Reinsurance and Policy Provisions

12 Months Ended

Dec. 31, 2019

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 $481.9 million and $560.8 million at December 31, 2019 and 2018, 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 $10.7 million and $2.2 million at December 31, 2019 and 2018, 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.

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 no longer eligible for recapture. The second agreement ceded 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, 80% of Eagle Life's fixed index annuities issued prior to January 1, 2017, 50% of certain of Eagle Life's fixed index annuities issued from January 1, 2017 through December 31, 2018, 20% of certain of Eagle Life's fixed index annuities issued on or after January 1, 2019 and 80% of certain of American Equity Life's fixed index annuities issued from August 1, 2016 through December 31, 2016. The business reinsured under this agreement may not be recaptured. Coinsurance deposits (aggregate policy benefit reserves transferred to Athene under these agreements) were $4.6 billion and $4.4 billion at December 31, 2019 and 2018, 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 secured by assets held in trusts and American Equity Life is 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 $100.2 million and $16.2 million at December 31, 2019 and 2018, 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,
	2019			2018			2017
	(Dollars in thousands)
Consolidated Statements of Operations
Annuity product charges	$	7,792		$	7,074		$	6,458
Change in fair value of derivatives	97,195			(41,487		)	94,382
	$	104,987		$	(34,413	)	$	100,840

Interest sensitive and index product benefits	$	132,127		$	165,485		$	177,332
Change in fair value of embedded derivatives	109,002			(92,649		)	35,561
Other operating costs and expenses	18,778			20,415			19,877
	$	259,907		$	93,251		$	232,770
Consolidated Statements of Cash Flows
Annuity deposits	$	(290,040	)	$	(413,222	)	$	(387,280	)
Cash payments to policyholders	381,276			389,384			380,683
	$	91,236		$	(23,838	)	$	(6,597	)

Financing Arrangements

We have a reinsurance agreement 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 agreement became effective April 1, 2019 (the "2019 Hannover Agreement").

The 2019 Hanover Agreement is a coinsurance funds withheld reinsurance agreement for statutory purposes covering 80% of lifetime income benefit rider payments in excess of policy fund values and waived surrender charges related to penalty free withdrawals on certain business. We may recapture the risks reinsured under this agreement without penalty as of the end of the accounting period in which every reinsured policy in the issue year cohort reaches its 12^th anniversary date. We can elect to recapture the business by issue year cohort any time prior to the 12^th anniversary date however we are subject to paying a make-whole payment to Hannover in the event of an early recapture. The agreement also makes it punitive to us if we do not recapture the business on or before the 12^th anniversary of each issue year cohort.

The 2019 Hannover Agreement replaced a yearly renewable term reinsurance transaction we had with Hannover, which was effective July 1, 2013 and was subsequently amended effective October 1, 2016 (the "2013 Hannover Agreement"). The 2013 Hannover Agreement was also treated as reinsurance under statutory accounting practices and as a financing arrangement for GAAP. The 2013 Hannover Agreement covered 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.

The reserve credit recorded on a statutory basis by American Equity Life was $1.2 billion and $780.0 million at December 31, 2019 and 2018, respectively. We pay a quarterly risk charge based on the pretax statutory benefit as of the end of each calendar quarter. Risk charges attributable to our agreements with Hannover were $37.8 million, $30.8 million, and $28.5 million during 2019, 2018 and 2017, respectively.