pricing assumptions. For example, if mortality rates are lower than our pricing assumptions, we could be required to make more payments under certain annuity contracts in addition to what we had projected.
In determining the liability from period to period of our lifetime income benefit riders, we must make significant assumptions such as the age at when a policyholder may begin to utilize the rider and the number of policyholders that may not utilize the rider at all. Changes in these assumptions can be material. Our experience regarding policyholder activity is limited as we began issuing policies with this rider in 2007. Accordingly, our results of operations could be adversely affected from time to time by actual policyholder behavior varying from what we have assumed in determining the liability associated with these riders and by changes in estimates based on this policyholder behavior.
If our estimated gross profits decrease significantly from initial expectations we may be required to expense our deferred policy acquisition costs and deferred sales inducements in an accelerated manner, which would reduce our profitability.
Deferred policy acquisition costs are costs that vary with and primarily relate to the acquisition of new business. Deferred sales inducements are contract enhancements such as first-year premium and interest bonuses that are credited to policyholder account balances. These costs are capitalized when incurred and are amortized over the life of the contracts. Current amortization of these costs is generally in proportion to expected gross profits from interest margins and, to a lesser extent, from surrender charges and rider fees. Unfavorable experience with regard to expected expenses, investment returns, mortality or withdrawals may cause acceleration of the amortization of these costs resulting in an increase of expenses and lower profitability.
If we do not manage our growth effectively, our financial performance could be adversely affected; our historical growth rates may not be indicative of our future growth.
We have experienced rapid growth since our formation in December 1995. We intend to continue to grow and further growth will impose significant added responsibilities on our management, including the need to identify, recruit, maintain and integrate additional employees, including management. There can be no assurance that we will be successful in expanding our business or that our systems, procedures and controls will be adequate to support our operations as they expand. In addition, due to our rapid growth and resulting increased size, it may be necessary to expand the scope of our investing activities to asset classes in which we historically have not invested or have not had significant exposure. If we are unable to adequately manage our investments in these classes, our financial condition or operating results in the future could be less favorable than in the past. Further, we have utilized reinsurance in the past to support our growth. The future availability and cost of reinsurance is uncertain. Our failure to manage growth effectively, or our inability to recruit, maintain and integrate additional qualified employees and independent agents, could have a material adverse effect on our business, financial condition or results of operations. In addition, our historical growth rates are not likely to accurately reflect our future growth rates or our growth potential. We cannot assure you that our future revenues will increase or that we will continue to be profitable.
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The loss of key employees could disrupt our operations.
Our success depends, in part, on the continued service of key executives and our ability to attract and retain additional executives and employees. We do not have employment agreements with our executive officers. The loss of key employees, or our inability to recruit and retain additional qualified personnel, could cause disruption in our business and prevent us from fully implementing our business strategies, which could materially and adversely affect our business, growth and profitability.
Our operations support complex transactions and are highly dependent on the proper functioning of information technology and communication systems. Any failure of our information technology or communications systems may result in a materially adverse effect on our results of operations and corporate reputation.
While systems and processes are designed to support complex transactions and avoid systems failure, fraud, information security failures, processing errors and breaches of regulation, any failure could lead to a materially adverse effect on our results of operations and corporate reputation. In addition, we must commit significant resources to maintain and enhance our existing systems in order to keep pace with industry standards and customer preferences. If we fail to keep up-to-date information systems, we may not be able to rely on information for product pricing, risk management and underwriting decisions. In addition, even though backup and recovery systems and contingency plans are in place, we cannot assure investors that interruptions, failures or breaches in security of these processes and systems will not occur, or if they do occur, that they can be remediated promptly. The occurrence of any of these events could have a materially adverse effect on our business, results of operations and financial condition.
An information technology failure or security breach may disrupt our business, damage our reputation and adversely affect our results of operations, financial condition and cash flows.
We use information technology ("IT") to store, retrieve, evaluate and utilize customer and company data and information. Our business is highly dependent on our ability to access IT systems to perform necessary business functions such as providing customer support, making changes to existing policies, filing and paying claims, managing our investment portfolios and producing financial statements. While we have policies, procedures, automation and backup plans, and a broad range of information security technical controls designed to prevent or limit the effect of failure, our IT may be vulnerable to disruptions or breaches as a result of natural disasters, man-made disasters, criminal activity, pandemics or other events beyond our control. The failure of our IT for any reason could disrupt our operations, result in the loss of customers and may adversely affect our business, results of operations and financial condition.
We retain confidential information within our IT, and we rely on sophisticated commercial technologies to maintain the security of those systems. Anyone who is able to circumvent our security measures and penetrate our IT could access, view, misappropriate, alter, or delete any information in the systems, including personally identifiable policyholder information and proprietary business information. In addition, an increasing number of states require that persons be notified if a security breach results in the disclosure of personally identifiable customer information. Any compromise of the security of our computer systems that results in inappropriate disclosure of personally identifiable customer information could damage our reputation in the marketplace, deter people from purchasing our products, subject us to significant civil and criminal liability and require us to incur significant technical, legal and other expenses. While there have been attempts to penetrate our IT defenses, there is evidence that the attacks have been blocked and there is no evidence that an IT breach has occurred.
If we are unable to attract and retain national marketing organizations and independent agents or develop new distribution channels such as broker/dealers, banks and registered investment advisors, sales of our products may be reduced.
We must attract and retain such marketers and agents to sell our products. Insurance companies compete vigorously for productive agents. We compete with other life insurance companies for marketers and agents primarily on the basis of our financial position, support services, compensation and product features. Such marketers and agents may promote products offered by other life insurance companies that may offer a larger variety of products than we do. Our competitiveness for such marketers and agents also depends upon the long-term relationships we develop with them. We are developing a network of broker/dealers, banks and registered investment advisors to distribute our products. If we are unable to attract and retain sufficient marketers, agents, broker/dealers, banks and registered investment advisors to sell our products, our ability to compete and our sales would suffer.
We may require additional capital to support our business and sustain future growth which may not be available when needed or may be available only on unfavorable terms.
Our long-term strategic capital requirements will depend on many factors including the accumulated statutory earnings of our life insurance subsidiaries and the relationship between the statutory capital and surplus of our life insurance subsidiaries and various elements of required capital. For the purpose of supporting long-term capital requirements, we may need to increase or maintain the statutory capital and surplus of our life insurance subsidiaries through additional financings, which could include debt, equity, financing arrangements and/or other surplus relief transactions. Adverse market conditions have affected and continue to affect the availability and cost of capital. Such financings, if available at all, may be available only on terms that are not favorable to us. If we cannot maintain adequate capital, we may be required to limit growth in sales of new annuity products, and such action could adversely affect our business, financial condition or results of operations.
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Changes in state and federal regulation may affect our profitability.
We are subject to regulation under applicable insurance statutes, including insurance holding company statutes, in the various states in which our life insurance subsidiaries transact business. Our life insurance subsidiaries are domiciled in Iowa and New York. We are currently licensed to sell our products in 50 states and the District of Columbia. Insurance regulation is intended to provide safeguards for policyholders rather than to protect shareholders of insurance companies or their holding companies. As increased scrutiny has been placed upon the insurance regulatory framework, a number of state legislatures have considered or enacted legislative proposals that alter, and in many cases increase, state authority to regulate insurance companies and holding company systems.
Regulators oversee matters relating to trade practices, policy forms, claims practices, guaranty funds, types and amounts of investments, reserve adequacy, insurer solvency, minimum amounts of capital and surplus, transactions with related parties, changes in control and payment of dividends.
The NAIC and state insurance regulators continually reexamine existing laws and regulations. The NAIC may develop and recommend adoption of new or modify existing Model Laws and Regulations. State insurance regulators may impose those recommended changes, or others, in the future.
Our life insurance subsidiaries are subject to state insurance regulations based on the NAIC's risk-based capital requirements which are intended to be used by insurance regulators as an early warning tool to identify deteriorating or weakly capitalized insurance companies for the purpose of initiating regulatory action. Our life insurance subsidiaries also may be required, under solvency or guaranty laws of most states in which they do business, to pay assessments up to certain prescribed limits to fund policyholder losses or liabilities for insolvent insurance companies.
Although the federal government does not directly regulate the insurance business, federal legislation and administrative policies in several areas, including pension regulation, age and sex discrimination, financial services regulation, securities regulation and federal taxation, can significantly affect the insurance business. In addition, legislation has been enacted which could result in the federal government assuming some role in the regulation of the insurance industry.
In July 2010, the Dodd-Frank Act was enacted and signed into law. The Dodd-Frank Act made extensive changes to the laws regulating the financial services industry and requires various federal agencies to adopt a broad range of new rules and regulations. Among other things, the Dodd-Frank Act imposes a comprehensive new regulatory regime on the over-the-counter ("OTC") derivatives marketplace. This legislation subjects swap dealers and "major swap participants" (as defined in the legislation and further clarified by the rulemaking) to substantial supervision and regulation, including capital standards, margin requirements, business conduct standards, recordkeeping and reporting requirements. It also requires central clearing for certain derivatives transactions that the U.S. Commodities Futures Trading Commission ("CFTC") determines must be cleared and are accepted for clearing by a "derivatives clearing organization" (subject to certain exceptions) and provides the CFTC with authority to impose position limits across markets. Many of the key concepts, definitions, processes and issues surrounding regulation of the OTC derivatives have been left to the relevant regulators to address and many of these regulations have yet to be proposed. The Dodd-Frank Act and any such regulations may subject us to additional restrictions on our hedging positions which may have an adverse effect on our ability to hedge risks associated with our business, including our fixed index annuity business, or on the cost of our hedging activity.
The Dodd-Frank Act also created FSOC. The FSOC may designate whether certain insurance companies and insurance holding companies pose a grave threat to the financial stability of the United States, in which case such companies would become subject to prudential regulation by the Board of Governors of the U.S. Federal Reserve (the "Federal Reserve Board") (including capital requirements, leverage limits, liquidity requirements and examinations). The Federal Reserve Board may limit such company's ability to enter into merger transactions, restrict its ability to offer financial products, require it to terminate one or more activities, or impose conditions on the manner in which it conducts activities.
The Dodd-Frank Act also established a Federal Insurance Office under the U.S. Treasury Department to monitor all aspects of the insurance industry and of lines of business other than certain health insurance, certain long-term care insurance and crop insurance. The director of the Federal Insurance Office is a non-voting member of FSOC and can provide guidance regarding insurance company designations as systemically important. The Dodd-Frank Act also provides for the pre-emption of state laws in certain instances involving the regulation of reinsurance and other limited insurance matters. The Dodd-Frank Act requires extensive rule-making and other future regulatory action, which in some cases will take a period of years to implement. It is not possible at this time to assess the impact on our business of the establishment of the Federal Insurance Office and the FSOC. However, the regulatory framework at the state and federal level applicable to our insurance products is evolving. The changing regulatory framework could affect the design of such products and our ability to sell certain products. Any changes in these laws and regulations could materially and adversely affect our business, financial condition or results of operations.
We cannot predict the requirements of any regulations ultimately adopted under the Dodd-Frank Act, the effect that such regulations will have on financial markets or on our business, the additional costs associated with compliance with such regulations, or any changes to our operations that may be necessary to comply with the Dodd-Frank Act, any of which could have a material adverse affect on our business, results of operations, cash flows or financial condition.
In April, 2015, the U.S. Department of Labor re-proposed a regulation which, if finalized in current form, substantially expands the range of activities that would be considered to be fiduciary advice under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. If finalized as proposed, agents who sell annuities to policyholders for their 401(k) plans and individual retirement accounts (“IRAs”) would be considered fiduciaries and subject to additional conflict of interest disclosure requirements. A significant portion of our annuity sales are to IRAs. We cannot predict when the regulations may be finalized, or how any final regulations may differ from the proposed regulation. If final regulations were to be issued with provisions substantially similar to the proposed regulations, they could negatively impact our sales of annuities to 401(k) plan participants and IRA holders which could negatively impact our business, results of operations or financial condition.
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The regulatory framework at the state and federal level applicable to our insurance products is evolving. The changing regulatory framework could affect the design of such products and our ability or the ability of our agents to sell certain products. Any changes in these laws and regulations could materially and adversely affect our business, financial condition or results of operations.
Changes in federal income taxation laws, including any reduction in individual income tax rates, may affect sales of our products and profitability.
The annuity and life insurance products that we market generally provide the policyholder with certain federal income tax advantages. For example, federal income taxation on any increases in non-qualified annuity contract values (i.e., the "inside build-up") is deferred until it is received by the policyholder. With other savings instruments, such as certificates of deposit and taxable bonds, the increase in value is generally taxed each year as it is realized. Additionally, life insurance death benefits are generally exempt from income tax. Decreases in individual income tax rates would decrease the advantage of deferring the inside build-up.
From time to time, various tax law changes have been proposed that could have an adverse effect on our business, including the elimination of all or a portion of the income tax advantages described above for annuities and life insurance. If legislation were enacted to eliminate all or a portion of the tax deferral for annuities, such a change would have an adverse effect on our ability to sell non-qualified annuities. Non-qualified annuities are annuities that are not sold to a qualified retirement plan.
Beginning in 2013, distributions from non-qualified annuity policies are now considered "investment income" for purposes of the Medicare tax on investment income contained in the Health Care and Education Reconciliation Act of 2010. As a result, in certain circumstances a 3.8% tax (“Medicare Tax”) may be applied to some or all of the taxable portion of distributions from non-qualified annuities to individuals whose income exceeds certain threshold amounts. This tax may have an adverse effect on our ability to sell non-qualified annuities to individuals whose income exceeds these threshold amounts.
We face risks relating to litigation, including the costs of such litigation, management distraction and the potential for damage awards, which may adversely impact our business.
We are occasionally involved in litigation, both as a defendant and as a plaintiff. In addition, state regulatory bodies, such as state insurance departments, the SEC, the Financial Industry Regulatory Authority, Inc. ("FINRA"), the Department of Labor and other regulatory bodies regularly make inquiries and conduct examinations or investigations concerning our compliance with, among other things, insurance laws, securities laws, the Employee Retirement Income Security Act of 1974, as amended, and laws governing the activities of broker/dealers. Companies in the life insurance and annuity business have faced litigation, including class action lawsuits, alleging improper product design, improper sales practices and similar claims. We entered into a settlement with respect to a purported class action lawsuit involving allegations that generally attack the suitability of sales of deferred annuity products to persons over the age of 65. While settlement has been approved by the district court and the case dismissed, such ruling remains subject to appeal. The settlement is contingent upon final court approval and appeal. See Note 13 to our audited consolidated financial statements.
A downgrade in our credit or financial strength ratings may increase our future cost of capital, reduce new sales, adversely affect relationships with distributors and increase policy surrenders and withdrawals.
Currently, our senior unsecured indebtedness carries, a "BBB-" rating with a stable outlook from Standard & Poor's, a BBB- rating with a stable outlook from Fitch Ratings, and a "bbb-" rating with a stable outlook from A.M. Best Company. Our ability to maintain such ratings is dependent upon the results of operations of our subsidiaries and our financial strength. If we fail to preserve the strength of our balance sheet and to maintain a capital structure that rating agencies deem suitable, it could result in a downgrade of the ratings applicable to our senior unsecured indebtedness. A downgrade would likely reduce the fair value of the common stock and may increase our future cost of capital.
Financial strength ratings are important factors in establishing the competitive position of life insurance and annuity companies. In recent years, the market for annuities has been dominated by those insurers with the highest ratings. A ratings downgrade, or the potential for a ratings downgrade, could have a number of adverse effects on our business. For example, distributors and sales agents for life insurance and annuity products use the ratings as one factor in determining which insurer's annuities to market. A ratings downgrade could cause those distributors and agents to seek alternative carriers. In addition, a ratings downgrade could materially increase the number of policy or contract surrenders we experience, as well as our ability to obtain reinsurance or obtain reasonable pricing on reinsurance.
Financial strength ratings are measures of an insurance company's ability to meet contractholder and policyholder obligations and generally involve quantitative and qualitative evaluations by rating agencies of a company's financial condition and operating performance. Generally, rating agencies base their ratings upon information furnished to them by the insurer and upon their own investigations, studies and assumptions. Ratings are based upon factors of concern to agents, policyholders and intermediaries and are not directed toward the protection of investors and are not recommendations to buy, sell or hold securities.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease commercial office space in one building in West Des Moines, Iowa, for our principal offices under an operating lease that expires on November 30, 2026. We also lease our office in Pell City, Alabama, pursuant to an operating lease that expires on December 31, 2016. We are fully utilizing these facilities and believe both locations to be sufficient to house our operations for the foreseeable future.
Item 3. Legal Proceedings
See Note 13 to our audited consolidated financial statements.
Item 4. Mine Safety Disclosures
None
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange ("NYSE") under the symbol AEL. The following table sets forth the high and low sales prices of our common stock for each quarterly period within the two most recent fiscal years as quoted on the NYSE.

| High |  | Low
2015 |  |  |
First Quarter | $29.62 |  | $25.46
Second Quarter | $29.90 |  | $25.06
Third Quarter | $30.02 |  | $22.36
Fourth Quarter | $28.30 |  | $22.55
2014 |  |  |
First Quarter | $26.42 |  | $18.84
Second Quarter | $25.15 |  | $20.97
Third Quarter | $25.25 |  | $21.69
Fourth Quarter | $29.75 |  | $21.36

As of February 23, 2016, there were approximately 15,500 holders of our common stock. In 2015 and 2014, we paid an annual cash dividend of $0.22 and $0.20, respectively, per share on our common stock. We intend to continue to pay an annual cash dividend on such shares so long as we have sufficient capital and/or future earnings to do so. However, we anticipate retaining most of our future earnings, if any, for use in our operations and the expansion of our business. Any further determination as to dividend policy will be made by our board of directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition and future prospects and such other factors as our board of directors may deem relevant.
Since we are a holding company, our ability to pay cash dividends depends in large measure on our subsidiaries' ability to make distributions of cash or property to us. Iowa insurance laws restrict the amount of distributions American Equity Life can pay to us without the approval of the Iowa Insurance Commissioner. See Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 12 to our audited consolidated financial statements, which are incorporated by reference in this Item 5.
Issuer Purchases of Equity Securities
There were no issuer purchases of equity securities for the quarter ended December 31, 2015.
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Item 6. Selected Consolidated Financial Data
The summary consolidated financial and other data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and our audited consolidated financial statements and related notes appearing elsewhere in this report. The results for past periods are not necessarily indicative of results that may be expected for future periods.

| Year ended December 31,
| 2015 |  | 2014 |  | 2013 |  | 2012 |  | 2011
| (Dollars in thousands, except per share data)
Consolidated Statements of Operations Data: |  |  |  |  |  |  |  |  |
Revenues |  |  |  |  |  |  |  |  |
Premiums and other considerations | $ | 36,048 |  |  | $ | 32,623 |  |  | $ | 45,347 |  |  | $ | 76,675 |  |  | $ | 118,912 |
Annuity product charges | 136,168 |  |  | 118,990 |  |  | 103,591 |  |  | 89,006 |  |  | 76,189 |
Net investment income | 1,692,192 |  |  | 1,531,667 |  |  | 1,383,927 |  |  | 1,286,923 |  |  | 1,218,780 |
Change in fair value of derivatives | (336,146 | ) |  | 504,825 |  |  | 1,076,015 |  |  | 221,138 |  |  | (114,728 | )
Net realized gains (losses) on investments, excluding other than temporary impairment ("OTTI") losses | 10,211 |  |  | (4,003 | ) |  | 40,561 |  |  | (6,454 | ) |  | (18,641 | )
Net OTTI losses recognized in operations | (19,536 | ) |  | (2,627 | ) |  | (6,234 | ) |  | (14,932 | ) |  | (33,976 | )
Total revenues | 1,518,937 |  |  | 2,168,973 |  |  | 2,610,692 |  |  | 1,652,356 |  |  | 1,246,536 |
Benefits and expenses |  |  |  |  |  |  |  |  |
Insurance policy benefits and change in future policy benefits | 45,458 |  |  | 41,815 |  |  | 53,071 |  |  | 81,481 |  |  | 115,291 |
Interest sensitive and index product benefits | 968,053 |  |  | 1,473,700 |  |  | 1,272,867 |  |  | 808,479 |  |  | 775,097 |
Change in fair value of embedded derivatives | (464,698 | ) |  | 32,321 |  |  | 133,968 |  |  | 286,899 |  |  | (105,194 | )
Amortization of deferred sales inducements and policy acquisition costs | 495,504 |  |  | 294,997 |  |  | 618,581 |  |  | 252,076 |  |  | 215,259 |
Interest expense on notes payable and subordinated debentures | 41,088 |  |  | 48,492 |  |  | 50,958 |  |  | 41,937 |  |  | 45,610 |
Other operating costs and expenses | 96,218 |  |  | 81,584 |  |  | 91,915 |  |  | 95,495 |  |  | 67,559 |
Total benefits and expenses | 1,181,623 |  |  | 1,972,909 |  |  | 2,221,360 |  |  | 1,566,367 |  |  | 1,113,622 |
Income before income taxes | 337,314 |  |  | 196,064 |  |  | 389,332 |  |  | 85,989 |  |  | 132,914 |
Income tax expense | 117,484 |  |  | 70,041 |  |  | 136,049 |  |  | 28,191 |  |  | 46,666 |
Net income | $ | 219,830 |  |  | $ | 126,023 |  |  | $ | 253,283 |  |  | $ | 57,798 |  |  | $ | 86,248 |
Per Share Data: |  |  |  |  |  |  |  |  |
Earnings per common share | $ | 2.78 |  |  | $ | 1.69 |  |  | $ | 3.86 |  |  | $ | 0.94 |  |  | $ | 1.45 |
Earnings per common share—assuming dilution | 2.72 |  |  | 1.58 |  |  | 3.38 |  |  | 0.89 |  |  | 1.37 |
Dividends declared per common share | 0.22 |  |  | 0.20 |  |  | 0.18 |  |  | 0.15 |  |  | 0.12 |
Non-GAAP Financial Measures (a): |  |  |  |  |  |  |  |  |
Reconciliation of net income to operating income: |  |  |  |  |  |  |  |  |
Net income | $ | 219,830 |  |  | $ | 126,023 |  |  | $ | 253,283 |  |  | $ | 57,798 |  |  | $ | 86,248 |
Net realized (gains) losses and net OTTI losses on investments, net of offsets | 3,709 |  |  | 2,863 |  |  | (11,702 | ) |  | 8,648 |  |  | 18,354 |
Change in fair value of derivatives and embedded derivatives - index annuities, net of offsets | (28,477 | ) |  | 51,099 |  |  | (98,704 | ) |  | 31,246 |  |  | 30,086 |
Change in fair value of derivatives and embedded derivatives - debt, net of income taxes | 758 |  |  | 61 |  |  | (1,192 | ) |  | 2,915 |  |  | (1,035 | )
Extinguishment of debt, net of income taxes | — |  |  | 11,516 |  |  | 21,716 |  |  | — |  |  | — |
Litigation reserve, net of offsets | — |  |  | (916 | ) |  | 19 |  |  | 9,580 |  |  | — |
Operating income | $ | 195,820 |  |  | $ | 190,646 |  |  | $ | 163,420 |  |  | $ | 110,187 |  |  | $ | 133,653 |
Operating income per common share | $ | 2.48 |  |  | $ | 2.56 |  |  | $ | 2.49 |  |  | $ | 1.80 |  |  | $ | 2.25 |
Operating income per common share—assuming dilution | 2.42 |  |  | 2.39 |  |  | 2.18 |  |  | 1.69 |  |  | 2.12 |

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| As of and for the Year Ended December 31,
| 2015 |  | 2014 |  | 2013 |  | 2012 |  | 2011
| (Dollars in thousands, except per share data)
Consolidated Balance Sheet Data: |  |  |  |  |  |  |  |  |
Total investments | $ | 39,570,332 |  |  | $ | 35,981,858 |  |  | $ | 30,346,654 |  |  | $ | 27,537,210 |  |  | $ | 24,383,451 |
Total assets | 49,041,163 |  |  | 43,989,734 |  |  | 39,621,499 |  |  | 35,133,478 |  |  | 30,874,719 |
Policy benefit reserves | 45,495,431 |  |  | 39,802,861 |  |  | 35,789,655 |  |  | 31,773,988 |  |  | 28,118,716 |
Notes payable | 400,000 |  |  | 421,679 |  |  | 549,958 |  |  | 309,869 |  |  | 297,608 |
Subordinated debentures | 246,450 |  |  | 246,243 |  |  | 246,050 |  |  | 245,869 |  |  | 268,593 |
Accumulated other comprehensive income ("AOCI") | 201,663 |  |  | 721,401 |  |  | 46,196 |  |  | 686,807 |  |  | 457,229 |
Total stockholders' equity | 1,944,535 |  |  | 2,139,876 |  |  | 1,384,687 |  |  | 1,720,237 |  |  | 1,408,679 |
Other Data: |  |  |  |  |  |  |  |  |
Life subsidiaries' statutory capital and surplus and asset valuation reserve | 2,593,472 |  |  | 2,327,335 |  |  | 1,995,658 |  |  | 1,741,638 |  |  | 1,655,205 |
Life subsidiaries' statutory net gain from operations before income taxes and realized capital gains (losses) | 227,865 |  |  | 467,923 |  |  | 305,628 |  |  | 182,057 |  |  | 344,538 |
Life subsidiaries' statutory net income | 132,723 |  |  | 344,666 |  |  | 205,112 |  |  | 79,644 |  |  | 167,925 |
Book value per share (b) | 23.83 |  |  | 27.93 |  |  | 19.40 |  |  | 27.46 |  |  | 23.82 |
Book value per share, excluding AOCI (b) | 21.36 |  |  | 18.52 |  |  | 18.75 |  |  | 16.49 |  |  | 16.09 |

(a) | In addition to net income, we have consistently utilized operating income, operating income per common share and operating income per common share—assuming dilution, non-GAAP financial measures commonly used in the life insurance industry, to evaluate our financial performance. Operating income equals net income adjusted to eliminate the impact of items that fluctuate from year to year in a manner unrelated to core operations. We believe measures excluding their impact are useful in analyzing operating trends, and the combined presentation and evaluation of operating income together with net income provides information that may enhance an investor's understanding of our underlying results and profitability. The amounts included in the reconciliation of net income to operating income are presented net of related adjustments to amortization of deferred sales inducements and deferred policy acquisition costs and income taxes.

(b) | Book value per share and book value per share excluding AOCI are calculated as total stockholders' equity and total stockholders' equity excluding AOCI divided by the total number of shares of common stock outstanding. AOCI fluctuates from year to year due to unrealized changes in the fair value of available for sale investments. Common shares outstanding include shares held by the NMO Deferred Compensation Trust and exclude unallocated shares held by our employee stock ownership plan—see Note 11 to our audited consolidated financial statements.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's discussion and analysis reviews our consolidated financial position at December 31, 2015 and 2014, and our consolidated results of operations for the three years in the period ended December 31, 2015, and where appropriate, factors that may affect future financial performance. This analysis should be read in conjunction with our audited consolidated financial statements, notes thereto and selected consolidated financial data appearing elsewhere in this report.
Cautionary Statement Regarding Forward-Looking Information
All statements, trend analyses and other information contained in this report and elsewhere (such as in filings by us with the SEC, press releases, presentations by us or our management or oral statements) relative to markets for our products and trends in our operations or financial results, as well as other statements including words such as "anticipate", "believe", "plan", "estimate", "expect", "intend" and other similar expressions, constitute forward-looking statements. We caution that these statements may and often do vary from actual results and the differences between these statements and actual results can be material. Accordingly, we cannot assure you that actual results will not differ materially from those expressed or implied by the forward-looking statements. Factors that could contribute to these differences include, among other things:

• | general economic conditions and other factors, including prevailing interest rate levels and stock and credit market performance which may affect (among other things) our ability to sell our products, our ability to access capital resources and the costs associated therewith, the fair value of our investments, which could result in impairments and other than temporary impairments, and certain liabilities, and the lapse rate and profitability of policies;

• | customer response to new products and marketing initiatives;

• | changes in Federal income tax laws and regulations which may affect the relative income tax advantages of our products;

• | increasing competition in the sale of annuities;

• | regulatory changes or actions, including those relating to regulation of financial services affecting (among other things) bank sales and underwriting of insurance products and regulation of the sale, underwriting and pricing of products; and

• | the risk factors or uncertainties listed from time to time in our filings with the SEC.

For a detailed discussion of these and other factors that might affect our performance, see Item 1A of this report.
Executive Summary
Excellent customer service teamed with our ability to offer innovative insurance products that provide principal protection and lifetime income continued to result in significant sales of our annuity products. In 2015, our sales increased 69% to $7.1 billion which has resulted in cash and investments in excess of $39 billion at December 31, 2015. Our sales for the last five years have ranged from $3.9 billion to $7.1 billion and we have exceeded $4 billion in sales in four of those years. We have applied a conservative investment strategy to the annuity deposits we continue to manage which has provided reliable returns on our invested assets. Our profitability has also been driven by maintaining an efficient operation.
We are currently in the midst of an unprecedented period of low interest rates. In response to this persistent low interest rate environment, we have been reducing policyholder crediting rates for new annuities and existing annuities since the fourth quarter of 2011. Spread results for 2015, 2014 and 2013 reflect the benefit from these reductions; however, the reductions in cost of money were offset by continued lower yields available on investments including those purchased with the reinvestment of proceeds from calls of callable bonds in our investment portfolio.
The current interest rate environment with low yields for investments with the credit quality we prefer presents a strong headwind to restoring our investment spread to our 3.00% target rate. With our portfolio yield under pressure from lower yields on benchmark U.S. Treasury securities and narrower credit spreads, further adjustments to new and renewal crediting rates will be considered. We have on average 0.48% of room to reduce rates before we would reach minimum guaranteed rates on our entire December 31, 2015 in force book of business. We remain aware of our spread and return on average equity objectives and will make further adjustments to new money and renewal rates based upon changes in investing and market conditions.
Our investment spread in 2014 and 2013 (see Our Business and Profitability) was impacted by shortfalls in investment income from excess liquidity resulting from a lag in the reinvestment of proceeds of government agency bonds called for redemption. The callable government agency securities have been a cornerstone of our investment portfolio since our formation. Through the years they have provided acceptable yields that met our spread requirements without any risk-based capital charges. We went through several cycles of calls on these securities and each time we have reinvested a portion of the call redemption proceeds into new callable government agency securities. This kept cash balances low but perpetuated the call risk. However, beginning in 2012, we substantially curtailed purchases of callable government agency securities and experienced several periods during the 2014 and 2013 where we held excess cash and other short-term investments due to lags in the reinvestment of proceeds from bonds called for redemption during those years. See Results of Operations—Net investment income for additional information regarding our excess liquidity.
In August 2015, we completed an underwritten public offering of 9,890,000 shares of our common stock at a public offering price of $25.25 per share, of which 5,590,000 shares are subject to forward sale agreements. The forward sale agreements provide us with flexibility to manage our capital based upon sales levels. The net proceeds available to us through physical settlement of the forward sale agreements based on the forward sale price would be approximately $134.6 million. See Note 14 to our audited consolidated financial statements for more information on this offering. We believe our existing statutory capital and surplus, the statutory surplus we expect to generate internally through statutory earnings and the capital raised through the public offering will be sufficient to support continuing strong sales.
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Our Business and Profitability
We specialize in the sale of individual annuities (primarily deferred annuities) and, to a lesser extent, we also sell life insurance policies. Under U.S. generally accepted accounting principles ("GAAP"), premium collections for deferred annuities are reported as deposit liabilities instead of as revenues. Similarly, cash payments to policyholders are reported as decreases in the liabilities for policyholder account balances and not as expenses. Sources of revenues for products accounted for as deposit liabilities are net investment income, surrender and other charges deducted from the account balances of policyholders, net realized gains (losses) on investments and changes in fair value of derivatives. Components of expenses for products accounted for as deposit liabilities are interest sensitive and index product benefits (primarily interest credited to account balances), changes in fair value of embedded derivatives, amortization of deferred sales inducements and deferred policy acquisition costs, other operating costs and expenses and income taxes.
Our business model contemplates continued growth in invested assets and operating income while maintaining a high quality investment portfolio that will not experience significant losses from impairments of invested assets. Growth in invested assets is predicated on a continuation of our high sales achievements of the last five years while at the same time maintaining a high level of retention of the funds received. The economic and personal investing environments continue to be conducive for high sales levels as retirees and others look to put their money in instruments that will protect their principal and provide them with consistent cash flow sources in their retirement years. We are committed to maintaining a high quality investment portfolio with limited exposure to below investment grade securities and other riskier assets.
Earnings from products accounted for as deposit liabilities are primarily generated from the excess of net investment income earned over the interest credited or the cost of providing index credits to the policyholder, or the "investment spread." Our investment spread is summarized as follows:

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
Average yield on invested assets | 4.73% |  | 4.90% |  | 4.98%
Aggregate cost of money | 1.96% |  | 2.10% |  | 2.26%
Aggregate investment spread | 2.77% |  | 2.80% |  | 2.72%
Impact of: |  |  |  |  |
Investment yield - additional prepayment income | 0.08% |  | 0.07% |  | 0.06%
Cost of money benefit from over-hedging | 0.04% |  | 0.03% |  | 0.02%

The cost of money for fixed index annuities and average crediting rates for fixed rate annuities are computed based upon policyholder account balances and do not include the impact of amortization of deferred sales inducements. See Critical Accounting Policies—Deferred Policy Acquisition Costs and Deferred Sales Inducements. With respect to our fixed index annuities, the cost of money includes the average crediting rate on amounts allocated to the fixed rate strategy, expenses we incur to fund the annual index credits and where applicable, minimum guaranteed interest credited. Proceeds received upon expiration or early termination of call options purchased to fund annual index credits are recorded as part of the change in fair value of derivatives, and are largely offset by an expense for interest credited to annuity policyholder account balances. See Critical Accounting Policies—Policy Liabilities for Fixed Index Annuities and Financial Condition—Derivative Instruments.
Our profitability depends in large part upon the amount of assets under our management, investment spreads we earn on our policyholder account balances, our ability to manage our investment portfolio to maximize returns and minimize risks such as interest rate changes and defaults or impairment of investments, our ability to manage interest rates credited to policyholders and costs of the options purchased to fund the annual index credits on our fixed index annuities, our ability to manage the costs of acquiring new business (principally commissions to agents and bonuses credited to policyholders) and our ability to manage our operating expenses.
Results of Operations for the Three Years Ended December 31, 2015
Annuity deposits by product type collected during 2015, 2014 and 2013, were as follows:

|  | Year Ended December 31,
Product Type |  | 2015 |  | 2014 |  | 2013
|  | (Dollars in thousands)
Fixed index annuities |  | $ | 6,791,689 |  |  | $ | 3,999,439 |  |  | $ | 3,882,424 |
Annual reset fixed rate annuities |  | 45,182 |  |  | 57,273 |  |  | 71,944 |
Multi-year fixed rate annuities |  | 214,356 |  |  | 103,293 |  |  | 205,978 |
Single premium immediate annuities |  | 32,752 |  |  | 24,580 |  |  | 52,142 |
Total before coinsurance ceded |  | 7,083,979 |  |  | 4,184,585 |  |  | 4,212,488 |
Coinsurance ceded |  | 471,822 |  |  | 171,124 |  |  | 182,616 |
Net after coinsurance ceded |  | $ | 6,612,157 |  |  | $ | 4,013,461 |  |  | $ | 4,029,872 |

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Annuity deposits before coinsurance ceded increased 69% during 2015 compared to 2014 and decreased 1% during 2014 compared to 2013. Over these years, we have remained consistently in the top three companies for sales of fixed index annuities according to Wink's Sales and Market Report published by Wink, Inc. We attribute the continuing significant sales to our attractive product offerings, our consistent presence in the fixed index annuity market, our continued strong relationships with and excellent service provided to our distribution partners, the withdrawal in the first quarter of 2015 of a competitor's guaranteed income product that had been the source of significant competition, the increased attractiveness of safe money products in volatile markets and lower interest rates on competing products such as bank certificates of deposit.
Net income, in general, has been positively impacted by the growth in the volume of business in force and the investment spread earned on this business. The average amount of annuity liabilities outstanding (net of annuity liabilities ceded under coinsurance agreements) increased 14% to $38.1 billion for the year ended December 31, 2015 compared to $33.4 billion in 2014 and 13% for the year ended December 31, 2014 compared to $29.5 billion in 2013. Our investment spread measured in dollars was $924.8 million, $809.5 million, and $695.6 million for the years ended December 31, 2015, 2014 and 2013. As discussed above, our investment spread in 2015, 2014 and 2013 has been negatively impacted by the extended low interest rate environment and in 2014 and 2013 our excess liquidity due to calls of our United States government agency securities (see Net investment income).
Net income is also impacted by the change in fair value of derivatives and embedded derivatives which fluctuates from year to year based upon changes in fair values of call options purchased to fund the annual index credits for fixed index annuities and changes in interest rates used to discount the embedded derivative liability. Net income for the years ended December 31, 2015 and 2013 was positively impacted by increases in the discount rates used to estimate our embedded derivative liabilities, while net income for the year ended December 31, 2014 was negatively impacted by decreases in the discount rates used to estimate our embedded derivative liabilities. Net income for the year ended December 31, 2014 was also positively impacted by revisions of assumptions used in determining fixed index annuity embedded derivatives that were made in the second quarter of 2014. These revisions, which consisted of changes in the lapse and expected costs of annual call options assumptions, decreased the change in the fair value of embedded derivatives for the year ended December 31, 2014 by $62.6 million, which after related adjustments to deferred sales inducements and deferred policy acquisition costs and income taxes, increased net income for the year ended December 31, 2014 by $14.8 million (see Change in fair value of embedded derivatives).
We periodically revise the key assumptions used in the calculation of amortization of deferred policy acquisition costs and deferred sales inducements retrospectively through an unlocking process when estimates of current or future gross profits/margins (including the impact of realized investment gains and losses) to be realized from a group of products are revised. The impact of unlocking on our results of operations, including the impact of account balance true ups and adjustments to future period assumptions for interest margins, surrenders and certain expenses, was as follows:

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
| (Dollars in thousands)
Decreased amortization of deferred sales inducements | $ | (5,612 | ) |  | $ | (12,595 | ) |  | $ | (11,138 | )
Decreased amortization of deferred policy acquisition costs | (10,970 | ) |  | (35,527 | ) |  | (18,519 | )
Increased net income | 10,695 |  |  | 30,990 |  |  | 19,099 |

The most significant revisions to assumptions were account balance true-ups, which have been favorable to us in each of the last three years due to stronger equity market performance than we assumed, favorable adjustments to lapse assumptions to reflect better persistency experienced than assumed and unfavorable adjustments to investment spread to reflect lower spreads being earned than assumed. In 2015, the favorable impact of the account balance true-up and lapse assumption change was largely offset by reductions in estimated future gross profits attributable to revisions to the assumptions for the lifetime income benefit rider liability described below.
Net income for 2015 and 2014 was negatively impacted and net income for 2013 was positively impacted by a revision of assumptions used in determining liabilities for lifetime income benefit riders. These revisions were consistent with unlocking for deferred policy acquisition costs and deferred sales inducements described above. The 2015 revisions also include a revision to the future period assumption for the primary age at which policyholders elect to exercise the rider's lifetime income benefit. The impact of these revisions on our results of operations was as follows:

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
| (Dollars in thousands)
Increased (decreased) interest sensitive and index product benefits | $ | 18,313 |  |  | $ | 12,428 |  |  | $ | (1,753 | )
Increased (decreased) net income | (11,812 | ) |  | (8,004 | ) |  | 1,129 |

The most significant assumption change generating the 2015 negative impact on net income was an increase to the primary election age to begin receiving lifetime income from 67 to 70 as our experience has shown that age 70 is the most popular age at which policyholders elect to begin receiving lifetime income benefit payments. The lifetime income benefit payments are determined by applying a payout factor to the rider's benefit base. The payout factors vary by the age at the time the lifetime income is elected. In early versions of the rider, the age band for payout factors was 10 years (i.e. 60-69; 70-79). As a result, policyholders have an incentive to defer their lifetime income election until age 70, when the payout factor stepped up. Subsequent versions of the rider reduced the age bands between payout factors to five years and the rider we
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currently sell has a different payout factor for every age. With these structures, assumption revisions from any further developments in our experience for primary election age should have a smaller impact than what was experienced in 2015.
In 2014, we retired $138 million aggregate principal amount of two issues of convertible notes. The loss on retirement was $12.5 million ($11.5 million after income taxes). In connection with the retirement of the 2015 notes, we entered into early termination agreements for a corresponding amount of the related 2015 notes hedges and the 2015 warrants. The impact of these partial unwinds decreased the change in fair value of derivatives and net income for the year ended December 31, 2014 by $6.3 million and $3.7 million, respectively (see Note 5 to our audited consolidated financial statements).
In 2013, we retired $184 million aggregate principal amount of three issues of convertible notes. The loss on retirement was $32.5 million ($21.7 million after income taxes). In connection with the retirement of the 2015 notes, we entered into early termination agreements for a corresponding amount of the related 2015 notes hedges and the 2015 warrants. The impact of the partial unwinds decreased the change in fair value of derivatives and net income for the year ended December 31, 2013 by $5.8 million and $3.4 million, respectively (see Note 5 to our audited consolidated financial statements).
Operating income, a non-GAAP financial measure (see reconciliation to net income in Item 6. Selected Consolidated Financial Data) increased 3% to $195.8 million in 2015 and increased 17% to $190.6 million in 2014 from $163.4 million in 2013.
In addition to net income, we have consistently utilized operating income, a non-GAAP financial measure commonly used in the life insurance industry, to evaluate our financial performance. Operating income equals net income adjusted to eliminate the impact of items that fluctuate from year to year in a manner unrelated to core operations. We believe measures excluding their impact are useful in analyzing operating trends, and the combined presentation and evaluation of operating income together with net income provides information that may enhance an investor's understanding of our underlying results and profitability.
Operating income is not a substitute for net income determined in accordance with GAAP. The adjustments made to derive operating income are important to understanding our overall results from operations and, if evaluated without proper context, operating income possesses material limitations. As an example, we could produce a low level of net income in a given period, despite strong operating performance, if in that period we experience significant net realized losses from our investment portfolio. We could also produce a high level of net income in a given period, despite poor operating performance, if in that period we generate significant net realized gains from our investment portfolio. As an example of another limitation of operating income, it does not include the decrease in cash flows expected to be collected as a result of credit loss OTTI. Therefore, our management reviews net realized investment gains (losses) and analyses of our net investment income, including impacts related to OTTI write-downs, in connection with their review of our investment portfolio. In addition, our management examines net income as part of their review of our overall financial results.
Operating income includes benefits from unlocking in 2015, 2014 and 2013 as follows:

