Business Context and Reporting Period
The supplied filing is the Form 10-K of American Equity Investment Life Holding Company, not American National Group Inc. It covers the fiscal year ended December 31, 2020, with comparisons primarily to 2019 and 2018. The company operates one segment focused on fixed index and fixed rate annuities, distributed through independent marketing organizations, agents, banks, broker-dealers and registered investment advisors.
Financial Performance and Position
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenues | $2.425 billion | $3.464 billion | Down 30% |
| Net investment income | $2.182 billion | $2.308 billion | Down 5% |
| Income before taxes | $816.0 million | $315.6 million | Up 159% |
| Net income | $671.5 million | $246.1 million | Up 173% |
| Net income available to common stockholders | $637.9 million | $246.1 million | Up 159% |
| Diluted earnings per share | $6.90 | $2.68 | Up 158% |
| Non-GAAP operating income available to common stockholders | $69.1 million | $548.2 million | Down 87% |
| Net cash provided by operating activities | $1.305 billion | $3.351 billion | Down 61% |
- Aggregate annuity deposits before coinsurance were $3.682 billion, down 26% from $4.963 billion. Net deposits after coinsurance were $3.647 billion, down 22%.
- Fourth-quarter deposits were approximately $1.8 billion, double the fourth quarter of 2019 and up 221% sequentially, led by new three- and five-year fixed-rate products.
- Average investment yield declined to 4.12% from 4.52%; aggregate investment spread declined to 2.43% from 2.68%.
- Annuity account value, net of coinsurance, was $54.1 billion at year-end, compared with $53.2 billion in 2019. Policy benefit reserves were $61.8 billion versus $61.9 billion.
- Total assets were $71.4 billion and total stockholders’ equity was $6.6 billion at December 31, 2020. Accumulated other comprehensive income was $2.4 billion.
- Total investments were $53.6 billion, including $47.5 billion of fixed maturity securities and $4.2 billion of mortgage loans. Approximately 97% of fixed maturity securities were investment grade under NAIC designations.
- Cash and cash equivalents increased to $9.1 billion from $2.3 billion, reflecting liquidity actions taken during the pandemic and preparation for proposed transactions.
- Debt included $495.7 million of senior notes payable and $78.1 million of subordinated debentures. The $150 million revolving credit facility had no borrowings outstanding at year-end.
- American Equity Life’s risk-based capital ratio was 372%, unchanged from 2019. Management’s normal target is approximately 400%, with an indicated willingness to operate near 320% during adverse conditions.
Material Changes Versus the Prior Comparable Period
- Reported GAAP earnings increased substantially, but the result was heavily affected by changes in fair values and actuarial assumptions. Non-GAAP operating income declined sharply.
- Net realized investment losses were $80.7 million, compared with net realized gains of $7.0 million in 2019. The company sold nearly $2.0 billion of structured securities and $2.4 billion of corporate securities in the fourth quarter to raise liquidity and reduce portfolio risk.
- Amortization of deferred policy acquisition costs and deferred sales inducements increased materially, to $1.088 billion from $176.3 million, primarily because of 2020 assumption updates and fair-value-related adjustments.
- The company revised near-term aggregate investment spread assumptions to 2.40%, increasing to 2.60% over eight years, versus a prior steady long-term assumption of 2.60%. The crediting or discount-rate assumption was reduced to 1.60% in the near term, increasing to 2.10% over eight years.
- The liability for lifetime income benefit riders increased to $1.9 billion from $1.3 billion, while deferred policy acquisition costs declined to $2.0 billion from $2.9 billion and deferred sales inducements declined to $1.3 billion from $2.0 billion.
- The company issued $300 million of Series B preferred stock for net proceeds of approximately $290.3 million and issued 9.1 million common shares to Brookfield for net proceeds of $333.6 million.
- The board authorized a $500 million share repurchase program. The company repurchased approximately $50 million of shares in the open market and entered into a $115 million accelerated share repurchase agreement. The final ASR settlement occurred on February 25, 2021.
Guidance, Outlook, Risks and Unusual Items
- Management is implementing the “AEL 2.0” strategy, centered on expanded distribution, investment management partnerships, greater use of reinsurance, improved capital efficiency and upgraded operating capabilities.
- The company expected to complete reinsurance partnerships with Värde/Agam and Brookfield during 2021 and establish its own reinsurance platform. These transactions were subject to final agreements, regulatory approvals and other closing conditions.
- On February 28, 2021, the company entered into an agreement assigning certain Brookfield investment obligations to Brookfield Asset Management Reinsurance Partners and North End Re, while retaining specified obligations of the original parties.
- COVID-19 disrupted face-to-face distribution, reduced sales and increased uncertainty around investment values, credit losses, policyholder withdrawals and operating continuity.
- Persistent low interest rates pressure investment yields and spreads. Management indicated it could reduce policyholder crediting rates by approximately 62 basis points if rates were lowered to contractual guaranteed minimums.
- Key risks include interest-rate and reinvestment risk, credit and liquidity risk, mortgage loan performance, counterparty and reinsurance risk, policyholder lapse and withdrawal behavior, regulatory changes, ratings downgrades, cybersecurity and execution risk related to AEL 2.0.
- GAAP results were unusually sensitive to actuarial assumptions and fair-value accounting. The fixed index annuity embedded-derivative liability was $7.9 billion at year-end and was classified as Level 3.
- The CARES Act generated an approximately $30.0 million tax benefit in 2020, reducing the effective tax rate to 17.7% from 22.0%.
- The filing reports effective disclosure controls and internal control over financial reporting, with an unqualified audit opinion from KPMG LLP.
Most Important Facts for Investors to Verify
- Verify the issuer identity: the supplied filing is for American Equity Investment Life Holding Company, ticker AEL, rather than American National Group Inc.
- Reconcile the large difference between GAAP net income of $671.5 million and non-GAAP operating income of $69.1 million.
- Review the sensitivity of embedded-derivative, lifetime-income-rider and deferred acquisition-cost balances to discount rates, option costs, lapse rates and rider utilization.
- Assess whether the proposed Brookfield and Värde/Agam reinsurance transactions were completed and received all required regulatory approvals after the filing date.
- Monitor the 372% RBC ratio against management’s approximately 400% target and the 275% minimum covenant level.
- Evaluate liquidity and asset quality, including the $9.1 billion cash balance, $64.8 million allowance for fixed-maturity credit losses, $31.0 million mortgage-loan allowance and concentrations in structured and corporate securities.
- Confirm the terms, settlement and effect of the $115 million ASR and the remaining availability under the $500 million repurchase authorization.