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
| (Dollars in thousands)
Decreased amortization of deferred sales inducements | $ | (478 | ) |  | $ | (10,713 | ) |  | $ | (12,575 | )
Decreased amortization of deferred policy acquisition costs | (4,260 | ) |  | (33,027 | ) |  | (20,460 | )
Increased operating income | 3,056 |  |  | 28,169 |  |  | 21,274 |

The revision of assumptions in 2015, 2014 and 2013 used in determining liabilities for lifetime income benefit riders had the same effect on operating income as it had on net income as discussed previously.
Annuity product charges (surrender charges assessed against policy withdrawals and fees deducted from policyholder account balances for lifetime income benefit riders) increased 14% to $136.2 million in 2015 and 15% to $119.0 million in 2014 from $103.6 million in 2013. The components of annuity product charges are set forth in the table that follows:

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
| (Dollars in thousands)
Surrender charges | $ | 46,614 |  |  | $ | 47,500 |  |  | $ | 49,193 |
Lifetime income benefit riders (LIBR) fees | 89,554 |  |  | 71,490 |  |  | 54,398 |
| $ | 136,168 |  |  | $ | 118,990 |  |  | $ | 103,591 |
Withdrawals from annuity policies subject to surrender charges | $ | 373,166 |  |  | $ | 387,274 |  |  | $ | 342,087 |
Average surrender charge collected on withdrawals subject to surrender charges | 12.5 | % |  | 12.3 | % |  | 14.4 | %
Fund values on policies subject to LIBR fees | $ | 14,296,046 |  |  | $ | 12,250,068 |  |  | $ | 9,904,857 |
Weighted average per policy LIBR fee | 0.63 | % |  | 0.58 | % |  | 0.55 | %

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The increases in annuity product charges were primarily attributable to increases in fees assessed for lifetime income benefit riders due to a larger volume of business in force subject to the fee and and an increase in the average fees being charged as compared to prior periods. See Interest sensitive and index product benefits below for corresponding expense recognized on lifetime income benefit riders. Surrender charges decreased in 2015 as withdrawals from annuity policies subject to surrender charges decreased as compared to 2014. The decrease in surrender charges in 2014 was primarily a result of the 2013 amount including surrender charges of $4.7 million deducted from California policyholders surrendering their policies as a condition of receiving certain benefits in a national class action lawsuit settlement.
Net investment income increased 10% to $1.7 billion in 2015 and 11% to $1.5 billion in 2014 from $1.4 billion in 2013. The increases were principally attributable to the growth in our annuity business and corresponding increases in our invested assets. Average invested assets excluding derivative instruments (on an amortized cost basis) increased 14% to $35.9 billion in 2015 and 13% to $31.3 billion in 2014 compared to $27.8 billion in 2013. The average yield earned on average invested assets was 4.73%, 4.90% and 4.98% for 2015, 2014 and 2013, respectively.
The decrease in yield earned on average invested assets in 2015, 2014 and 2013 was attributable to yields on investments purchased in those periods and 2012 being lower than the overall portfolio yield. In addition, net investment income and average yield were negatively impacted by a lag in reinvestment of proceeds from bonds called for redemption during 2014 and 2013 into new assets causing excess liquidity held in low yielding cash and other short-term investments. The average balance held in cash and short-term investments was $0.4 billion and $1.0 billion in 2014 and 2013, respectively. The average yield on our cash and short-term investments was 0.07% in 2014 and 0.38% in 2013. Additionally, net investment income and average yield was positively impacted by prepayment and fee income received resulting in additional net investment income of $26.9 million, $22.3 million and $15.7 million, in 2015, 2014 and 2013, respectively.
Change in fair value of derivatives consists of call options purchased to fund annual index credits on fixed index annuities, the 2015 notes hedges and 2015 warrants related to our 2015 notes and an interest rate swap and interest rate caps that hedge our floating rate subordinated debentures. The components of change in fair value of derivatives are as follows:

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
| (Dollars in thousands)
Call options: |  |  |  |  |
Gain (loss) on option expiration | $ | (464,027 | ) |  | $ | 707,520 |  |  | $ | 554,218 |
Change in unrealized gains/losses | 136,106 |  |  | (185,573 | ) |  | 377,785 |
2015 notes hedges | (4,516 | ) |  | (8,934 | ) |  | 145,751 |
2015 warrants | — |  |  | — |  |  | (9,568 | )
Interest rate swap | (2,341 | ) |  | (4,863 | ) |  | 4,973 |
Interest rate caps | (1,368 | ) |  | (3,325 | ) |  | 2,856 |
| $ | (336,146 | ) |  | $ | 504,825 |  |  | $ | 1,076,015 |

The differences between the change in fair value of derivatives between years for call options are primarily due to the performance of the indices upon which our call options are based. A substantial portion of our call options are based upon the S&P 500 Index with the remainder based upon other equity and bond market indices. The range of index appreciation (after applicable caps, participation rates and asset fees) for options expiring during these years is as follows:

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
S&P 500 Index |  |  |  |  |
Point-to-point strategy | 0.0 - 8.9% |  | 1.0 - 11.5% |  | 1.5 - 11.5%
Monthly average strategy | 0.0 - 9.0% |  | 0.8 - 11.1% |  | 0.0 - 15.7%
Monthly point-to-point strategy | 0.0 - 12.1% |  | 0.0 - 19.9% |  | 0.0 - 21.7%
Fixed income (bond index) strategies | 0.0 - 10.0% |  | 0.0 - 10.0% |  | 0.0 - 8.0%

The change in fair value of derivatives is also influenced by the aggregate costs of options purchased. The aggregate cost of options has increased primarily due to an increased amount of fixed index annuities in force. The aggregate cost of options is also influenced by the amount of policyholder funds allocated to the various indices and market volatility which affects option pricing. See Critical Accounting Policies - Policy Liabilities for Fixed Index Annuities.
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The fair value of the 2015 notes hedges changed based upon changes in the price of our common stock, interest rates, stock price volatility, dividend yield and the time to expiration of the 2015 notes hedges. Similarly, the fair value of the conversion option obligation to the holders of the 2015 notes changed based upon these same factors and the conversion option obligation was accounted for as an embedded derivative liability with changes in fair value reported in the Change in fair value of embedded derivatives. The amount of the change in fair value of the 2015 notes hedges was typically equal to the amount of the change in the related embedded derivative liability and there typically was an offsetting expense in the change in fair value of embedded derivatives. Due to the partial unwind agreements we entered into in 2014, the decrease in the change in the fair value of the 2015 notes embedded derivative conversion liability exceeded the decrease in the fair value of the 2015 notes hedges by $10.1 million for the year ended December 31, 2014. Due to the partial unwind agreements we entered into in 2013, the amount of the change in fair value of the 2015 notes hedges was $3.8 million more than the amount of the change in the related embedded conversion derivative liability for the year ended December 31, 2013. See Note 5 to our audited consolidated financial statements for a discussion of the unwind agreements, the 2015 notes hedges and the 2015 notes embedded derivative conversion liability.
The 2015 warrants were to be settled in shares of our common stock and accordingly were classified as equity in our consolidated balance sheets, and the changes in fair value of the 2015 warrants were not recognized in the consolidated financial statements. In conjunction with the retirement of a portion of the 2015 notes in 2014 and 2013 and related early termination of a corresponding portion of the 2015 notes hedges, a corresponding amount of the 2015 warrants were also terminated in 2014 and 2013 prior to maturity and settled in cash rather than shares of our common stock. Accordingly, changes in the fair value of the 2015 warrants that were terminated in 2013 prior to maturity from the dates the early termination agreements were executed through the dates of settlement are included in the consolidated statement of operations for the year ended December 31, 2013. The fair value of the warrants that were settled in cash in 2014 did not change after reclassification as they were settled in cash at the time the agreements were executed. See Note 5 to our audited consolidated financial statements for a discussion of the 2015 warrants.
Net realized gains (losses) on investments, excluding OTTI losses include gains and losses on the sale of securities and impairment losses on mortgage loans on real estate which fluctuate from year to year due to changes in the interest rate and economic environment and the timing of the sale of investments, as well as gains (losses) recognized on real estate owned due to any sales and impairments on long-lived assets. See Note 3 to our audited consolidated financial statements for a detailed presentation of the types of investments that generated the gains (losses).
Losses on available for sale fixed maturity securities were realized primarily due to strategies to reposition the fixed maturity security portfolio that resulted in improved net investment income, risk or duration profiles as they pertain to our asset liability management. Corporate securities were sold at losses in 2015 and 2013 due to our long-term fundamental concern with the issuers' ability to meet their future financial obligations. See Note 4 to our audited consolidated financial statements for additional discussion of allowance for credit losses recognized on mortgage loans on real estate.
Net OTTI losses recognized in operations increased to $19.5 million in 2015 and decreased to $2.6 million in 2014 from $6.2 million in 2013. The impairments recognized in 2015 were primarily on two corporate securities with exposure to the metals and mining sector and one asset-backed security with exposure to the energy sector. The impairments recognized in 2014 and 2013 were primarily on residential mortgage backed securities and were principally due to changes of assumptions regarding loss severity of a number of securities we hold which affected our ongoing analysis of expected cash flow projections. See Financial Condition—Investments and Note 3 to our audited consolidated financial statements for additional discussion of write downs of securities for other than temporary impairments.
Interest sensitive and index product benefits decreased 34% to $1.0 billion in 2015 and increased 16% to $1.5 billion in 2014 from $1.3 billion in 2013. The components of interest sensitive and index product benefits are summarized as follows:

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
| (Dollars in thousands)
Index credits on index policies | $ | 587,705 |  |  | $ | 1,096,504 |  |  | $ | 908,717 |
Interest credited (including changes in minimum guaranteed interest for fixed index annuities) | 258,870 |  |  | 284,577 |  |  | 310,369 |
Lifetime income benefit riders | 121,478 |  |  | 92,619 |  |  | 53,781 |
| $ | 968,053 |  |  | $ | 1,473,700 |  |  | $ | 1,272,867 |

The changes in index credits were attributable to changes in the level of appreciation of the underlying indices (see discussion above under Change in fair value of derivatives) and the amount of funds allocated by policyholders to the respective index options. Total proceeds received upon expiration of the call options purchased to fund the annual index credits were $602.4 million, $1,103.7 million and $910.4 million for the years ended December 31, 2015, 2014 and 2013, respectively. The decreases in interest credited were primarily due to decreases in the average rate credited to the annuity liabilities outstanding receiving a fixed rate of interest. The average amount of annuity liabilities outstanding (net of annuity liabilities ceded under coinsurance agreements) increased 14% to $38.1 billion in 2015 and 13% to $33.4 billion in 2014 from $29.5 billion in 2013. The increases in benefits recognized for lifetime income benefit riders were due to increases in the number of policies with lifetime income benefit riders and correlates to the increase in fees discussed in Annuity product charges and in 2015 and 2014, the impact of revisions to assumptions used in determining reserves held for lifetime income benefit riders. For 2013, the impact of revisions to assumptions used in determining reserves held for lifetime income benefit riders partially offset the increase in expense attributable to a larger volume of policies with the rider. See Net income above for discussion of the impact of changes in the assumptions used in determining reserves for lifetime income benefit riders for the years ended December 31, 2015, 2014 and 2013.
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Amortization of deferred sales inducements, in general, has been increasing each year due to growth in our annuity business and the deferral of sales inducements incurred with respect to sales of premium bonus annuity products. Bonus products represented 86%, 95% and 97% of our net annuity deposits during 2015, 2014 and 2013, respectively. The increase in amortization from these factors has been affected by amortization associated with fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business, amortization associated with the net realized gains (losses) on investments and net OTTI losses recognized in operations and amortization associated with litigation reserves. Fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business creates differences in the recognition of revenues and expenses from derivative instruments including the embedded derivative liabilities in our fixed index annuity contracts. The change in fair value of the embedded derivatives will not correspond to the change in fair value of the derivatives (purchased call options), because the purchased call options are one-year options while the options valued in the fair value of embedded derivatives cover the expected lives of the contracts which typically exceed ten years. Amortization of deferred sales inducements is summarized as follows:

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
| (Dollars in thousands)
Amortization of deferred sales inducements before gross profit adjustments | $ | 209,051 |  |  | $ | 174,799 |  |  | $ | 143,415 |
Gross profit adjustments: |  |  |  |  |
Fair value accounting for derivatives and embedded derivatives | 1,976 |  |  | (42,865 | ) |  | 103,172 |
Net realized gains (losses) on investments, net OTTI losses recognized in operations and changes in litigation reserves | (1,637 | ) |  | (515 | ) |  | 6,526 |
Amortization of deferred sales inducements after gross profit adjustments | $ | 209,390 |  |  | $ | 131,419 |  |  | $ | 253,113 |

See Net income and Operating income, a non-GAAP financial measure, above for discussion of the impact of unlocking on amortization of deferred sales inducements for the years ended December 31, 2015, 2014 and 2013. See Critical Accounting Policies—Deferred Policy Acquisition Costs and Deferred Sales Inducements.
Change in fair value of embedded derivatives includes changes in the fair value of our fixed index annuity embedded derivatives and changes in the fair value of the embedded derivative related to the conversion option of our 2015 notes and, in 2014, our 2029 notes (see Notes 5 and 9 to our audited consolidated financial statements). The components of change in fair value of embedded derivatives are as follows:

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
| (Dollars in thousands)
Fixed index annuities—embedded derivatives | $ | (825,668 | ) |  | $ | (532,337 | ) |  | $ | (416,502 | )
Other changes in difference between policy benefit reserves computed using derivative accounting vs. long-duration contracts accounting | 365,486 |  |  | 579,885 |  |  | 408,496 |
2015 notes embedded conversion derivative | (4,516 | ) |  | (19,036 | ) |  | 141,974 |
2029 notes embedded conversion derivative | — |  |  | 3,809 |  |  | — |
| $ | (464,698 | ) |  | $ | 32,321 |  |  | $ | 133,968 |

The change in fair value of the fixed index annuity embedded derivatives resulted from (i) changes in the expected index credits on the next policy anniversary dates, which are related to the change in fair value of the call options acquired to fund those index credits discussed above in Change in fair value of derivatives; (ii) changes in discount rates used in estimating our embedded derivative liabilities; and (iii) the growth in the host component of the policy liability. The amounts presented as "Other changes in difference between policy benefit reserves computed using derivative accounting vs. long-duration contracts accounting" represents the total change in the difference between policy benefit reserves for fixed index annuities computed under the derivative accounting standard and the long-duration contracts accounting standard at each balance sheet date, less the change in fair value of our fixed index annuities embedded derivative. See Critical Accounting Policies—Policy Liabilities for Fixed Index Annuities. The primary reasons for the decrease in the change in fair value of the fixed index annuity embedded derivatives for 2015 were increases in the discount rates used in estimating our embedded derivative liabilities and decreases in the expected index credits on the next policy anniversary dates resulting from decreases in the fair value of the call options acquired to fund these index credits during 2015 as compared to 2014. The primary reasons for the decrease in the change in fair value of the fixed index annuity embedded derivatives for 2014 were decreases in the expected index credits resulting from decreases in the fair value of the call options acquired to fund those index credits, offset by decreases in the discount rates used in estimating our embedded derivative liabilities. The primary reason for the decrease in the change in fair value of the fixed index annuity embedded derivatives in 2013 was an increase in the discount rates used in estimating our embedded derivative liabilities. The discount rates used in estimating our embedded derivative liabilities fluctuate from year to year based on changes in the general level of interest rates. See Net income above for discussion of the impact of assumption changes for the fixed index annuity embedded derivatives in 2014.
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As discussed above under Change in fair value of derivatives, the fair value of the 2015 notes embedded conversion derivative changes based upon the same factors effecting the changes in the 2015 notes hedges and, in general, the amount for the change in the fair value of the 2015 notes embedded conversion derivative was equal to the amount for the change in fair value of the 2015 notes hedges. See discussion above for explanation of the differences in these amounts for 2014 and 2013. Prior to November 2014, the conversion option in the 2029 convertible notes was expected to be settled in net shares of our common stock and the conversion option in the 2029 notes was accounted for as equity. In November 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 derivative liability.
Interest expense on notes payable decreased 21% to $28.8 million in 2015 and decreased 6% to $36.4 million in 2014 from $38.9 million in 2013. The decreases in 2015 and 2014 are primarily attributable to the extinguishment of $322 million aggregate principal amount of our convertible senior notes in 2014 and 2013, which was partially offset by interest expense on the $400 million of 6.625% senior unsecured notes we issued in July 2013. See Note 9 to our audited consolidated financial statements.
Amortization of deferred policy acquisition costs, in general, has been increasing each year due to the growth in our annuity business and the deferral of policy acquisition costs incurred with respect to sales of annuity products. The increase in amortization from these factors has been affected by amortization associated with fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business, amortization associated with net realized gains (losses) on investments and net OTTI losses recognized in operations and the amortization associated with litigation reserves. As discussed above, fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business creates differences in the recognition of revenues and expenses from derivative instruments including the embedded derivative liabilities in our fixed index annuity contracts.
Amortization of deferred policy acquisition costs is summarized as follows:

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
| (Dollars in thousands)
Amortization of deferred policy acquisition costs before gross profit adjustments | $ | 293,676 |  |  | $ | 239,369 |  |  | $ | 215,560 |
Gross profit adjustments: |  |  |  |  |
Fair value accounting for derivatives and embedded derivatives | (5,611 | ) |  | (74,900 | ) |  | 141,283 |
Net realized gains (losses) on investments, net OTTI losses recognized in operations and changes in litigation reserves | (1,951 | ) |  | (891 | ) |  | 8,625 |
Amortization of deferred policy acquisition costs after gross profit adjustments | $ | 286,114 |  |  | $ | 163,578 |  |  | $ | 365,468 |

See Net income and Operating income, a non-GAAP financial measure, above for discussion of the impact of unlocking on amortization of deferred policy acquisition costs for the years ended December 31, 2015, 2014 and 2013. See Critical Accounting Policies—Deferred Policy Acquisition Costs and Deferred Sales Inducements.
Other operating costs and expenses increased 18% to $96.2 million in 2015 and decreased 11% to $81.6 million in 2014 from $91.9 million in 2013. The increase in 2015 is due to an increase in salaries and benefits of $4.5 million and an increase in risk charges for our financing reinsurance agreement with Hannover (2013 Hannover Transaction) of $4.8 million. In addition, 2015 other operating costs and expenses increased as compared to 2014 other operating costs and expenses as 2014 benefited from reductions in accrued liabilities for litigation and guaranty fund assessments accruals of $3.2 million. The decrease in 2014 is due to a decrease in expense for guaranty fund assessments of $10.0 million and a decrease of $3.2 million in litigation expense (See Note 13 to our consolidated financial statements) offset by increases in risk charges for the 2013 Hannover Transaction of $2.7 million and $0.9 in compensation costs.
In 2014, other operating costs and expenses, net of changes in litigation liabilities and guaranty fund assessments, were primarily affected by increases in salary and benefits and increased risk charges for the 2013 Hannover Transaction. Other operating costs and expenses excluding litigation expense and guaranty fund assessments discussed previously increased 3% to $84.8 million in 2014 from $82.4 million in 2013.
Income tax expense increased in 2015 and decreased in 2014 primarily because of the changes in income before income taxes. The effective income tax rates were 34.8%, 35.7% and 34.9% for 2015, 2014 and 2013, respectively.
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Income tax expense and the resulting effective tax rate are based upon two components of income before income taxes ("pretax income") that are taxed at different tax rates. Life insurance income is generally taxed at an effective rate of approximately 35.4% reflecting the absence of state income taxes for substantially all of the states that the life insurance subsidiaries do business in. The income (loss) for the parent company and other non-life insurance subsidiaries is generally taxed at an effective tax rate of 41.5% reflecting the combined federal / state income tax rates. The effective tax rates resulting from the combination of the income tax provisions for the life / non-life sources of income (loss) vary from year to year based primarily on the relative size of pretax income (loss) from the two sources. The effective income tax rate decreased in 2015 and increased in 2014, because a portion of the 2014 parent company's loss on extinguishment of debt was not deductible resulting in an effective tax rate on the parent company's pretax loss that was less than 41.5%.
Financial Condition
Investments
Our investment strategy is to maintain a predominantly investment grade fixed income portfolio, provide adequate liquidity to meet our cash obligations to policyholders and others and maximize current income and total investment return through active investment management. Consistent with this strategy, our investments principally consist of fixed maturity securities and mortgage loans on real estate.
Insurance statutes regulate the type of investments that our life subsidiaries are permitted to make and limit the amount of funds that may be used for any one type of investment. In light of these statutes and regulations and our business and investment strategy, we generally seek to invest in United States government and government-sponsored agency securities, corporate securities, residential and commercial mortgage backed securities, other asset backed securities and United States municipalities, states and territories securities rated investment grade by established nationally recognized statistical rating organizations ("NRSRO's") or in securities of comparable investment quality, if not rated and commercial mortgage loans on real estate.
The composition of our investment portfolio is summarized as follows:

| December 31,
| 2015 |  | 2014
| Carrying Amount |  | Percent |  | Carrying Amount |  | Percent
| (Dollars in thousands)
Fixed maturity securities: |  |  |  |  |  |  |
United States Government full faith and credit | $ | 471,256 |  |  | 1.3 | % |  | $ | 138,460 |  |  | 0.4 | %
United States Government sponsored agencies | 1,398,611 |  |  | 3.5 | % |  | 1,393,890 |  |  | 3.9 | %
United States municipalities, states and territories | 3,755,367 |  |  | 9.5 | % |  | 3,723,309 |  |  | 10.4 | %
Foreign government obligations | 212,565 |  |  | 0.5 | % |  | 193,803 |  |  | 0.5 | %
Corporate securities | 23,879,016 |  |  | 60.3 | % |  | 21,566,724 |  |  | 59.9 | %
Residential mortgage backed securities | 1,462,072 |  |  | 3.7 | % |  | 1,751,345 |  |  | 4.9 | %
Commercial mortgage backed securities | 4,174,396 |  |  | 10.5 | % |  | 2,807,620 |  |  | 7.8 | %
Other asset backed securities | 1,145,178 |  |  | 2.9 | % |  | 946,483 |  |  | 2.6 | %
Total fixed maturity securities | 36,498,461 |  |  | 92.2 | % |  | 32,521,634 |  |  | 90.4 | %
Equity securities | 7,828 |  |  | — | % |  | 7,805 |  |  | — | %
Mortgage loans on real estate | 2,435,257 |  |  | 6.2 | % |  | 2,434,580 |  |  | 6.8 | %
Derivative instruments | 337,256 |  |  | 0.9 | % |  | 731,113 |  |  | 2.0 | %
Other investments | 291,530 |  |  | 0.7 | % |  | 286,726 |  |  | 0.8 | %
| $ | 39,570,332 |  |  | 100.0 | % |  | $ | 35,981,858 |  |  | 100.0 | %

During 2015 and 2014, we received $370.7 million and $516.5 million, respectively, in net redemption proceeds related to calls of our callable United States Government sponsored agency securities. The proceeds from these redemptions have been reinvested primarily in corporate securities, residential and commercial mortgage backed securities and United States Government sponsored agencies classified as available for sale. We remain committed to maintaining a high quality investment portfolio with low credit risk. At December 31, 2015, 33% of our fixed income securities have call features, of which 2.0% ($0.7 billion) were subject to call redemption and another 0.4% ($0.2 billion) will become subject to call redemption during 2016.
Fixed Maturity Securities
Our fixed maturity security portfolio is managed to minimize risks such as interest rate changes and defaults or impairments while earning a sufficient and stable return on our investments. The largest portion of our fixed maturity securities are in investment grade (NAIC designation 1 or 2) publicly traded or privately placed corporate securities.
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A summary of our fixed maturity securities by NRSRO ratings is as follows:

|  | December 31,
|  | 2015 |  | 2014
Rating Agency Rating |  | Carrying Amount |  | Percent of Fixed Maturity Securities |  | Carrying Amount |  | Percent of Fixed Maturity Securities
|  | (Dollars in thousands)
Aaa/Aa/A |  | $ | 23,724,648 |  |  | 65.0 | % |  | $ | 20,672,331 |  |  | 63.6 | %
Baa |  | 11,491,609 |  |  | 31.5 | % |  | 10,516,834 |  |  | 32.3 | %
Total investment grade |  | 35,216,257 |  |  | 96.5 | % |  | 31,189,165 |  |  | 95.9 | %
Ba |  | 657,760 |  |  | 1.8 | % |  | 548,681 |  |  | 1.7 | %
B |  | 68,712 |  |  | 0.2 | % |  | 87,272 |  |  | 0.3 | %
Caa and lower |  | 388,908 |  |  | 1.1 | % |  | 497,477 |  |  | 1.5 | %
In or near default |  | 166,824 |  |  | 0.4 | % |  | 199,039 |  |  | 0.6 | %
Total below investment grade |  | 1,282,204 |  |  | 3.5 | % |  | 1,332,469 |  |  | 4.1 | %
|  | $ | 36,498,461 |  |  | 100.0 | % |  | $ | 32,521,634 |  |  | 100.0 | %

The NAIC's Securities Valuation Office ("SVO") is responsible for the day-to-day credit quality assessment and the valuation of fixed maturity securities owned by state regulated insurance companies. The purpose of such assessment and valuation is for determining regulatory capital requirements and regulatory reporting. Insurance companies report ownership to the SVO when such securities are eligible for regulatory filings. The SVO conducts credit analysis on these securities for the purpose of assigning a NAIC designation and/or unit price. Typically, if a security has been rated by a NRSRO, the SVO utilizes that rating and assigns a NAIC designation based upon the following system:

NAIC Designation |  | NRSRO Equivalent Rating
1 |  | Aaa/Aa/A
2 |  | Baa
3 |  | Ba
4 |  | B
5 |  | Caa and lower
6 |  | In or near default

For most of the bonds held in our portfolio the NAIC designation matches the NRSRO equivalent rating. However, for certain loan-backed and structured securities, as defined by the NAIC, the NAIC rating is not always equivalent to the NRSRO rating presented in the previous table. The NAIC has adopted revised rating methodologies for certain loan-backed and structured securities comprised of non-agency residential and commercial mortgage backed securities. The NAIC’s objective with the revised rating methodologies for these structured securities is to increase the accuracy in assessing expected losses and use the improved assessment to determine a more appropriate capital requirement for such structured securities. The revised methodologies reduce regulatory reliance on rating agencies and allow for greater regulatory input into the assumptions used to estimate expected losses from structured securities.
The use of this process by the SVO may result in certain non-agency residential and commercial mortgage backed securities being assigned a NAIC designation that is higher than the equivalent NRSRO rating. The NAIC designations for non-agency residential and commercial mortgage backed securities are based on security level expected losses as modeled by an independent third party (engaged by the NAIC) and the statutory carrying value of the security, including any purchase discounts or impairment charges previously recognized. Evaluation of non-agency residential and commercial mortgage backed securities held by insurers using the revised NAIC rating methodologies is performed on an annual basis.
As stated previously, our fixed maturity security portfolio is managed to minimize risks such as defaults or impairments while earning a sufficient and stable return on our investments. Our strategy has been to invest primarily in investment grade fixed maturity securities. Investment grade is NAIC 1 and 2 securities and Baa3/BBB- and better securities on the NRSRO scale. This strategy meets the objective of minimizing risk while also managing asset capital charges on a regulatory capital basis.
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A summary of our fixed maturity securities by NAIC designation is as follows:

|  | December 31, 2015 |  | December 31, 2014
NAIC Designation |  | Amortized Cost |  | Fair Value |  | Carrying Amount |  | Percentage of Total Carrying Amount |  | Amortized Cost |  | Fair Value |  | Carrying Amount |  | Percentage of Total Carrying Amount
|  | (Dollars in thousands) |  |  |  | (Dollars in thousands) |  |
1 |  | $ | 23,363,259 |  |  | $ | 24,207,801 |  |  | $ | 24,207,801 |  |  | 66.3 | % |  | $ | 19,223,151 |  |  | $ | 20,941,634 |  |  | $ | 20,941,634 |  |  | 64.4 | %
2 |  | 11,709,730 |  |  | 11,589,325 |  |  | 11,589,325 |  |  | 31.8 | % |  | 10,432,593 |  |  | 10,981,618 |  |  | 10,981,618 |  |  | 33.8 | %
3 |  | 758,531 |  |  | 643,293 |  |  | 654,538 |  |  | 1.8 | % |  | 602,191 |  |  | 583,313 |  |  | 583,907 |  |  | 1.8 | %
4 |  | 60,480 |  |  | 44,312 |  |  | 44,312 |  |  | 0.1 | % |  | 22,888 |  |  | 14,089 |  |  | 14,089 |  |  | — | %
5 |  | — |  |  | — |  |  | — |  |  | — | % |  | — |  |  | — |  |  | — |  |  | — | %
6 |  | 8,332 |  |  | 2,485 |  |  | 2,485 |  |  | — | % |  | 655 |  |  | 386 |  |  | 386 |  |  | — | %
|  | $ | 35,900,332 |  |  | $ | 36,487,216 |  |  | $ | 36,498,461 |  |  | 100.0 | % |  | $ | 30,281,478 |  |  | $ | 32,521,040 |  |  | $ | 32,521,634 |  |  | 100.0 | %

The amortized cost and fair value of fixed maturity securities at December 31, 2015, by contractual maturity are presented in Note 3 to our audited consolidated financial statements in this Form 10-K, which is incorporated by reference in this Item 7.
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Unrealized Losses
The amortized cost and fair value of fixed maturity securities that were in an unrealized loss position were as follows:

| Number of Securities |  | Amortized Cost |  | Unrealized Losses |  | Fair Value
| (Dollars in thousands)
December 31, 2015 |  |  |  |  |  |  |
Fixed maturity securities, available for sale: |  |  |  |  |  |  |
United States Government full faith and credit | 4 |  |  | $ | 38,029 |  |  | $ | (299 | ) |  | $ | 37,730 |
United States Government sponsored agencies | 21 |  |  | 971,462 |  |  | (14,409 | ) |  | 957,053 |
United States municipalities, states and territories | 76 |  |  | 273,297 |  |  | (8,628 | ) |  | 264,669 |
Foreign government obligations | 6 |  |  | 69,364 |  |  | (10,935 | ) |  | 58,429 |
Corporate securities: |  |  |  |  |  |  |
Finance, insurance and real estate | 145 |  |  | 2,201,597 |  |  | (74,462 | ) |  | 2,127,135 |
Manufacturing, construction and mining | 334 |  |  | 4,271,655 |  |  | (377,459 | ) |  | 3,894,196 |
Utilities and related sectors | 216 |  |  | 2,499,341 |  |  | (161,505 | ) |  | 2,337,836 |
Wholesale/retail trade | 43 |  |  | 537,720 |  |  | (25,988 | ) |  | 511,732 |
Services, media and other | 101 |  |  | 1,112,071 |  |  | (43,010 | ) |  | 1,069,061 |
Residential mortgage backed securities | 34 |  |  | 172,697 |  |  | (3,489 | ) |  | 169,208 |
Commercial mortgage backed securities | 222 |  |  | 2,796,286 |  |  | (105,281 | ) |  | 2,691,005 |
Other asset backed securities | 43 |  |  | 523,592 |  |  | (19,880 | ) |  | 503,712 |
| 1,245 |  |  | $ | 15,467,111 |  |  | $ | (845,345 | ) |  | $ | 14,621,766 |
Fixed maturity securities, held for investment: |  |  |  |  |  |  |
Corporate security: |  |  |  |  |  |  |
Insurance | 1 |  |  | $ | 76,622 |  |  | $ | (11,245 | ) |  | $ | 65,377 |
December 31, 2014 |  |  |  |  |  |  |
Fixed maturity securities, available for sale: |  |  |  |  |  |  |
United States Government full faith and credit | 1 |  |  | $ | 513 |  |  | $ | (15 | ) |  | $ | 498 |
United States Government sponsored agencies | 7 |  |  | 624,272 |  |  | (13,933 | ) |  | 610,339 |
United States municipalities, states and territories | 17 |  |  | 28,658 |  |  | (711 | ) |  | 27,947 |
Foreign government obligations | 3 |  |  | 29,689 |  |  | (3,953 | ) |  | 25,736 |
Corporate securities: |  |  |  |  |  |  |
Finance, insurance and real estate | 40 |  |  | 672,176 |  |  | (18,863 | ) |  | 653,313 |
Manufacturing, construction and mining | 138 |  |  | 1,843,254 |  |  | (71,077 | ) |  | 1,772,177 |
Utilities and related sectors | 77 |  |  | 736,603 |  |  | (18,338 | ) |  | 718,265 |
Wholesale/retail trade | 17 |  |  | 193,605 |  |  | (5,412 | ) |  | 188,193 |
Services, media and other | 39 |  |  | 418,942 |  |  | (9,706 | ) |  | 409,236 |
Residential mortgage backed securities | 12 |  |  | 44,747 |  |  | (2,205 | ) |  | 42,542 |
Commercial mortgage backed securities | 33 |  |  | 432,201 |  |  | (3,323 | ) |  | 428,878 |
Other asset backed securities | 17 |  |  | 208,937 |  |  | (7,885 | ) |  | 201,052 |
| 401 |  |  | $ | 5,233,597 |  |  | $ | (155,421 | ) |  | $ | 5,078,176 |
Fixed maturity securities, held for investment: |  |  |  |  |  |  |
Corporate security: |  |  |  |  |  |  |
Insurance | 1 |  |  | $ | 76,432 |  |  | $ | (594 | ) |  | $ | 75,838 |

Unrealized losses increased $700.6 million from $156.0 million at December 31, 2014 to $856.6 million at December 31, 2015. The increase in unrealized losses was primarily due to a general widening in credit spreads in select industries (especially in the energy and metals & mining sectors) and credits during the year ended December 31, 2015. The 10-year treasury yield curve rates at December 31, 2015 and 2014 were 2.27% and 2.17%, respectively.
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The following table sets forth the composition by credit quality (NAIC designation) of fixed maturity securities with gross unrealized losses:

NAIC Designation |  | Carrying Value of Securities with Gross Unrealized Losses |  | Percent of Total |  | Gross Unrealized Losses |  | Percent of Total
|  | (Dollars in thousands)
December 31, 2015 |  |  |  |  |  |  |  |
1 |  | $ | 8,278,102 |  |  | 56.3 | % |  | $ | (280,209 | ) |  | 32.7 | %
2 |  | 5,813,570 |  |  | 39.6 | % |  | (436,543 | ) |  | 51.0 | %
3 |  | 560,199 |  |  | 3.8 | % |  | (117,814 | ) |  | 13.7 | %
4 |  | 44,041 |  |  | 0.3 | % |  | (16,168 | ) |  | 1.9 | %
5 |  | — |  |  | — | % |  | — |  |  | — | %
6 |  | 2,476 |  |  | — | % |  | (5,856 | ) |  | 0.7 | %
|  | $ | 14,698,388 |  |  | 100.0 | % |  | $ | (856,590 | ) |  | 100.0 | %
December 31, 2014 |  |  |  |  |  |  |  |
1 |  | $ | 2,366,939 |  |  | 45.9 | % |  | $ | (44,380 | ) |  | 28.5 | %
2 |  | 2,381,413 |  |  | 46.2 | % |  | (77,681 | ) |  | 49.8 | %
3 |  | 391,792 |  |  | 7.6 | % |  | (24,876 | ) |  | 15.9 | %
4 |  | 14,089 |  |  | 0.3 | % |  | (8,799 | ) |  | 5.6 | %
5 |  | — |  |  | — | % |  | — |  |  | — | %
6 |  | 375 |  |  | — | % |  | (279 | ) |  | 0.2 | %
|  | $ | 5,154,608 |  |  | 100.0 | % |  | $ | (156,015 | ) |  | 100.0 | %

Our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities (consisting of 1,246 and 402 securities, respectively) have been in a continuous unrealized loss position at December 31, 2015 and 2014, along with a description of the factors causing the unrealized losses is presented in Note 3 to our audited consolidated financial statements in this Form 10-K, which is incorporated by reference in this Item 7.
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The amortized cost and fair value of fixed maturity securities in an unrealized loss position and the number of months in a continuous unrealized loss position (fixed maturity securities that carry an NRSRO rating of BBB/Baa or higher are considered investment grade) were as follows:

| Number of Securities |  | Amortized Cost |  | Fair Value |  | Gross Unrealized Losses
|  |  | (Dollars in thousands)
December 31, 2015 |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |
Investment grade: |  |  |  |  |  |  |
Less than six months | 588 |  |  | $ | 7,395,125 |  |  | $ | 7,193,059 |  |  | $ | (202,066 | )
Six months or more and less than twelve months | 484 |  |  | 6,799,113 |  |  | 6,388,844 |  |  | (410,268 | )
Twelve months or greater | 44 |  |  | 592,600 |  |  | 484,646 |  |  | (107,954 | )
Total investment grade | 1,116 |  |  | 14,786,838 |  |  | 14,066,549 |  |  | (720,288 | )
Below investment grade: |  |  |  |  |  |  |
Less than six months | 87 |  |  | 297,879 |  |  | 279,947 |  |  | (17,933 | )
Six months or more and less than twelve months | 15 |  |  | 175,603 |  |  | 148,337 |  |  | (27,266 | )
Twelve months or greater | 28 |  |  | 283,413 |  |  | 192,310 |  |  | (91,103 | )
Total below investment grade | 130 |  |  | 756,895 |  |  | 620,594 |  |  | (136,302 | )
| 1,246 |  |  | $ | 15,543,733 |  |  | $ | 14,687,143 |  |  | $ | (856,590 | )
December 31, 2014 |  |  |  |  |  |  |
Fixed maturity securities |  |  |  |  |  |  |
Investment grade: |  |  |  |  |  |  |
Less than six months | 154 |  |  | $ | 2,114,497 |  |  | $ | 2,065,474 |  |  | $ | (49,023 | )
Six months or more and less than twelve months | 6 |  |  | 85,951 |  |  | 82,264 |  |  | (3,687 | )
Twelve months or greater | 155 |  |  | 2,664,255 |  |  | 2,595,916 |  |  | (68,339 | )
Total investment grade | 315 |  |  | 4,864,703 |  |  | 4,743,654 |  |  | (121,049 | )
Below investment grade: |  |  |  |  |  |  |
Less than six months | 55 |  |  | 153,861 |  |  | 151,532 |  |  | (2,329 | )
Six months or more and less than twelve months | 12 |  |  | 48,846 |  |  | 46,956 |  |  | (1,890 | )
Twelve months or greater | 20 |  |  | 242,619 |  |  | 211,872 |  |  | (30,747 | )
Total below investment grade | 87 |  |  | 445,326 |  |  | 410,360 |  |  | (34,966 | )
| 402 |  |  | $ | 5,310,029 |  |  | $ | 5,154,014 |  |  | $ | (156,015 | )

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The amortized cost and fair value of fixed maturity securities (excluding United States Government and United States Government sponsored agency securities) segregated by investment grade (NRSRO rating of BBB/Baa or higher) and below investment grade that had unrealized losses greater than 20% and the number of months in a continuous unrealized loss position were as follows:

| Number of Securities |  | Amortized Cost |  | Fair Value |  | Gross Unrealized Losses
|  |  | (Dollars in thousands)
December 31, 2015 |  |  |  |  |  |  |
Investment grade: |  |  |  |  |  |  |
Less than six months | 22 |  |  | $ | 211,075 |  |  | $ | 147,683 |  |  | $ | (63,392 | )
Six months or more and less than twelve months | 1 |  |  | 3,218 |  |  | 2,253 |  |  | (965 | )
Twelve months or greater | — |  |  | 214,293 |  |  | 149,936 |  |  | (64,357 | )
Total investment grade | 23 |  |  | 428,586 |  |  | 299,872 |  |  | (128,714 | )
Below investment grade: |  |  |  |  |  |  |
Less than six months | 9 |  |  | 104,204 |  |  | 72,539 |  |  | (31,665 | )
Six months or more and less than twelve months | — |  |  | — |  |  | — |  |  | — |
Twelve months or greater | 1 |  |  | 12,281 |  |  | 3,750 |  |  | (8,531 | )
Total below investment grade | 10 |  |  | 116,485 |  |  | 76,289 |  |  | (40,196 | )
| 33 |  |  | $ | 545,071 |  |  | $ | 376,161 |  |  | $ | (168,910 | )
December 31, 2014 |  |  |  |  |  |  |
Investment grade: |  |  |  |  |  |  |
Less than six months | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Six months or more and less than twelve months | — |  |  | — |  |  | — |  |  | — |
Twelve months or greater | — |  |  | — |  |  | — |  |  | — |
Total investment grade | — |  |  | — |  |  | — |  |  | — |
Below investment grade: |  |  |  |  |  |  |
Less than six months | — |  |  | — |  |  | — |  |  | — |
Six months or more and less than twelve months | 3 |  |  | 43,881 |  |  | 28,651 |  |  | (15,230 | )
Twelve months or greater | 1 |  |  | 655 |  |  | 375 |  |  | (280 | )
Total below investment grade | 4 |  |  | 44,536 |  |  | 29,026 |  |  | (15,510 | )
| 4 |  |  | $ | 44,536 |  |  | $ | 29,026 |  |  | $ | (15,510 | )

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The amortized cost and fair value of fixed maturity securities, by contractual maturity, that were in an unrealized loss position are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. All of our mortgage and other asset backed securities provide for periodic payments throughout their lives, and are shown below as a separate line.

| Available for sale |  | Held for investment
| Amortized Cost |  | Fair Value |  | Amortized Cost |  | Fair Value
| (Dollars in thousands)
December 31, 2015 |  |  |  |  |  |  |
Due in one year of less | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Due after one year through five years | 257,994 |  |  | 247,957 |  |  | — |  |  | — |
Due after five years through ten years | 6,111,139 |  |  | 5,802,168 |  |  | — |  |  | — |
Due after ten years through twenty years | 2,816,752 |  |  | 2,693,742 |  |  | — |  |  | — |
Due after twenty years | 2,788,651 |  |  | 2,513,974 |  |  | 76,622 |  |  | 65,377 |
| 11,974,536 |  |  | 11,257,841 |  |  | 76,622 |  |  | 65,377 |
Residential mortgage backed securities | 172,697 |  |  | 169,208 |  |  | — |  |  | — |
Commercial mortgage backed securities | 2,796,286 |  |  | 2,691,005 |  |  | — |  |  | — |
Other asset backed securities | 523,592 |  |  | 503,712 |  |  | — |  |  | — |
| $ | 15,467,111 |  |  | $ | 14,621,766 |  |  | $ | 76,622 |  |  | $ | 65,377 |
December 31, 2014 |  |  |  |  |  |  |
Due in one year or less | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Due after one year through five years | 74,447 |  |  | 73,594 |  |  | — |  |  | — |
Due after five years through ten years | 2,753,526 |  |  | 2,692,393 |  |  | — |  |  | — |
Due after ten years through twenty years | 1,091,955 |  |  | 1,061,437 |  |  | — |  |  | — |
Due after twenty years | 627,784 |  |  | 578,280 |  |  | 76,432 |  |  | 75,838 |
| 4,547,712 |  |  | 4,405,704 |  |  | 76,432 |  |  | 75,838 |
Residential mortgage backed securities | 44,747 |  |  | 42,542 |  |  | — |  |  | — |
Commercial mortgage backed securities | 432,201 |  |  | 428,878 |  |  | — |  |  | — |
Other asset backed securities | 208,937 |  |  | 201,052 |  |  | — |  |  | — |
| $ | 5,233,597 |  |  | $ | 5,078,176 |  |  | $ | 76,432 |  |  | $ | 75,838 |

Energy and Metals & Mining
The tables below summarize our publicly issued corporate fixed maturity securities in the energy and metals & mining sectors. Our privately placed available for sale fixed maturity securities at December 31, 2015 total $167.3 million fair value ($189.6 million amortized cost) in energy and $39.2 million fair value ($47.5 million amortized cost) in metals & mining and are not included in the following tables.

|  | December 31, 2015
Sector and Subsector |  | Amortized Cost |  | Fair Value |  | Unrealized Gain (Loss) |  | Average Credit Rating
|  | (Dollars in thousands) |  |
Energy |  |  |  |  |  |  |  |
Independent |  | $ | 494,440 |  |  | $ | 435,476 |  |  | $ | (58,964 | ) |  | Baa
Integrated |  | 451,848 |  |  | 438,884 |  |  | (12,964 | ) |  | A
Oil field services |  | 399,077 |  |  | 348,558 |  |  | (50,519 | ) |  | Baa
Refining |  | 101,055 |  |  | 97,379 |  |  | (3,676 | ) |  | Baa
Midstream |  | 738,396 |  |  | 663,068 |  |  | (75,328 | ) |  | Baa
Government owned no guarantee |  | 283,504 |  |  | 283,522 |  |  | 18 |  |  | A
Metals & Mining |  | 546,906 |  |  | 442,943 |  |  | (103,963 | ) |  | Baa
Total Energy and Metals & Mining |  | $ | 3,015,226 |  |  | $ | 2,709,830 |  |  | $ | (305,396 | ) |  | Baa

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|  | Amortized Cost at December 31, 2015
|  | Energy |  |  |  |
NRSRO Rating |  | Independent |  | Integrated |  | Oil field services |  | Refining |  | Midstream |  | Government Owned No Guarantee |  | Metals & Mining |  | Total
|  | (Dollars in thousands)
Aaa |  | $ | — |  |  | $ | 23,914 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 23,914 |
Aa |  | — |  |  | 166,662 |  |  | 28,277 |  |  | — |  |  | — |  |  | 147,763 |  |  | — |  |  | 342,702 |
A |  | 130,615 |  |  | 150,400 |  |  | 117,993 |  |  | 11,617 |  |  | 90,185 |  |  | 85,846 |  |  | 74,670 |  |  | 661,326 |
Baa |  | 363,825 |  |  | 110,872 |  |  | 223,741 |  |  | 89,438 |  |  | 614,167 |  |  | 25,259 |  |  | 382,121 |  |  | 1,809,423 |
Ba |  | — |  |  | — |  |  | 29,066 |  |  | — |  |  | 34,044 |  |  | 24,636 |  |  | 60,093 |  |  | 147,839 |
B |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 23,897 |  |  | 23,897 |
Below B |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 6,125 |  |  | 6,125 |
|  | $ | 494,440 |  |  | $ | 451,848 |  |  | $ | 399,077 |  |  | $ | 101,055 |  |  | $ | 738,396 |  |  | $ | 283,504 |  |  | $ | 546,906 |  |  | $ | 3,015,226 |

|  | Fair Value at December 31, 2015
|  | Energy |  |  |  |
NRSRO Rating |  | Independent |  | Integrated |  | Oil field services |  | Refining |  | Midstream |  | Government Owned No Guarantee |  | Metals & Mining |  | Total
|  | (Dollars in thousands)
Aaa |  | $ | — |  |  | $ | 24,734 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 24,734 |
Aa |  | — |  |  | 166,245 |  |  | 27,997 |  |  | — |  |  | — |  |  | 152,334 |  |  | — |  |  | 346,576 |
A |  | 127,940 |  |  | 144,831 |  |  | 112,187 |  |  | 10,928 |  |  | 90,335 |  |  | 91,499 |  |  | 67,332 |  |  | 645,052 |
Baa |  | 307,536 |  |  | 103,074 |  |  | 191,603 |  |  | 86,451 |  |  | 550,056 |  |  | 24,227 |  |  | 321,617 |  |  | 1,584,564 |
Ba |  | — |  |  | — |  |  | 16,771 |  |  | — |  |  | 22,677 |  |  | 15,462 |  |  | 37,226 |  |  | 92,136 |
B |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 13,618 |  |  | 13,618 |
Below B |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 3,150 |  |  | 3,150 |
|  | $ | 435,476 |  |  | $ | 438,884 |  |  | $ | 348,558 |  |  | $ | 97,379 |  |  | $ | 663,068 |  |  | $ | 283,522 |  |  | $ | 442,943 |  |  | $ | 2,709,830 |

International Exposure
We hold fixed maturity securities with international exposure. As of December 31, 2015, 18% of the carrying value of our fixed maturity securities was comprised of corporate debt securities of issuers based outside of the United States and debt securities of foreign governments. All of these securities are denominated in U.S. dollars and all are investment grade (NAIC designation of either 1 or 2), except for 19 securities with a total fair value of $118.2 million which have a NAIC 3 designation and 1 security with a fair value of $2.5 million which has a NAIC 6 designation. Our investment professionals analyze each holding for credit risk by economic and other factors of each country and industry. The following table presents our international exposure in our fixed maturity portfolio by country or region:

| December 31, 2015
| Amortized Cost |  | Fair Value |  | Percent of Total Fair Value
| (Dollars in thousands) |  |
GIIPS (1) | $ | 209,971 |  |  | $ | 225,926 |  |  | 0.6 | %
Asia/Pacific | 395,343 |  |  | 404,931 |  |  | 1.1 | %
Non-GIIPS Europe | 2,867,651 |  |  | 2,884,117 |  |  | 7.9 | %
Latin America | 263,887 |  |  | 220,994 |  |  | 0.6 | %
Non-U.S. North America | 1,211,268 |  |  | 1,141,790 |  |  | 3.1 | %
Australia & New Zealand | 625,754 |  |  | 614,938 |  |  | 1.7 | %
Other | 994,819 |  |  | 1,010,985 |  |  | 2.8 | %
| $ | 6,568,693 |  |  | $ | 6,503,681 |  |  | 17.8 | %

(1) | Greece, Ireland, Italy, Portugal and Spain continue to cause credit risk as economic conditions in these countries continue to be volatile, especially within the financial and banking sectors. All of our exposure in GIIPS are corporate securities with issuers domiciled in these countries. None of our foreign government obligations were held in any of these countries.

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Watch List
At each balance sheet date, we identify invested assets which have characteristics (i.e. significant unrealized losses compared to amortized cost and industry trends) creating uncertainty as to our future assessment of an other than temporary impairment. As part of this assessment we review not only a change in current price relative to its amortized cost but the issuer's current credit rating and the probability of full recovery of principal based upon the issuer's financial strength. Specifically for corporate issues we evaluate the financial stability and quality of asset coverage for the securities relative to the term to maturity for the issues we own. A security which has a 25% or greater change in market price relative to its amortized cost and a possibility of a loss of principal will be included on a list which is referred to as our watch list. We exclude from this list securities with unrealized losses which are related to market movements in interest rates and which have no factors indicating that such unrealized losses may be other than temporary as we do not intend to sell these securities and it is more likely than not we will not have to sell these securities before a recovery is realized. In addition, we exclude our residential and commercial mortgage backed securities as we monitor all of our residential and commercial mortgage backed securities on a quarterly basis for changes in default rates, loss severities and expected cash flows for the purpose of assessing potential other than temporary impairments and related credit losses to be recognized in operations. At December 31, 2015, the amortized cost and fair value of securities on the watch list (all fixed maturity securities) are as follows:

General Description |  | Number of Securities |  | Amortized Cost |  | Unrealized Losses |  | Fair Value |  | Months in Continuous Unrealized Loss Position |  | Months Unrealized Losses Greater Than 20%
|  |  |  | (Dollars in thousands) |  |  |  |
Investment grade |  |  |  |  |  |  |  |  |  |  |  |
Corporate securities: |  |  |  |  |  |  |  |  |  |  |  |
Financials |  | 1 |  | $ | 20,000 |  |  | $ | (3,888 | ) |  | $ | 16,112 |  |  | 52 |  | —
Industrial |  | 1 |  | 4,980 |  |  | (1,817 | ) |  | 3,163 |  |  | 14 |  | 5
Other asset backed securities: |  |  |  |  |  |  |  |  |  |  |  |
Financials |  | 1 |  | 2,855 |  |  | (856 | ) |  | 1,999 |  |  | 57 |  | 8
|  | 3 |  | $ | 27,835 |  |  | $ | (6,561 | ) |  | $ | 21,274 |  |  |  |  |
Below investment grade |  |  |  |  |  |  |  |  |  |  |  |
Corporate securities: |  |  |  |  |  |  |  |  |  |  |  |
Energy |  | 4 |  | 45,090 |  |  | (18,900 | ) |  | 26,190 |  |  | 16 - 32 |  | 4 - 12
Materials |  | 6 |  | 39,209 |  |  | (18,923 | ) |  | 20,286 |  |  | 6 - 35 |  | 1 - 16
Telecommunications |  | 1 |  | 6,000 |  |  | (3,240 | ) |  | 2,760 |  |  | 18 |  | 6
Other asset backed securities: |  |  |  |  |  |  |  |  |  |  |  |
Financials |  | 1 |  | 8,332 |  |  | (5,856 | ) |  | 2,476 |  |  | 31 |  | 12
|  | 12 |  | $ | 98,631 |  |  | $ | (46,919 | ) |  | $ | 51,712 |  |  |  |  |
|  | 15 |  | $ | 126,466 |  |  | $ | (53,480 | ) |  | $ | 72,986 |  |  |  |  |

We have determined that all of the securities on the watch list that have unrealized losses are temporarily impaired as we do not intend to sell these securities and it is more likely than not we will not have to sell these securities before recovery of their amortized cost. Our analysis of these securities and their credit performance at December 31, 2015 is as follows:
Financials: The decline in value of this security is due to the continued wide spreads as a result of the ongoing concerns relating to capital, asset quality and earnings stability due to the financial events of the past four years and the ongoing events in the Eurozone. While this issuer has had its financial position and profitability weakened by the credit and liquidity crisis, we have determined that this security was not other than temporarily impaired due to our evaluation of the operating performance and the credit worthiness of the issuer.
Industrial, Energy and Materials: The decline in the value of these securities relates to ongoing operational issues related to the decline in certain commodity prices specific to their businesses. The decline in these commodity prices creates financial challenges as the industries realign to accommodate the lower prices. These issuers will be stressed greater than the average company due to their price sensitivity and the specific position they hold in the chain of supply. We recognized other than temporary impairments on two securities from the same issuer with exposure to the materials sector during 2015. While the other issuers have seen the financial and profitability profile weakened, we have determined that the remaining securities were not other than temporarily impaired due to our evaluation of the operating performance and the credit worthiness of the issuer.
Other asset backed securities: The decline in value of the investment grade other asset backed security is due to poor performance in the underlying pool of student loans. The investment is backed by a guarantee from the for-profit education services provider. We have determined that this security was not other than temporarily impaired, because the guarantee is in good standing and all required payments have been made, including hyper-amortization payments triggered by the performance of the student loan portfolio. The decline in value of the below investment grade other asset backed security is related directly to the decline in oil prices and the financial stability of its operator. The issuer has direct exposure to the oil market as its primary business is deep water drilling. As oil prices have declined the operator of the deep water vessel has experienced financial pressure on its balance sheet. We recognized an other than temporary impairment on this security during 2015.
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Telecommunications: The decline in the value of this security is the result of regional economic recessionary pressure and an increase in competition in the markets it operates. There is potential for merger and acquisition activity in this market and an increase in price volatility is expected. While this issuer has seen weakened performance and heightened risk of merger activity, we have determined that this security was not other than temporarily impaired due to our evaluation of the operating performance and the credit worthiness of the issuer.
Other Than Temporary Impairments
We have a policy and process to identify securities in our investment portfolio for which we should recognize impairments. See Critical Accounting Policies—Evaluation of Other Than Temporary Impairments. We recognized other than temporary impairments and additional credit losses on residential mortgage backed securities, on one other asset backed security for which we had not previously recognized OTTI and on two corporate securities from the same issuer for which we had not previously recognized OTTI.. Several factors led us to believe that full recovery of amortized cost is not expected on the securities for which we recognized credit losses and reclassified OTTI from accumulated other comprehensive income to net income A discussion of these factors, our policy and process to identify securities that could potentially have impairment that is other than temporary and a summary of OTTI is presented in Note 3 to our audited consolidated financial statements in this Form 10-K, which is incorporated by reference in this Item 7.
Mortgage Loans on Real Estate
Our commercial mortgage loan portfolio consists of mortgage loans collateralized by the related properties and diversified as to property type, location and loan size. Our mortgage lending policies establish limits on the amount that can be loaned to one borrower and other criteria to attempt to reduce the risk of default. Our commercial mortgage loans on real estate are reported at cost, adjusted for amortization of premiums and accrual of discounts net of loan loss allowances. At December 31, 2015 and 2014, the largest principal amount outstanding for any single mortgage loan was $17.9 million and $15.8 million, respectively, and the average loan size was $2.9 million and $2.7 million, respectively. We have the contractual ability to pursue full personal recourse on 5.5% of the loans and partial personal recourse on 17.4% of the loans. In addition, the average loan to value ratio for the overall portfolio was 53.7% at December 31, 2015 and 2014, based upon the underwriting and appraisal at the time the loan was made. This loan to value is indicative of our conservative underwriting policies and practices for making commercial mortgage loans and may not be indicative of collateral values at the current reporting date. Our current practice is to only obtain market value appraisals of the underlying collateral at the inception of the loan unless we identify indicators of impairment in our ongoing analysis of the portfolio, in which case, we either calculate a value of the collateral using a capitalization method or obtain a current appraisal of the underlying collateral. The commercial mortgage loan portfolio is summarized by geographic region and property type in Note 4 of our audited consolidated financial statements of this Form 10-K, which is incorporated by reference in this Item 7.
In the normal course of business, we commit to fund commercial mortgage loans up to 90 days in advance. At December 31, 2015, we had commitments to fund commercial mortgage loans totaling $97.2 million, with fixed interest rates ranging from 4.15% to 4.67%. During 2015 and 2014, due to historically low interest rates, the commercial mortgage loan industry has been very competitive. This competition has resulted in a number of borrowers refinancing with other lenders. For the year ended December 31, 2015, we received $371.0 million in cash for loans being paid in full compared to $361.1 million for the year ended December 31, 2014. Some of the loans being paid off have either reached their maturity or are nearing maturity; however, some borrowers are paying the prepayment fee and refinancing at a lower rate.
See Note 4 to our audited consolidated financial statements for a presentation of our specific and general loan loss allowances, impaired loans, foreclosure activity and troubled debt restructure analysis.
We have a process by which we evaluate the credit quality of each of our commercial mortgage loans. This process utilizes each loan's debt service coverage ratio as a primary metric. A summary of our portfolio by debt service coverage ratio (based on most recent information collected)follows:

| December 31, 2015 |  | December 31, 2014
| Principal Outstanding |  | Percent of Total Principal Outstanding |  | Principal Outstanding |  | Percent of Total Principal Outstanding
| (Dollars in thousands) |  |  |  | (Dollars in thousands) |  |
Debt Service Coverage Ratio: |  |  |  |  |  |  |
Greater than or equal to 1.5 | $ | 1,772,226 |  |  | 72.3 | % |  | $ | 1,599,817 |  |  | 65.1 | %
Greater than or equal to 1.2 and less than 1.5 | 414,482 |  |  | 16.9 | % |  | 537,828 |  |  | 21.9 | %
Greater than or equal to 1.0 and less than 1.2 | 141,799 |  |  | 5.8 | % |  | 155,004 |  |  | 6.3 | %
Less than 1.0 | 121,402 |  |  | 5.0 | % |  | 165,072 |  |  | 6.7 | %
| $ | 2,449,909 |  |  | 100.0 | % |  | $ | 2,457,721 |  |  | 100.0 | %

Approximately 92% (based on principal outstanding) of our mortgage loans that have a debt service coverage ratio of less than 1.0 are performing under the original contractual loan terms at December 31, 2015.
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Mortgage loans summarized in the following table represent all loans that we are either not currently collecting or those we feel it is probable we will not collect all amounts due according to the contractual terms of the loan agreements (all loans that we have worked with the borrower to alleviate short-term cash flow issues, loans delinquent for 60 days or more at the reporting date, loans we have determined to be collateral dependent and loans that we have recorded specific impairments on that we feel may continue to have performance issues).

| December 31,
| 2015 |  | 2014
| (Dollars in thousands)
Impaired mortgage loans with an allowance | $ | 21,277 |  |  | $ | 29,116 |
Impaired mortgage loans with no related allowance | 8,859 |  |  | 2,656 |
Allowance for probable loan losses | (7,842 | ) |  | (12,333 | )
Net carrying value of impaired mortgage loans | $ | 22,294 |  |  | $ | 19,439 |

At December 31, 2015, we had no commercial mortgage loans that were delinquent (60 days or more past due at the reporting date) in their principal and interest payments.
Derivative Instruments
Our derivative instruments primarily consist of call options purchased to provide the income needed to fund the annual index credits on our fixed index annuity products. The fair value of the call options is based upon the amount of cash that would be required to settle the call options obtained from the counterparties adjusted for the nonperformance risk of the counterparty. The nonperformance risk for each counterparty is based upon its credit default swap rate. We have no performance obligations related to the call options.
None of our derivatives qualify for hedge accounting, thus, any change in the fair value of the derivatives that are not classified as equity is recognized immediately in the consolidated statements of operations. A presentation of our derivative instruments along with a discussion of the business strategy involved with our derivatives is included in Note 5 to our audited consolidated financial statements in this Form 10-K, which is incorporated by reference in this Item 7.
Liabilities
Our liability for policy benefit reserves increased to $45.5 billion at December 31, 2015 compared to $39.8 billion at December 31, 2014, primarily due to additional annuity sales as discussed above. Substantially all of our annuity products have a surrender charge feature designed to reduce the risk of early withdrawal or surrender of the policies and to compensate us for our costs if policies are withdrawn early. Notwithstanding these policy features, the withdrawal rates of policyholder funds may be affected by changes in interest rates and other factors.
See Note 9 to our audited consolidated financial statements in this Form 10-K, which is incorporated by reference in this Item 7 for discussion of our notes payable and borrowings under repurchase agreements.
See Note 10 to our audited consolidated financial statements for additional information concerning our subordinated debentures payable to, and the preferred securities issued by, our subsidiary trusts.
Liquidity and Capital Resources
Liquidity for Insurance Operations
Our insurance subsidiaries' primary sources of cash flow are annuity deposits, investment income, and proceeds from the sale, maturity and calls of investments. The primary uses of funds are investment purchases, payments to policyholders in connection with surrenders and withdrawals, policy acquisition costs and other operating expenses.
Liquidity requirements are met primarily by funds provided from operations. Our life subsidiaries generally receive adequate cash flow from annuity deposits and investment income to meet their obligations. Annuity and life insurance liabilities are generally long-term in nature. However, a primary liquidity concern is the risk of an extraordinary level of early policyholder withdrawals. We include provisions within our annuity policies, such as surrender charges and bonus vesting, that help limit and discourage early withdrawals. At December 31, 2015, approximately 95% of our annuity liabilities were subject to penalty upon surrender, with a weighted average remaining surrender charge period of 9.1 years and a weighted average surrender charge percentage of 14.3%.
Our insurance subsidiaries continue to have adequate cash flows from annuity deposits and investment income to meet their policyholder and other obligations. Net cash flows from annuity deposits and funds returned to policyholders as surrenders, withdrawals and death claims were $4.7 billion for the year ended December 31, 2015 compared to $2.2 billion for the year ended December 31, 2014 with the increase primarily attributable to a $2.6 billion increase in net annuity deposits after coinsurance offset by a $136.0 million (after coinsurance) increase in funds returned to policyholders. . We continue to invest the net proceeds from policyholder transactions and investment activities in high quality fixed maturity securities and fixed rate commercial mortgage loans.
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Liquidity of Parent Company
We, as the parent company, are a legal entity separate and distinct from our subsidiaries, and have no business operations. We need liquidity primarily to service our debt (senior notes and subordinated debentures issued to subsidiary trusts), pay operating expenses and pay dividends to stockholders. Our assets consist primarily of the capital stock and surplus notes of our subsidiaries. Accordingly, our future cash flows depend upon the availability of dividends, surplus note interest payments and other statutorily permissible payments from our subsidiaries, such as payments under our investment advisory agreements and tax allocation agreement with our subsidiaries. These sources provide adequate cash flow to us to meet our current and reasonably foreseeable future obligations and we expect they will be adequate to fund our parent company cash flow requirements in 2016.
The ability of our life insurance subsidiaries to pay dividends or distributions, including surplus note payments, will be limited by applicable laws and regulations of the states in which our life insurance subsidiaries are domiciled, which subject our life insurance subsidiaries to significant regulatory restrictions. These laws and regulations require, among other things, our insurance subsidiaries to maintain minimum solvency requirements and limit the amount of dividends these subsidiaries can pay.
Currently, American Equity Life may pay dividends or make other distributions without the prior approval of the Iowa Insurance Commissioner, unless such payments, together with all other such payments within the preceding twelve months, exceed the greater of (1) American Equity Life's net gain from operations for the preceding calendar year, or (2) 10% of American Equity Life's statutory surplus at the preceding December 31. For 2016, up to $241.3 million can be distributed as dividends by American Equity Life without prior approval of the Iowa Insurance Commissioner. In addition, dividends and surplus note payments may be made only out of statutory earned surplus, and all surplus note payments are subject to prior approval by regulatory authorities in the life subsidiary's state of domicile. American Equity Life had $1.3 billion of statutory earned surplus at December 31, 2015.
The maximum distribution permitted by law or contract is not necessarily indicative of an insurer's actual ability to pay such distributions, which may be constrained by business and regulatory considerations, such as the impact of such distributions on surplus, which could affect the insurer's ratings or competitive position, the amount of premiums that can be written and the ability to pay future dividends or make other distributions. Further, state insurance laws and regulations require that the statutory surplus of our life subsidiaries following any dividend or distribution must be reasonable in relation to their outstanding liabilities and adequate for their financial needs. Along with solvency regulations, the primary driver in determining the amount of capital used for dividends is the level of capital needed to maintain desired financial strength ratings from A.M. Best and Standard and Poor's. Both regulators and rating agencies could become more conservative in their methodology and criteria, including increasing capital requirements for our insurance subsidiaries which, in turn, could negatively affect the cash available to us from insurance subsidiaries. As of December 31, 2015, we estimate American Equity Life has sufficient statutory capital and surplus, combined with capital available to the holding company, to meet this rating objective. However, this capital may not be sufficient if significant future losses are incurred or a rating agency modifies its rating criteria and access to additional capital could be limited.
The transfer of funds by American Equity Life is also restricted by a covenant in our line of credit agreement which requires American Equity Life to maintain a minimum risk-based capital ratio of 275% and a minimum level of statutory surplus equal to the sum of 1) 80% of statutory surplus at September 30, 2013, 2) 50% of the statutory net income for each fiscal quarter ending after September 30, 2013, and 3) 50% of all capital contributed to American Equity Life after September 30, 2013. American Equity Life's risk-based capital ratio was 336% at December 31, 2015. Under this agreement we are also required to maintain a maximum ratio of adjusted debt to total adjusted capital of 0.35.
In August 2015, we completed an underwritten public offering of 9,890,000 shares of our common stock at a public offering price of $25.25 per share, of which 5,590,000 shares are subject to forward sale agreements. During the third quarter of 2015, we contributed $120 million to the capital and surplus of American Equity Life which included $104.5 million of initial net proceeds from the issuance of 4.3 million shares of common stock in our August 2015 public stock offering. If we elect to exercise our rights to physically settle the forward sales agreements, we intend to use the net proceeds from the settlement of approximately $134.6 million, based on the current forward price, for general corporate purposes, including contributions to the capital and surplus of our life insurance subsidiaries to support their continued growth and maintain desired financial strength ratings.
In 2015, 2014 and 2013, we retired $344 million aggregate principal amount of three convertible note issues. The total consideration paid to retire the convertible notes included $486 million of cash and 9.45 million shares of our common stock. We have now extinguished all of our convertible notes.
Cash and cash equivalents of the parent holding company at December 31, 2015, were $38.9 million. In addition, as discussed in Note 9 to our audited consolidated financial statements we have a $140 million revolving line of credit agreement. This revolving line of credit terminates on November 22, 2017, and borrowings are available for general corporate purposes of the parent company and its subsidiaries. We also have the ability to issue equity, debt or other types of securities through one or more methods of distribution under a currently effective shelf registration statement on Form S-3. The terms of any offering would be established at the time of the offering, subject to market conditions.
On August 5, 2015, Standard & Poor's raised its counterparty credit rating on American Equity Investment Life Holding Company to BBB- from BB+ and its financial strength rating on American Equity Life to A- from BBB+. On August 7, 2015, Fitch Ratings upgraded the issuer default rating of American Equity Investment Life Holding Company to BBB- from BB+.
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Statutory accounting practices prescribed or permitted for our life subsidiaries differ in many respects from those governing the preparation of financial statements under GAAP. Accordingly, statutory operating results and statutory capital and surplus may differ substantially from amounts reported in the GAAP basis financial statements for comparable items. Information as to statutory capital and surplus and statutory net income for our life subsidiaries as of December 31, 2015 and 2014 and for the years ended December 31, 2015, 2014 and 2013 is included in Note 12 to our audited consolidated financial statements.
In the normal course of business, we enter into financing transactions, lease agreements, or other commitments. These commitments may obligate us to certain cash flows during future periods. The following table summarizes such obligations as of December 31, 2015.

| Payments Due by Period
| Total |  | Less Than 1 year |  | 1–3 Years |  | 4–5 Years |  | After 5 Years
| (Dollars in thousands)
Annuity and single premium universal life products (1) | $ | 44,298,120 |  |  | $ | 2,772,812 |  |  | $ | 9,799,407 |  |  | $ | 6,652,105 |  |  | $ | 25,073,796 |
Notes payable, including interest payments (2) | 559,000 |  |  | 26,500 |  |  | 53,000 |  |  | 53,000 |  |  | 426,500 |
Subordinated debentures, including interest payments (3) | 539,944 |  |  | 11,355 |  |  | 22,709 |  |  | 22,709 |  |  | 483,171 |
Operating leases | 16,754 |  |  | 1,808 |  |  | 3,161 |  |  | 3,106 |  |  | 8,679 |
Mortgage loan funding and other investments | 162,586 |  |  | 133,834 |  |  | 28,752 |  |  | — |  |  | — |
Total | $ | 45,576,404 |  |  | $ | 2,946,309 |  |  | $ | 9,907,029 |  |  | $ | 6,730,920 |  |  | $ | 25,992,146 |

(1) | Amounts shown in this table are projected payments through the year 2035 which we are contractually obligated to pay to our annuity policyholders. The payments are derived from actuarial models which assume a level interest rate scenario and incorporate assumptions regarding mortality and persistency, when applicable. These assumptions are based on our historical experience.

(2) | Period that principal amounts are due is determined by the earliest of the call/put date or the maturity date of each note payable.

(3) | Amount shown is net of equity investments in the capital trusts due to the contractual right of offset upon repayment of the notes.

Inflation
Inflation does not have a significant effect on our consolidated balance sheet. We have minimal investments in property, equipment or inventories. To the extent that interest rates may change to reflect inflation or inflation expectations, there would be an effect on our balance sheet and operations. Higher interest rates experienced in 2015 have decreased the value of our fixed maturity investments. It is likely that lower interest rates would have the opposite effect. It is not possible to calculate the effect such changes in interest rates, if any, have had on our operating results.
Critical Accounting Policies
The increasing complexity of the business environment and applicable authoritative accounting guidance require us to closely monitor our accounting policies. We have identified six critical accounting policies that are complex and require significant judgment. The following summary of our critical accounting policies is intended to enhance your ability to assess our financial condition and results of operations and the potential volatility due to changes in estimates.
Valuation of Investments
Our fixed maturity securities (bonds and redeemable preferred stocks maturing more than one year after issuance) and equity securities classified as available for sale are reported at fair value. Unrealized gains and losses, if any, on these securities are included directly in stockholders' equity as a component of accumulated other comprehensive income (loss), net of income taxes and certain adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements. Unrealized gains and losses represent the difference between the amortized cost or cost basis and the fair value of these investments. We use significant judgment within the process used to determine fair value of these investments.
GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. We categorize our investments into three levels of fair value hierarchy based on the priority of inputs used in determining fair value. The hierarchy defines the highest priority inputs (Level 1) as quoted prices in active markets for identical assets or liabilities. The lowest priority inputs (Level 3) are our own assumptions about what a market participant would use in determining fair value such as estimated future cash flows. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, a financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.
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We categorize investments recorded at fair value in the consolidated balance sheets as follows:

Level 1 — | Quoted prices are available in active markets for identical financial instruments as of the reporting date. We do not adjust the quoted price for these financial instruments, even in situations where we hold a large position and a sale could reasonably impact the quoted price.

Level 2 — | Quoted prices in active markets for similar financial instruments, quoted prices for identical or similar financial instruments in markets that are not active; and models and other valuation methodologies using inputs other than quoted prices that are observable.

Level 3 — | Models and other valuation methodologies using significant inputs that are unobservable for financial instruments and include situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair value require significant management judgment or estimation. Financial instruments that are included in Level 3 are securities for which no market activity or data exists and for which we used discounted expected future cash flows with our own assumptions about what a market participant would use in determining fair value.

The following table presents the fair value of fixed maturity and equity securities, available for sale, by pricing source and hierarchy level as of December 31, 2015 and 2014, respectively:

| Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Total
| (Dollars in thousands)
December 31, 2015 |  |  |  |  |  |  |
Priced via third party pricing services | $ | 438,719 |  |  | $ | 35,785,649 |  |  | $ | — |  |  | $ | 36,224,368 |
Priced via independent broker quotations | — |  |  | 164,314 |  |  | — |  |  | 164,314 |
Priced via matrices | — |  |  | — |  |  | — |  |  | — |
Priced via other methods | — |  |  | 40,985 |  |  | — |  |  | 40,985 |
| $ | 438,719 |  |  | $ | 35,990,948 |  |  | $ | — |  |  | $ | 36,429,667 |
% of Total | 1.2 | % |  | 98.8 | % |  | — | % |  | 100.0 | %
December 31, 2014 |  |  |  |  |  |  |
Priced via third party pricing services | $ | 4,266 |  |  | $ | 32,204,981 |  |  | $ | — |  |  | $ | 32,209,247 |
Priced via independent broker quotations | — |  |  | 38,368 |  |  | — |  |  | 38,368 |
Priced via matrices | — |  |  | — |  |  | — |  |  | — |
Priced via other methods | — |  |  | 205,017 |  |  | 375 |  |  | 205,392 |
| $ | 4,266 |  |  | $ | 32,448,366 |  |  | $ | 375 |  |  | $ | 32,453,007 |
% of Total | — | % |  | 100.0 | % |  | — | % |  | 100.0 | %

Management's assessment of all available data when determining fair value of our investments is necessary to appropriately apply fair value accounting.
We utilize independent pricing services in estimating the fair values of investment securities. The independent pricing services incorporate a variety of observable market data in their valuation techniques, including:

• | reported trading prices,

• | benchmark yields

• | broker-dealer quotes,

• | benchmark securities,

• | bids and offers,

• | credit ratings,

• | relative credit information, and

• | other reference data.

The independent pricing services also take into account perceived market movements and sector news, as well as a security's terms and conditions, including any features specific to that issue that may influence risk and marketability. Depending on the security, the priority of the use of observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary.
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The independent pricing services provide quoted market prices when available. Quoted prices are not always available due to market inactivity. When quoted market prices are not available, the third parties use yield data and other factors relating to instruments or securities with similar characteristics to determine fair value for securities that are not actively traded. We generally obtain one value from our primary external pricing service. In situations where a price is not available from this service, we may obtain further quotes or prices from additional parties as needed. In addition, for our callable United States Government sponsored agencies we obtain multiple broker quotes and take the average of two broker prices received. Market indices of similar rated asset class spreads are considered for valuations and broker indications of similar securities are compared. Inputs used by the broker include market information, such as yield data and other factors relating to instruments or securities with similar characteristics. Valuations and quotes obtained from third party commercial pricing services are non-binding and do not represent quotes on which one may execute the disposition of the assets.
We validate external valuations at least quarterly through a combination of procedures that include the evaluation of methodologies used by the pricing services, analytical reviews and performance analysis of the prices against trends, and maintenance of a securities watch list. Additionally, as needed we utilize discounted cash flow models or perform independent valuations on a case-by-case basis using inputs and assumptions similar to those used by the pricing services. Although we do identify differences from time to time as a result of these validation procedures, we did not make any significant adjustments as of December 31, 2015 and 2014.
Evaluation of Other Than Temporary Impairments and Allowance for Loan Loss
The evaluation of investments for other than temporary impairments involves significant judgment and estimates by management. We review and analyze all investments on an ongoing basis for changes in market interest rates and credit deterioration. This review process includes analyzing our ability to recover the amortized cost or cost basis of each investment that has a fair value that is lower than its amortized cost or cost and requires a high degree of management judgment and involves uncertainty. The evaluation of securities for other than temporary impairments is a quantitative and qualitative process, which is subject to risks and uncertainties.
We have a policy and process to identify securities that could potentially have an impairment that is other than temporary. This process involves monitoring market events and other items that could impact issuers. The evaluation includes but is not limited to such factors as:

• | the length of time and the extent to which the fair value has been less than amortized cost or cost;

• | whether the issuer is current on all payments and all contractual payments have been made as agreed;

• | the remaining payment terms and the financial condition and near-term prospects of the issuer;

• | the lack of ability to refinance due to liquidity problems in the credit market;

• | the fair value of any underlying collateral;

• | the existence of any credit protection available;

• | our intent to sell and whether it is more likely than not we would be required to sell prior to recovery for debt securities;

• | our assessment in the case of equity securities including perpetual preferred stocks with credit deterioration that the security cannot recover to cost in a reasonable period of time;

• | our intent and ability to retain equity securities for a period of time sufficient to allow for recovery;

• | consideration of rating agency actions; and

• | changes in estimated cash flows of residential mortgage and asset backed securities.

We determine whether other than temporary impairment losses should be recognized for debt and equity securities by assessing all facts and circumstances surrounding each security. Where the decline in fair value of debt securities is attributable to changes in market interest rates or to factors such as market volatility, liquidity and spread widening, and we anticipate recovery of all contractual or expected cash flows, we do not consider these investments to be other than temporarily impaired because we do not intend to sell these investments and it is not more likely than not we will be required to sell these investments before a recovery of amortized cost, which may be maturity. For equity securities, we recognize an impairment charge in the period in which we do not have the intent and ability to hold the securities until recovery of cost or we determine that the security will not recover to book value within a reasonable period of time. We determine what constitutes a reasonable period of time on a security-by-security basis by considering all the evidence available to us, including the magnitude of any unrealized loss and its duration.
Other than temporary impairment losses on equity securities are recognized in operations. If we intend to sell a debt security or if it is more likely than not that we will be required to sell a debt security before recovery of its amortized cost basis, other than temporary impairment has occurred and the difference between amortized cost and fair value will be recognized as a loss in operations.
If we do not intend to sell and it is not more likely than not we will be required to sell the debt security but also do not expect to recover the entire amortized cost basis of the security, an impairment loss would be recognized in operations in the amount of the expected credit loss. We determine the amount of expected credit loss by calculating the present value of the cash flows expected to be collected discounted at each security's acquisition yield based on our consideration of whether the security was of high credit quality at the time of acquisition. The difference between the present value of expected future cash flows and the amortized cost basis of the security is the amount of credit loss recognized in operations. The remaining amount of the other than temporary impairment is recognized in other comprehensive income.
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The determination of the credit loss component of a residential mortgage backed security is based on a number of factors. The primary consideration in this evaluation process is the issuer's ability to meet current and future interest and principal payments as contractually stated at time of purchase. Our review of these securities includes an analysis of the cash flow modeling under various default scenarios considering independent third party benchmarks, the seniority of the specific tranche within the structure of the security, the composition of the collateral and the actual default, loss severity and prepayment experience exhibited. With the input of third party assumptions for default projections, loss severity and prepayment expectations, we evaluate the cash flow projections to determine whether the security is performing in accordance with its contractual obligation.
We utilize the models from a leading structured product software specialist serving institutional investors. These models incorporate each security's seniority and cash flow structure. In circumstances where the analysis implies a potential for principal loss at some point in the future, we use our "best estimate" cash flow projection discounted at the security's effective yield at acquisition to determine the amount of our potential credit loss associated with this security. The discounted expected future cash flows equates to our expected recovery value. Any shortfall of the expected recovery when compared to the amortized cost of the security will be recorded as the credit loss component of an other than temporary impairment.
The cash flow modeling is performed on a security-by-security basis and incorporates actual cash flows on the residential mortgage backed securities through the current period, as well as the projection of remaining cash flows using a number of assumptions including default rates, prepayment rates and loss severity rates. The default curves we use are tailored to the Prime or Alt-A residential mortgage backed securities that we own, which assume lower default rates and loss severity for Prime securities versus Alt-A securities. These default curves are scaled higher or lower depending on factors such as current underlying mortgage loan performance, rating agency loss projections, loan to value ratios, geographic diversity, as well as other appropriate considerations.
The determination of the credit loss component of a corporate bond (including redeemable preferred stocks) is based on the underlying financial performance of the issuer and their ability to meet their contractual obligations. Considerations in our evaluation include, but are not limited to, credit rating changes, financial statement and ratio analysis, changes in management, significant changes in credit spreads, breaches of financial covenants and a review of the economic outlook for the industry and markets in which they trade. In circumstances where an issuer appears unlikely to meet its future obligation, or the security's price decline is deemed other than temporary, an estimate of credit loss is determined. Credit loss is calculated using default probabilities as derived from the credit default swaps markets in conjunction with recovery rates derived from independent third party analysis or a best estimate of credit loss. This credit loss rate is then incorporated into a present value calculation based on an expected principal loss in the future discounted at the yield at the date of purchase and compared to amortized cost to determine the amount of credit loss associated with the security.
In addition, for debt securities which we do not intend to sell and it is not more likely than not we will be required to sell, but our intent changes due to changes or events that could not have been reasonably anticipated, an other than temporary impairment charge is recognized in net income and amortized cost is written down to fair value. Once an impairment charge has been recorded, we then continue to review the other than temporarily impaired securities for appropriate valuation on an ongoing basis. Unrealized losses may be recognized in future periods through a charge to earnings, should we later conclude that the decline in fair value below amortized cost is other than temporary pursuant to our accounting policy described above. The use of different methodologies and assumptions to determine the fair value of investments and the timing and amount of impairments may have a material effect on the amounts presented in our audited consolidated financial statements.
We evaluate our mortgage loan portfolio for the establishment of a loan loss allowance by specific identification of impaired loans and the measurement of an estimated loss for each individual loan identified. A mortgage loan is i mpaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. If we determine that the value of any specific mortgage loan is impaired, the carrying amount of the mortgage loan will be reduced to its fair value, based upon the present value of expected future cash flows from the loan discounted at the loan's effective interest rate, or the fair value of the underlying collateral less estimated costs to sell.
In addition, we analyze the mortgage loan portfolio for the need of a general loan allowance for probable losses on all other loans on a quantitative and qualitative basis. The amount of the general loan allowance is based upon management's evaluation of the collectability of the loan portfolio, historical loss experience, delinquencies, credit concentrations, underwriting standards and national and local economic conditions.
We rate each of the mortgage loans in our portfolio based on factors such as historical operating performance, loan to value ratio and economic outlook, among others. We calculate a loss factor to apply to each rating based on historical losses we have recognized in our mortgage loan portfolio. We apply the loss factors to the total principal outstanding within each rating category to determine an appropriate estimate of the general loan loss allowance. We also assess the portfolio quantitatively and apply a loss rate to all loans without a specific allowance based on management's assessment of economic conditions, and we apply an additional amount of loss allowance to a group of loans that we have identified as having higher risk of loss.
Policy Liabilities for Fixed Index Annuities
We offer a variety of fixed index annuities with crediting strategies linked to the S&P 500 Index and other equity and bond market indices. We purchase call options on the applicable indices as an investment to provide the income needed to fund the annual index credits on the index products. See Financial Condition—Derivative Instruments. Certain derivative instruments embedded in the fixed index annuity contracts are recognized in the consolidated balance sheet at their fair values and changes in fair value are recognized immediately in our consolidated statements of operations in accordance with accounting standards for derivative instruments and hedging activities.
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Accounting for derivatives prescribes that the contractual obligations for future annual index credits are treated as a "series of embedded derivatives" over the expected life of the applicable contracts. Policy liabilities for fixed index annuities are equal to the sum of the "host" (or guaranteed) component and the embedded derivative component for each fixed index annuity policy. The host value is established at inception of the contract and accreted over the policy's life at a constant rate of interest. We estimate the fair value of the embedded derivative component at each valuation date by (i) projecting policy contract values and minimum guaranteed contract values over the expected lives of the contracts and (ii) discounting the excess of the projected contract value amounts at the applicable risk free interest rates adjusted for our nonperformance risk related to those liabilities. The projections of policy contract values are based on our best estimate assumptions for future policy growth and future policy decrements. Our best estimate assumptions for future policy growth include assumptions for the expected index credits on the next policy anniversary date which are derived from the fair values of the underlying call options purchased to fund such index credits and the expected costs of annual call options we will purchase in the future to fund index credits beyond the next policy anniversary. The projections of minimum guaranteed contract values include the same best estimate assumptions for policy decrements as were used to project policy contract values. The amounts reported in the consolidated statements of operations as "Interest sensitive and index product benefits" represent amounts credited to policy liabilities pursuant to accounting by insurance companies for certain long-duration contracts which include index credits through the most recent policy anniversary. The amounts reported in the consolidated statements of operations as "Changes in fair value of embedded derivatives" equal the change in the difference between policy benefit reserves for fixed index annuities computed under the derivative accounting standard and the long-duration contracts accounting standard at each balance sheet date.
In general, the change in the fair value of the embedded derivatives will not correspond to the change in fair value of the purchased call options because the purchased call options are one year options while the options valued in the embedded derivatives represent the rights of the contract holder to receive index credits over the entire period the fixed index annuities are expected to be in force, which typically exceeds 10 years.
The most sensitive assumption in determining policy liabilities for fixed index annuities is the rates used to discount the excess projected contract values. As indicated above, the discount rate reflects our nonperformance risk. If the discount rates used to discount the excess projected contract values at December 31, 2015 were to increase by 100 basis points, our reserves for fixed index annuities would decrease by $400.3 million recorded through operations as a decrease in the change in fair value of embedded derivatives and there would be a corresponding decrease of $173.3 million to our combined balance for deferred policy acquisition costs and deferred sales inducements recorded through operations as an increase in amortization of deferred policy acquisition costs and deferred sales inducements. A decrease by 100 basis points in the discount rate used to discount the excess projected contract values would increase our reserves for fixed index annuities by $447.5 million recorded through operations as an increase in the change in fair value of embedded derivatives and increase our combined balance for deferred policy acquisition costs and deferred sales inducements by $248.9 million recorded through operations as a decrease in amortization of deferred policy acquisition costs and deferred sales inducements.
Liability for Lifetime Income Benefit Riders
Beginning in July 2007, substantially all of our fixed index annuity policies and many of our annual reset fixed rate deferred annuities were issued with a lifetime income benefit rider.
The liability for lifetime income benefit riders is based on estimates of the value of benefit payments expected to be paid in excess of projected policy values recognizing the excess over the expected lives of the underlying policies. The inputs used in the calculation of the liability for lifetime income benefit riders include actual policy values, actual income account values, actual payout factors, actual roll-up rates and our best estimate assumptions for future policy growth, future policy decrements, the ages at which policyholders are expected to elect to begin to receive lifetime income benefit payments, the percentage of policyholders who elect to receive lifetime income benefit payments and the type of income benefit payments selected upon election. The assumptions are reviewed quarterly and revisions to the assumptions are made based on historical results and our best estimates of future experience. The liability for lifetime income benefit riders is included in policy benefit reserves in the consolidated balance sheets and the change in the liability is included in interest sensitive and index product benefits in the consolidated statements of operations. See Results of Operations for the Three Years Ended December 31, 2015 in this Item 7. for a discussion and presentation of the actual effects of assumption revisions.
Deferred Policy Acquisition Costs and Deferred Sales Inducements
Costs relating to the successful production of new business are not expensed when incurred but instead are capitalized as deferred policy acquisition costs or deferred sales inducements. Only costs which are expected to be recovered from future policy revenues and gross profits may be deferred.
Deferred policy acquisition costs and deferred sales inducements are subject to loss recognition testing on a quarterly basis or when an event occurs that may warrant loss recognition. Deferred policy acquisition costs consist principally of commissions and certain costs of policy issuance. Deferred sales inducements consist of premium and interest bonuses credited to policyholder account balances.
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For annuity products, these costs are being amortized generally in proportion to expected gross profits from investment spreads, including the cost of hedging the fixed indexed annuity obligations, and, to a lesser extent, from product charges net of expected excess payments for lifetime income benefit riders, and mortality and expense margins. Current and future period gross profits/margins for fixed index annuities also include the impact of amounts recorded for the change in fair value of derivatives and the change in fair value of embedded derivatives. Current period amortization is adjusted retrospectively through an unlocking process when estimates of current or future gross profits/margins (including the impact of realized investment gains and losses) to be realized from a group of products are revised. Our estimates of future gross profits/margins are based on actuarial assumptions related to the underlying policies terms, lives of the policies, yield on investments supporting the liabilities and level of expenses necessary to maintain the polices over their entire lives. Revisions are made based on historical results and our best estimates of future experience. See Results of Operations for the Three Years Ended December 31, 2015 in this Item 7. for a discussion and presentation of the actual effects of unlocking.
Estimated future gross profits vary based on a number of sources including investment spread margins, surrender charge income, policy persistency, policy administrative expenses and realized gains and losses on investments including credit related other than temporary impairment losses. Estimated future gross profits are most sensitive to changes in investment spread margins which are the most significant component of gross profits. If estimated gross profits for all future years on business in force at December 31, 2015 were to increase by 10%, our combined balance for deferred policy acquisition costs and deferred sales inducements at December 31, 2015 would increase by $171.0 million recorded through operations as a decrease to amortization of deferred policy acquisition costs and deferred sales inducements. Correspondingly, a 10% decrease in estimated gross profits for all future years would result in a $191.7 million decrease in the combined December 31, 2015 balances recorded through operations as an increase to amortization of deferred policy acquisition costs and deferred sales inducements.
Deferred Income Taxes
We account for income taxes using the liability method. This method provides for the tax effects of transactions reported in the audited consolidated financial statements for both taxes currently due and deferred. Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. A temporary difference is a transaction, or amount of a transaction, that is recognized currently for financial reporting purposes but will not be recognized for tax purposes until a future tax period, or is recognized currently for tax purposes but will not be recognized for financial reporting purposes until a future reporting period. Deferred income taxes are measured by applying enacted tax rates for the years in which the temporary differences are expected to be recovered or settled to the amount of each temporary difference.
The realization of deferred income tax assets is primarily based upon management's estimates of future taxable income. Valuation allowances are established when management estimates, based on available information, that it is more likely than not that deferred income tax assets will not be realized. Significant judgment is required in determining whether valuation allowances should be established, as well as the amount of such allowances. When making such determination, consideration is given to, among other things, the following:

• | future taxable income of the necessary character exclusive of reversing temporary differences and carryforwards;

• | future reversals of existing taxable temporary differences;

• | taxable income in prior carryback years; and

• | tax planning strategies.

Actual realization of deferred income tax assets and liabilities may materially differ from these estimates as a result of changes in tax laws as well as unanticipated future transactions impacting related income tax balances.
The realization of deferred income tax assets related to unrealized losses on our available for sale fixed maturity securities is also based upon our intent to hold these securities for a period of time sufficient to allow for a recovery in fair value and not realize the unrealized loss.
New Accounting Pronouncements
See Note 1 to our audited consolidated financial statements in this Form 10-K beginning on page F-9, which is incorporated by reference in this Item 7, for new accounting pronouncement disclosures.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We seek to invest our available funds in a manner that will maximize shareholder value and fund future obligations to policyholders and debtors, subject to appropriate risk considerations. We seek to meet this objective through investments that: (i) consist substantially of investment grade fixed maturity securities, (ii) have projected returns which satisfy our spread targets and (iii) have characteristics which support the underlying liabilities. Many of our products incorporate surrender charges, market interest rate adjustments or other features to encourage persistency.
We seek to maximize the total return on our available for sale investments through active investment management. Accordingly, we have determined that our available for sale portfolio of fixed maturity securities is available to be sold in response to: (i) changes in market interest rates; (ii) changes in relative values of individual securities and asset sectors; (iii) changes in prepayment risks; (iv) changes in credit quality outlook for certain securities; (v) liquidity needs; and (vi) other factors.
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Interest rate risk is our primary market risk exposure. Substantial and sustained increases and decreases in market interest rates can affect the profitability of our products, the fair value of our investments and the amount of interest we pay on our floating rate subordinated debentures. Our floating rate trust preferred securities bear interest at the three month LIBOR plus 3.50% - 4.00%. Our outstanding balance of floating rate trust preferred securities was $164.5 million at December 31, 2015, of which $85.5 million has been swapped to a fixed rate which began in March of 2014 and $79.0 million has been capped for a term of seven years which began in July of 2014 (See Note 5 to our audited consolidated financial statements in this Form 10-K). The profitability of most of our products depends on the spreads between interest yield on investments and rates credited on insurance liabilities. We have the ability to adjust crediting rates (caps, participation rates or asset fee rates for fixed index annuities) on substantially all of our annuity liabilities at least annually (subject to minimum guaranteed values). In addition, substantially all of our annuity products have surrender and withdrawal penalty provisions designed to encourage persistency and to help ensure targeted spreads are earned. However, competitive factors, including the impact of the level of surrenders and withdrawals, may limit our ability to adjust or maintain crediting rates at levels necessary to avoid narrowing of spreads under certain market conditions.
A major component of our interest rate risk management program is structuring the investment portfolio with cash flow characteristics consistent with the cash flow characteristics of our insurance liabilities. We use models to simulate cash flows expected from our existing business under various interest rate scenarios. These simulations enable us to measure the potential gain or loss in fair value of our interest rate-sensitive financial instruments, to evaluate the adequacy of expected cash flows from our assets to meet the expected cash requirements of our liabilities and to determine if it is necessary to lengthen or shorten the average life and duration of our investment portfolio. The "duration" of a security is the time weighted present value of the security's expected cash flows and is used to measure a security's sensitivity to changes in interest rates. When the durations of assets and liabilities are similar, exposure to interest rate risk is minimized because a change in value of assets should be largely offset by a change in the value of liabilities.
If interest rates were to increase 10% (30 basis points) from levels at December 31, 2015, we estimate that the fair value of our fixed maturity securities would decrease by approximately $914.7 million. The impact on stockholders' equity of such decrease (net of income taxes and certain adjustments for changes in amortization of deferred policy acquisition costs and deferred sales inducements) would be a decrease of $270.3 million in accumulated other comprehensive income and a decrease in stockholders' equity. The computer models used to estimate the impact of a 10% change in market interest rates incorporate numerous assumptions, require significant estimates and assume an immediate and parallel change in interest rates without any management of the investment portfolio in reaction to such change. Consequently, potential changes in value of our financial instruments indicated by the simulations will likely be different from the actual changes experienced under given interest rate scenarios, and the differences may be material. Because we actively manage our investments and liabilities, our net exposure to interest rates can vary over time. However, any such decreases in the fair value of our fixed maturity securities (unless related to credit concerns of the issuer requiring recognition of an other than temporary impairment) would generally be realized only if we were required to sell such securities at losses prior to their maturity to meet our liquidity needs, which we manage using the surrender and withdrawal provisions of our annuity contracts and through other means. See Financial Condition—Liquidity for Insurance Operations for a further discussion of the liquidity risk.
At December 31, 2015, 33% of our fixed income securities have call features, of which 2.0% ($0.7 billion) were subject to call redemption. Another 0.4% ($0.2 billion) will become subject to call redemption during 2016. Approximately 68% of our fixed income securities that have call features are not callable until within six months of their stated maturities. During the years ended December 31, 2015 and 2014, we received $0.7 billion and $0.8 billion, respectively, in net redemption proceeds related to the exercise of such call options. We have reinvestment risk related to these redemptions to the extent we cannot reinvest the net proceeds in assets with credit quality and yield characteristics similar to the redeemed bonds. Such reinvestment risk typically occurs in a declining rate environment. Should rates decline to levels which tighten the spread between our average portfolio yield and average cost of interest credited on annuity liabilities, we have the ability to reduce crediting rates (caps, participation rates or asset fees for index annuities) on most of our annuity liabilities to maintain the spread at our targeted level. At December 31, 2015, approximately 99% of our annuity liabilities were subject to annual adjustment of the applicable crediting rates at our discretion, limited by minimum guaranteed crediting rates specified in the policies.
We purchase call options on the applicable indices to fund the annual index credits on our fixed index annuities. These options are primarily one-year instruments purchased to match the funding requirements of the underlying policies. Fair value changes associated with those investments are substantially offset by an increase or decrease in the amounts added to policyholder account balances for fixed index products. The difference between proceeds received at expiration of these options and index credits, as shown in the following table, is primarily due to over-hedging as a result of policyholder behavior being different than our expectations.

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
| (Dollars in thousands)
Annual index credits to policyholders on their anniversaries | $ | 587,705 |  |  | $ | 1,096,504 |  |  | $ | 908,717 |
Proceeds received at expiration of options related to such credits | 602,436 |  |  | 1,103,710 |  |  | 910,413 |

On the anniversary dates of the index policies, we purchase new one-year call options to fund the next annual index credits. The risk associated with these prospective purchases is the uncertainty of the cost, which will determine whether we are able to earn our spread on our index business. We manage this risk through the terms of our fixed index annuities, which permit us to change caps, participation rates and asset fees, subject to contractual features. By modifying caps, participation rates or asset fees, we can limit option costs to budgeted amounts, except in cases where the contractual features would prevent further modifications. Based upon actuarial testing which we conduct as a part of the design of our index products and on an ongoing basis, we believe the risk that contractual features would prevent us from controlling option costs is not material.
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Item 8. Consolidated Financial Statements and Supplementary Data
The audited consolidated financial statements are included as a part of this report on Form 10-K on pages F-1 through F-57.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures

(a) | Evaluation of Disclosure Controls and Procedures.

In accordance with the Securities Exchange Act Rules 13a-15(e) and 15d-15(e), our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2015 solely because of the material weakness in our internal control over financial reporting described below.

(b) | Management's Report on Internal Control over Financial Reporting.

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2015 based upon criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the assessment, management has determined that we did not maintain effective internal control over financial reporting as of December 31, 2015, solely because of the material weakness in our internal control over financial reporting described below. A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis.
Inadequate Controls Over Implementation of Changes to the Calculation of Lifetime Income Benefit Reserves
We did not have adequate controls designed and in place to ensure that we correctly implemented changes made to the calculation of lifetime income benefit reserves in the third quarter of 2015. Specifically, the design of our control relating to the review of the implementation of code changes to reflect revised assumptions and the impact of those changes (the “review control”) on the lifetime income benefit reserves was not modified given the complex nature and volume of code changes we made as part of the third quarter review. As a result, we failed to identify an immaterial after-tax calculation error. This amount was corrected in the fourth quarter of 2015 prior to issuing our consolidated financial statements. The control deficiency related to the lifetime income benefit reserves created a reasonable possibility that a material misstatement to the consolidated financial statements would not be prevented or detected on a timely basis and therefore we concluded that the deficiency represents a material weakness in the Company's internal control over financial reporting as of December 31, 2015.
The Company's independent registered public accounting firm, KPMG LLP, who audited the consolidated financial statements included in this annual report on Form 10-K, has issued an adverse report on the effectiveness of management's internal control over financial reporting as of December 31, 2015. This report appears on page F-3 of this annual report on Form 10-K.

(c) | Changes in Internal Control over Financial Reporting.

Other than the ongoing remediation plans described below, there were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
(d) Remediation of the Material Weakness in Internal Control Over Financial Reporting.
We are currently working to remediate the material weakness. We have reviewed the design of our current “review control” over the implementation of code changes to our lifetime income benefit reserves to determine appropriate improvements and have implemented enhanced procedures. As part of these procedures, our controls have been enhanced to ensure that all code changes are reviewed by an individual who was not responsible for the implementation of the code changes.
In addition, the scope of the “review control” over the implementation of code changes to our lifetime income benefit reserves has been expanded to include detail testing of our lifetime income benefit reserves calculation to ensure any code changes are implemented accurately. These control enhancements are intended to ensure that code changes to the lifetime income benefit reserves calculation function as intended.
We believe these measures will remediate the control deficiency identified above and have strengthened our internal control over financial reporting for the calculation of our lifetime income benefit reserves. We will test the ongoing operating effectiveness of the new controls and will consider the material weakness remediated after the applicable remedial controls operate effectively for a sufficient period of time.
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Item 9B. Other Information
There is no information required to be disclosed on Form 8-K for the quarter ended December 31, 2015 which has not been previously reported.
PART III
The information required by Part III is incorporated by reference from our definitive proxy statement for our annual meeting of shareholders to be held June 2, 2016 to be filed with the Commission pursuant to Regulation 14A within 120 days after December 31, 2015.
PART IV
Item 15. Exhibits and Financial Statement Schedules
Financial Statements and Financial Statement Schedules. See Index to Consolidated Financial Statements and Schedules on page F-1 for a list of financial statements and financial statement schedules included in this report.
All other schedules to the audited consolidated financial statements required by Article 7 of Regulation S-X are omitted because they are not applicable, not required, or because the information is included elsewhere in the audited consolidated financial statements or notes thereto.
Exhibits. See Exhibit Index immediately preceding the Exhibits for a list of Exhibits filed with this report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 26th day of February 2016.

| AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
| By: |  | /s/ JOHN M. MATOVINA
|  |  | John M. Matovina, Chief Executive Officer and President

Pursuant to the requirements of the Securities Exchange Act of 1934, this registration statement has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

Signature |  | Title (Capacity) |  | Date
/s/ JOHN M. MATOVINA |  | Chief Executive Officer, President and Director (Principal Executive Officer) |  | February 26, 2016
John M. Matovina |  |  |
/s/ TED M. JOHNSON |  | Chief Financial Officer and Treasurer (Principal Financial Officer) |  | February 26, 2016
Ted M. Johnson |  |  |
/s/ SCOTT A. SAMUELSON |  | Vice President—Controller (Principal Accounting Officer) |  | February 26, 2016
Scott A. Samuelson |  |  |
/s/ D.J. NOBLE |  | Executive Chairman and Director |  | February 26, 2016
D.J. Noble |  |  |  |
/s/ JOYCE A. CHAPMAN |  | Director |  | February 26, 2016
Joyce A. Chapman |  |  |  |
/s/ ALEXANDER M. CLARK |  | Director |  | February 26, 2016
Alexander M. Clark |  |  |  |
/s/ JAMES M. GERLACH |  | Director |  | February 26, 2016
James M. Gerlach |  |  |  |
/s/ ROBERT L. HOWE |  | Director |  | February 26, 2016
Robert L. Howe |  |  |  |
/s/ ALAN D. MATULA |  | Director |  | February 26, 2016
Alan D. Matula |  |  |  |
/s/ DAVID S. MULCAHY |  | Director |  | February 26, 2016
David S. Mulcahy |  |  |  |
/s/ GERARD D. NEUGENT |  | Director |  | February 26, 2016
Gerard D. Neugent |  |  |  |
/s/ DEBRA J. RICHARDSON |  | Director |  | February 26, 2016
Debra J. Richardson |  |  |  |
/s/ A.J. STRICKLAND, III |  | Director |  | February 26, 2016
A.J. Strickland, III |  |  |  |
/s/ HARLEY A. WHITFIELD |  | Director |  | February 26, 2016
Harley A. Whitfield |  |  |  |

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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
YEARS ENDED DECEMBER 31, 2015, 2014 and 2013

Reports of Independent Registered Public Accounting Firm | F-2
Consolidated Financial Statements: |
Consolidated Balance Sheets | F-4
Consolidated Statements of Operations | F-5
Consolidated Statements of Comprehensive Income (Loss) | F-6
Consolidated Statements of Changes in Stockholders' Equity | F-7
Consolidated Statements of Cash Flows | F-8
Notes to Consolidated Financial Statements | F-10
Schedules: |
Schedule I—Summary of Investments—Other Than Investments in Related Parties | F-50
Schedule II—Condensed Financial Information of Registrant | F-51
Schedule III—Supplementary Insurance Information | F-55
Schedule IV—Reinsurance | F-56
Schedule V—Valuation and Qualifying Accounts | F-57

F-1

Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
American Equity Investment Life Holding Company:
We have audited the accompanying consolidated balance sheets of American Equity Investment Life Holding Company and subsidiaries (the Company) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2015. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules listed in the Index on page F-1. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Equity Investment Life Holding Company and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three‑year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 26, 2016 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Des Moines, Iowa
February 26, 2016

Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
American Equity Investment Life Holding Company:
We have audited American Equity Investment Life Holding Company and subsidiaries (the Company) internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control ‑ Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures, as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness related to inadequate controls over implementation of changes to the calculation of lifetime income benefit reserves has been identified and included in management’s assessment. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2015 consolidated financial statements, and this report does not affect our report dated February 26, 2016, which expressed an unqualified opinion on those consolidated financial statements.
In our opinion, because of the effect of the aforementioned material weakness on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control ‑ Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ KPMG LLP
Des Moines, Iowa
February 26, 2016

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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)

| December 31,
| 2015 |  | 2014
Assets |  |  |
Investments: |  |  |
Fixed maturity securities: |  |  |
Available for sale, at fair value (amortized cost: 2015 - $35,823,710; 2014 - $30,205,046) | $ | 36,421,839 |  |  | $ | 32,445,202 |
Held for investment, at amortized cost (fair value: 2015 - $65,377; 2014 - $75,838) | 76,622 |  |  | 76,432 |
Equity securities, available for sale, at fair value (cost: 2015 - $7,515; 2014 - $7,509) | 7,828 |  |  | 7,805 |
Mortgage loans on real estate | 2,435,257 |  |  | 2,434,580 |
Derivative instruments | 337,256 |  |  | 731,113 |
Other investments | 291,530 |  |  | 286,726 |
Total investments | 39,570,332 |  |  | 35,981,858 |
Cash and cash equivalents | 397,749 |  |  | 701,514 |
Coinsurance deposits | 3,187,470 |  |  | 3,044,342 |
Accrued investment income | 362,104 |  |  | 326,559 |
Deferred policy acquisition costs | 2,905,136 |  |  | 2,058,556 |
Deferred sales inducements | 2,232,148 |  |  | 1,587,257 |
Deferred income taxes | 232,683 |  |  | — |
Income taxes recoverable | 29,599 |  |  | 9,252 |
Other assets | 123,942 |  |  | 280,396 |
Total assets | $ | 49,041,163 |  |  | $ | 43,989,734 |
Liabilities and Stockholders' Equity |  |  |
Liabilities: |  |  |
Policy benefit reserves | $ | 45,495,431 |  |  | $ | 39,802,861 |
Other policy funds and contract claims | 324,850 |  |  | 365,819 |
Notes payable | 400,000 |  |  | 421,679 |
Subordinated debentures | 246,450 |  |  | 246,243 |
Deferred income taxes | — |  |  | 3,895 |
Other liabilities | 629,897 |  |  | 1,009,361 |
Total liabilities | 47,096,628 |  |  | 41,849,858 |
Stockholders' equity: |  |  |
Preferred stock, par value $1 per share, 2,000,000 shares authorized, 2015 and 2014 - no shares issued and outstanding | — |  |  | — |
Common stock, par value $1 per share, 200,000,000 shares authorized; issued and outstanding: 2015 - 81,354,079 shares (excluding 3,448,750 treasury shares); 2014 - 76,062,407 shares (excluding 4,126,167 treasury shares) | 81,354 |  |  | 76,062 |
Additional paid-in capital | 630,367 |  |  | 513,218 |
Accumulated other comprehensive income | 201,663 |  |  | 721,401 |
Retained earnings | 1,031,151 |  |  | 829,195 |
Total stockholders' equity | 1,944,535 |  |  | 2,139,876 |
Total liabilities and stockholders' equity | $ | 49,041,163 |  |  | $ | 43,989,734 |

See accompanying notes to consolidated financial statements.
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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
Revenues: |  |  |  |  |
Premiums and other considerations | $ | 36,048 |  |  | $ | 32,623 |  |  | $ | 45,347 |
Annuity product charges | 136,168 |  |  | 118,990 |  |  | 103,591 |
Net investment income | 1,692,192 |  |  | 1,531,667 |  |  | 1,383,927 |
Change in fair value of derivatives | (336,146 | ) |  | 504,825 |  |  | 1,076,015 |
Net realized gains (losses) on investments, excluding other than temporary impairment ("OTTI") losses | 10,211 |  |  | (4,003 | ) |  | 40,561 |
OTTI losses on investments: |  |  |  |  |
Total OTTI losses | (25,547 | ) |  | — |  |  | (4,964 | )
Portion of OTTI losses recognized in (from) other comprehensive income | 6,011 |  |  | (2,627 | ) |  | (1,270 | )
Net OTTI losses recognized in operations | (19,536 | ) |  | (2,627 | ) |  | (6,234 | )
Loss on extinguishment of debt | — |  |  | (12,502 | ) |  | (32,515 | )
Total revenues | 1,518,937 |  |  | 2,168,973 |  |  | 2,610,692 |
Benefits and expenses: |  |  |  |  |
Insurance policy benefits and change in future policy benefits | 45,458 |  |  | 41,815 |  |  | 53,071 |
Interest sensitive and index product benefits | 968,053 |  |  | 1,473,700 |  |  | 1,272,867 |
Amortization of deferred sales inducements | 209,390 |  |  | 131,419 |  |  | 253,113 |
Change in fair value of embedded derivatives | (464,698 | ) |  | 32,321 |  |  | 133,968 |
Interest expense on notes payable | 28,849 |  |  | 36,370 |  |  | 38,870 |
Interest expense on subordinated debentures | 12,239 |  |  | 12,122 |  |  | 12,088 |
Amortization of deferred policy acquisition costs | 286,114 |  |  | 163,578 |  |  | 365,468 |
Other operating costs and expenses | 96,218 |  |  | 81,584 |  |  | 91,915 |
Total benefits and expenses | 1,181,623 |  |  | 1,972,909 |  |  | 2,221,360 |
Income before income taxes | 337,314 |  |  | 196,064 |  |  | 389,332 |
Income tax expense | 117,484 |  |  | 70,041 |  |  | 136,049 |
Net income | $ | 219,830 |  |  | $ | 126,023 |  |  | $ | 253,283 |
Earnings per common share | $ | 2.78 |  |  | $ | 1.69 |  |  | $ | 3.86 |
Earnings per common share - assuming dilution | $ | 2.72 |  |  | $ | 1.58 |  |  | $ | 3.38 |
Weighted average common shares outstanding (in thousands): |  |  |  |  |
Earnings per common share | 78,937 |  |  | 74,431 |  |  | 65,544 |
Earnings per common share - assuming dilution | 80,961 |  |  | 79,894 |  |  | 75,041 |

See accompanying notes to consolidated financial statements.
F-5

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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
Net income | $ | 219,830 |  |  | $ | 126,023 |  |  | $ | 253,283 |
Other comprehensive income (loss): |  |  |  |  |
Change in net unrealized investment gains/losses (1) | (797,374 | ) |  | 1,038,604 |  |  | (1,001,943 | )
Noncredit component of OTTI losses (1) | (2,927 | ) |  | 1,265 |  |  | 586 |
Reclassification of unrealized investment gains/losses to net income (1) | 703 |  |  | (1,092 | ) |  | 15,802 |
Other comprehensive income (loss) before income tax | (799,598 | ) |  | 1,038,777 |  |  | (985,555 | )
Income tax effect related to other comprehensive income (loss) | 279,860 |  |  | (363,572 | ) |  | 344,944 |
Other comprehensive income (loss) | (519,738 | ) |  | 675,205 |  |  | (640,611 | )
Comprehensive income (loss) | $ | (299,908 | ) |  | $ | 801,228 |  |  | $ | (387,328 | )

(1) | Net of related adjustments to amortization of deferred sales inducements and deferred policy acquisition costs.

See accompanying notes to consolidated financial statements.
F-6

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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)

| Common Stock |  | Additional Paid-in Capital |  | Unallocated Common Stock Held by ESOP |  | Accumulated Other Comprehensive Income |  | Retained Earnings |  | Total Stockholders' Equity
Balance at December 31, 2012 | $ | 61,751 |  |  | $ | 496,715 |  |  | $ | (2,583 | ) |  | $ | 686,807 |  |  | $ | 477,547 |  |  | $ | 1,720,237 |
Net income for the year | — |  |  | — |  |  | — |  |  | — |  |  | 253,283 |  |  | 253,283 |
Other comprehensive loss | — |  |  | — |  |  | — |  |  | (640,611 | ) |  | — |  |  | (640,611 | )
Allocation of 181,181 shares of common stock by ESOP, including excess income tax benefits | — |  |  | 1,438 |  |  | 1,952 |  |  | — |  |  | — |  |  | 3,390 |
Share-based compensation, including excess income tax benefits | — |  |  | 13,624 |  |  | — |  |  | — |  |  | — |  |  | 13,624 |
Issuance of 3,294,995 shares of common stock under compensation plans, including excess income tax benefits | 3,295 |  |  | 29,440 |  |  | — |  |  | — |  |  | — |  |  | 32,735 |
Extinguishment of convertible senior notes, net of tax, including 5,489,808 shares of common stock issued upon conversion | 5,489 |  |  | 57,174 |  |  | — |  |  | — |  |  | — |  |  | 62,663 |
Warrants reclassified to embedded derivative liability to be settled in cash | — |  |  | (47,991 | ) |  | — |  |  | — |  |  | — |  |  | (47,991 | )
Dividends on common stock ($0.18 per share) | — |  |  | — |  |  | — |  |  | — |  |  | (12,643 | ) |  | (12,643 | )
Balance at December 31, 2013 | 70,535 |  |  | 550,400 |  |  | (631 | ) |  | 46,196 |  |  | 718,187 |  |  | 1,384,687 |
Net income for the year | — |  |  | — |  |  | — |  |  | — |  |  | 126,023 |  |  | 126,023 |
Other comprehensive income | — |  |  | — |  |  | — |  |  | 675,205 |  |  | — |  |  | 675,205 |
Allocation of 58,618 shares of common stock by ESOP, including excess income tax benefits | — |  |  | 721 |  |  | 631 |  |  | — |  |  | — |  |  | 1,352 |
Share-based compensation, including excess income tax benefits | — |  |  | 7,705 |  |  | — |  |  | — |  |  | — |  |  | 7,705 |
Issuance of 1,567,607 shares of common stock under compensation plans, including excess income tax benefits | 1,568 |  |  | 13,137 |  |  | — |  |  | — |  |  | — |  |  | 14,705 |
Extinguishment of convertible senior notes, net of tax, including 3,959,396 shares of common stock issued upon conversion | 3,959 |  |  | (7,488 | ) |  | — |  |  | — |  |  | — |  |  | (3,529 | )
Warrants reclassified to embedded derivative liability to be settled in cash | — |  |  | (51,257 | ) |  | — |  |  | — |  |  | — |  |  | (51,257 | )
Dividends on common stock ($0.20 per share) | — |  |  | — |  |  | — |  |  | — |  |  | (15,015 | ) |  | (15,015 | )
Balance at December 31, 2014 | 76,062 |  |  | 513,218 |  |  | — |  |  | 721,401 |  |  | 829,195 |  |  | 2,139,876 |
Net income for the year | — |  |  | — |  |  | — |  |  | — |  |  | 219,830 |  |  | 219,830 |
Other comprehensive loss | — |  |  | — |  |  | — |  |  | (519,738 | ) |  | — |  |  | (519,738 | )
Share-based compensation, including excess income tax benefits | — |  |  | 9,976 |  |  | — |  |  | — |  |  | — |  |  | 9,976 |
Issuance of common stock via public offering | 4,300 |  |  | 100,179 |  |  | — |  |  | — |  |  | — |  |  | 104,479 |
Issuance of 944,504 shares of common stock under compensation plans, including excess income tax benefits | 944 |  |  | 7,042 |  |  | — |  |  | — |  |  | — |  |  | 7,986 |
Issuance of 47,868 shares of common stock to settle warrants that have reached their expiration | 48 |  |  | (48 | ) |  | — |  |  | — |  |  | — |  |  | — |
Dividends on common stock ($0.22 per share) | — |  |  | — |  |  | — |  |  | — |  |  | (17,874 | ) |  | (17,874 | )
Balance at December 31, 2015 | $ | 81,354 |  |  | $ | 630,367 |  |  | $ | — |  |  | $ | 201,663 |  |  | $ | 1,031,151 |  |  | $ | 1,944,535 |

See accompanying notes to consolidated financial statements.
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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
Operating activities |  |  |  |  |
Net income | $ | 219,830 |  |  | $ | 126,023 |  |  | $ | 253,283 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |  |
Interest sensitive and index product benefits | 968,053 |  |  | 1,473,700 |  |  | 1,272,867 |
Amortization of deferred sales inducements | 209,390 |  |  | 131,419 |  |  | 253,113 |
Annuity product charges | (136,168 | ) |  | (118,990 | ) |  | (103,591 | )
Change in fair value of embedded derivatives | (464,698 | ) |  | 32,321 |  |  | 133,968 |
Increase in traditional life and accident and health insurance reserves | 5,097 |  |  | 2,385 |  |  | 14,997 |
Policy acquisition costs deferred | (657,639 | ) |  | (426,882 | ) |  | (425,800 | )
Amortization of deferred policy acquisition costs | 286,114 |  |  | 163,578 |  |  | 365,468 |
Provision for depreciation and other amortization | 4,610 |  |  | 9,490 |  |  | 18,375 |
Amortization of discounts and premiums on investments | (8,464 | ) |  | (14,960 | ) |  | 6,861 |
Loss on extinguishment of debt | — |  |  | 12,502 |  |  | 32,515 |
Realized gains/losses on investments and net OTTI losses recognized in operations | 9,325 |  |  | 6,630 |  |  | (34,327 | )
Change in fair value of derivatives | 334,300 |  |  | (506,328 | ) |  | (1,076,015 | )
Deferred income taxes (benefits) | 41,916 |  |  | (46,504 | ) |  | 3,013 |
Share-based compensation | 7,373 |  |  | 3,544 |  |  | 10,476 |
Change in accrued investment income | (35,545 | ) |  | (24,918 | ) |  | (39,808 | )
Change in income taxes recoverable/payable | (20,027 | ) |  | (19,405 | ) |  | 5,397 |
Change in other assets | 71 |  |  | (2,771 | ) |  | 1,113 |
Change in other policy funds and contract claims | (49,092 | ) |  | (60,931 | ) |  | (47,445 | )
Change in collateral held for derivatives | (269,474 | ) |  | 27,839 |  |  | 236,702 |
Change in other liabilities | 75,794 |  |  | (51,008 | ) |  | (11,435 | )
Other | (15,962 | ) |  | (8,948 | ) |  | (7,059 | )
Net cash provided by operating activities | 504,804 |  |  | 707,786 |  |  | 862,668 |
Investing activities |  |  |  |  |
Sales, maturities, or repayments of investments: |  |  |  |  |
Fixed maturity securities—available for sale | 1,612,121 |  |  | 1,490,906 |  |  | 3,456,719 |
Equity securities—available for sale | — |  |  | — |  |  | 46,674 |
Mortgage loans on real estate | 468,102 |  |  | 453,937 |  |  | 539,240 |
Derivative instruments | 640,467 |  |  | 1,169,874 |  |  | 971,432 |
Other investments | 16,792 |  |  | 23,165 |  |  | 24,050 |
Acquisitions of investments: |  |  |  |  |
Fixed maturity securities—available for sale | (7,256,137 | ) |  | (5,191,781 | ) |  | (7,962,150 | )
Mortgage loans on real estate | (455,286 | ) |  | (327,654 | ) |  | (505,953 | )
Derivative instruments | (588,859 | ) |  | (492,296 | ) |  | (419,345 | )
Other investments | (13,092 | ) |  | (72,548 | ) |  | (29,015 | )
Purchases of property, furniture and equipment | (1,313 | ) |  | (1,352 | ) |  | (948 | )
Net cash used in investing activities | (5,577,205 | ) |  | (2,947,749 | ) |  | (3,879,296 | )

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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
Financing activities |  |  |  |  |
Receipts credited to annuity and single premium universal life policyholder account balances | $ | 7,051,227 |  |  | $ | 4,160,005 |  |  | $ | 4,160,346 |
Coinsurance deposits | (80,777 | ) |  | 109,184 |  |  | 25,729 |
Return of annuity policyholder account balances | (2,271,950 | ) |  | (2,025,203 | ) |  | (1,763,913 | )
Financing fees incurred and deferred | — |  |  | (100 | ) |  | (11,942 | )
Proceeds from notes payable | — |  |  | — |  |  | 415,000 |
Repayment of notes payable | (48,152 | ) |  | (219,094 | ) |  | (234,154 | )
Net proceeds from settlement of notes hedges and warrants | 25,775 |  |  | 16,558 |  |  | 22,170 |
Acquisition of common stock | (16 | ) |  | — |  |  | — |
Excess tax benefits realized from share-based compensation plans | 3,649 |  |  | 5,184 |  |  | 4,043 |
Proceeds from issuance of common stock | 112,481 |  |  | 13,681 |  |  | 31,764 |
Change in checks in excess of cash balance | (5,727 | ) |  | (1,252 | ) |  | 9,212 |
Dividends paid | (17,874 | ) |  | (15,015 | ) |  | (12,643 | )
Net cash provided by financing activities | 4,768,636 |  |  | 2,043,948 |  |  | 2,645,612 |
Decrease in cash and cash equivalents | (303,765 | ) |  | (196,015 | ) |  | (371,016 | )
Cash and cash equivalents at beginning of year | 701,514 |  |  | 897,529 |  |  | 1,268,545 |
Cash and cash equivalents at end of year | $ | 397,749 |  |  | $ | 701,514 |  |  | $ | 897,529 |
Supplemental disclosures of cash flow information |  |  |  |  |
Cash paid during the year for: |  |  |  |  |
Interest expense | $ | 39,118 |  |  | $ | 42,989 |  |  | $ | 25,608 |
Income taxes | 91,887 |  |  | 132,754 |  |  | 128,225 |
Non-cash operating activity: |  |  |  |  |
Deferral of sales inducements | 486,924 |  |  | 330,079 |  |  | 337,787 |
Non-cash investing activity: |  |  |  |  |
Real estate acquired in satisfaction of mortgage loans | — |  |  | 14,555 |  |  | 8,217 |
Mortgage loan on real estate sold | 4,879 |  |  | — |  |  | — |
Non-cash financing activity: |  |  |  |  |
Common stock issued in extinguishment of debt | — |  |  | 95,993 |  |  | 117,463 |
Common stock issued to settle warrants that have expired | 48 |  |  | — |  |  | — |

See accompanying notes to consolidated financial statements.
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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Nature of Operations
American Equity Investment Life Holding Company ("we", "us", "our" or "parent company"), through its wholly-owned subsidiaries, American Equity Investment Life Insurance Company ("American Equity Life"), American Equity Investment Life Insurance Company of New York ("American Equity Life of New York") and Eagle Life Insurance Company ("Eagle Life"), is licensed to sell insurance products in 50 states and the District of Columbia at December 31, 2015. We operate solely in the insurance business.
We primarily market fixed index and fixed rate annuities and to a lesser extent, life insurance. Premiums and annuity deposits (net of coinsurance) collected in 2015, 2014 and 2013, by product type were as follows:

|  | Year Ended December 31,
Product Type |  | 2015 |  | 2014 |  | 2013
|  | (Dollars in thousands)
Fixed index annuities |  | $ | 6,491,981 |  |  | $ | 3,911,109 |  |  | $ | 3,864,990 |
Annual reset fixed rate annuities |  | 44,715 |  |  | 56,647 |  |  | 71,162 |
Multi-year fixed rate annuities |  | 42,709 |  |  | 21,125 |  |  | 41,578 |
Single premium immediate annuities (SPIA) |  | 32,752 |  |  | 24,580 |  |  | 52,142 |
Life insurance |  | 10,917 |  |  | 10,810 |  |  | 10,556 |
|  | $ | 6,623,074 |  |  | $ | 4,024,271 |  |  | $ | 4,040,428 |

Agents contracted with us through one national marketing organization accounted for more than 10% of the annuity deposits and insurance premium collections during 2015 representing 24% of the annuity deposits and insurance premiums collected. Agents contracted with us through two national marketing organizations accounted for more than 10% of the annuity deposits and insurance premium collections during 2014, each representing 10% individually, of the annuity deposits and insurance premiums collected. Agents contracted with us through one national marketing organization accounted for more than 10% of the annuity deposits and insurance premium collections during 2013 representing 11% of the annuity deposits and insurance premiums collected.
Consolidation and Basis of Presentation
The consolidated financial statements include our accounts and our wholly-owned subsidiaries: American Equity Life, American Equity Life of New York, Eagle Life, AERL, L.C., American Equity Capital, Inc., American Equity Investment Properties, L.C., American Equity Advisors, Inc. and American Equity Investment Service Company. All significant intercompany accounts and transactions have been eliminated.
Estimates and Assumptions
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are utilized in the calculation of deferred policy acquisition costs, deferred sales inducements, policy benefit reserves, valuation of derivatives, including embedded derivatives on index annuity reserves, contingent convertible senior notes, valuation of investments, other than temporary impairment of investments, allowances for loan losses on mortgage loans and valuation allowances on deferred tax assets. A description of each critical estimate is incorporated within the discussion of the related accounting policies which follow. It is reasonably possible that actual experience could differ from the estimates and assumptions utilized.
Investments
Fixed maturity securities (bonds and redeemable preferred stocks maturing more than one year after issuance) that may be sold prior to maturity are classified as available for sale. Available for sale securities are reported at fair value and unrealized gains and losses, if any, on these securities are included directly in a separate component of stockholders' equity, net of income taxes and certain adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements. Fair values, as reported herein, of fixed maturity and equity securities are based on quoted market prices in active markets when available, or for those fixed maturity securities not actively traded, yield data and other factors relating to instruments or securities with similar characteristics are used. See Note 2 for more information on the determination of fair value. Premiums and discounts are amortized/accrued using methods which result in a constant yield over the securities' expected lives. Amortization/accrual of premiums and discounts on residential and commercial mortgage backed securities incorporate prepayment assumptions to estimate the securities' expected lives. Interest income is recognized as earned.
Fixed maturity securities that we have the positive intent and ability to hold to maturity are classified as held for investment. Such securities may, at times, be called prior to maturity. Held for investment securities are reported at cost adjusted for amortization of premiums and discounts. Changes in the fair value of these securities, except for declines that are other than temporary, are not reflected in our consolidated financial statements.
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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Equity securities are classified as available for sale and are reported at fair value. Unrealized gains and losses are included directly in a separate component of stockholders' equity, net of income taxes and certain adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements. Dividends are recognized when declared.
The carrying amounts of our impaired investments in fixed maturity and equity securities are adjusted for declines in value that are other than temporary. Other than temporary impairment losses are reported as a component of revenues in the consolidated statements of operations, which presents the amount of noncredit impairment losses for certain fixed maturity securities that is reported in accumulated other comprehensive income (loss). See Note 3 for further discussion of other than temporary impairment losses.
Deterioration in credit quality of the companies or assets backing our investment securities, deterioration in the condition of the financial services industry, imbalances in liquidity recurring in the marketplace or declines in real estate values may further affect the fair value of these investment securities and increase the potential that certain unrealized losses will be recognized as other than temporary impairments in the future.
Mortgage loans on real estate are reported at cost, adjusted for amortization of premiums and accrual of discounts. Interest income is recorded when earned; however, interest ceases to accrue for loans on which interest is more than 90 days past due based upon contractual terms and/or when the collection of interest is not considered probable. We evaluate the mortgage loan portfolio for the establishment of a loan loss allowance by specific identification of impaired loans and the measurement of an estimated loss, if any, for each impaired loan identified and an analysis of the mortgage loan portfolio for the need of a general loan allowance for probable losses on all loans. If we determine that the value of any specific mortgage loan is impaired, the carrying amount of the mortgage loan will be reduced to its fair value, based upon the present value of expected future cash flows from the loan discounted at the loan's contractual interest rate, or the fair value of the underlying collateral, less costs to sell. The amount of the general loan allowance, if any, is based upon our evaluation of the probability of collection, historical loss experience, delinquencies, credit concentrations, underwriting standards and national and local economic conditions. The carrying value of impaired loans is reduced by the establishment of an allowance for loan losses, changes to which are recognized as realized gains or losses on investments. Interest income on impaired loans is recorded on a cash basis.
Other invested assets include company owned life insurance, real estate, limited partnerships accounted for using the equity method and policy loans. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the end of the reporting period, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Policy loans are stated at current unpaid principal balances.
Real estate owned is reported at cost less accumulated depreciation. Cost is determined at the time ownership is acquired in satisfaction of mortgage loans and is the lower of the carrying value of the mortgage loan or fair value of the real estate less its estimated cost to sell. Buildings and improvements are depreciated using the straight-line method over their estimated useful lives. Impairment losses on real estate owned are recognized when there are indicators of impairment present and the expected future undiscounted cash flows are not sufficient to recover the real estate's carrying value. Any impairment losses are reported as realized losses and are part of net income.
Derivative Instruments
Our derivative instruments include call options used to fund fixed index annuity credits, interest rate swap and caps used to manage interest rate risk associated with the floating rate component on certain of our subordinated debentures, call options to hedge the conversion spread on our convertible senior notes (see Note 9) and certain other derivative instruments embedded in other contracts. All of our derivative instruments are recognized in the balance sheet at fair value and changes in fair value are recognized immediately in operations. See Note 5 for more information on derivative instruments.
Cash and Cash Equivalents
We consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
We also consider reverse repurchase agreements, which typically have an initial maturity of 6 weeks or less, to be cash equivalents. Amounts advanced under these agreements represent short-term loans that carry a fixed rate of interest. Borrowers under these agreements are required to post collateral that is investment grade debt securities with fair value in excess of the amount advanced.
Book Overdrafts
Under our cash management system, checks issued but not yet presented to banks frequently result in overdraft balances for accounting purposes and are classified as Other liabilities on our consolidated balance sheets. We report the changes in the amount of the overdraft balance as a financing activity in our consolidated statement of cash flows as Change in checks in excess of cash balance.
Deferred Policy Acquisition Costs and Deferred Sales Inducements
To the extent recoverable from future policy revenues and gross profits, certain costs that are incremental or directly related to the successful production of new business are not expensed when incurred but instead are capitalized as deferred policy acquisition costs or deferred sales inducements. Deferred policy acquisition costs and deferred sales inducements are subject to loss recognition testing on a quarterly basis or when an event occurs that may warrant loss recognition. Deferred policy acquisition costs consist primarily of commissions and certain costs of policy issuance. Deferred sales inducements consist of premium and interest bonuses credited to policyholder account balances.
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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For annuity products, these capitalized costs are being amortized generally in proportion to expected gross profits from investment spreads, including the cost of hedging the fixed indexed annuity obligations, and, to a lesser extent, from product charges net of expected excess payments for lifetime income benefit riders, and mortality and expense margins. Current and future period gross profits/margins for fixed index annuities also include the impact of amounts recorded for the change in fair value of derivatives and the change in fair value of embedded derivatives. That amortization is adjusted retrospectively through an unlocking process when estimates of current or future gross profits/margins (including the impact of net realized gains on investments and net OTTI losses recognized in operations) to be realized from a group of products are revised. Deferred policy acquisition costs and deferred sales inducements are also adjusted for the change in amortization that would have occurred if available for sale fixed maturity securities and equity securities had been sold at their aggregate fair value at the end of the reporting period and the proceeds reinvested at current yields. The impact of this adjustment is included in accumulated other comprehensive income within consolidated stockholders' equity, net of applicable taxes. See Note 6 for more information on deferred policy acquisition costs and deferred sales inducements.
Policy Benefit Reserves
Policy benefit reserves for fixed index annuities with returns linked to the performance of a specified market index are equal to the sum of the fair value of the embedded derivatives and the host (or guaranteed) component of the contracts. The host value is established at inception of the contract and accreted over the policy's life at a constant rate of interest. Future policy benefit reserves for fixed index annuities earning a fixed rate of interest and other deferred annuity products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. For the years ended December 31, 2015, 2014 and 2013, interest crediting rates for these products ranged from 1.00% to 3.50%.
The liability for lifetime income benefit riders is based on estimates of the value of benefit payments expected to be paid in excess of projected policy values recognizing the excess over the expected lives of the underlying policies. The inputs used in the calculation of the liability for lifetime income benefit riders include actual policy values, actual income account values, actual payout factors, actual roll-up rates and our best estimate assumptions for future policy growth, future policy decrements, the ages at which policyholders are expected to elect to begin to receive lifetime income benefit payments, the percentage of policyholders who elect to receive lifetime income benefit payments and the type of income benefit payments selected upon election.
Policy benefit reserves are not reduced for amounts ceded under coinsurance agreements which are reported as coinsurance deposits on our consolidated balance sheets. See Note 7 for more information on reinsurance.
The liability for future policy benefits for traditional life insurance is based on net level premium reserves, including assumptions as to interest, mortality, and other assumptions underlying the guaranteed policy cash values. Reserve interest assumptions are level and range from 3.00% to 5.50%. Policy benefit claims are charged to expense in the period that the claims are incurred.
Deferred Income Taxes
Deferred income tax assets or liabilities are computed based on the temporary differences between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. Deferred income tax expenses or benefits are based on the changes in the asset or liability from period to period. Deferred income tax assets are subject to ongoing evaluation of whether such assets will more likely than not be realized. The realization of deferred income tax assets primarily depends on generating future taxable income during the periods in which temporary differences become deductible. Deferred income tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. In making such a determination, all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations, is considered. The realization of deferred income tax assets related to unrealized losses on available for sale fixed maturity securities is also based upon our intent and ability to hold those securities for a period of time sufficient to allow for a recovery in fair value and not realize the unrealized loss.
Recognition of Premium Revenues and Costs
Revenues for annuity products include surrender and living income benefit rider charges assessed against policyholder account balances during the period. Interest sensitive and index product benefits related to annuity products include interest credited or index credits to policyholder account balances pursuant to accounting by insurance companies for certain long-duration contracts. The change in fair value of the embedded derivatives for fixed index annuities equals the change in the difference between policy benefit reserves for fixed index annuities computed under the derivative accounting standard and the long-duration contracts accounting standard at each balance sheet date.
Considerations from immediate annuities with life contingencies are recognized as revenue when the policy is issued.
Traditional life insurance premiums are recognized as revenues over the premium-paying period. Certain group policies include provisions for annual experience refunds of premiums equal to net premiums received less an administrative fee and less claims incurred. Such amounts (2015 - $1.5 million; 2014 - $1.7 million; and 2013 - $1.1 million) are reported as a reduction of traditional life insurance premiums in the consolidated statements of operations. Future policy benefits are recognized as expenses over the life of the policy by means of the provision for future policy benefits.
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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All insurance-related revenues, including the change in the fair value of derivatives for call options related to the business ceded under coinsurance agreements (see Note 7), benefits, losses and expenses are reported net of reinsurance ceded.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) includes all changes in stockholders' 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 which merely represent transfers from unrealized to realized gains and losses.
New Accounting Pronouncements
In June 2014, the FASB issued an ASU that requires that a performance target in a share based payment arrangement that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. This ASU will be effective for us on January 1, 2016, and early adoption is permitted, but it is not expected to have a material impact on our consolidated financial statements.
In April 2015, the FASB issued an ASU which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This ASU will be effective for us on January 1, 2016, and retroactive application is required. It is not expected to have a material impact on our consolidated financial statements. Subsequently, in August 2015, the FASB issued an ASU that states that the Securities and Exchange Commission staff would not object to an entity deferring and presenting debt issuance costs related to line-of-credit arrangements as an asset and expensing those costs ratably over the term of the line of credit arrangement.
In January 2016, the FASB issued an ASU that, among other aspects of recognition, measurement, presentation and disclosure of financial instruments, primarily requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. This ASU will be effective for fiscal years beginning after December 15, 2017, and we have not determined the effect it will have on our consolidated financial statements.
2. Fair Values of Financial Instruments
The following sets forth a comparison of the carrying amounts and fair values of our financial instruments:

| December 31,
| 2015 |  | 2014
| Carrying Amount |  | Fair Value |  | Carrying Amount |  | Fair Value
| (Dollars in thousands)
Assets |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |
Available for sale | $ | 36,421,839 |  |  | $ | 36,421,839 |  |  | $ | 32,445,202 |  |  | $ | 32,445,202 |
Held for investment | 76,622 |  |  | 65,377 |  |  | 76,432 |  |  | 75,838 |
Equity securities, available for sale | 7,828 |  |  | 7,828 |  |  | 7,805 |  |  | 7,805 |
Mortgage loans on real estate | 2,435,257 |  |  | 2,471,864 |  |  | 2,434,580 |  |  | 2,493,901 |
Derivative instruments | 337,256 |  |  | 337,256 |  |  | 731,113 |  |  | 731,113 |
Other investments | 285,044 |  |  | 290,075 |  |  | 266,488 |  |  | 273,004 |
Cash and cash equivalents | 397,749 |  |  | 397,749 |  |  | 701,514 |  |  | 701,514 |
Coinsurance deposits | 3,187,470 |  |  | 2,860,882 |  |  | 3,044,342 |  |  | 2,698,552 |
Interest rate caps | 1,411 |  |  | 1,411 |  |  | 2,778 |  |  | 2,778 |
2015 notes hedges | — |  |  | — |  |  | 30,291 |  |  | 30,291 |
Counterparty collateral | 82,312 |  |  | 82,312 |  |  | 206,096 |  |  | 206,096 |
Liabilities |  |  |  |  |  |  |
Policy benefit reserves | 45,151,460 |  |  | 38,435,515 |  |  | 39,463,987 |  |  | 33,078,978 |
Single premium immediate annuity (SPIA) benefit reserves | 324,264 |  |  | 336,066 |  |  | 365,440 |  |  | 377,654 |
Notes payable | 400,000 |  |  | 417,752 |  |  | 421,679 |  |  | 503,349 |
Subordinated debentures | 246,450 |  |  | 216,933 |  |  | 246,243 |  |  | 244,437 |
2015 notes embedded conversion derivative | — |  |  | — |  |  | 30,291 |  |  | 30,291 |
Interest rate swap | 3,139 |  |  | 3,139 |  |  | 2,644 |  |  | 2,644 |

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Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. The objective of a fair value measurement is to determine that price for each financial instrument at each measurement date. We meet this objective using various methods of valuation that include market, income and cost approaches.
We categorize our financial instruments into three levels of fair value hierarchy based on the priority of inputs used in determining fair value. The hierarchy defines the highest priority inputs (Level 1) as quoted prices in active markets for identical assets or liabilities. The lowest priority inputs (Level 3) are our own assumptions about what a market participant would use in determining fair value such as estimated future cash flows. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, a financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument. We categorize financial assets and liabilities recorded at fair value in the consolidated balance sheets as follows:

Level 1— | Quoted prices are available in active markets for identical financial instruments as of the reporting date. We do not adjust the quoted price for these financial instruments, even in situations where we hold a large position and a sale could reasonably impact the quoted price.

Level 2— | Quoted prices in active markets for similar financial instruments, quoted prices for identical or similar financial instruments in markets that are not active; and models and other valuation methodologies using inputs other than quoted prices that are observable.

Level 3— | Models and other valuation methodologies using significant inputs that are unobservable for financial instruments and include situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair value require significant management judgment or estimation. Financial instruments that are included in Level 3 are securities for which no market activity or data exists and for which we used discounted expected future cash flows with our own assumptions about what a market participant would use in determining fair value.

Transfers of securities among the levels occur at times and depend on the type of inputs used to determine fair value of each security. There were no transfers between levels during any period presented.
F-14

Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our assets and liabilities which are measured at fair value on a recurring basis as of December 31, 2015 and 2014 are presented below based on the fair value hierarchy levels:

| Total Fair Value |  | Quoted Prices in Active Markets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
| (Dollars in thousands)
December 31, 2015 |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |
Available for sale: |  |  |  |  |  |  |
United States Government full faith and credit | $ | 471,256 |  |  | $ | 438,598 |  |  | $ | 32,658 |  |  | $ | — |
United States Government sponsored agencies | 1,398,611 |  |  | — |  |  | 1,398,611 |  |  | — |
United States municipalities, states and territories | 3,755,367 |  |  | — |  |  | 3,755,367 |  |  | — |
Foreign government obligations | 212,565 |  |  | — |  |  | 212,565 |  |  | — |
Corporate securities | 23,802,394 |  |  | 121 |  |  | 23,802,273 |  |  | — |
Residential mortgage backed securities | 1,462,072 |  |  | — |  |  | 1,462,072 |  |  | — |
Commercial mortgage backed securities | 4,174,396 |  |  | — |  |  | 4,174,396 |  |  | — |
Other asset backed securities | 1,145,178 |  |  | — |  |  | 1,145,178 |  |  | — |
Equity securities, available for sale: finance, insurance and real estate | 7,828 |  |  | — |  |  | 7,828 |  |  | — |
Derivative instruments | 337,256 |  |  | — |  |  | 337,256 |  |  | — |
Cash and cash equivalents | 397,749 |  |  | 397,749 |  |  | — |  |  | — |
Interest rate caps | 1,411 |  |  | — |  |  | 1,411 |  |  | — |
Counterparty collateral | 82,312 |  |  | — |  |  | 82,312 |  |  | — |
| $ | 37,248,395 |  |  | $ | 836,468 |  |  | $ | 36,411,927 |  |  | $ | — |
Liabilities |  |  |  |  |  |  |
Interest rate swap | $ | 3,139 |  |  | $ | — |  |  | $ | 3,139 |  |  | $ | — |
Fixed index annuities—embedded derivatives | 5,983,622 |  |  | — |  |  | — |  |  | 5,983,622 |
| $ | 5,986,761 |  |  | $ | — |  |  | $ | 3,139 |  |  | $ | 5,983,622 |
December 31, 2014 |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |
Available for sale: |  |  |  |  |  |  |
United States Government full faith and credit | $ | 138,460 |  |  | $ | 4,255 |  |  | $ | 134,205 |  |  | $ | — |
United States Government sponsored agencies | 1,393,890 |  |  | — |  |  | 1,393,890 |  |  | — |
United States municipalities, states and territories | 3,723,309 |  |  | — |  |  | 3,723,309 |  |  | — |
Foreign government obligations | 193,803 |  |  | — |  |  | 193,803 |  |  | — |
Corporate securities | 21,490,292 |  |  | 11 |  |  | 21,490,281 |  |  | — |
Residential mortgage backed securities | 1,751,345 |  |  | — |  |  | 1,750,970 |  |  | 375 |
Commercial mortgage backed securities | 2,807,620 |  |  | — |  |  | 2,807,620 |  |  | — |
Other asset backed securities | 946,483 |  |  | — |  |  | 946,483 |  |  | — |
Equity securities, available for sale: finance, insurance and real estate | 7,805 |  |  | — |  |  | 7,805 |  |  | — |
Derivative instruments | 731,113 |  |  | — |  |  | 731,113 |  |  | — |
Cash and cash equivalents | 701,514 |  |  | 701,514 |  |  | — |  |  | — |
Interest rate caps | 2,778 |  |  | — |  |  | 2,778 |  |  | — |
2015 notes hedges | 30,291 |  |  | — |  |  | 30,291 |  |  | — |
Counterparty collateral | 206,096 |  |  | — |  |  | 206,096 |  |  | — |
| $ | 34,124,799 |  |  | $ | 705,780 |  |  | $ | 33,418,644 |  |  | $ | 375 |
Liabilities |  |  |  |  |  |  |
2015 notes embedded conversion derivative | $ | 30,291 |  |  | $ | — |  |  | $ | 30,291 |  |  | $ | — |
Interest rate swap | 2,644 |  |  | — |  |  | 2,644 |  |  | — |
Fixed index annuities—embedded derivatives | 5,574,653 |  |  | — |  |  | — |  |  | 5,574,653 |
| $ | 5,607,588 |  |  | $ | — |  |  | $ | 32,935 |  |  | $ | 5,574,653 |

F-15

Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following methods and assumptions were used in estimating the fair values of financial instruments during the periods presented in these consolidated financial statements.
Fixed maturity securities and equity securities
The fair values of fixed maturity securities and equity securities in an active and orderly market are determined by utilizing independent pricing services. The independent pricing services incorporate a variety of observable market data in their valuation techniques, including:

• | reported trading prices,

• | benchmark yields,

• | broker-dealer quotes,

• | benchmark securities,

• | bids and offers,

• | credit ratings,

• | relative credit information, and

• | other reference data.

The independent pricing services also take into account perceived market movements and sector news, as well as a security's terms and conditions, including any features specific to that issue that may influence risk and marketability. Depending on the security, the priority of the use of observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary.
The independent pricing services provide quoted market prices when available. Quoted prices are not always available due to market inactivity. When quoted market prices are not available, the third parties use yield data and other factors relating to instruments or securities with similar characteristics to determine fair value for securities that are not actively traded. We generally obtain one value from our primary external pricing service. In situations where a price is not available from this service, we may obtain further quotes or prices from additional parties as needed. In addition, for our callable United States Government sponsored agencies we obtain multiple broker quotes and take the average of the broker prices received. Market indices of similar rated asset class spreads are considered for valuations and broker indications of similar securities are compared. Inputs used by the broker include market information, such as yield data and other factors relating to instruments or securities with similar characteristics. Valuations and quotes obtained from third party commercial pricing services are non-binding and do not represent quotes on which one may execute the disposition of the assets.
We validate external valuations at least quarterly through a combination of procedures that include the evaluation of methodologies used by the pricing services, analytical reviews and performance analysis of the prices against trends, and maintenance of a securities watch list. Additionally, as needed we utilize discounted cash flow models or perform independent valuations on a case-by-case basis using inputs and assumptions similar to those used by the pricing services. Although we do identify differences from time to time as a result of these validation procedures, we did not make any significant adjustments as of December 31, 2015 and 2014.
Mortgage loans on real estate
Mortgage loans on real estate are not measured at fair value on a recurring basis. The fair values of mortgage loans on real estate are calculated using discounted expected cash flows using current competitive market interest rates currently being offered for similar loans. The fair values of impaired mortgage loans on real estate that we have considered to be collateral dependent are based on the fair value of the real estate collateral (based on appraised values) less estimated costs to sell. The inputs utilized to determine fair value of all mortgage loans are unobservable market data (competitive market interest rates and appraised property values); therefore, fair value of mortgage loans falls into Level 3 in the fair value hierarchy.
Derivative instruments
The fair values of derivative instruments, primarily call options, are based upon the amount of cash that we will receive to settle each derivative instrument on the reporting date. These amounts are determined by our investment team using industry accepted valuation models and are adjusted for the nonperformance risk of each counterparty net of any collateral held. Inputs include market volatility and risk free interest rates and are used in income valuation techniques in arriving at a fair value for each option contract. The nonperformance risk for each counterparty is based upon its credit default swap rate. We have no performance obligations related to the call options purchased to fund our fixed index annuity policy liabilities.
F-16

Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other investments
None of the financial instruments included in other investments are measured at fair value on a recurring basis. Financial instruments included in other investments are policy loans, equity method investments and company owned life insurance (COLI). We have not attempted to determine the fair values associated with our policy loans, as we believe any differences between carrying value and the fair values afforded these instruments are immaterial to our consolidated financial position and, accordingly, the cost to provide such disclosure does not justify the benefit to be derived. The fair value of our equity method investments qualify as Level 3 fair values and were determined by calculating the present value of future cash flows discounted by a risk free rate, a risk spread and a liquidity discount. The risk spread and liquidity discount are rates determined by our investment professionals and are unobservable market inputs. The fair value of our COLI approximates the cash surrender value of the policies and whose fair values fall within Level 2 of the fair value hierarchy.
Cash and cash equivalents
Amounts reported in the consolidated balance sheets for these instruments are reported at their historical cost which approximates fair value due to the nature of the assets assigned to this category.
Interest rate swap and caps
The fair values of our pay fixed/receive variable interest rate swap and interest rate caps are obtained from third parties and are determined by discounting expected future cash flows using projected LIBOR rates for the term of the swap and caps.
2015 notes hedges
The fair value of these call options has been determined by a third party who applies market observable data such as our common stock price, its dividend yield and its volatility, as well as the time to expiration of the call options to determine a fair value of the buy side of these options.
Counterparty collateral
Amounts reported in other assets of the consolidated balance sheets for these instruments are reported at their historical cost which approximates fair value due to the nature of the assets assigned to this category.
Policy benefit reserves, coinsurance deposits and SPIA benefit reserves
The fair values of the liabilities under contracts not involving significant mortality or morbidity risks (principally deferred annuities), are stated at the cost we would incur to extinguish the liability (i.e., the cash surrender value) as these contracts are generally issued without an annuitization date. The coinsurance deposits related to the annuity benefit reserves have fair values determined in a similar fashion. For period-certain annuity benefit contracts, the fair value is determined by discounting the benefits at the interest rates currently in effect for newly purchased immediate annuity contracts. We are not required to and have not estimated the fair value of the liabilities under contracts that involve significant mortality or morbidity risks, as these liabilities fall within the definition of insurance contracts that are exceptions from financial instruments that require disclosures of fair value. Policy benefit reserves, coinsurance deposits and SPIA benefit reserves are not measured at fair value on a recurring basis. All of the fair values presented within these categories fall within Level 3 of the fair value hierarchy as most of the inputs are unobservable market data.
Notes payable
The fair values of our senior unsecured notes and convertible senior notes are based upon pricing matrices developed by a third party pricing service when quoted market prices are not available and are categorized as Level 2 within the fair value hierarchy. Notes payable are not remeasured at fair value on a recurring basis.
Subordinated debentures
Fair values for subordinated debentures are estimated using discounted cash flow calculations based principally on observable inputs including our incremental borrowing rates, which reflect our credit rating, for similar types of borrowings with maturities consistent with those remaining for the debt being valued. These fair values are categorized as Level 2 within the fair value hierarchy. Subordinated debentures are not measured at fair value on a recurring basis.
2015 notes embedded conversion derivative
The fair value of this embedded derivative was determined by pricing the call options that hedge this potential liability. The terms of the conversion option are identical to the 2015 notes hedges and the method of determining fair value of the call options is based upon observable market data.
F-17

Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fixed index annuities - embedded derivatives
We estimate the fair value of the embedded derivative component of our fixed index annuity policy benefit reserves at each valuation date by (i) projecting policy contract values and minimum guaranteed contract values over the expected lives of the contracts and (ii) discounting the excess of the projected contract value amounts at the applicable risk free interest rates adjusted for our nonperformance risk related to those liabilities. The projections of policy contract values are based on our best estimate assumptions for future policy growth and future policy decrements. Our best estimate assumptions for future policy growth include assumptions for the expected index credit on the next policy anniversary date which are derived from the fair values of the underlying call options purchased to fund such index credits and the expected costs of annual call options we will purchase in the future to fund index credits beyond the next policy anniversary. The projections of minimum guaranteed contract values include the same best estimate assumptions for policy decrements as were used to project policy contract values.
Within this determination we have the following significant unobservable inputs: 1) the expected cost of annual call options we will purchase in the future to fund index credits beyond the next policy anniversary and 2) our best estimates for future policy decrements, primarily lapse, partial withdrawal and mortality rates. As of December 31, 2015 and 2014, we utilized an estimate of 3.10% and 3.10%, respectively, for the expected cost of annual call options, which are based on estimated account value growth and a historical review of our actual option costs.
Our best estimate assumptions for lapse, partial withdrawal and mortality rates are based on our actual experience and our outlook as to future expectations for such assumptions. These assumptions, which are consistent with the assumptions used in calculating deferred policy acquisition costs and deferred sales inducements, are reviewed on a quarterly basis and are revised as our experience develops and/or as future expectations change. Our mortality rate assumptions are based on 65% of the 1983 Basic Annuity Mortality Tables. The following table presents average lapse rate and partial withdrawal rate assumptions, by contract duration, used in estimating the fair value of the embedded derivative component of our fixed index annuity policy benefit reserves at each reporting date:

|  | Average Lapse Rates |  | Average Partial Withdrawal Rates
Contract Duration (Years) |  | Year Ended December 31, 2015 |  | Year Ended December 31, 2014 |  | Year Ended December 31, 2015 |  | Year Ended December 31, 2014
1 - 5 |  | 1.58 | % |  | 1.60 | % |  | 3.08 | % |  | 3.07 | %
6 - 10 |  | 8.55 | % |  | 8.14 | % |  | 3.55 | % |  | 3.54 | %
11 - 15 |  | 12.01 | % |  | 11.58 | % |  | 3.59 | % |  | 3.56 | %
16 - 20 |  | 12.99 | % |  | 12.25 | % |  | 3.22 | % |  | 3.31 | %
20+ |  | 12.54 | % |  | 11.94 | % |  | 3.22 | % |  | 3.31 | %

Lapse rates are generally expected to increase as surrender charge percentages decrease. Lapse expectations reflect a significant increase in the year in which the surrender charge period on a contract ends.
The following tables provide a reconciliation of the beginning and ending balances for our Level 3 assets and liabilities, which are measured at fair value on a recurring basis using significant unobservable inputs for the years ended December 31, 2015 and 2014:

| Year Ended December 31,
| 2015 |  | 2014
| (Dollars in thousands)
Available for sale securities |  |  |
Beginning balance | $ | 375 |  |  | $ | 1,376 |
Principal returned | (23 | ) |  | (285 | )
Amortization of premium/accretion of discount | (494 | ) |  | (262 | )
Total gains (losses) (realized/unrealized): |  |  |
Included in other comprehensive income (loss) | 280 |  |  | 109 |
Included in operations | (138 | ) |  | (563 | )
Ending balance | $ | — |  |  | $ | 375 |

F-18

Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Level 3 assets included in the table above are not material to our financial position, results of operations or cash flows, and it is management's opinion that the sensitivity of the inputs used in determining the fair value of these assets is not material as well.

| Year Ended December 31,
| 2015 |  | 2014
| (Dollars in thousands)
Fixed index annuities—embedded derivatives |  |  |
Beginning balance | $ | 5,574,653 |  |  | $ | 4,406,163 |
Premiums less benefits | 1,234,637 |  |  | 1,700,827 |
Change in fair value, net | (825,668 | ) |  | (532,337 | )
Ending balance | $ | 5,983,622 |  |  | $ | 5,574,653 |

Change in fair value, net for each period in our embedded derivatives are included in change in fair value of embedded derivatives in the consolidated statements of operations.
Certain derivatives embedded in our fixed index annuity contracts are our most significant financial instrument measured at fair value that are categorized as Level 3 in the fair value hierarchy. The contractual obligations for future annual index credits within our fixed index annuity contracts are treated as a "series of embedded derivatives" over the expected life of the applicable contracts. We estimate the fair value of these embedded derivatives at each valuation date by the method described above under fixed index annuities - embedded derivatives. The projections of minimum guaranteed contract values include the same best estimate assumptions for policy decrements as were used to project policy contract values.
The most sensitive assumption in determining policy liabilities for fixed index annuities is the rates used to discount the excess projected contract values. As indicated above, the discount rate reflects our nonperformance risk. If the discount rates used to discount the excess projected contract values at December 31, 2015, were to increase by 100 basis points, the fair value of the embedded derivatives would decrease by $400.3 million recorded through operations as a decrease in the change in fair value of embedded derivatives and there would be a corresponding decrease of $173.3 million to our combined balance for deferred policy acquisition costs and deferred sales inducements recorded through operations as an increase in amortization of deferred policy acquisition costs and deferred sales inducements. A decrease by 100 basis points in the discount rate used to discount the excess projected contract values would increase the fair value of the embedded derivatives by $447.5 million recorded through operations as an increase in the change in fair value of embedded derivatives and there would be a corresponding increase of $248.9 million to our combined balance for deferred policy acquisition costs and deferred sales inducements recorded through operations as a decrease in amortization of deferred policy acquisition costs and deferred sales inducements.
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Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Investments
At December 31, 2015 and 2014, the amortized cost and fair value of fixed maturity securities and equity securities were as follows:

| Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value
| (Dollars in thousands)
December 31, 2015 |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |
Available for sale: |  |  |  |  |  |  |
United States Government full faith and credit | $ | 470,567 |  |  | $ | 988 |  |  | $ | (299 | ) |  | $ | 471,256 |
United States Government sponsored agencies | 1,386,219 |  |  | 26,801 |  |  | (14,409 | ) |  | 1,398,611 |
United States municipalities, states and territories | 3,422,667 |  |  | 341,328 |  |  | (8,628 | ) |  | 3,755,367 |
Foreign government obligations | 210,953 |  |  | 12,547 |  |  | (10,935 | ) |  | 212,565 |
Corporate securities | 23,597,530 |  |  | 887,288 |  |  | (682,424 | ) |  | 23,802,394 |
Residential mortgage backed securities | 1,366,985 |  |  | 98,576 |  |  | (3,489 | ) |  | 1,462,072 |
Commercial mortgage backed securities | 4,238,265 |  |  | 41,412 |  |  | (105,281 | ) |  | 4,174,396 |
Other asset backed securities | 1,130,524 |  |  | 34,534 |  |  | (19,880 | ) |  | 1,145,178 |
| $ | 35,823,710 |  |  | $ | 1,443,474 |  |  | $ | (845,345 | ) |  | $ | 36,421,839 |
Held for investment: |  |  |  |  |  |  |
Corporate security | $ | 76,622 |  |  | $ | — |  |  | $ | (11,245 | ) |  | $ | 65,377 |
Equity securities, available for sale: |  |  |  |  |  |  |
Finance, insurance and real estate | $ | 7,515 |  |  | $ | 313 |  |  | $ | — |  |  | $ | 7,828 |
December 31, 2014 |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |
Available for sale: |  |  |  |  |  |  |
United States Government full faith and credit | $ | 137,710 |  |  | $ | 765 |  |  | $ | (15 | ) |  | $ | 138,460 |
United States Government sponsored agencies | 1,364,424 |  |  | 43,399 |  |  | (13,933 | ) |  | 1,393,890 |
United States municipalities, states and territories | 3,293,551 |  |  | 430,469 |  |  | (711 | ) |  | 3,723,309 |
Foreign government obligations | 181,128 |  |  | 16,628 |  |  | (3,953 | ) |  | 193,803 |
Corporate securities | 19,984,747 |  |  | 1,628,941 |  |  | (123,396 | ) |  | 21,490,292 |
Residential mortgage backed securities | 1,616,846 |  |  | 136,704 |  |  | (2,205 | ) |  | 1,751,345 |
Commercial mortgage backed securities | 2,720,294 |  |  | 90,649 |  |  | (3,323 | ) |  | 2,807,620 |
Other asset backed securities | 906,346 |  |  | 48,022 |  |  | (7,885 | ) |  | 946,483 |
| $ | 30,205,046 |  |  | $ | 2,395,577 |  |  | $ | (155,421 | ) |  | $ | 32,445,202 |
Held for investment: |  |  |  |  |  |  |
Corporate security | $ | 76,432 |  |  | $ | — |  |  | $ | (594 | ) |  | $ | 75,838 |
Equity securities, available for sale: |  |  |  |  |  |  |
Finance, insurance and real estate | $ | 7,509 |  |  | $ | 296 |  |  | $ | — |  |  | $ | 7,805 |

At December 31, 2015, 33% of our fixed income securities have call features, of which 2.0% ($0.7 billion) were subject to call redemption and another 0.4% ($0.2 billion) will become subject to call redemption during 2016. Approximately 68% of our fixed income securities that have call features are not callable until within six months of their stated maturities.
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Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The amortized cost and fair value of fixed maturity securities at December 31, 2015, by contractual maturity are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. All of our mortgage and other asset backed securities provide for periodic payments throughout their lives and are shown below as separate lines.

| Available for sale |  | Held for investment
| Amortized Cost |  | Fair Value |  | Amortized Cost |  | Fair Value
| (Dollars in thousands)
Due in one year or less | $ | 134,629 |  |  | $ | 138,161 |  |  | $ | — |  |  | $ | — |
Due after one year through five years | 2,355,740 |  |  | 2,474,985 |  |  | — |  |  | — |
Due after five years through ten years | 10,586,688 |  |  | 10,449,194 |  |  | — |  |  | — |
Due after ten years through twenty years | 8,683,404 |  |  | 9,103,228 |  |  | — |  |  | — |
Due after twenty years | 7,327,475 |  |  | 7,474,625 |  |  | 76,622 |  |  | 65,377 |
| 29,087,936 |  |  | 29,640,193 |  |  | 76,622 |  |  | 65,377 |
Residential mortgage backed securities | 1,366,985 |  |  | 1,462,072 |  |  | — |  |  | — |
Commercial mortgage backed securities | 4,238,265 |  |  | 4,174,396 |  |  | — |  |  | — |
Other asset backed securities | 1,130,524 |  |  | 1,145,178 |  |  | — |  |  | — |
| $ | 35,823,710 |  |  | $ | 36,421,839 |  |  | $ | 76,622 |  |  | $ | 65,377 |

Net unrealized gains on available for sale fixed maturity securities and equity securities reported as a separate component of stockholders' equity were comprised of the following:

| December 31,
| 2015 |  | 2014
| (Dollars in thousands)
Net unrealized gains on available for sale fixed maturity securities and equity securities | $ | 598,442 |  |  | $ | 2,240,452 |
Adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements | (322,859 | ) |  | (1,165,271 | )
Deferred income tax valuation allowance reversal | 22,534 |  |  | 22,534 |
Deferred income tax expense | (96,454 | ) |  | (376,314 | )
Net unrealized gains reported as accumulated other comprehensive income | $ | 201,663 |  |  | $ | 721,401 |

The National Association of Insurance Commissioners ("NAIC") assigns designations to fixed maturity securities. These designations range from Class 1 (highest quality) to Class 6 (lowest quality). In general, securities are assigned a designation based upon the ratings they are given by the Nationally Recognized Statistical Rating Organizations ("NRSRO's"). The NAIC designations are utilized by insurers in preparing their annual statutory statements. NAIC Class 1 and 2 designations are considered "investment grade" while NAIC Class 3 through 6 designations are considered "non-investment grade." Based on the NAIC designations, we had 98% of our fixed maturity portfolio rated investment grade at both December 31, 2015 and 2014.
The following table summarizes the credit quality, as determined by NAIC designation, of our fixed maturity portfolio as of the dates indicated:

|  | December 31,
|  | 2015 |  | 2014
NAIC Designation |  | Amortized Cost |  | Fair Value |  | Amortized Cost |  | Fair Value
|  | (Dollars in thousands)
1 |  | $ | 23,363,259 |  |  | $ | 24,207,801 |  |  | $ | 19,223,151 |  |  | $ | 20,941,634 |
2 |  | 11,709,730 |  |  | 11,589,325 |  |  | 10,432,593 |  |  | 10,981,618 |
3 |  | 758,531 |  |  | 643,293 |  |  | 602,191 |  |  | 583,313 |
4 |  | 60,480 |  |  | 44,312 |  |  | 22,888 |  |  | 14,089 |
5 |  | — |  |  | — |  |  | — |  |  | — |
6 |  | 8,332 |  |  | 2,485 |  |  | 655 |  |  | 386 |
|  | $ | 35,900,332 |  |  | $ | 36,487,216 |  |  | $ | 30,281,478 |  |  | $ | 32,521,040 |

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Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table shows our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities (consisting of 1,246 and 402 securities, respectively) have been in a continuous unrealized loss position, at December 31, 2015 and 2014:

| Less than 12 months |  | 12 months or more |  | Total
| Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
| (Dollars in thousands)
December 31, 2015 |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |  |  |  |  |
Available for sale: |  |  |  |  |  |  |  |  |  |  |
United States Government full faith and credit | $ | 37,730 |  |  | $ | (299 | ) |  | $ | — |  |  | $ | — |  |  | $ | 37,730 |  |  | $ | (299 | )
United States Government sponsored agencies | 957,053 |  |  | (14,409 | ) |  | — |  |  | — |  |  | 957,053 |  |  | (14,409 | )
United States municipalities, states and territories | 261,823 |  |  | (8,474 | ) |  | 2,846 |  |  | (154 | ) |  | 264,669 |  |  | (8,628 | )
Foreign government obligations | 42,966 |  |  | (1,762 | ) |  | 15,463 |  |  | (9,173 | ) |  | 58,429 |  |  | (10,935 | )
Corporate securities: |  |  |  |  |  |  |  |  |  |  |
Finance, insurance and real estate | 2,077,223 |  |  | (59,607 | ) |  | 49,912 |  |  | (14,855 | ) |  | 2,127,135 |  |  | (74,462 | )
Manufacturing, construction and mining | 3,517,967 |  |  | (246,456 | ) |  | 376,229 |  |  | (131,003 | ) |  | 3,894,196 |  |  | (377,459 | )
Utilities and related sectors | 2,240,652 |  |  | (138,940 | ) |  | 97,184 |  |  | (22,565 | ) |  | 2,337,836 |  |  | (161,505 | )
Wholesale/retail trade | 473,050 |  |  | (17,863 | ) |  | 38,682 |  |  | (8,125 | ) |  | 511,732 |  |  | (25,988 | )
Services, media and other | 1,037,011 |  |  | (39,937 | ) |  | 32,050 |  |  | (3,073 | ) |  | 1,069,061 |  |  | (43,010 | )
Residential mortgage backed securities | 162,770 |  |  | (2,958 | ) |  | 6,438 |  |  | (531 | ) |  | 169,208 |  |  | (3,489 | )
Commercial mortgage backed securities | 2,679,510 |  |  | (105,002 | ) |  | 11,495 |  |  | (279 | ) |  | 2,691,005 |  |  | (105,281 | )
Other asset backed securities | 457,055 |  |  | (10,581 | ) |  | 46,657 |  |  | (9,299 | ) |  | 503,712 |  |  | (19,880 | )
| $ | 13,944,810 |  |  | $ | (646,288 | ) |  | $ | 676,956 |  |  | $ | (199,057 | ) |  | $ | 14,621,766 |  |  | $ | (845,345 | )
Held for investment: |  |  |  |  |  |  |  |  |  |  |
Corporate security: |  |  |  |  |  |  |  |  |  |  |
Insurance | $ | 65,377 |  |  | $ | (11,245 | ) |  | $ | — |  |  | $ | — |  |  | $ | 65,377 |  |  | $ | (11,245 | )
December 31, 2014 |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |  |  |  |  |
Available for sale: |  |  |  |  |  |  |  |  |  |  |
United States Government full faith and credit | $ | — |  |  | $ | — |  |  | $ | 498 |  |  | $ | (15 | ) |  | $ | 498 |  |  | $ | (15 | )
United States Government sponsored agencies | — |  |  | — |  |  | 610,339 |  |  | (13,933 | ) |  | 610,339 |  |  | (13,933 | )
United States municipalities, states and territories | — |  |  | — |  |  | 27,947 |  |  | (711 | ) |  | 27,947 |  |  | (711 | )
Foreign government obligations | 14,194 |  |  | (1,068 | ) |  | 11,542 |  |  | (2,885 | ) |  | 25,736 |  |  | (3,953 | )
Corporate securities: |  |  |  |  |  |  |  |  |  |  |
Finance, insurance and real estate | 253,439 |  |  | (2,586 | ) |  | 399,874 |  |  | (16,277 | ) |  | 653,313 |  |  | (18,863 | )
Manufacturing, construction and mining | 1,078,089 |  |  | (35,151 | ) |  | 694,088 |  |  | (35,926 | ) |  | 1,772,177 |  |  | (71,077 | )
Utilities and related sectors | 373,952 |  |  | (8,185 | ) |  | 344,313 |  |  | (10,153 | ) |  | 718,265 |  |  | (18,338 | )
Wholesale/retail trade | 88,766 |  |  | (2,290 | ) |  | 99,427 |  |  | (3,122 | ) |  | 188,193 |  |  | (5,412 | )
Services, media and other | 131,940 |  |  | (1,567 | ) |  | 277,296 |  |  | (8,139 | ) |  | 409,236 |  |  | (9,706 | )
Residential mortgage backed securities | 22,115 |  |  | (1,219 | ) |  | 20,427 |  |  | (986 | ) |  | 42,542 |  |  | (2,205 | )
Commercial mortgage backed securities | 241,637 |  |  | (1,344 | ) |  | 187,241 |  |  | (1,979 | ) |  | 428,878 |  |  | (3,323 | )
Other asset backed securities | 142,094 |  |  | (3,519 | ) |  | 58,958 |  |  | (4,366 | ) |  | 201,052 |  |  | (7,885 | )
| $ | 2,346,226 |  |  | $ | (56,929 | ) |  | $ | 2,731,950 |  |  | $ | (98,492 | ) |  | $ | 5,078,176 |  |  | $ | (155,421 | )
Held for investment: |  |  |  |  |  |  |  |  |  |  |
Corporate security: |  |  |  |  |  |  |  |  |  |  |
Insurance | $ | — |  |  | $ | — |  |  | $ | 75,838 |  |  | $ | (594 | ) |  | $ | 75,838 |  |  | $ | (594 | )

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Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Based on the results of our process for evaluating available for sale securities in unrealized loss positions for other-than-temporary-impairments, which is discussed in detail later in this footnote, we have determined that the unrealized losses on the securities in the preceding table are temporary. The unrealized losses at December 31, 2015 are principally related to timing of the purchases of these securities, which carry less yield than those available at December 31, 2015. In addition, a general widening of credit spreads has occurred in risk asset classes due to economic uncertainty and concerns of prolonged economic weakness.
The commodity related sectors had a high concentration of gross unrealized losses in our corporate fixed income securities portfolio as of December 31, 2015. Commodity prices, specifically oil, gas and base metals, have declined significantly since September 30, 2014. The value of oil has decreased significantly as the amount of supply from new production has exceeded demand. In addition, iron ore and other key industrial metals have declined in prices as investors perceive the economic slowdown in Asia Pacific will curb demand as supply remains high. The companies in the metal and mining sectors have experienced the largest decline in values of their debt. In the above table, oil and metals and mining exposure is reflected within the foreign government, manufacturing, construction and mining, and utilities and related sectors. Within these sectors, we continue to monitor the impact to our investment portfolio for those companies that may be adversely affected, both directly and indirectly. Even though the energy holdings and a majority of the metals and mining holdings are rated investment grade by one or more of the NRSRO’s, they could continue to see price volatility and possible downgrades in credit ratings. If oil and commodity prices remain at depressed levels for an extended period of time or decline further, certain issuers and investments may come under further stress. At this time, we believe the unrealized losses are temporary due to the fact that the price decline is driven by an over-supply of oil in the energy sector, which we feel is unsustainable long term. Our exposure is in companies that we believe have more financial flexibility and significant operational scale to manage through the downturn. In addition, price declines in the metal and mining sector have been heavily influenced by excess production and softer demand. Companies in the mining sector are more susceptible to rating downgrades and we believe companies will be under continued financial strain at the current commodity price structure. We believe company issuers in our portfolio will be able to meet their debt service obligations.
All of our residential mortgage backed securities are pools of first-lien residential mortgage loans. Substantially all of the securities that we own are in the most senior tranche of the securitization in which they are structured and are not subordinated to any other tranche. Our "Alt-A" residential mortgage backed securities are comprised of 34 securities with a total amortized cost basis of $204.7 million and a fair value of $227.5 million. At December 31, 2015, we had no exposure to sub-prime residential mortgage backed securities.
Approximately 84% and 78% of the unrealized losses on fixed maturity securities shown in the above table for December 31, 2015 and 2014, respectively, are on securities that are rated investment grade, defined as being the highest two NAIC designations. All of the fixed maturity securities with unrealized losses are current with respect to the payment of principal and interest.
Changes in net unrealized gains on investments for the years ended December 31, 2015, 2014 and 2013 are as follows:

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
| (Dollars in thousands)
Fixed maturity securities held for investment carried at amortized cost | $ | (10,651 | ) |  | $ | 14,821 |  |  | $ | (848 | )
Investments carried at fair value: |  |  |  |  |
Fixed maturity securities, available for sale | $ | (1,642,027 | ) |  | $ | 2,157,439 |  |  | $ | (2,132,392 | )
Equity securities, available for sale | 17 |  |  | 21 |  |  | (8,549 | )
| (1,642,010 | ) |  | 2,157,460 |  |  | (2,140,941 | )
Adjustment for effect on other balance sheet accounts: |  |  |  |  |
Deferred policy acquisition costs and deferred sales inducements | 842,412 |  |  | (1,118,683 | ) |  | 1,155,386 |
Deferred income tax asset/liability | 279,860 |  |  | (363,572 | ) |  | 344,944 |
| 1,122,272 |  |  | (1,482,255 | ) |  | 1,500,330 |
Change in net unrealized gains on investments carried at fair value | $ | (519,738 | ) |  | $ | 675,205 |  |  | $ | (640,611 | )

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Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Components of net investment income are as follows:

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
| (Dollars in thousands)
Fixed maturity securities | $ | 1,566,409 |  |  | $ | 1,394,301 |  |  | $ | 1,229,486 |
Equity securities | 441 |  |  | 404 |  |  | 1,586 |
Mortgage loans on real estate | 131,892 |  |  | 143,998 |  |  | 159,769 |
Cash and cash equivalents | 601 |  |  | 286 |  |  | 775 |
Other | 4,858 |  |  | 6,903 |  |  | 5,711 |
| 1,704,201 |  |  | 1,545,892 |  |  | 1,397,327 |
Less investment expenses | (12,009 | ) |  | (14,225 | ) |  | (13,400 | )
Net investment income | $ | 1,692,192 |  |  | $ | 1,531,667 |  |  | $ | 1,383,927 |

Proceeds from sales of available for sale securities for the years ended December 31, 2015, 2014 and 2013 were $0.4 billion, $0.2 billion and $1.5 billion, respectively. Scheduled principal repayments, calls and tenders for available for sale fixed maturity securities for the years ended December 31, 2015, 2014 and 2013 were $1.2 billion, $1.3 billion and $2.1 billion, respectively.
Realized gains and losses on sales are determined on the basis of specific identification of investments based on the trade date. Net realized gains (losses) on investments, excluding net OTTI losses are as follows:

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
| (Dollars in thousands)
Available for sale fixed maturity securities: |  |  |  |  |
Gross realized gains | $ | 7,230 |  |  | $ | 3,273 |  |  | $ | 39,079 |
Gross realized losses | (5,787 | ) |  | (1,006 | ) |  | (6,170 | )
| 1,443 |  |  | 2,267 |  |  | 32,909 |
Available for sale equity securities: |  |  |  |  |
Gross realized gains | — |  |  | — |  |  | 9,571 |
Other investments: |  |  |  |  |
Gain on sale of real estate | 4,194 |  |  | 2,454 |  |  | 2,144 |
Loss on sale of real estate | (575 | ) |  | (231 | ) |  | (1,317 | )
Impairment losses on real estate | (1,297 | ) |  | (2,441 | ) |  | (1,195 | )
| 2,322 |  |  | (218 | ) |  | (368 | )
Mortgage loans on real estate: |  |  |  |  |
Decrease (increase) in allowance for credit losses | 1,018 |  |  | (6,052 | ) |  | (5,621 | )
Recovery of specific allowance | 5,428 |  |  | — |  |  | 4,070 |
| 6,446 |  |  | (6,052 | ) |  | (1,551 | )
| $ | 10,211 |  |  | $ | (4,003 | ) |  | $ | 40,561 |

Losses on available for sale fixed maturity securities in 2015, 2014 and 2013 were realized primarily due to strategies to reposition the fixed maturity security portfolio that result in improved net investment income, risk or duration profiles as they pertain to our asset liability management. Corporate securities were sold at losses in 2015 and 2013 due to the our long-term fundamental concern with the issuers' ability to meet their future financial obligations.
The following table summarizes the carrying value of our fixed maturity securities, mortgage loans on real estate and real estate owned that have been non-income producing for 12 consecutive months:

| December 31,
| 2015 |  | 2014
| (Dollars in thousands)
Fixed maturity securities, available for sale | $ | 10 |  |  | $ | 11 |
Real estate owned | 1,800 |  |  | 868 |
| $ | 1,810 |  |  | $ | 879 |

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Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We review and analyze all investments on an ongoing basis for changes in market interest rates and credit deterioration. This review process includes analyzing our ability to recover the amortized cost basis of each investment that has a fair value that is materially lower than its amortized cost and requires a high degree of management judgment and involves uncertainty. The evaluation of securities for other than temporary impairments is a quantitative and qualitative process, which is subject to risks and uncertainties.
We have a policy and process to identify securities that could potentially have impairments that are other than temporary. This process involves monitoring market events and other items that could impact issuers. The evaluation includes but is not limited to such factors as:

• | the length of time and the extent to which the fair value has been less than amortized cost or cost;

• | whether the issuer is current on all payments and all contractual payments have been made as agreed;

• | the remaining payment terms and the financial condition and near-term prospects of the issuer;

• | the lack of ability to refinance due to liquidity problems in the credit market;

• | the fair value of any underlying collateral;

• | the existence of any credit protection available;

• | our intent to sell and whether it is more likely than not we would be required to sell prior to recovery for debt securities;

• | our assessment in the case of equity securities including perpetual preferred stocks with credit deterioration that the security cannot recover to cost in a reasonable period of time;

• | our intent and ability to retain equity securities for a period of time sufficient to allow for recovery;

• | consideration of rating agency actions; and

• | changes in estimated cash flows of mortgage and asset backed securities.

We determine whether other than temporary impairment losses should be recognized for debt and equity securities by assessing all facts and circumstances surrounding each security. Where the decline in fair value of debt securities is attributable to changes in market interest rates or to factors such as market volatility, liquidity and spread widening, and we anticipate recovery of all contractual or expected cash flows, we do not consider these investments to be other than temporarily impaired because we do not intend to sell these investments and it is not more likely than not we will be required to sell these investments before a recovery of amortized cost, which may be maturity. For equity securities, we recognize an impairment charge in the period in which we do not have the intent and ability to hold the securities until recovery of cost or we determine that the security will not recover to book value within a reasonable period of time. We determine what constitutes a reasonable period of time on a security-by-security basis by considering all the evidence available to us, including the magnitude of any unrealized loss and its duration.
Other than temporary impairment losses on equity securities are recognized in operations. If we intend to sell a debt security or if it is more likely than not that we will be required to sell a debt security before recovery of its amortized cost basis, other than temporary impairment has occurred and the difference between amortized cost and fair value will be recognized as a loss in operations.
If we do not intend to sell and it is not more likely than not we will be required to sell the debt security but also do not expect to recover the entire amortized cost basis of the security, an impairment loss would be recognized in operations in the amount of the expected credit loss. We determine the amount of expected credit loss by calculating the present value of the cash flows expected to be collected discounted at each security's acquisition yield based on our consideration of whether the security was of high credit quality at the time of acquisition. The difference between the present value of expected future cash flows and the amortized cost basis of the security is the amount of credit loss recognized in operations. The remaining amount of the other than temporary impairment is recognized in other comprehensive income (loss).
The determination of the credit loss component of a mortgage backed security is based on a number of factors. The primary consideration in this evaluation process is the issuer's ability to meet current and future interest and principal payments as contractually stated at time of purchase. Our review of these securities includes an analysis of the cash flow modeling under various default scenarios considering independent third party benchmarks, the seniority of the specific tranche within the structure of the security, the composition of the collateral and the actual default, loss severity and prepayment experience exhibited. With the input of third party assumptions for default projections, loss severity and prepayment expectations, we evaluate the cash flow projections to determine whether the security is performing in accordance with its contractual obligation.
We utilize the models from a leading structured product software specialist serving institutional investors. These models incorporate each security's seniority and cash flow structure. In circumstances where the analysis implies a potential for principal loss at some point in the future, we use the "best estimate" cash flow projection discounted at the security's effective yield at acquisition to determine the amount of our potential credit loss associated with this security. The discounted expected future cash flows equates to our expected recovery value. Any shortfall of the expected recovery when compared to the amortized cost of the security will be recorded as the credit loss component of the other than temporary impairment.
The cash flow modeling is performed on a security-by-security basis and incorporates actual cash flows on the residential mortgage backed securities through the current period, as well as the projection of remaining cash flows using a number of assumptions including default rates, prepayment rates and loss severity rates. The default curves we use are tailored to the Prime or Alt-A residential mortgage backed securities that we own, which assume lower default rates and loss severity for Prime securities versus Alt-A securities. These default curves are scaled higher or lower depending on factors such as current underlying mortgage loan performance, rating agency loss projections, loan to value ratios, geographic diversity, as well as other appropriate considerations.
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Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the range of significant assumptions used to determine the credit loss component of other than temporary impairments we have recognized on residential mortgage backed securities for the years ended December 31, 2015 and 2014, which are all senior level tranches within the structure of the securities:

|  |  |  | Discount Rate |  | Default Rate |  | Loss Severity
Sector |  | Vintage |  | Min |  | Max |  | Min |  | Max |  | Min |  | Max
Year ended December 31, 2015 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Prime |  | 2006 |  | 6.5 | % |  | 7.4 | % |  | 12 | % |  | 14 | % |  | 40 | % |  | 50 | %
|  | 2007 |  | 5.8 | % |  | 7.0 | % |  | 15 | % |  | 25 | % |  | 45 | % |  | 55 | %
Alt-A |  | 2005 |  | 5.6 | % |  | 7.4 | % |  | 13 | % |  | 99 | % |  | 2 | % |  | 50 | %
Year ended December 31, 2014 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Prime |  | 2005 |  | 7.5 | % |  | 7.5 | % |  | 15 | % |  | 15 | % |  | 50 | % |  | 50 | %
|  | 2006 |  | 6.5 | % |  | 7.4 | % |  | 11 | % |  | 15 | % |  | 40 | % |  | 50 | %
|  | 2007 |  | 7.0 | % |  | 7.0 | % |  | 14 | % |  | 14 | % |  | 55 | % |  | 55 | %
Alt-A |  | 2005 |  | 5.6 | % |  | 6.4 | % |  | 87 | % |  | 91 | % |  | 2 | % |  | 2 | %

The determination of the credit loss component of a corporate bond (including redeemable preferred stocks) is based on the underlying financial performance of the issuer and their ability to meet their contractual obligations. Considerations in our evaluation include, but are not limited to, credit rating changes, financial statement and ratio analysis, changes in management, significant changes in credit spreads, breaches of financial covenants and a review of the economic outlook for the industry and markets in which they trade. In circumstances where an issuer appears unlikely to meet its future obligation, or the security's price decline is deemed other than temporary, an estimate of credit loss is determined. Credit loss is calculated using default probabilities as derived from the credit default swaps markets in conjunction with recovery rates derived from independent third party analysis or a best estimate of credit loss. This credit loss rate is then incorporated into a present value calculation based on an expected principal loss in the future discounted at the yield at the date of purchase and compared to amortized cost to determine the amount of credit loss associated with the security.
In addition, for debt securities which we do not intend to sell and it is not more likely than not we will be required to sell, but our intent changes due to changes or events that could not have been reasonably anticipated, an other than temporary impairment charge is recognized. Once an impairment charge has been recorded, we then continue to review the other than temporarily impaired securities for appropriate valuation on an ongoing basis. Unrealized losses may be recognized in future periods through a charge to earnings, should we later conclude that the decline in fair value below amortized cost is other than temporary pursuant to our accounting policy described above. The use of different methodologies and assumptions to determine the fair value of investments and the timing and amount of impairments may have a material effect on the amounts presented in our consolidated financial statements.
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Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes other than temporary impairments by asset type:

| Number of Securities |  | Total OTTI Losses |  | Portion of OTTI Losses Recognized in (from) Other Comprehensive Income |  | Net OTTI Losses Recognized in Operations
|  |  | (Dollars in thousands)
Year ended December 31, 2015 |  |  |  |  |  |  |
Fixed maturity securities, available for sale: |  |  |  |  |  |  |
Corporate securities: |  |  |  |  |  |  |
Industrial | 2 |  |  | $ | (15,414 | ) |  | $ | 2,975 |  |  | $ | (12,439 | )
Residential mortgage backed securities | 11 |  |  | (133 | ) |  | (2,089 | ) |  | (2,222 | )
Other asset backed securities | 1 |  |  | (10,000 | ) |  | 5,125 |  |  | (4,875 | )
| 14 |  |  | $ | (25,547 | ) |  | $ | 6,011 |  |  | $ | (19,536 | )
Year ended December 31, 2014 |  |  |  |  |  |  |
Fixed maturity securities, available for sale: |  |  |  |  |  |  |
Residential mortgage backed securities | 7 |  |  | $ | — |  |  | $ | (2,627 | ) |  | $ | (2,627 | )
Year ended December 31, 2013 |  |  |  |  |  |  |
Fixed maturity securities, available for sale: |  |  |  |  |  |  |
United States Government sponsored agencies | 2 |  |  | $ | (2,775 | ) |  | $ | — |  |  | $ | (2,775 | )
Corporate securities: |  |  |  |  |  |  |
Industrial | 1 |  |  | (1,761 | ) |  | — |  |  | (1,761 | )
Residential mortgage backed securities | 6 |  |  | — |  |  | (1,270 | ) |  | (1,270 | )
Equity security, available for sale: |  |  |  |  |  |  |
Industrial | 1 |  |  | (428 | ) |  | — |  |  | (428 | )
| 10 |  |  | $ | (4,964 | ) |  | $ | (1,270 | ) |  | $ | (6,234 | )

The cumulative portion of other than temporary impairments determined to be credit losses which have been recognized in operations for debt securities are summarized as follows:

| Year Ended December 31,
| 2015 |  | 2014
| (Dollars in thousands)
Cumulative credit loss at beginning of year | $ | (127,050 | ) |  | $ | (125,960 | )
Credit losses on securities for which OTTI has not previously been recognized | (17,447 | ) |  | — |
Additional credit losses on securities for which OTTI has previously been recognized | (2,089 | ) |  | (2,627 | )
Accumulated losses on securities that were disposed of during the period | 762 |  |  | 1,537 |
Cumulative credit loss at end of year | $ | (145,824 | ) |  | $ | (127,050 | )

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Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the cumulative noncredit portion of OTTI and the change in fair value since recognition of OTTI, both of which were recognized in other comprehensive income, by major type of security, for securities that are part of our investment portfolio at December 31, 2015 and 2014:

| Amortized Cost |  | OTTI Recognized in Other Comprehensive Income |  | Change in Fair Value Since OTTI was Recognized |  | Fair Value
| (Dollars in thousands)
December 31, 2015 |  |  |  |  |  |  |
Fixed maturity securities, available for sale: |  |  |  |  |  |  |
Corporate securities | $ | 6,396 |  |  | $ | (2,975 | ) |  | $ | 9 |  |  | $ | 3,430 |
Residential mortgage backed securities | 466,871 |  |  | (170,724 | ) |  | 199,149 |  |  | 495,296 |
Other asset backed securities | 8,154 |  |  | (5,125 | ) |  | (553 | ) |  | 2,476 |
| $ | 481,421 |  |  | $ | (178,824 | ) |  | $ | 198,605 |  |  | $ | 501,202 |
December 31, 2014 |  |  |  |  |  |  |
Fixed maturity securities, available for sale: |  |  |  |  |  |  |
Corporate securities | $ | — |  |  | $ | — |  |  | $ | 11 |  |  | $ | 11 |
Residential mortgage backed securities | 569,508 |  |  | (173,494 | ) |  | 215,625 |  |  | 611,639 |
| $ | 569,508 |  |  | $ | (173,494 | ) |  | $ | 215,636 |  |  | $ | 611,650 |

At December 31, 2015 and 2014, fixed maturity securities and short-term investments with an amortized cost of $38.3 billion and $32.6 billion, respectively, were on deposit with state agencies to meet regulatory requirements. There are no restrictions on these assets.
At December 31, 2015 and 2014, we had no investment in any person or its affiliates (other than bonds issued by agencies of the United States Government) that exceeded 10% of stockholders' equity.
4. Mortgage Loans on Real Estate
Our mortgage loan portfolio is summarized in the following table. There were commitments outstanding of $97.2 million at December 31, 2015.

| December 31,
| 2015 |  | 2014
| (Dollars in thousands)
Principal outstanding | $ | 2,449,909 |  |  | $ | 2,457,721 |
Loan loss allowance | (14,142 | ) |  | (22,633 | )
Deferred prepayment fees | (510 | ) |  | (508 | )
Carrying value | $ | 2,435,257 |  |  | $ | 2,434,580 |

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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The portfolio consists of commercial mortgage loans collateralized by the related properties and diversified as to property type, location and loan size. Our mortgage lending policies establish limits on the amount that can be loaned to one borrower and other criteria to attempt to reduce the risk of default. The mortgage loan portfolio is summarized by geographic region and property type as follows:

| December 31,
| 2015 |  | 2014
| Principal |  | Percent |  | Principal |  | Percent
| (Dollars in thousands)
Geographic distribution |  |  |  |  |  |  |
East | $ | 698,113 |  |  | 28.5 | % |  | $ | 701,638 |  |  | 28.5 | %
Middle Atlantic | 160,261 |  |  | 6.6 | % |  | 166,249 |  |  | 6.8 | %
Mountain | 252,442 |  |  | 10.3 | % |  | 279,075 |  |  | 11.4 | %
New England | 13,161 |  |  | 0.5 | % |  | 12,280 |  |  | 0.5 | %
Pacific | 355,268 |  |  | 14.5 | % |  | 302,307 |  |  | 12.3 | %
South Atlantic | 456,227 |  |  | 18.6 | % |  | 471,849 |  |  | 19.2 | %
West North Central | 313,120 |  |  | 12.8 | % |  | 349,028 |  |  | 14.2 | %
West South Central | 201,317 |  |  | 8.2 | % |  | 175,295 |  |  | 7.1 | %
| $ | 2,449,909 |  |  | 100.0 | % |  | $ | 2,457,721 |  |  | 100.0 | %
Property type distribution |  |  |  |  |  |  |
Office | $ | 396,154 |  |  | 16.2 | % |  | $ | 484,585 |  |  | 19.7 | %
Medical Office | 77,438 |  |  | 3.2 | % |  | 88,275 |  |  | 3.6 | %
Retail | 790,158 |  |  | 32.2 | % |  | 711,775 |  |  | 29.0 | %
Industrial/Warehouse | 686,400 |  |  | 28.0 | % |  | 649,425 |  |  | 26.4 | %
Hotel | 3,361 |  |  | 0.1 | % |  | 30,640 |  |  | 1.3 | %
Apartment | 352,971 |  |  | 14.4 | % |  | 335,087 |  |  | 13.6 | %
Mixed use/other | 143,427 |  |  | 5.9 | % |  | 157,934 |  |  | 6.4 | %
| $ | 2,449,909 |  |  | 100.0 | % |  | $ | 2,457,721 |  |  | 100.0 | %

Our financing receivables currently consist of one portfolio segment which is our commercial mortgage loan portfolio. These are mortgage loans with collateral consisting of commercial real estate and borrowers consisting mostly of limited liability partnerships or limited liability corporations.
We evaluate our mortgage loan portfolio for the establishment of a loan loss allowance by specific identification of impaired loans and the measurement of an estimated loss for each individual loan identified. A mortgage loan is impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. If we determine that the value of any specific mortgage loan is impaired, the carrying amount of the mortgage loan will be reduced to its fair value, based upon the present value of expected future cash flows from the loan discounted at the loan's effective interest rate, or the fair value of the underlying collateral less estimated costs to sell.
In addition, we analyze the mortgage loan portfolio for the need of a general loan allowance for probable losses on all other loans on a quantitative and qualitative basis. The amount of the general loan allowance is based upon management's evaluation of the collectability of the loan portfolio, historical loss experience, delinquencies, credit concentrations, underwriting standards and national and local economic conditions.
We rate each of the mortgage loans in our portfolio based on factors such as historical operating performance, loan to value ratio and economic outlook, among others. We calculate a loss factor to apply to each rating based on historical losses we have recognized in our mortgage loan portfolio. We apply the loss factors to the total principal outstanding within each rating category to determine an appropriate estimate of the general loan loss allowance. We also assess the portfolio qualitatively and apply a loss rate to all loans without a specific allowance based on management's assessment of economic conditions, and we apply an additional amount of loss allowance to a group of loans that we have identified as having higher risk of loss.
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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents a rollforward of our specific and general valuation allowances for mortgage loans on real estate:

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
| Specific Allowance |  | General Allowance |  | Specific Allowance |  | General Allowance |  | Specific Allowance |  | General Allowance
| (Dollars in thousands)
Beginning allowance balance | $ | (12,333 | ) |  | $ | (10,300 | ) |  | $ | (16,847 | ) |  | $ | (9,200 | ) |  | $ | (23,134 | ) |  | $ | (11,100 | )
Charge-offs | 2,045 |  |  | — |  |  | 9,211 |  |  | — |  |  | 9,738 |  |  | — |
Recoveries | 5,428 |  |  | — |  |  | 255 |  |  | — |  |  | 4,070 |  |  | — |
Change in provision for credit losses | (2,982 | ) |  | 4,000 |  |  | (4,952 | ) |  | (1,100 | ) |  | (7,521 | ) |  | 1,900 |
Ending allowance balance | $ | (7,842 | ) |  | $ | (6,300 | ) |  | $ | (12,333 | ) |  | $ | (10,300 | ) |  | $ | (16,847 | ) |  | $ | (9,200 | )

The specific allowance represents the total credit loss allowances on loans which are individually evaluated for impairment. The general allowance is for the group of loans discussed above which are collectively evaluated for impairment. The following table presents the total outstanding principal of loans evaluated for impairment by basis of impairment method:

| December 31,
| 2015 |  | 2014 |  | 2013
| (Dollars in thousands)
Individually evaluated for impairment | $ | 21,277 |  |  | $ | 29,116 |  |  | $ | 47,018 |
Collectively evaluated for impairment | 2,428,632 |  |  | 2,428,605 |  |  | 2,560,680 |
Total loans evaluated for impairment | $ | 2,449,909 |  |  | $ | 2,457,721 |  |  | $ | 2,607,698 |

Charge-offs include allowances that have been established on loans that were satisfied by taking ownership of the collateral. When ownership of the property is taken it is recorded at the lower of the mortgage loan's carrying value or the property's fair value (based on appraised values) less estimated costs to sell. The real estate owned is recorded as a component of other investments and the mortgage loan is recorded as fully paid, with any allowance for credit loss that has been established charged off. Fair value of the real estate is determined by third party appraisal. Recoveries are situations where we have received a payment from the borrower in an amount greater than the carrying value of the loan (principal outstanding less specific allowance).
During the years ended December 31, 2014 and 2013, seven and five mortgage loans, respectively, were satisfied by taking ownership of any real estate serving as collateral. The following table summarizes the activity in the real estate owned, included in Other investments, which was obtained in satisfaction of mortgage loans on real estate:

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
| (Dollars in thousands)
Real estate owned at beginning of period | $ | 20,238 |  |  | $ | 22,844 |  |  | $ | 33,172 |
Real estate acquired in satisfaction of mortgage loans | — |  |  | 14,555 |  |  | 8,217 |
Additions | 121 |  |  | — |  |  | 626 |
Sales | (12,322 | ) |  | (14,134 | ) |  | (17,358 | )
Impairments | (1,297 | ) |  | (2,441 | ) |  | (1,195 | )
Depreciation | (255 | ) |  | (586 | ) |  | (618 | )
Real estate owned at end of period | $ | 6,485 |  |  | $ | 20,238 |  |  | $ | 22,844 |

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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We analyze credit risk of our mortgage loans by analyzing all available evidence on loans that are delinquent and loans that are in a workout period.

| December 31,
| 2015 |  | 2014
| (Dollars in thousands)
Credit Exposure--By Payment Activity |  |  |
Performing | $ | 2,438,341 |  |  | $ | 2,451,760 |
In workout | 11,568 |  |  | — |
Delinquent | — |  |  | — |
Collateral dependent | — |  |  | 5,961 |
| $ | 2,449,909 |  |  | $ | 2,457,721 |

The loans that are categorized as "in workout" consist of loans that we have agreed to lower or no mortgage payments for a period of time while the borrowers address cash flow and/or operational issues. The key features of these workouts have been determined on a loan-by-loan basis. Most of these loans are in a period of low cash flow due to tenants vacating their space or tenants requesting rent relief during difficult economic periods. Generally, we have allowed the borrower a six month interest only period and in some cases a twelve month period of interest only. Interest only workout loans are expected to return to their regular debt service payments after the interest only period. Interest only loans that are not fully amortizing will have a larger balance at their balloon date than originally contracted. Fully amortizing loans that are in interest only periods will have larger debt service payments for their remaining term due to lost principal payments during the interest only period. In limited circumstances we have allowed borrowers to pay the principal portion of their loan payment into an escrow account that can be used for capital and tenant improvements for a period of not more than twelve months. In these situations new loan amortization schedules are calculated based on the principal not collected during this twelve month workout period and larger payments are collected for the remaining term of each loan. In all cases, the original interest rate and maturity date have not been modified, and we have not forgiven any principal amounts.
Mortgage loans are considered delinquent when they become 60 days or more past due. In general, when loans become 90 days past due, become collateral dependent or enter a period with no debt service payments required we place them on non-accrual status and discontinue recognizing interest income. If payments are received on a delinquent loan, interest income is recognized to the extent it would have been recognized if normal principal and interest would have been received timely. If the payments are received to bring a delinquent loan back to current we will resume accruing interest income on that loan. Outstanding principal of loans in a non-accrual status at December 31, 2015 and 2014 totaled $0.0 million and $6.0 million, respectively.
We define collateral dependent loans as those mortgage loans for which we will depend on the value of the collateral real estate to satisfy the outstanding principal of the loan.
All of our commercial mortgage loans depend on the cash flow of the borrower to be at a sufficient level to service the principal and interest payments as they come due. In general, cash inflows of the borrowers are generated by collecting monthly rent from tenants occupying space within the borrowers' properties. Our borrowers face collateral risks such as tenants going out of business, tenants struggling to make rent payments as they become due, and tenants canceling leases and moving to other locations. We have a number of loans where the real estate is occupied by a single tenant. Our borrowers sometimes face both a reduction in cash flow on their mortgage property as well as a reduction in the fair value of the real estate collateral. If borrowers are unable to replace lost rent revenue and increases in the fair value of their property do not materialize we could potentially incur more losses than what we have allowed for in our specific and general loan loss allowances.
Aging of financing receivables is summarized in the following table, with loans in a "workout" period as of the reporting date considered current if payments are current in accordance with agreed upon terms:

| 30 - 59 Days |  | 60 - 89 Days |  | 90 Days and Over |  | Total Past Due |  | Current |  | Collateral Dependent Receivables |  | Total Financing Receivables
| (Dollars in thousands)
Commercial Mortgage Loans |  |  |  |  |  |  |  |  |  |  |  |  |
December 31, 2015 | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 2,449,909 |  |  | $ | — |  |  | $ | 2,449,909 |
December 31, 2014 | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 2,451,760 |  |  | $ | 5,961 |  |  | $ | 2,457,721 |

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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Financing receivables summarized in the following two tables represent all loans that we are either not currently collecting, or those we feel it is probable we will not collect all amounts due according to the contractual terms of the loan agreements (all loans that we have worked with the borrower to alleviate short-term cash flow issues, loans delinquent for more than 60 days or more at the reporting date, loans we have determined to be collateral dependent and loans that we have recorded specific impairments on that we feel may continue to have performance issues).

| Recorded Investment |  | Unpaid Principal Balance |  | Related Allowance
| (Dollars in thousands)
December 31, 2015 |  |  |  |  |
Mortgage loans with an allowance | $ | 13,435 |  |  | $ | 21,277 |  |  | $ | (7,842 | )
Mortgage loans with no related allowance | 8,859 |  |  | 8,859 |  |  | — |
| $ | 22,294 |  |  | $ | 30,136 |  |  | $ | (7,842 | )
December 31, 2014 |  |  |  |  |
Mortgage loans with an allowance | $ | 16,783 |  |  | $ | 29,116 |  |  | $ | (12,333 | )
Mortgage loans with no related allowance | 2,656 |  |  | 2,656 |  |  | — |
| $ | 19,439 |  |  | $ | 31,772 |  |  | $ | (12,333 | )

| Average Recorded Investment |  | Interest Income Recognized
| (Dollars in thousands)
December 31, 2015 |  |  |
Mortgage loans with an allowance | $ | 13,893 |  |  | $ | 1,117 |
Mortgage loans with no related allowance | 8,930 |  |  | 584 |
| $ | 22,823 |  |  | $ | 1,701 |
December 31, 2014 |  |  |
Mortgage loans with an allowance | $ | 18,465 |  |  | $ | 1,797 |
Mortgage loans with no related allowance | 2,656 |  |  | 43 |
| $ | 21,121 |  |  | $ | 1,840 |
December 31, 2013 |  |  |
Mortgage loans with an allowance | $ | 33,772 |  |  | $ | 2,094 |
Mortgage loans with no related allowance | 3,264 |  |  | 138 |
| $ | 37,036 |  |  | $ | 2,232 |

A Troubled Debt Restructuring ("TDR") is a situation where we have granted a concession to a borrower for economic or legal reasons related to the borrower's financial difficulties that we would not otherwise consider. A mortgage loan that has been granted new terms, including workout terms as described previously, would be considered a TDR if it meets conditions that would indicate a borrower is experiencing financial difficulty and the new terms constitute a concession on our part. We analyze all loans where we have agreed to workout terms and all loans that we have refinanced to determine if they meet the definition of a TDR. We consider the following factors in determining whether or not a borrower is experiencing financial difficulty:

• | borrower is in default,

• | borrower has declared bankruptcy,

• | there is growing concern about the borrower's ability to continue as a going concern,

• | borrower has insufficient cash flows to service debt,

• | borrower's inability to obtain funds from other sources, and

• | there is a breach of financial covenants by the borrower.

If the borrower is determined to be in financial difficulty, we consider the following conditions to determine if the borrower was granted a concession:

• | assets used to satisfy debt are less than our recorded investment,

• | interest rate is modified,

• | maturity date extension at an interest rate less than market rate,

• | capitalization of interest,

• | delaying principal and/or interest for a period of three months or more, and

• | partial forgiveness of the balance or charge-off.

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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Mortgage loan workouts, refinances or restructures that are classified as TDRs are individually evaluated and measured for impairment. A summary of mortgage loans on commercial real estate with outstanding principal at December 31, 2015 and 2014 that we determined to be TDRs are as follows:

Geographic Region |  | Number of TDRs |  | Principal Balance Outstanding |  | Specific Loan Loss Allowance |  | Net Carrying Amount
|  |  |  | (Dollars in thousands)
Year ended December 31, 2015: |  |  |  |  |  |  |  |
South Atlantic |  | 6 |  | $ | 11,155 |  |  | $ | (2,992 | ) |  | $ | 8,163 |
East North Central |  | 2 |  | 3,306 |  |  | (467 | ) |  | 2,839 |
West North Central |  | 1 |  | 5,913 |  |  | — |  |  | 5,913 |
|  | 9 |  | $ | 20,374 |  |  | $ | (3,459 | ) |  | $ | 16,915 |
Year ended December 31, 2014: |  |  |  |  |  |  |  |
South Atlantic |  | 7 |  | $ | 14,475 |  |  | $ | (4,244 | ) |  | $ | 10,231 |
East North Central |  | 1 |  | 2,177 |  |  | (467 | ) |  | 1,710 |
West North Central |  | 1 |  | 1,881 |  |  | (1,047 | ) |  | 834 |
|  | 9 |  | $ | 18,533 |  |  | $ | (5,758 | ) |  | $ | 12,775 |

5. Derivative Instruments
None of our derivatives qualify for hedge accounting, thus, any change in the fair value of the derivatives is recognized immediately in the consolidated statements of operations. The fair value of our derivative instruments, including derivative instruments embedded in fixed index annuity contracts and derivative instruments embedded in a convertible debt issue, presented in the consolidated balance sheets are as follows:

| December 31,
| 2015 |  | 2014
| (Dollars in thousands)
Assets |  |  |
Derivative instruments |  |  |
Call options | $ | 337,256 |  |  | $ | 731,113 |
Other assets |  |  |
2015 notes hedges | — |  |  | 30,291 |
Interest rate caps | 1,410 |  |  | 2,778 |
| $ | 338,666 |  |  | $ | 764,182 |
Liabilities |  |  |
Policy benefit reserves—annuity products |  |  |
Fixed index annuities—embedded derivatives | $ | 5,983,622 |  |  | $ | 5,574,653 |
Other liabilities |  |  |
2015 notes embedded conversion derivative (see Note 9) | — |  |  | 30,291 |
Interest rate swap | 3,139 |  |  | 2,644 |
| $ | 5,986,761 |  |  | $ | 5,607,588 |

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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The changes in fair value of derivatives included in the consolidated statements of operations are as follows:

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
| (Dollars in thousands)
Change in fair value of derivatives: |  |  |  |  |
Call options | $ | (327,921 | ) |  | $ | 521,947 |  |  | $ | 932,003 |
2015 notes hedges | (4,516 | ) |  | (8,934 | ) |  | 145,751 |
2015 warrants | — |  |  | — |  |  | (9,568 | )
Interest rate swap | (2,341 | ) |  | (4,863 | ) |  | 4,973 |
Interest rate caps | (1,368 | ) |  | (3,325 | ) |  | 2,856 |
| $ | (336,146 | ) |  | $ | 504,825 |  |  | $ | 1,076,015 |
Change in fair value of embedded derivatives: |  |  |  |  |
Fixed index annuities—embedded derivatives (see Note 2) | $ | (825,668 | ) |  | $ | (532,337 | ) |  | $ | (416,502 | )
Other changes in difference between policy benefit reserves computed using derivative accounting vs. long-duration contracts accounting | 365,486 |  |  | 579,885 |  |  | 408,496 |
2015 notes embedded conversion derivative (see Note 9) | (4,516 | ) |  | (19,036 | ) |  | 141,974 |
2029 notes embedded conversion derivative (see Note 9) | — |  |  | 3,809 |  |  | — |
| $ | (464,698 | ) |  | $ | 32,321 |  |  | $ | 133,968 |

The amounts presented as "Other changes in difference between policy benefit reserves computed using derivative accounting vs. long-duration contracts accounting" represents the total change in the difference between policy benefit reserves for fixed index annuities computed under the derivative accounting standard and the long-duration contracts accounting standard at each balance sheet date, less the change in fair value of our fixed index annuities embedded derivatives that is presented as Level 3 liabilities in Note 2.
We have fixed index annuity products that guarantee the return of principal to the policyholder and credit interest based on a percentage of the gain in a specified market index. When fixed index annuity deposits are received, a portion of the deposit is used to purchase derivatives consisting of call options on the applicable market indices to fund the index credits due to fixed index annuity policyholders. Substantially all such call options are one year options purchased to match the funding requirements of the underlying policies. The call options are marked to fair value with the change in fair value included as a component of revenues. The change in fair value of derivatives includes the gains or losses recognized at the expiration of the option term or upon early termination and the changes in fair value for open positions. On the respective anniversary dates of the index policies, the index used to compute the annual index credit is reset and we purchase new one-year call options to fund the next annual index credit. We manage the cost of these purchases through the terms of our fixed index annuities, which permit us to change caps, participation rates, and/or asset fees, subject to guaranteed minimums on each policy's anniversary date. By adjusting caps, participation rates, or asset fees, we can generally manage option costs except in cases where the contractual features would prevent further modifications.
Our strategy attempts to mitigate any potential risk of loss under these agreements through a regular monitoring process which evaluates the program's effectiveness. We do not purchase call options that would require payment or collateral to another institution and our call options do not contain counterparty credit-risk-related contingent features. We are exposed to risk of loss in the event of nonperformance by the counterparties and, accordingly, we purchase our option contracts from multiple counterparties and evaluate the creditworthiness of all counterparties prior to purchase of the contracts. All of these options have been purchased from nationally recognized financial institutions with a Standard and Poor's credit rating of A- or higher at the time of purchase and the maximum credit exposure to any single counterparty is subject to concentration limits. We also have credit support agreements that allow us to request the counterparty to provide collateral to us when the fair value of our exposure to the counterparty exceeds specified amounts.
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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The notional amount and fair value of our call options by counterparty and each counterparty's current credit rating are as follows:

|  |  |  |  |  | December 31,
|  |  |  |  |  | 2015 |  | 2014
Counterparty |  | Credit Rating (S&P) |  | Credit Rating (Moody's) |  | Notional Amount |  | Fair Value |  | Notional Amount |  | Fair Value
|  |  |  |  |  | (Dollars in thousands)
Bank of America |  | A |  | A1 |  | $ | 6,257,861 |  |  | $ | 67,662 |  |  | $ | 2,114,812 |  |  | $ | 62,932 |
Barclays |  | A- |  | A2 |  | 2,463,768 |  |  | 35,273 |  |  | 4,083,259 |  |  | 135,609 |
BNP Paribas |  | A+ |  | A1 |  | 1,520,710 |  |  | 16,944 |  |  | 1,321,136 |  |  | 42,644 |
Citibank, N.A. |  | A |  | A1 |  | 3,786,498 |  |  | 23,587 |  |  | 3,190,204 |  |  | 96,759 |
Credit Suisse |  | A |  | A1 |  | 1,278,492 |  |  | 12,508 |  |  | 2,354,811 |  |  | 75,381 |
Deutsche Bank |  | BBB+ |  | A3 |  | 1,349,002 |  |  | 10,704 |  |  | 2,682,960 |  |  | 64,028 |
HSBC |  | AA- |  | Aa3 |  | — |  |  | — |  |  | 38,599 |  |  | 1,767 |
J.P. Morgan |  | A+ |  | Aa3 |  | 838,982 |  |  | 5,283 |  |  | 401,804 |  |  | 13,488 |
Morgan Stanley |  | A |  | A1 |  | 3,465,457 |  |  | 33,171 |  |  | 2,605,687 |  |  | 77,106 |
Royal Bank of Canada |  | AA- |  | Aa3 |  | 2,820,410 |  |  | 48,654 |  |  | 1,364,362 |  |  | 41,717 |
SunTrust |  | A- |  | Baa1 |  | 1,308,434 |  |  | 20,028 |  |  | 248,622 |  |  | 5,405 |
Wells Fargo |  | AA- |  | Aa2 |  | 4,187,955 |  |  | 63,442 |  |  | 3,550,188 |  |  | 114,277 |
|  |  |  |  |  | $ | 29,277,569 |  |  | $ | 337,256 |  |  | $ | 23,956,444 |  |  | $ | 731,113 |

As of December 31, 2015 and 2014, we held $349.8 million and $743.0 million, respectively, of cash and cash equivalents and other securities from counterparties for derivative collateral, which is included in other liabilities on our consolidated balance sheets. This derivative collateral limits the maximum amount of economic loss due to credit risk that we would incur if parties to the call options failed completely to perform according to the terms of the contracts to $36.9 million and $47.4 million at December 31, 2015 and 2014, respectively.
The future annual index credits on our fixed index annuities are treated as a "series of embedded derivatives" over the expected life of the applicable contract. We do not purchase call options to fund the index liabilities which may arise after the next policy anniversary date. We must value both the call options and the related forward embedded options in the policies at fair value. During the year ended December 31, 2014, we revised future period assumptions for lapse rates and the expected costs of annual call options used in determining fixed index annuity embedded derivatives. These revisions decreased the change in fair value of embedded derivatives for the year ended December 31, 2014 by $62.6 million, which after related adjustments to deferred sales inducements and deferred policy acquisition costs and income taxes, increased net income by $14.8 million.
We entered into an interest rate swap and interest rate caps to manage interest rate risk associated with the floating rate component on certain of our subordinated debentures. See Note 10 for more information on our subordinated debentures. The terms of the interest rate swap provide that we pay a fixed rate of interest and receive a floating rate of interest. The terms of the interest rate caps limit the three month London Interbank Offered Rate ("LIBOR") to 2.50%. The interest rate swap and caps are not effective hedges under accounting guidance for derivative instruments and hedging activities. Therefore, we record the interest rate swap and caps at fair value and any net cash payments received or paid are included in the change in fair value of derivatives in the consolidated statements of operations.
Details regarding the interest rate swap are as follows:

|  |  |  |  |  |  |  |  |  | December 31,
|  |  |  |  |  |  |  |  |  | 2015 |  | 2014
Maturity Date |  | Notional Amount |  | Receive Rate |  | Pay Rate |  | Counterparty |  | Fair Value |  | Fair Value
|  |  |  |  |  |  |  |  |  | (Dollars in thousands)
March 15, 2021 |  | $ | 85,500 |  |  | LIBOR |  | 2.415% |  | SunTrust |  | $ | (3,139 | ) |  | $ | (2,644 | )

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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Details regarding the interest rate caps are as follows:

|  |  |  |  |  |  |  |  |  | December 31,
|  |  |  |  |  |  |  |  |  | 2015 |  | 2014
Maturity Date |  | Notional Amount |  | Floating Rate |  | Cap Rate |  | Counterparty |  | Fair Value |  | Fair Value
|  |  |  |  |  |  |  |  |  | (Dollars in thousands)
July 7, 2021 |  | $ | 40,000 |  |  | LIBOR |  | 2.50% |  | SunTrust |  | $ | 708 |  |  | $ | 1,398 |
July 8, 2021 |  | 12,000 |  |  | LIBOR |  | 2.50% |  | SunTrust |  | 213 |  |  | 420 |
July 29, 2021 |  | 27,000 |  |  | LIBOR |  | 2.50% |  | SunTrust |  | 490 |  |  | 960 |
|  | $ | 79,000 |  |  |  |  |  |  |  |  | $ | 1,411 |  |  | $ | 2,778 |

The interest rate swap converts floating rates to fixed rates for seven years which began in March 2014. The interest rate caps cap our interest rates for seven years which began in July 2014. As of December 31, 2015, we deposited $1.5 million of collateral with the counterparty to the swap and caps.
In September 2010, concurrently with the issuance of $200.0 million principal amount of 3.50% Convertible Senior Notes due September 15, 2015 (the "2015 notes"), we entered into hedge transactions (the "2015 notes hedges") with two counterparties whereby we would receive the cash equivalent of the conversion spread on 16.0 million shares of our common stock based upon a strike price of $12.50 per share, subject to certain conversion rate adjustments in the 2015 notes. The number of shares and strike price of the 2015 notes hedges were subject to adjustment based on dividends we paid subsequent to their purchase. The 2015 notes hedges expired on September 15, 2015, and we received $25.8 million in cash. At December 31, 2014, as a result of partial unwind transactions executed in 2013 and 2014 and cash dividend adjustments, we had 2015 notes hedges outstanding on 1.8 million shares of our common stock at a strike price of $12.25 per share. The 2015 notes hedges were accounted for as derivative assets and were included in other assets in our consolidated balance sheets. The 2015 notes embedded conversion derivative liability was settled with the extinguishment of the 2015 notes (see Note 6) whereby we paid holders of the notes a total of $25.8 million in cash to settle the conversion premium. The 2015 notes hedges and 2015 notes embedded conversion derivative were adjusted to fair value each reporting period and unrealized gains and losses are reflected in our consolidated statements of operations.
In separate transactions, we sold warrants (the "2015 warrants") to the 2015 notes hedges counterparties for the purchase of up to 16.0 million shares of our common stock at a price of $16.00 per share. We received $15.6 million in cash proceeds from the sale of the 2015 warrants, which was recorded as an increase in additional paid-in capital. The number of shares and strike price of the warrants are subject to adjustment based on dividends we pay subsequent to selling the warrants. The warrants expire on various dates from December 2015 through March 2016. Changes in the fair value of these warrants will not be recognized in our consolidated financial statements as long as the instruments remain classified as equity.
In December 2015, we began settling the 2015 warrants in net shares on a weekly basis, and as of December 31, 2015, 47,868 shares of our common stock have been delivered to holders of the expiring warrants. At December 31, 2015, 2015 warrants remain outstanding on 1.6 million shares of our common stock at a strike price of $15.59 per share. The average price of our common stock has exceeded the strike price of the 2015 warrants in each quarter of 2015, 2014 and the last two quarters of 2013 and the dilutive effect of the 2015 warrants has been included in diluted earnings per share for the years ended December 31, 2015, 2014 and 2013.
In 2014, we entered into five separate partial unwind agreements with the counterparties to the 2015 notes hedges and the 2015 warrants to coincide with the extinguishment of a portion of our 2015 notes (see Note 9) whereby we agreed to settle the related 2015 notes hedges and the 2015 warrants and received net cash from the counterparties totaling $16.6 million. The agreements to settle the 2015 warrants in cash required us to reclassify $51.3 million from equity to a derivative liability which represented the fair value of the 2015 warrants committed to the unwind on the day that we entered into the unwind agreements. The fair value of these warrants did not change after reclassification as they were settled in cash at the time the agreements were executed.
At December 31, 2014, as a result of the partial unwind transactions executed in 2013 and 2014 and cash dividend adjustments, we had 2015 warrants outstanding on 1.8 million shares of our common stock at a strike price of $15.68 per share.
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6. Deferred Policy Acquisition Costs and Deferred Sales Inducements
Policy acquisition costs deferred and amortized are as follows:

| December 31,
| 2015 |  | 2014 |  | 2013
| (Dollars in thousands)
Balance at beginning of year | $ | 2,058,556 |  |  | $ | 2,426,652 |  |  | $ | 1,709,799 |
Costs deferred during the year: |  |  |  |  |
Commissions | 651,094 |  |  | 421,802 |  |  | 420,378 |
Policy issue costs | 6,545 |  |  | 5,080 |  |  | 5,422 |
Amortization | (286,114 | ) |  | (163,578 | ) |  | (365,468 | )
Effect of net unrealized gains/losses | 475,055 |  |  | (631,400 | ) |  | 656,521 |
Balance at end of year | $ | 2,905,136 |  |  | $ | 2,058,556 |  |  | $ | 2,426,652 |

Sales inducements deferred and amortized are as follows:

| December 31,
| 2015 |  | 2014 |  | 2013
| (Dollars in thousands)
Balance at beginning of year | $ | 1,587,257 |  |  | $ | 1,875,880 |  |  | $ | 1,292,341 |
Costs deferred during the year | 486,924 |  |  | 330,079 |  |  | 337,787 |
Amortization | (209,390 | ) |  | (131,419 | ) |  | (253,113 | )
Effect of net unrealized gains/losses | 367,357 |  |  | (487,283 | ) |  | 498,865 |
Balance at end of year | $ | 2,232,148 |  |  | $ | 1,587,257 |  |  | $ | 1,875,880 |

We periodically revise the key assumptions used in the calculation of amortization of deferred policy acquisition costs and deferred sales inducements retrospectively through an unlocking process when estimates of current or future gross profits/margins (including the impact of realized investment gains and losses) to be realized from a group of products are revised. The unlocking adjustment in 2015 decreased amortization of deferred policy acquisition costs by $11.0 million and amortization of deferred sales inducements by $5.6 million and included the impact of account balance true ups as of September 30, 2015, which have been favorable to us due to stronger equity market performance than we assumed, favorable adjustments to lapse assumptions to reflect better persistency experienced than assumed and unfavorable adjustments to investment spread to reflect lower spreads being earned than assumed. In 2015, the favorable impact of the account balance true-up and lapse assumption change was largely offset by reductions in estimated future gross profits attributable to revisions to the assumptions for the lifetime income benefit rider liability. The unlocking adjustment in 2014 decreased amortization of deferred policy acquisition costs by $35.5 million and amortization for deferred sales inducements by $12.6 million and included the impact of account balance true-ups as of September 30, 2014 and adjustment to future period assumptions for interest margins, surrenders and certain expenses. The unlocking adjustment in 2013 decreased amortization of deferred policy acquisition costs by $18.5 million and amortization for deferred sales inducements by $11.1 million.
7. Reinsurance and Policy Provisions
Coinsurance
We have two coinsurance agreements with EquiTrust Life Insurance Company ("EquiTrust"), covering 70% of certain of American Equity Life's fixed index and fixed rate annuities issued from August 1, 2001 through December 31, 2001, 40% of those contracts issued during 2002 and 2003, and 20% of those contracts issued from January 1, 2004 to July 31, 2004. The business reinsured under these agreements may not be recaptured. Coinsurance deposits (aggregate policy benefit reserves transferred to EquiTrust under these agreements) were $0.8 billion and $0.9 billion at December 31, 2015 and 2014, respectively. We remain liable to policyholders with respect to the policy liabilities ceded to EquiTrust should EquiTrust fail to meet the obligations it has coinsured. None of the coinsurance deposits with EquiTrust are deemed by management to be uncollectible. The balance due under these agreements to EquiTrust was $2.5 million and $15.2 million at December 31, 2015 and 2014, respectively, and represents the fair value of call options held by us to fund index credits related to the ceded business net of cash due to or from EquiTrust related to monthly settlements of policy activity and other expenses.
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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We have three coinsurance agreements with Athene Life Re Ltd. ("Athene"), an unauthorized life reinsurer domiciled in Bermuda. One agreement ceded 20% of certain of American Equity Life's fixed index annuities issued from January 1, 2009 through March 31, 2010. The business reinsured under this agreement is not eligible for recapture until the end of the month following seven years after the date of issuance of the policy. The second agreement cedes 80% of American Equity Life's multi-year rate guaranteed annuities issued from July 1, 2009 through December 31, 2013 and 80% of Eagle Life's multi-year rate guaranteed annuities issued from November 20, 2013 through December 31, 2013. The business reinsured under this agreement may not be recaptured. The third agreement cedes 80% of American Equity Life's and Eagle Life's multi-year rate guaranteed annuities issued on or after January 1, 2014, and 80% of Eagle Life's fixed index annuities. The reinsurance agreement specifies that the coinsurance percentage for Eagle Life's fixed index annuities decreases to 50% for policies issued between January 1, 2017 and December 31, 2018, and to 20% for policies issued on or after January 1, 2019. The business reinsured under this agreement may not be recaptured. Coinsurance deposits (aggregate policy benefit reserves transferred to Athene under these agreements) were $2.4 billion and $2.2 billion at December 31, 2015 and 2014, respectively. American Equity Life is an intermediary for reinsurance of Eagle Life's business ceded to Athene. American Equity Life and Eagle Life remain liable to policyholders with respect to the policy liabilities ceded to Athene should Athene fail to meet the obligations it has coinsured. The annuity deposits that have been ceded to Athene are held in trusts and American Equity Life is named as the sole beneficiary of the trusts. The assets in the trusts are required to remain at a value that is sufficient to support the current balance of policy benefit liabilities of the ceded business on a statutory basis. If the value of the trust accounts would ever be less than the amount of the ceded policy benefit liabilities on a statutory basis, Athene is required to either establish a letter of credit or deposit securities in the trusts for the amount of any shortfall. None of the coinsurance deposits with Athene are deemed by management to be uncollectible. The balance due under these agreements to Athene was $12.7 million and $21.9 million at December 31, 2015 and 2014, respectively, and represents the fair value of call options held by us to fund index credits related to the ceded business net of cash due from Athene related to monthly settlements of policy activity.
Amounts ceded to EquiTrust and Athene under these agreements are as follows:

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
| (Dollars in thousands)
Consolidated Statements of Operations |  |  |  |  |
Annuity product charges | $ | 5,427 |  |  | $ | 5,956 |  |  | $ | 6,551 |
Change in fair value of derivatives | (14,360 | ) |  | 31,076 |  |  | 60,876 |
| $ | (8,933 | ) |  | $ | 37,032 |  |  | $ | 67,427 |
Interest sensitive and index product benefits | $ | 88,923 |  |  | $ | 122,666 |  |  | $ | 117,934 |
Change in fair value of embedded derivatives | (22,616 | ) |  | 35,820 |  |  | 2,898 |
Other operating costs and expenses | 9,922 |  |  | 9,241 |  |  | 9,926 |
| $ | 76,229 |  |  | $ | 167,727 |  |  | $ | 130,758 |
Consolidated Statements of Cash Flows |  |  |  |  |
Annuity deposits | $ | (471,822 | ) |  | $ | (171,124 | ) |  | $ | (182,616 | )
Cash payments to policyholders | 391,045 |  |  | 280,308 |  |  | 208,345 |
| $ | (80,777 | ) |  | $ | 109,184 |  |  | $ | 25,729 |

Financing Arrangements
We have a reinsurance transaction with Hannover Life Reassurance Company of America ("Hannover"), which is treated as reinsurance under statutory accounting practices and as a financing arrangement under GAAP. The statutory surplus benefit under this agreement is eliminated under GAAP and the associated charges are recorded as risk charges and included in other operating costs and expenses in the consolidated statements of operations. The transaction became effective July 1, 2013 (the "2013 Hannover Transaction").
The 2013 Hannover Transaction is a yearly renewable term reinsurance agreement for statutory purposes covering 45.6% of waived surrender charges related to penalty free withdrawals, deaths and lifetime income benefit rider payments as well as lifetime income benefit rider payments in excess of policy fund values on certain business. We may recapture the risks reinsured under this agreement as of the end of any quarter after June 30, 2016. However, the agreement, as amended, makes it punitive to us if we do not recapture the business ceded no later than the first quarter of 2018. The reserve credit recorded on a statutory basis by American Equity Life was $480.7 million and $322.5 million at December 31, 2015 and 2014, respectively. We pay quarterly reinsurance premiums under this agreement with an experience refund calculated on a quarterly basis and a risk charge equal to 1.25% of the pretax statutory surplus benefit as of the end of each calendar quarter. Risk charges attributable to the 2013 Hannover Transaction were $21.0 million and $15.7 million during 2015 and 2014.
The 2013 Hannover Transaction replaces a similar reinsurance agreement with Hannover that was entered into in 2005 (the "2005 Hannover Agreement") which was recaptured simultaneously with entering into the 2013 Hannover Transaction. Risk charges attributable to the 2005 Hannover Transaction were $5.4 million during 2013.
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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Prior to its recapture in 2015, we had a coinsurance and yearly renewable term reinsurance agreement for statutory purposes that provided $49.2 million in net pretax statutory surplus benefit at inception in 2011 (the "2011 Hannover Transaction"). Pursuant to the terms of this agreement, pretax statutory surplus was reduced by $10.3 million, $10.8 million and $11.3 million in 2015, 2014 and 2013, respectively. These amounts include risk charges equal to 1.25% of the pretax statutory surplus benefit as of the end of each calendar quarter. Risk charges attributable to the 2011 Hannover Transaction were $0.3 million, $0.8 million and $1.3 million during 2015, 2014 and 2013, respectively.
Prior to its recapture in 2013, we had a coinsurance and yearly renewable term reinsurance agreement for statutory purposes that provided $29.5 million in net pretax statutory surplus benefit at inception in 2008 (the "2008 Hannover Transaction"). Pursuant to the terms of this agreement, pretax statutory surplus was reduced by $6.9 million in 2013. These amounts include risk charges equal to 1.25% of the pretax statutory surplus benefit as of the end of each calendar quarter. Risk charges attributable to the 2008 Hannover Transaction were $0.1 million during 2013.
Indemnity Reinsurance
In the normal course of business, we seek to limit our exposure to loss on any single insured and to recover a portion of benefits paid under our annuity, life and accident and health insurance products by ceding reinsurance to other insurance enterprises or reinsurers. Reinsurance contracts do not relieve us of our obligations to our policyholders. To the extent that reinsuring companies are later unable to meet obligations under reinsurance agreements, our life insurance subsidiaries would be liable for these obligations, and payment of these obligations could result in losses to us. To limit the possibility of such losses, we evaluate the financial condition of our reinsurers, and monitor concentrations of credit risk. No allowance for uncollectible amounts has been established against our asset for amounts receivable from other insurance companies as none of the receivables are deemed by management to be uncollectible.
8. Income Taxes
We file consolidated federal income tax returns that include all of our wholly-owned subsidiaries, except for 2009–2013 when Eagle Life filed a separate federal income tax return under applicable federal income tax guidelines. Our income tax expense as presented in the consolidated financial statements is summarized as follows:

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
| (Dollars in thousands)
Consolidated statements of operations: |  |  |  |  |
Current income taxes | $ | 75,568 |  |  | $ | 116,545 |  |  | $ | 133,036 |
Deferred income taxes (benefits) | 41,916 |  |  | (46,504 | ) |  | 3,013 |
Total income tax expense included in consolidated statements of operations | 117,484 |  |  | 70,041 |  |  | 136,049 |
Stockholders' equity: |  |  |  |  |
Expense (benefit) relating to: |  |  |  |  |
Change in net unrealized investment losses | (279,860 | ) |  | 363,572 |  |  | (344,944 | )
Share-based compensation | (3,649 | ) |  | (5,716 | ) |  | (4,043 | )
Extinguishment of convertible debt | — |  |  | (9,284 | ) |  | (4,546 | )
Total income tax expense (benefit) included in consolidated financial statements | $ | (166,025 | ) |  | $ | 418,613 |  |  | $ | (217,484 | )

Income tax expense in the consolidated statements of operations differed from the amount computed at the applicable statutory federal income tax rate of 35% as follows:

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
| (Dollars in thousands)
Income before income taxes | $ | 337,314 |  |  | $ | 196,064 |  |  | $ | 389,332 |
Income tax expense on income before income taxes | $ | 118,060 |  |  | $ | 68,622 |  |  | $ | 136,266 |
Tax effect of: |  |  |  |  |
Tax exempt net investment income | (3,834 | ) |  | (3,669 | ) |  | (2,657 | )
Extinguishment of convertible debt | — |  |  | 4,202 |  |  | 2,695 |
Other | 3,258 |  |  | 886 |  |  | (255 | )
Income tax expense | $ | 117,484 |  |  | $ | 70,041 |  |  | $ | 136,049 |
Effective tax rate | 34.8 | % |  | 35.7 | % |  | 34.9 | %

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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred income tax assets or liabilities are established for temporary differences between the financial reporting amounts and tax bases of assets and liabilities that will result in deductible or taxable amounts, respectively, in future years. The tax effects of temporary differences that give rise to the deferred tax assets and liabilities at December 31, 2015 and 2014, are as follows:

| December 31,
| 2015 |  | 2014
| (Dollars in thousands)
Deferred income tax assets: |  |  |
Policy benefit reserves | $ | 2,092,731 |  |  | $ | 2,052,968 |
Other than temporary impairments | 7,801 |  |  | 753 |
Derivative instruments | 91,638 |  |  | — |
Amounts due reinsurer | — |  |  | 680 |
Other policyholder funds | 6,861 |  |  | 7,765 |
Litigation settlement accrual | 7,100 |  |  | 7,100 |
Deferred compensation | 8,346 |  |  | 10,565 |
Convertible senior notes | — |  |  | 12,281 |
Net operating loss carryforwards | 6,637 |  |  | 17,694 |
Other | 13,317 |  |  | 11,685 |
Gross deferred tax assets | 2,234,431 |  |  | 2,121,491 |
Deferred income tax liabilities: |  |  |
Deferred policy acquisition costs and deferred sales inducements | (1,860,722 | ) |  | (1,637,607 | )
Net unrealized gains on available for sale fixed maturity and equity securities | (96,454 | ) |  | (376,314 | )
Derivative instruments | — |  |  | (94,038 | )
Amounts due reinsurer | (9,677 | ) |  | — |
Investment income items | (32,466 | ) |  | (14,842 | )
Other | (2,429 | ) |  | (2,585 | )
Gross deferred tax liabilities | (2,001,748 | ) |  | (2,125,386 | )
Net deferred income tax (liability) asset | $ | 232,683 |  |  | $ | (3,895 | )

Included in the deferred income taxes is the expected income tax benefit attributable to unrealized losses on available for sale fixed maturity securities. There is no valuation allowance provided for the deferred income tax asset attributable to unrealized losses on available for sale fixed maturity securities. Management expects that the passage of time will result in the reversal of these unrealized losses due to the fair value increasing as these securities near maturity. We have the intent and ability to hold these securities to maturity, because we generate adequate cash flow from new business to fund all foreseeable cash flow needs and do not believe it would be necessary to liquidate these securities at a loss to meet cash flow needs.
Realization of our deferred income tax assets is more likely than not based on expectations as to our future taxable income and considering all other available evidence, both positive and negative. Therefore, no valuation allowance against deferred income tax assets has been established as of December 31, 2015 and 2014.
There were no material income tax contingencies requiring recognition in our consolidated financial statements as of December 31, 2015. We are no longer subject to income tax examinations by tax authorities for years prior to 2011.
At December 31, 2015, we had non-life net operating loss carryforwards for federal income tax purposes totaling $1.4 million which expire beginning in 2034.
9. Notes Payable and Amounts Due Under Repurchase Agreements
On July 17, 2013, we issued $400 million aggregate principal amount of senior unsecured notes due 2021 which bear interest at 6.625% per year and will mature on July 15, 2021. Contractual interest is payable semi-annually in arrears each January 15th and July 15th. 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 had a coupon interest rate of 3.5% per year, matured on September 15, 2015, and were settled in cash on the maturity date. Contractual interest was 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 were amortized over the term of the 2015 notes using the effective interest method.
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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The conversion option of the 2015 notes (the "2015 notes embedded conversion derivative") was an embedded derivative that required bifurcation from the 2015 notes and was 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 was 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), and was recorded as the original debt discount for purposes of accounting for the debt component of the 2029 notes. 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.
We were required to include the dilutive effect of the 2029 notes in our diluted earnings per share calculation. Because these notes included a mandatory cash settlement feature for the principal amount, incremental dilutive shares only existed when the fair value of our common stock at the end of the reporting period exceeded the conversion price per share. The conversion premium of the 2029 notes was dilutive and the effect was included in diluted earnings per share for the years ended December 31, 2014 and 2013. The 2015 notes were excluded from the dilutive effect in our diluted earnings per share calculation as they were intended to be settled only in cash.
The 2015 notes matured and were extinguished on September 15, 2015. Total consideration paid to holders of the 2015 notes at maturity was $48.2 million in cash, which included $22.4 million principal amount and $25.8 million conversion premium. See Note 5 for a discussion of the settlement of the 2015 notes embedded derivative liability.
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
| September 2015 Notes
| (Dollars in thousands)
Notes payable: |
Principal amount of liability component | $ | 22,377 |
Unamortized discount | (698 | )
Net carrying amount of liability component | $ | 21,679 |
Amount by which the if-converted value exceeds principal | $ | 30,497 |

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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The debt discounts were amortized over the expected lives of the notes, which was December 15, 2014 for the 2029 notes and September 15, 2015 for the 2015 notes. The effective interest rates during the discount amortization periods were 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 $1.4 million, $9.0 million, and $26.4 million for the years ended December 31, 2015, 2014 and 2013, 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 0.75% for alternate base rate borrowings and 1.75% for adjusted LIBOR rate borrowings, and the commitment fee is 0.30%. 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, 2015 and 2014. As of December 31, 2015, $472.4 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 2015, 2014 and 2013 was $40.6 million, $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 $0.5 million, $9.2 million and $68.3 million for the years ended December 31, 2015, 2014 and 2013, respectively. The weighted average interest rate on amounts due under repurchase agreements was 0.39%, 0.19% and 0.20% for the years ended December 31, 2015, 2014 and 2013, respectively.
10. Subordinated Debentures
Our wholly-owned subsidiary trusts (which are not consolidated) have issued fixed rate and floating rate trust preferred securities and have used the proceeds from these offerings to purchase subordinated debentures from us. We also issued subordinated debentures to the trusts in exchange for all of the common securities of each trust. The sole assets of the trusts are the subordinated debentures and any interest accrued thereon. The interest payment dates on the subordinated debentures correspond to the distribution dates on the trust preferred securities issued by the trusts. The trust preferred securities mature simultaneously with the subordinated debentures. Our obligations under the subordinated debentures and related agreements provide a full and unconditional guarantee of payments due under the trust preferred securities. All subordinated debentures are callable by us at any time, except for the Trust II subordinated debt obligations.
Following is a summary of subordinated debt obligations to the trusts at December 31, 2015 and 2014:

| December 31, |  |  |  |  |
| 2015 |  | 2014 |  | Interest Rate |  | Due Date
| (Dollars in thousands) |  |  |  |  |
American Equity Capital Trust II | $ | 76,840 |  |  | $ | 76,633 |  |  | 5% |  | June 1, 2047
American Equity Capital Trust III | 27,840 |  |  | 27,840 |  |  | *LIBOR + | 3.90% |  | April 29, 2034
American Equity Capital Trust IV | 12,372 |  |  | 12,372 |  |  | *LIBOR + | 4.00% |  | January 8, 2034
American Equity Capital Trust VII | 10,830 |  |  | 10,830 |  |  | *LIBOR + | 3.75% |  | December 14, 2034
American Equity Capital Trust VIII | 20,620 |  |  | 20,620 |  |  | *LIBOR + | 3.75% |  | December 15, 2034
American Equity Capital Trust IX | 15,470 |  |  | 15,470 |  |  | *LIBOR + | 3.65% |  | June 15, 2035
American Equity Capital Trust X | 20,620 |  |  | 20,620 |  |  | *LIBOR + | 3.65% |  | September 15, 2035
American Equity Capital Trust XI | 20,620 |  |  | 20,620 |  |  | *LIBOR + | 3.65% |  | December 15, 2035
American Equity Capital Trust XII | 41,238 |  |  | 41,238 |  |  | *LIBOR + | 3.50% |  | April 7, 2036
| $ | 246,450 |  |  | $ | 246,243 |  |  |  |  |  |

*—three month London Interbank Offered Rate
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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The principal amount of the subordinated debentures issued by us to American Equity Capital Trust II ("Trust II") is $100.0 million. These debentures were assigned a fair value of $74.7 million at the date of issue (based upon an effective yield-to-maturity of 6.8%). The difference between the fair value at the date of issue and the principal amount is being accreted over the life of the debentures. The trust preferred securities issued by Trust II were issued to Iowa Farm Bureau Federation, which owns more than 50% of the voting capital stock of FBL Financial Group, Inc. ("FBL"). The consideration received by Trust II in connection with the issuance of its trust preferred securities consisted of fixed income securities of equal value which were issued by FBL.
11. Retirement and Share-based Compensation Plans
We have adopted a contributory defined contribution plan which is qualified under Section 401(k) of the Internal Revenue Code. The plan covers substantially all of our full-time employees subject to minimum eligibility requirements. Employees can contribute a percentage of their annual salary (up to a maximum contribution of $18,000 in 2015, $17,500 in 2014 and $17,500 in 2013) 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 $441,000, $423,000 and $391,000 for the years ended December 31, 2015, 2014 and 2013, 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, 2015 and 2014, these individuals have earned, and we have reserved for future issuance, 366,072 and 362,287 shares of common stock, respectively, pursuant to these arrangements. We have incurred expense of $102,000, $127,000 and $162,000 for the years ended December 31, 2015, 2014 and 2013, 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 $3.7 million and $3.9 million at December 31, 2015 and 2014, respectively. The Officer Rabbi Trust held 103,251 shares and 102,551 shares of our common stock at December 31, 2015 and 2014, 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 could 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, 2015 and 2014, the total number of undistributed vested shares under the NMO Deferred Compensation Plan was 223,454 and 543,120, 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 313,108, 349,568 and 249,644 shares during 2015, 2014 and 2013, respectively. The number of shares held by the NMO Trust at December 31, 2015 and 2014, was 230,012 and 543,120, respectively.
The following table summarizes compensation expense recognized for employees, directors and consultants as a result of share-based compensation:

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
| (Dollars in thousands)
ESOP | $ | 2,604 |  |  | $ | 2,486 |  |  | $ | 3,464 |
2009 Employee Incentive Plan | 1,911 |  |  | 1,306 |  |  | 1,294 |
2013 Director Equity and Incentive Plan | 564 |  |  | 603 |  |  | 380 |
2011 Director Stock Option Plan | 49 |  |  | 186 |  |  | 304 |
| $ | 5,128 |  |  | $ | 4,581 |  |  | $ | 5,442 |

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.
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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, we issued 33,489 shares of common stock (23,681 shares were restricted stock).
During 2013, we established a long-term performance incentive plan utilizing restricted stock units granted pursuant to the 2009 Employee Incentive Plan. During 2015, 2014 and 2013, we granted 60,947, 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, 2017, 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 2015, 2014 and 2013, we issued 25,784, 18,239 and 26,087 (23,062, 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 2015, 2014 and 2013, we issued 22,000, 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 2015, we had 164,000 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, 2015, 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, 2015, we had 1,414,219 shares of common stock available for future grant under the 2009 Employee Incentive Plan.
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 2016, American Equity Life's agents were granted 650,683 restricted stock units based on their production during 2015, and we recorded commission expense (capitalized as deferred policy acquisition costs) of $3.5 million in 2015. 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 to retirement eligible individuals will vest over a four year period if the agent remains in good standing with American Equity Life. The remaining 80% of the restricted stock units granted to non-retirement eligible individuals will vest based on the agent's individual sales and continued service as an independent agent over a period of time not to exceed five years.
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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 over a period of time not to exceed five years. In January 2016, agents vested in 85,104 restricted stock units granted in January of 2015 based on their continued service as an independent agent and their 2015 individual sales of our products, and for which we recorded commission expense (capitalized as deferred policy acquisition costs) of $1.3 million in 2015.
During 2007, 2010 and 2012 we established Independent Insurance Agent Stock Option plans. Under these plans, agents of American Equity Life received 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 year ended December 31, 2013 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
Average risk-free interest rate | 1.21 | %
Dividend yield | 0.7 | %
Average expected life (years) | 3.75 |
Volatility | 31.2 | %

American Equity Life's agents earned 1,284,950 options during 2013, which were granted in January 2014, and we recorded commission expense (capitalized as deferred policy acquisition costs) of $8.1 million in 2013. 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, 2015, 2014 and 2013 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, 2013 | 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 |
Granted | — |  |  | — |  |  | — |
Canceled | (47,300 | ) |  | 10.54 |  |  | (499 | )
Exercised | (552,884 | ) |  | 14.51 |  |  | (8,021 | )
Outstanding at December 31, 2015 | 3,443,991 |  |  | 15.17 |  |  | $ | 52,240 |

The following table summarizes information about stock options outstanding at December 31, 2015:

|  | 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 |  | 383,500 |  |  | 2.19 |  | $ | 7.33 |  |  | 383,500 |  |  | 2.19 |  | $ | 7.33 |
$9.27 - $11.35 |  | 1,051,525 |  |  | 3.06 |  | 10.23 |  |  | 1,051,525 |  |  | 3.06 |  | 10.23 |
$11.87 - $24.79 |  | 2,008,966 |  |  | 4.25 |  | 19.25 |  |  | 2,008,966 |  |  | 4.25 |  | 19.25 |
$5.07 - $24.79 |  | 3,443,991 |  |  | 3.66 |  | 15.17 |  |  | 3,443,991 |  |  | 3.66 |  | 15.17 |

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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The aggregate intrinsic value for stock options outstanding and vested awards was $31.3 million and $31.3 million, respectively, at December 31, 2015. For the years ended December 31, 2015, 2014 and 2013, the total intrinsic value of options exercised by officers, directors and employees was $1.4 million, $5.4 million and $10.4 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, 2015, 2014 and 2013 was $8.1 million, $13.7 million and $31.8 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, 2015, 2014 and 2013, was $0.0 million, $1.0 million and $1.0 million, respectively.
12. Statutory Financial Information and Dividend Restrictions
Statutory accounting practices prescribed or permitted by regulatory authorities for our life insurance subsidiaries differ from GAAP. Net income for our primary life insurance subsidiary as determined in accordance with statutory accounting practices was as follows:

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
| (Dollars in thousands)
American Equity Life | $ | 131,452 |  |  | $ | 340,000 |  |  | $ | 205,202 |

Statutory capital and surplus for our primary life insurance subsidiary was as follows:

| December 31,
| 2015 |  | 2014
| (Dollars in thousands)
American Equity Life | $ | 2,415,419 |  |  | $ | 2,172,455 |

American Equity Life is domiciled in the state of Iowa and is regulated by the Iowa Insurance Division. Life insurance companies are subject to the National Association of Insurance Commissioners ("NAIC") risk-based capital (RBC) requirements which are intended to be used by insurance regulators as an early warning tool to identify deteriorating or weakly capitalized insurance companies for the purpose of initiating regulatory action. Calculations using the NAIC formula indicated that American Equity Life's ratio of total adjusted capital to the highest level of required capital at which regulatory action might be initiated (Company Action Level) is as follows:

| December 31,
| 2015 |  | 2014
| (Dollars in thousands)
Total adjusted capital | $ | 2,593,472 |  |  | $ | 2,327,335 |
Company Action Level RBC | 771,293 |  |  | 625,373 |
Ratio of adjusted capital to Company Action Level RBC | 336 | % |  | 372 | %

Prior approval of regulatory authorities is required for the payment of dividends to the parent company by American Equity Life which exceed an annual limitation. American Equity Life may pay dividends without prior approval, unless such payments, together with all other such payments within the preceding twelve months, exceed the greater of (1) net gain from operations before net realized capital gains/losses for the preceding calendar year or, (2) 10% of the American Equity Life's surplus at the preceding year-end. The amount of dividends permitted to be paid by American Equity Life to its parent company without prior approval of regulatory authorities is $241.3 million as of December 31, 2015. No dividends were paid by any of our insurance subsidiaries for any of the years presented in these financial statements.
The Parent Company relies on its subsidiaries for cash flow, which has primarily been in the form of investment management fees and/or dividends. Retained earnings in our consolidated financial statements primarily represent undistributed earnings of American Equity Life. As such, our ability to pay dividends is limited by the regulatory restriction placed upon insurance companies as described above. In addition, American Equity Life retains funds to allow for sufficient capital for growth.
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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Commitments and Contingencies
We lease our home office space and certain equipment under various operating leases. Rent expense for the years ended December 31, 2015, 2014 and 2013 totaled $2.5 million, $2.5 million and $2.3 million, respectively. At December 31, 2015, the aggregate future minimum lease payments are $16.8 million. The following represents payments due by period for operating lease obligations as of December 31, 2015 (dollars in thousands):

Year Ending December 31: |
2016 | $ | 1,808 |
2017 | 1,611 |
2018 | 1,550 |
2019 | 1,529 |
2020 | 1,577 |
2021 and thereafter | 8,679 |

We are occasionally involved in litigation, both as a defendant and as a plaintiff. In addition, state regulatory bodies, such as state insurance departments, the SEC, FINRA, the Department of Labor, and other regulatory bodies regularly make inquiries and conduct examinations or investigations concerning our compliance with, among other things, insurance laws, securities laws, the Employee Retirement Income Security Act of 1974, as amended, and laws governing the activities of broker/dealers.
In accordance with applicable accounting guidelines, we establish an accrued liability for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. As a litigation or regulatory matter is developing we, in conjunction with outside counsel, evaluate on an ongoing basis whether the matter presents a loss contingency that meets conditions indicating the need for accrual and/or disclosure, and if not the matter will continue to be monitored for further developments. If and when the loss contingency related to litigation or regulatory matters is deemed to be both probable and estimable, we will establish an accrued liability with respect to that matter and will continue to monitor the matter for further developments that may affect the amount of the accrued liability.
Companies in the life insurance and annuity business have faced litigation, including class action lawsuits, alleging improper product design, improper sales practices and similar claims. We were a defendant in a purported class action, McCormack, et al. v. American Equity Investment Life Insurance Company, et al., in the United States District Court for the Central District of California, Western Division and Anagnostis v. American Equity, et al., coordinated in the Central District, entitled, In Re: American Equity Annuity Practices and Sales Litigation (complaint filed September 7, 2005) (the "Los Angeles Case"), involving allegations of improper sales practices and similar claims.
The Los Angeles Case was a consolidated action involving several lawsuits filed by putative class members seeking class action status for a national class of purchasers of annuities issued by us. On July 30, 2013, the parties entered into a settlement agreement and stipulated to certification of the case as a class action for settlement purposes only. Notice of the terms of the settlement was mailed to the members of the class on October 7, 2013 and settlement claim forms were due from members of the class on or before December 6, 2013. On January 27, 2014, a hearing was held regarding the fairness of the settlement. On January 29, 2014, the District Court signed a final order approving the settlement and finding the settlement is fair and represents a complete resolution of all claims asserted on behalf of the class. On January 30, 2014, a final judgment was entered dismissing the case on the merits and with prejudice. On February 28, 2014, a member of the class filed an appeal of the District Court's approval of the terms of the settlement agreement with the United States Court of Appeals for the Ninth Circuit. On February 17, 2016, the United States Court of Appeals for the Ninth Circuit affirmed the District Court's approval of attorneys' fees and its approval of the settlement agreement.
We recorded an estimated litigation liability of $17.5 million during the third quarter of 2012 related to the Los Angeles Case. We increased our estimated litigation liability for this matter to $21.2 million during the fourth quarter of 2013 following the passage of the deadline for submission of claims by class members in the lawsuit and based upon information available at that time. However, we decreased the liability by $2.3 million in the first quarter of 2014 as additional information became available concerning the nature and magnitude of the claims received. In addition, during the first quarter of 2014, we paid $7.8 million in legal fees to the plaintiffs' counsel. The estimated litigation liability at December 31, 2015 is $11.1 million. While review of the claim forms has been stayed due to the appeal and it is difficult to predict the amount of the liabilities that will ultimately result from the completion of the claims process, the $11.1 million litigation liability represents our best estimate of probable loss with respect to this litigation. In light of the inherent uncertainties involved in the matter described above, there can be no assurance that such litigation, or any other pending or future litigation, will not have a material adverse effect on our business, financial condition, or results of operations.
In addition to our commitments to fund mortgage loans, we have unfunded commitments at December 31, 2015 to limited partnerships of $46.6 million and to secured bank loans of $18.7 million.
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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Earnings Per Share and Stockholders' Equity
Earnings Per Share
The following table sets forth the computation of earnings per common share and earnings per common share—assuming dilution:

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
| (Dollars in thousands, except per share data)
Numerator: |  |  |  |  |
Net income—numerator for earnings per common share | $ | 219,830 |  |  | $ | 126,023 |  |  | $ | 253,283 |
Denominator: |  |  |  |  |
Weighted average common shares outstanding (1) | 78,936,828 |  |  | 74,431,087 |  |  | 65,543,895 |
Effect of dilutive securities: |  |  |  |  |
Convertible senior notes | — |  |  | 2,657,158 |  |  | 7,088,149 |
Equity forward sale agreements | 67,575 |  |  | — |  |  | — |
2015 warrants | 759,723 |  |  | 1,559,646 |  |  | 1,184,549 |
Stock options and deferred compensation agreements | 1,040,922 |  |  | 1,178,783 |  |  | 1,224,053 |
Restricted stock and restricted stock units | 155,520 |  |  | 66,926 |  |  | — |
Denominator for earnings per common share—assuming dilution | 80,960,568 |  |  | 79,893,600 |  |  | 75,040,646 |
Earnings per common share | $ | 2.78 |  |  | $ | 1.69 |  |  | $ | 3.86 |
Earnings per common share—assuming dilution | $ | 2.72 |  |  | $ | 1.58 |  |  | $ | 3.38 |

(1) | Weighted average common shares outstanding include shares vested under the NMO Deferred Compensation Plan and exclude unallocated shares held by the ESOP.

Options to purchase shares of our common stock that were outstanding during the respective periods indicated but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares are as follows:

Period |  | Number of Shares |  | Range of Exercise Prices
|  |  |  | Minimum |  | Maximum
Year ended December 31, 2015 |  | 1,061,541 |  | $24.79 |  | $24.79
Year ended December 31, 2014 |  | 1,215,450 |  | $24.79 |  | $24.79
Year ended December 31, 2013 |  | — |  | — |  | —

Stockholders' Equity
In August 2015, we completed an underwritten public offering of 8,600,000 shares of our common stock at a public offering price of $25.25 per share, of which 4,300,000 shares are subject to a forward sale agreement described below. The offering of 4,300,000 shares of our common stock (shares not subject to the forward sale agreement) resulted in initial net proceeds of approximately $104.5 million (after deducting fees and expenses related to the offering). The underwriters exercised in full their option to purchase 1,290,000 additional shares of common stock, which is subject to a separate forward sale agreement. Settlement of the forward sale agreements will occur on one or more dates occurring no later than 12 months after August 12, 2015, the closing date of the offering. We used the net proceeds from the offering for a contribution to the capital and surplus of American Equity Life. If we elect to exercise our rights to physically settle the forward sales agreements, we intend to use the net proceeds from the settlement for general corporate purposes, including contributions to the capital and surplus of our life insurance subsidiaries to support their continued growth and maintain desired financial strength ratings.
The forward sale agreements had no initial fair value since they were entered into at the then market price of the common stock. The forward sale agreements are equity instruments and they qualify for an exception from derivative and fair value accounting.
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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Quarterly Financial Information (Unaudited)
Unaudited quarterly results of operations are summarized below.

| Quarter Ended
| March 31, |  | June 30, |  | September 30, |  | December 31,
| (Dollars in thousands, except per share data)
2015 |  |  |  |  |  |  |
Premiums and product charges | $ | 35,679 |  |  | $ | 42,446 |  |  | $ | 46,310 |  |  | $ | 47,781 |
Net investment income | 399,669 |  |  | 418,176 |  |  | 436,085 |  |  | 438,262 |
Change in fair value of derivatives | (31,100 | ) |  | (23,024 | ) |  | (351,360 | ) |  | 69,338 |
Net realized gains (losses) on investments, excluding OTTI losses | 4,879 |  |  | 4,324 |  |  | 1,159 |  |  | (151 | )
Net OTTI losses recognized in operations | (132 | ) |  | (828 | ) |  | (5,229 | ) |  | (13,347 | )
Total revenues | 408,995 |  |  | 441,094 |  |  | 126,965 |  |  | 541,883 |
Net income | 5,903 |  |  | 82,845 |  |  | 97,306 |  |  | 33,776 |
Earnings per common share | 0.08 |  |  | 1.07 |  |  | 1.22 |  |  | 0.41 |
Earnings per common share—assuming dilution | 0.07 |  |  | 1.05 |  |  | 1.19 |  |  | 0.40 |
2014 |  |  |  |  |  |  |
Premiums and product charges | $ | 32,603 |  |  | $ | 38,370 |  |  | $ | 38,001 |  |  | $ | 42,639 |
Net investment income | 370,005 |  |  | 370,882 |  |  | 386,931 |  |  | 403,849 |
Change in fair value of derivatives | 48,493 |  |  | 270,883 |  |  | 39,218 |  |  | 146,231 |
Net realized gains (losses) on investments, excluding OTTI losses | (714 | ) |  | (2,230 | ) |  | (3,190 | ) |  | 2,131 |
Net OTTI losses recognized in operations | (905 | ) |  | (594 | ) |  | (564 | ) |  | (564 | )
Loss on extinguishment of debt | (3,977 | ) |  | (6,574 | ) |  | — |  |  | (1,951 | )
Total revenues | 445,505 |  |  | 670,737 |  |  | 460,396 |  |  | 592,335 |
Net income (loss) | (9,753 | ) |  | 36,744 |  |  | 67,815 |  |  | 31,217 |
Earnings (loss) per common share | (0.13 | ) |  | 0.49 |  |  | 0.90 |  |  | 0.41 |
Earnings (loss) per common share—assuming dilution | (0.13 | ) |  | 0.46 |  |  | 0.85 |  |  | 0.39 |

Earnings (loss) per common share for each quarter is computed independently of earnings (loss) per common share for the year. As a result, the sum of the quarterly earnings (loss) per common share amounts may not equal the earnings (loss) per common share for the year.
The differences between the change in fair value of derivatives for each quarter primarily correspond to the performance of the indices upon which our call options are based. The comparability of net income (loss) is impacted by the application of fair value accounting to our fixed index annuity business is as follows:

| Quarter Ended
| March 31, |  | June 30, |  | September 30, |  | December 31,
| (Dollars in thousands)
2015 | $ | 42,849 |  |  | $ | (28,596 | ) |  | $ | (53,716 | ) |  | $ | 11,091 |
2014 | 42,297 |  |  | (2,232 | ) |  | (5,017 | ) |  | 15,862 |

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Schedule I—Summary of Investments—
Other Than Investments in Related Parties
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
December 31, 2015

Column A |  | Column B |  | Column C |  | Column D
Type of Investment |  | Amortized Cost (1) |  | Fair Value |  | Amount at which shown in the balance sheet
|  | (Dollars in thousands)
Fixed maturity securities: |  |  |  |  |  |
Available for sale: |  |  |  |  |  |
United States Government full faith and credit |  | $ | 470,567 |  |  | $ | 471,256 |  |  | $ | 471,256 |
United States Government sponsored agencies |  | 1,386,219 |  |  | 1,398,611 |  |  | 1,398,611 |
United States municipalities, states and territories |  | 3,422,667 |  |  | 3,755,367 |  |  | 3,755,367 |
Foreign government obligations |  | 210,953 |  |  | 212,565 |  |  | 212,565 |
Corporate securities |  | 23,597,530 |  |  | 23,802,394 |  |  | 23,802,394 |
Residential mortgage backed securities |  | 1,366,985 |  |  | 1,462,072 |  |  | 1,462,072 |
Commercial mortgage backed securities |  | 4,238,265 |  |  | 4,174,396 |  |  | 4,174,396 |
Other asset backed securities |  | 1,130,524 |  |  | 1,145,178 |  |  | 1,145,178 |
|  | 35,823,710 |  |  | 36,421,839 |  |  | 36,421,839 |
Held for investment: |  |  |  |  |  |
Corporate security |  | 76,622 |  |  | 65,377 |  |  | 76,622 |
Total fixed maturity securities |  | 35,900,332 |  |  | 36,487,216 |  |  | 36,498,461 |
Equity securities, available for sale: |  |  |  |  |  |
Common stocks |  | 7,515 |  |  | 7,828 |  |  | 7,828 |
Total equity securities |  | 7,515 |  |  | 7,828 |  |  | 7,828 |
Mortgage loans on real estate |  | 2,435,257 |  |  | 2,471,864 |  |  | 2,435,257 |
Derivative instruments |  | 309,716 |  |  | 337,256 |  |  | 337,256 |
Other investments |  | 291,530 |  |  |  |  | 291,530 |
Total investments |  | $ | 38,944,350 |  |  |  |  | $ | 39,570,332 |

(1) | On the basis of cost adjusted for other than temporary impairments, repayments and amortization of premiums and accrual of discounts for fixed maturity securities and short-term investments, original cost for derivative instruments and unpaid principal balance less allowance for credit losses for mortgage loans.

See accompanying Report of Independent Registered Public Accounting Firm.
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Schedule II—Condensed Financial Information of Registrant
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
Condensed Balance Sheets
(Dollars in thousands)

| December 31,
| 2015 |  | 2014
Assets |  |  |
Cash and cash equivalents | $ | 38,903 |  |  | $ | 61,139 |
Equity securities of subsidiary trusts | 7,415 |  |  | 7,409 |
Receivable from subsidiaries | 207 |  |  | 221 |
Deferred income taxes | 11,645 |  |  | 20,612 |
Federal income tax recoverable, including amount from subsidiaries | 7,747 |  |  | 10,430 |
Other assets, including 2015 notes hedges | 14,041 |  |  | 47,308 |
| 79,958 |  |  | 147,119 |
Investment in and advances to subsidiaries | 2,526,972 |  |  | 2,708,085 |
Total assets | $ | 2,606,930 |  |  | $ | 2,855,204 |
Liabilities and Stockholders' Equity |  |  |
Liabilities: |  |  |
Notes payable | $ | 400,000 |  |  | $ | 421,679 |
Subordinated debentures payable to subsidiary trusts | 246,450 |  |  | 246,243 |
Other liabilities, including 2015 notes embedded derivative | 15,945 |  |  | 47,406 |
Total liabilities | 662,395 |  |  | 715,328 |
Stockholders' equity: |  |  |
Common stock | 81,354 |  |  | 76,062 |
Additional paid-in capital | 630,367 |  |  | 513,218 |
Accumulated other comprehensive income | 201,663 |  |  | 721,401 |
Retained earnings | 1,031,151 |  |  | 829,195 |
Total stockholders' equity | 1,944,535 |  |  | 2,139,876 |
Total liabilities and stockholders' equity | $ | 2,606,930 |  |  | $ | 2,855,204 |

See accompanying note to condensed financial statements.
See accompanying Report of Independent Registered Public Accounting Firm.
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Schedule II—Condensed Financial Information of Registrant (Continued)
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
Condensed Statements of Operations
(Dollars in thousands)

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
Revenues: |  |  |  |  |
Net investment income | $ | 62 |  |  | $ | 130 |  |  | $ | 130 |
Dividends from subsidiary trusts | 363 |  |  | 360 |  |  | 361 |
Investment advisory fees | 65,957 |  |  | 58,044 |  |  | 44,469 |
Surplus note interest from subsidiary | 4,080 |  |  | 4,080 |  |  | 4,080 |
Change in fair value of derivatives | (8,225 | ) |  | (17,122 | ) |  | 144,012 |
Loss on extinguishment of debt | — |  |  | (12,502 | ) |  | (32,515 | )
Total revenues | 62,237 |  |  | 32,990 |  |  | 160,537 |
Expenses: |  |  |  |  |
Change in fair value of embedded derivatives | (4,516 | ) |  | (15,227 | ) |  | 141,974 |
Interest expense on notes payable | 28,849 |  |  | 36,370 |  |  | 38,870 |
Interest expense on subordinated debentures issued to subsidiary trusts | 12,239 |  |  | 12,122 |  |  | 12,088 |
Other operating costs and expenses | 8,195 |  |  | 7,928 |  |  | 8,163 |
Total expenses | 44,767 |  |  | 41,193 |  |  | 201,095 |
Income (loss) before income taxes and equity in undistributed income of subsidiaries | 17,470 |  |  | (8,203 | ) |  | (40,558 | )
Income tax expense (benefit) | 7,338 |  |  | 664 |  |  | (13,880 | )
Income (loss) before equity in undistributed income of subsidiaries | 10,132 |  |  | (8,867 | ) |  | (26,678 | )
Equity in undistributed income of subsidiaries | 209,698 |  |  | 134,890 |  |  | 279,961 |
Net income | $ | 219,830 |  |  | $ | 126,023 |  |  | $ | 253,283 |

See accompanying note to condensed financial statements.
See accompanying Report of Independent Registered Public Accounting Firm.
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Schedule II—Condensed Financial Information of Registrant (Continued)
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
Condensed Statements of Cash Flows
(Dollars in thousands)

| Year Ended December 31,
| 2015 |  | 2014 |  | 2013
Operating activities |  |  |  |  |
Net income | $ | 219,830 |  |  | $ | 126,023 |  |  | $ | 253,283 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |  |
Change in fair value of 2015 notes embedded conversion derivative | (4,516 | ) |  | (15,227 | ) |  | 141,974 |
Provision for depreciation and amortization | 1,613 |  |  | 2,081 |  |  | 2,831 |
Accrual of discount on equity security | (6 | ) |  | (6 | ) |  | (5 | )
Equity in undistributed income of subsidiaries | (209,698 | ) |  | (134,890 | ) |  | (279,961 | )
Accrual of discount on contingent convertible notes | 698 |  |  | 4,417 |  |  | 12,417 |
Change in fair value of derivatives | 6,377 |  |  | 15,619 |  |  | (144,012 | )
Loss on extinguishment of debt | — |  |  | 12,502 |  |  | 32,515 |
Accrual of discount on debenture issued to subsidiary trust | 207 |  |  | 193 |  |  | 181 |
Share-based compensation | 1,026 |  |  | 1,141 |  |  | 1,407 |
ESOP compensation | — |  |  | 82 |  |  | 110 |
Deferred income taxes (benefits) | 8,967 |  |  | 6,439 |  |  | (5,202 | )
Other | — |  |  | (2,235 | ) |  | (3,608 | )
Changes in operating assets and liabilities: |  |  |  |  |
Receivable from subsidiaries | 93 |  |  | 2,208 |  |  | 995 |
Federal income tax recoverable | 2,683 |  |  | 1,121 |  |  | 62 |
Other assets | (4 | ) |  | 378 |  |  | (1,945 | )
Other liabilities | (1,664 | ) |  | (7,256 | ) |  | 20,131 |
Net cash provided by operating activities | 25,606 |  |  | 12,590 |  |  | 31,173 |
Investing activities |  |  |  |  |
Capital contributions to subsidiaries | $ | (120,000 | ) |  | $ | — |  |  | $ | — |
Net cash used in investing activities | (120,000 | ) |  | — |  |  | — |
Financing activities |  |  |  |  |
Financing fees incurred and deferred | $ | — |  |  | $ | (100 | ) |  | $ | (11,942 | )
Proceeds from notes payable | — |  |  | — |  |  | 415,000 |
Repayments of notes payable | (48,152 | ) |  | (219,094 | ) |  | (234,154 | )
Net proceeds from settlement of notes hedges and warrants | 25,775 |  |  | 16,558 |  |  | 22,170 |
Excess tax benefits realized from share-based compensation plans | — |  |  | 184 |  |  | 159 |
Proceeds from issuance of common stock | 112,481 |  |  | 13,681 |  |  | 31,764 |
Dividends paid | (17,946 | ) |  | (15,221 | ) |  | (12,849 | )
Net cash provided by (used in) financing activities | 72,158 |  |  | (203,992 | ) |  | 210,148 |
Increase (decrease) in cash and cash equivalents | (22,236 | ) |  | (191,402 | ) |  | 241,321 |
Cash and cash equivalents at beginning of year | 61,139 |  |  | 252,541 |  |  | 11,220 |
Cash and cash equivalents at end of year | $ | 38,903 |  |  | $ | 61,139 |  |  | $ | 252,541 |
Supplemental disclosures of cash flow information |  |  |  |  |
Cash paid during the year for: |  |  |  |  |
Interest on notes payable | $ | 27,283 |  |  | $ | 31,206 |  |  | $ | 13,758 |
Interest on subordinated debentures | 11,833 |  |  | 11,765 |  |  | 11,850 |
Non-cash financing activity: |  |  |  |  |
Common stock issued in extinguishment of debt | — |  |  | 95,993 |  |  | 117,463 |
Common stock issued to settle warrants that have expired | 48 |  |  | — |  |  | — |

See accompanying note to condensed financial statements.
See accompanying Report of Independent Registered Public Accounting Firm.
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Schedule II—Condensed Financial Information of Registrant (Continued)
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
Note to Condensed Financial Statements
December 31, 2015
1. Basis of Presentation
The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of American Equity Investment Life Holding Company (Parent Company).
In the Parent Company financial statements, its investment in and advances to subsidiaries are stated at cost plus equity in undistributed income (losses) of subsidiaries since the date of acquisition and net unrealized gains/losses on the subsidiaries' fixed maturity securities classified as "available for sale" and equity securities.
See Notes 9 and 10 to the consolidated financial statements for a description of the Parent Company's notes payable and subordinated debentures payable to subsidiary trusts.
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Schedule III—Supplementary Insurance Information
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY

Column A |  | Column B |  | Column C |  | Column D |  | Column E
|  | Deferred policy acquisition costs |  | Future policy benefits, losses, claims and loss expenses |  | Unearned premiums |  | Other policy claims and benefits payable
|  | (Dollars in thousands)
As of December 31, 2015: Life insurance |  | $ | 2,905,136 |  |  | $ | 45,495,431 |  |  | $ | — |  |  | $ | 324,850 |
As of December 31, 2014: Life insurance |  | $ | 2,058,556 |  |  | $ | 39,802,861 |  |  | $ | — |  |  | $ | 365,819 |
As of December 31, 2013: Life insurance |  | $ | 2,426,652 |  |  | $ | 35,789,655 |  |  | $ | — |  |  | $ | 418,033 |

Column A |  | Column F |  | Column G |  | Column H |  | Column I |  | Column J
|  | Premium revenue |  | Net investment income |  | Benefits, claims, losses and settlement expenses |  | Amortization of deferred policy acquisition costs |  | Other operating expenses
|  | (Dollars in thousands)
For the year ended December 31, 2015: Life insurance |  | $ | 172,216 |  |  | $ | 1,692,192 |  |  | $ | 758,203 |  |  | $ | 286,114 |  |  | $ | 137,306 |
For the year ended December 31, 2014: Life insurance |  | $ | 151,613 |  |  | $ | 1,531,667 |  |  | $ | 1,679,255 |  |  | $ | 163,578 |  |  | $ | 130,076 |
For the year ended December 31, 2013: Life insurance |  | $ | 148,938 |  |  | $ | 1,383,927 |  |  | $ | 1,713,019 |  |  | $ | 365,468 |  |  | $ | 142,873 |

See accompanying Report of Independent Registered Public Accounting Firm.
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Schedule IV—Reinsurance
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY

Column A |  | Column B |  | Column C |  | Column D |  | Column E |  | Column F
|  | Gross amount |  | Ceded to other companies |  | Assumed from other companies |  | Net amount |  | Percent of amount assumed to net
|  | (Dollars in thousands)
Year ended December 31, 2015 |  |  |  |  |  |  |  |  |  |
Life insurance in force, at end of year |  | $ | 2,036,690 |  |  | $ | 10,677 |  |  | $ | 56,882 |  |  | $ | 2,082,895 |  |  | 2.73 | %
Insurance premiums and other considerations: |  |  |  |  |  |  |  |  |  |
Annuity product charges |  | $ | 141,595 |  |  | $ | 5,427 |  |  | $ | — |  |  | $ | 136,168 |  |  | — |
Traditional life, accident and health insurance, and life contingent immediate annuity premiums |  | 35,715 |  |  | 256 |  |  | 589 |  |  | 36,048 |  |  | 1.63 | %
|  | $ | 177,310 |  |  | $ | 5,683 |  |  | $ | 589 |  |  | $ | 172,216 |  |  | 0.34 | %
Year ended December 31, 2014 |  |  |  |  |  |  |  |  |  |
Life insurance in force, at end of year |  | $ | 2,171,426 |  |  | $ | 11,548 |  |  | $ | 56,509 |  |  | $ | 2,216,387 |  |  | 2.55 | %
Insurance premiums and other considerations: |  |  |  |  |  |  |  |  |  |
Annuity product charges |  | $ | 124,946 |  |  | $ | 5,956 |  |  | $ | — |  |  | $ | 118,990 |  |  | — |
Traditional life, accident and health insurance, and life contingent immediate annuity premiums |  | 32,308 |  |  | 336 |  |  | 651 |  |  | 32,623 |  |  | 2.00 | %
|  | $ | 157,254 |  |  | $ | 6,292 |  |  | $ | 651 |  |  | $ | 151,613 |  |  | 0.43 | %
Year ended December 31, 2013 |  |  |  |  |  |  |  |  |  |
Life insurance in force, at end of year |  | $ | 2,250,112 |  |  | $ | 13,521 |  |  | $ | 57,976 |  |  | $ | 2,294,567 |  |  | 2.53 | %
Insurance premiums and other considerations: |  |  |  |  |  |  |  |  |  |
Annuity product charges |  | $ | 110,142 |  |  | $ | 6,551 |  |  | $ | — |  |  | $ | 103,591 |  |  | — |
Traditional life, accident and health insurance, and life contingent immediate annuity premiums |  | 45,057 |  |  | 328 |  |  | 618 |  |  | 45,347 |  |  | 1.36 | %
|  | $ | 155,199 |  |  | $ | 6,879 |  |  | $ | 618 |  |  | $ | 148,938 |  |  | 0.41 | %

See accompanying Report of Independent Registered Public Accounting Firm.
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Schedule V—Valuation and Qualifying Accounts
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY

| Balance January 1, |  | Charged to Costs and Expenses |  | Translation Adjustment |  | Write-offs/ Payments/Other |  | Balance December 31,
| (Dollars in thousands
Year ended December 31, 2015 |  |  |  |  |  |  |  |  |
Valuation allowance on mortgage loans | $ | (22,633 | ) |  | $ | 1,018 |  |  | $ | — |  |  | $ | 7,473 |  |  | $ | (14,142 | )
Year ended December 31, 2014 |  |  |  |  |  |  |  |  |
Valuation allowance on mortgage loans | $ | (26,047 | ) |  | $ | (6,052 | ) |  | $ | — |  |  | $ | 9,466 |  |  | $ | (22,633 | )
Year ended December 31, 2013 |  |  |  |  |  |  |  |  |
Valuation allowance on mortgage loans | $ | (34,234 | ) |  | $ | (5,621 | ) |  | $ | — |  |  | $ | 13,808 |  |  | $ | (26,047 | )

See accompanying Report of Independent Registered Public Accounting Firm.
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Item 15. Exhibits and Financial Statement Schedules.
(a) Exhibits:

Exhibit No. |  | Description
3.1 |  | Articles of Incorporation, including Articles of Amendment (Incorporated by reference to Exhibit 3.1 to Post-Effective Amendment No. 1 to the Registration Statement on Form 10, filed on July 22, 1999, File No. 000-25985)
3.2 |  | Articles of Amendment to Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to Form 10-Q for the period ended June 30, 2000 filed on August 14, 2000, File No. 000-25985)
3.3 |  | Articles of Amendment to Articles of Incorporation (Incorporated by reference to Exhibit 3.2 to Pre-Effective Amendment No. 1 to the Registration Statement on Form S-1 filed on October 20, 2003, File No. 333-108794)
3.4 |  | Articles of Amendment to Articles of Incorporation (Incorporated by reference to Exhibit 3.3 to the Registration Statement on Form S-3 filed on January 15, 2008, File No. 333-148681)
3.5 |  | Articles of Amendment to Articles of Incorporation (Incorporated by reference to Exhibit 3.5 to Form 10-Q for the period ended June 30, 2011 filed on August 5, 2011, File No. 001-31911)
3.6 |  | Third Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.1 to Form 8-K filed on September 2, 2008, File No. 001-31911)
4.1 |  | Indenture dated October 29, 1999 between American Equity Investment Life Holding Company and Wilmington Trust Company (as successor in interest to West Des Moines State Bank), as trustee (Incorporated by reference to Exhibit 10.19 to the Registration Statement on Form S-1, File No. 333-108794, including all pre-effective amendments thereto)
4.2 |  | Trust Preferred Securities Guarantee Agreement dated October 29, 1999 between American Equity Investment Life Holding Company and Wilmington Trust Company (as successor in interest to West Des Moines State Bank), as trustee (Incorporated by reference to Exhibit 10.20 to the Registration Statement on Form S-1, File No. 333-108794, including all pre-effective amendments thereto)
4.3 |  | Trust Common Securities Guarantee Agreement dated October 29, 1999 between American Equity Investment Life Holding Company and West Des Moines State Bank, as trustee (Incorporated by reference to Exhibit 10.21 to the Registration Statement on Form S-1, File No. 333-108794, including all pre-effective amendments thereto)
4.4 |  | Instruments of Resignation, Appointment and Acceptance, effective September 12, 2006, among American Equity Investment Life Holding Company, Wilmington Trust Company, West Des Moines State Bank and Delaware Trust Company, National Association (formerly known as First Union Trust Company, National Association) (Incorporated by reference to Exhibit 4.10A to Form 10-K for the year ended December 31, 2008 filed on March 16, 2009)
4.5 |  | Indenture dated December 16, 2003, between American Equity Investment Life Holding Company and Wilmington Trust Company, as trustee (Incorporated by reference to Exhibit 4.11 to Form 10-K for the year ended December 31, 2003 filed on March 4, 2004)
4.6 |  | Guarantee Agreement dated December 16, 2003, between American Equity Investment Life Holding Company and Wilmington Trust Company, as trustee (Incorporated by reference to Exhibit 4.12 to Form 10-K for the year ended December 31, 2003 filed on March 4, 2004)
4.7 |  | Indenture dated April 29, 2004, between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National Association, as trustee (Incorporated by reference to Exhibit 4.13 to Form 10-Q for the period ended September 30, 2004 filed on November 9, 2004)
4.8 |  | Guarantee Agreement dated April 29, 2004, between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National Association, as trustee (Incorporated by reference to Exhibit 4.14 to Form 10-Q for the period ended September 30, 2004 filed on November 9, 2004)
4.9 |  | Indenture dated September 14, 2004, between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National Association, as trustee (Incorporated by reference to Exhibit 4.15 to Form 10-Q for the period ended September 30, 2004 filed on November 9, 2004)
4.10 |  | Guarantee Agreement dated September 14, 2004, between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National Association, as trustee (Incorporated by reference to Exhibit 4.16 to Form 10-Q for the period ended September 30, 2004 filed on November 9, 2004)
4.11 |  | Indenture dated December 22, 2004, between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National Association, as trustee (Incorporated by reference to Exhibit 4.17 to Form 10-K for the year ended December 31, 2004 filed on March 14, 2005)
4.12 |  | Guarantee Agreement dated December 22, 2004, between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National Association, as trustee (Incorporated by reference to Exhibit 4.18 to Form 10-K for the year ended December 31, 2004 filed on March 14, 2005)
4.13 |  | Indenture dated June 15, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National Association, as trustee (Incorporated by reference to Exhibit 4.23 to Form 10-Q for the period ended June 30, 2005 filed on August 4, 2005)
4.14 |  | Guarantee Agreement dated June 15, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National Association, as trustee (Incorporated by reference to Exhibit 4.24 to Form 10-Q for the period ended June 30, 2005 filed on August 4, 2005)
4.15 |  | Indenture dated August 4, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National Association, as trustee (Incorporated by reference to Exhibit 4.25 to Form 10-Q for the period ended September 30, 2005 filed on November 4, 2005)
4.16 |  | Guarantee Agreement dated August 4, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National Association, as trustee (Incorporated by reference to Exhibit 4.26 to Form 10-Q for the period ended September 30, 2005 filed on November 4, 2005)
4.17 |  | Indenture dated December 15, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National Association, as trustee (Incorporated by reference to Exhibit 4.27 to Form 10-K for the year ended December 31, 2005 filed on March 14, 2006)
4.18 |  | Guarantee Agreement dated December 15, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National Association, as trustee (Incorporated by reference to Exhibit 4.28 to Form 10-K for the year ended December 31, 2005 filed on March 14, 2006)
4.19 |  | Amended and Restated Indenture dated July 7, 2006 between American Equity Investment Life Holding Company and Wells Fargo Bank, National Association, as trustee (Incorporated by reference to Exhibit 4.31 to Form 10-Q for the period ended September 30, 2006 filed on November 3, 2006)
4.20 |  | Amended and Restated Guarantee Agreement dated July 7, 2006 between American Equity Investment Life Holding Company and Wells Fargo Delaware Trust Company, as trustee (Incorporated by reference to Exhibit 4.32 to Form 10-Q for the period ended September 30, 2006 filed on November 3, 2006)

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Exhibit No. |  | Description
4.21 |  | Senior Amended and Restated Indenture, dated as of April 22, 2004, between American Equity Investment Life Holding Company and U.S. Bank National Association, as trustee (Incorporated by reference to Exhibit 4.1 to Amendment No.1 to Form S-3 filed on April 22, 2004).
4.22 |  | First Supplemental Indenture, dated July 17, 2013, among American Equity Investment Life Holding Company, U.S. Bank National Association, and Wells Fargo Bank, National Association, as trustee (Incorporated by reference to Exhibit 4.2 to Form 8-K filed on July 17, 2013)
4.23 |  | Second Supplemental Indenture, dated as of July 17, 2013, between American Equity Investment Life Holding Company and Wells Fargo Bank, National Association, as trustee (Incorporated by reference to Exhibit 4.3 to Form 8-K filed on July 17, 2013)
10.1 |  | Deferred Compensation Agreement between American Equity Investment Life Holding Company and David S. Mulcahy dated December 31, 1997 (Incorporated by reference to Exhibit 10.5 to the Registration Statement on Form 10 filed on May 6, 1999)
10.2 |  | 2000 Employee Stock Option Plan (Incorporated by reference to Exhibit 10.7 to Form 10-Q for the period ended June 30, 2000 filed on August 14, 2000)
10.3 |  | 2000 Director Stock Option Plan (Incorporated by reference to Exhibit 10.8 to Form 10-Q for the period ended June 30, 2000 filed on August 14, 2000)
10.4 |  | American Equity Investment Life Holding Company 2009 Employee Incentive Plan (Incorporated by reference to Exhibit 10.2 to Form 8-K filed on June 9, 2009)
10.5 |  | Coinsurance Agreement dated December 19, 2001, including First Amendment dated February 26, 2002 between American Equity Investment Life Insurance Company and EquiTrust Life Insurance Company (Incorporated by reference to Exhibit 10.10 to Form 10-K for the year ended December 31, 2001 filed on April 1, 2002)
10.6 |  | Coinsurance Agreement dated December 29, 2003 between American Equity Investment Life Insurance Company and EquiTrust Life Insurance Company (Incorporated by reference to Exhibit 10.10-A to Form 10-K for the year ended December 31, 2003 filed on April 1, 2002)
10.7 |  | First Amendment to Coinsurance Agreement dated July 30, 2004 between American Equity Investment Life Insurance Company and EquiTrust Life Insurance Company (Incorporated by reference to Exhibit 10.10-B to Form 10-Q for the period ended June 30, 2004 filed on August 4, 2004)
10.8 |  | Form of Change in Control Agreement between American Equity Investment Life Holding Company and each of John M. Matovina and Debra J. Richardson (Incorporated by reference to the Registration Statement on Form S-1, File No. 333-108794, including all pre-effective amendments thereto)
10.9 |  | Form of Amendment to Change in Control Agreement between American Equity Investment Life Holding Company and each of John M. Matovina and Debra J. Richardson (Incorporated by reference to Exhibit 10.11-A to Form 10-K for the year ended December 31, 2012 filed on March 7, 2013)
10.10 |  | American Equity Investment Life Holding Company Independent Insurance Agent Stock Option Plan (Incorporated by reference to Exhibit 10.26 to Form 10-Q for the period ended September 30, 2007 filed on November 2, 2007)
10.11 |  | Coinsurance Agreement effective July 1, 2009, between American Equity Investment Life Insurance Company and Athene Life Re Ltd (Treaty #070109) (Incorporated by reference to Exhibit 10.29 to Form 10-Q for the period ended September 30, 2009 filed on November 9, 2009)
10.12 |  | Coinsurance Agreement effective July 1, 2009, between American Equity Investment Life Insurance Company and Athene Life Re Ltd (Treaty #08042009) (Incorporated by reference to Exhibit 10.29 to Form 10-Q for the period ended September 30, 2009 filed on November 9, 2009)
10.13 |  | Amended Retirement Benefit Agreement, dated as of March 29, 2010, between American Equity Investment Life Holding Company and David J. Noble (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on April 2, 2010)
10.14 |  | American Equity Investment Life Holding Company Short-Term Performance Incentive Plan (Incorporated by reference to Exhibit 10.2 to Form 10-Q for the period ended September 30, 2010 filed on November 9, 2010)
10.15 |  | 2010 Independent Insurance Agent Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-3 filed on December 15, 2010)
10.16 |  | American Equity Investment Life Holding Company 2011 Director Stock Option Plan (Incorporated by reference to Appendix A to Schedule 14A Definitive Proxy Statement for the 2011 annual meeting of stockholders filed on April 25, 2011)
10.17 |  | Second Amendment to Coinsurance Agreement effective August 1, 2001 between American Equity Investment Life Insurance Company and EquiTrust Life Insurance Company (Incorporated by reference to Exhibit 10.36 to Form 10-Q for the period ended September 30, 2011 filed on November 7, 2011)
10.18 |  | Second Amendment to Coinsurance Agreement effective January 1, 2004 between American Equity Investment Life Insurance Company and EquiTrust Life Insurance Company (Incorporated by reference to Exhibit 10.37 to Form 10-Q for the period ended September 30, 2011 filed on November 7, 2011)
10.19 |  | 2012 Independent Insurance Agent Stock Option Plan (Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-3 filed on August 23, 2012)
10.20 |  | Form of Change in Control Agreement between American Equity Investment Life Holding Company and each of Ted M. Johnson, Ronald J. Grensteiner and William R. Kunkel (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on December 13, 2012)
10.21 |  | Form of Change in Control Agreement between American Equity Investment Life Holding Company and Jeffrey D. Lorenzen (Incorporated by reference to Exhibit 10.42 to Form 10-K for the year ended December 31, 2012 filed on March 7, 2013)
10.22 |  | American Equity Investment Life Holding Company Short-Term Performance Incentive Plan adopted April 15, 2013, as amended and restated (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on April 15, 2013)
10.23 |  | Form of Restricted Stock Award Agreement with respect to Common Stock of American Equity Investment Life Holding Company-Nonperformance Based (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the period ended March 31, 2013 filed on May 8, 2013)
10.24 |  | Form of Performance Restricted Stock Unit Award Agreement (Incorporated by reference to Exhibit 10.2 to Form 10-Q for the period ended March 31, 2013 filed on May 8, 2013)
10.25 |  | Form of Restricted Stock Award Agreement with respect to Common Stock of American Equity Investment Life Holding Company-Performance Based (Incorporated by reference to Exhibit 10.3 to Form 10-Q for the period ended March 31, 2013 filed on May 8, 2013)
10.26 |  | Form of Change in Control Agreement between American Equity Investment Life Holding Company and Scott A. Samuelson (Incorporated by reference to Exhibit 10.3 to Form 10-Q for the period ended June 30, 2013 filed on August 8, 2013)
10.27 |  | 2013 Director Equity and Incentive Plan (Incorporated by reference to Exhibit 10.4 to Form 10-Q for the period ended June 30, 2013 filed on August 8, 2013)
10.28 |  | Credit Agreement dated November 22, 2013 among American Equity Life Investment Holding Company, JP Morgan Chase Bank, National Association and SunTrust Bank (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on November 26, 2013)

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Table of Contents

Exhibit No. |  | Description
10.29 |  | Amended and Restated American Equity Investment Life Holding Company 2014 Independent Insurance Agent Restricted Stock and Restricted Stock Unit Plan (Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-3 filed on December 17, 2014)
10.30 |  | Confirmation, dated August 6, 2015, by and between American Equity Life Investment Holding Company and RBC Capital Markets, LLC, as agent for Royal Bank of Canada (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on August 12, 2015)
10.31 |  | Confirmation, dated August 11, 2015, by and between American Equity Life Investment Holding Company and RBC Capital Markets, LLC, as agent for Royal Bank of Canada (Incorporated by reference to Exhibit 10.2 to Form 8-K filed on August 12, 2015)
12.1 |  | Ratio of Earnings to Fixed Charges
21.2 |  | Subsidiaries of American Equity Investment Life Holding Company
23.1 |  | Consent of Independent Registered Public Accounting Firm
31.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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