Business Context and Reporting Period
Filing: Form 10-Q for the quarter and six months ended June 30, 2017, filed August 7, 2017. The source filing identifies the registrant as American Equity Investment Life Holding Company, not American National Group Inc.; this company identity should be verified.
The company primarily sells individual annuities, especially fixed index and deferred annuities, and also sells a smaller amount of life insurance. Premiums for deferred annuities are generally recorded as deposits rather than revenue under GAAP.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $819.1 million, versus $549.8 million | $1.746 billion, versus $967.4 million |
| Income before taxes | $40.3 million, versus $22.7 million | $121.7 million, versus a $46.4 million loss |
| Net income | $26.9 million, versus $14.7 million | $80.9 million, versus a $30.1 million loss |
| Diluted EPS | $0.30, versus $0.18 | $0.90, versus a $0.37 loss |
| Operating cash flow | Not separately provided for the quarter | $831.1 million, versus $422.4 million |
| Investment spread | $286.9 million, versus $248.9 million | $565.6 million, versus $492.5 million |
- Net investment income increased 7% to $493.5 million in the quarter and 8% to $979.1 million for the six months, driven mainly by growth in invested assets.
- Non-GAAP operating income increased 27% to $63.7 million in the quarter and 73% to $123.3 million for the six months.
- Average investment yield declined to 4.45% for the quarter and 4.46% for the six months, from 4.54% and 4.56%, respectively. The aggregate investment spread nevertheless improved to 2.72% and 2.71%, from 2.62% and 2.64%.
- Total assets were $59.6 billion at June 30, 2017, versus $56.1 billion at December 31, 2016. Stockholders’ equity was $2.65 billion, versus $2.29 billion.
- Cash and cash equivalents were $1.575 billion, versus $791.3 million at year-end. Total investments were $47.9 billion, versus $44.8 billion.
- Policy benefit reserves were $53.9 billion, versus $51.6 billion. Notes and loan payable were $888.7 million, versus $493.8 million; repurchase-agreement borrowings were $61.7 million versus none at year-end.
- Fixed maturity securities totaled $44.0 billion and were 97% investment grade under NAIC designations. Gross unrealized losses declined to $318.2 million from $584.7 million at December 31, 2016; management considered the losses temporary.
Material Changes Versus the Prior Comparable Period
- Net annuity deposits declined 29% in the quarter and 34% for the six months after coinsurance; gross deposits declined 44% and 46%, respectively. Management attributed the declines to increased competition and uncertainty surrounding the Department of Labor fiduciary rule.
- Fixed index annuity deposits declined to $1.121 billion in the quarter from $1.526 billion and to $2.150 billion for the six months from $3.214 billion. Multi-year fixed-rate annuity deposits declined substantially.
- Interest-sensitive and index product benefits increased 325% in the quarter and 327% for the six months, primarily because of substantially higher index credits.
- Change in fair value of derivatives was a $266.8 million gain in the quarter and a $653.4 million gain for the six months, compared with gains of $39.1 million and a loss of $35.0 million in the prior periods. These results are highly sensitive to equity-index performance and interest rates.
- Net other-than-temporary impairment losses recognized in operations decreased to $0.9 million in the quarter and $1.1 million for the six months, compared with $4.4 million and $10.1 million.
- On June 16, 2017, the company issued $500 million of 5.0% senior unsecured notes due 2027. Proceeds were used to repay a $100 million term loan and redeem $400 million of 2021 notes. The July 17, 2017 redemption resulted in an $18.4 million loss, including a $13.3 million premium, recognized in the third quarter.
- Risk-based capital was estimated at 366% at June 30, 2017, compared with 342% at December 31, 2016.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management did not provide formal earnings guidance in the supplied filing. It expects continued growth in invested assets and operating income but identified low investment yields and competitive annuity pricing as headwinds.
- Renewal-rate adjustments on approximately $16–17 billion of policyholder account values were expected to reduce the overall cost of money by about 8 basis points when fully implemented. Additional adjustments on $7.4 billion were expected to reduce part of the spread between existing crediting rates and guaranteed minimum rates.
- The company stated that approximately 99% of annuity liabilities were subject to annual discretionary crediting-rate adjustments, subject to contractual minimum guarantees.
- Key risks include interest-rate movements, investment impairments and defaults, spread compression, annuity surrender activity, competition, regulatory changes, and the ability to control option costs for fixed index annuities.
- The DOL fiduciary rule became partially effective June 9, 2017, with additional requirements then scheduled for January 1, 2018. Management warned of potential lower sales, increased compliance costs, changes to compensation and products, and increased litigation risk.
- A 100-basis-point increase in the discount rate used for embedded-derivative liabilities would have reduced their fair value by approximately $510.7 million and increased related amortization by approximately $307.0 million; a 100-basis-point decrease would have had the opposite direction and larger stated effects.
- Parent-company liquidity included $450.2 million of cash at June 30, 2017, of which $413.3 million was subsequently used to redeem the 2021 notes. A $150 million revolving credit facility had no outstanding borrowings.
- Unfunded commitments included $46.9 million for mortgage loans, $58.2 million to limited partnerships, and $9.3 million to secured bank loans. The filing discusses ongoing litigation and regulatory inquiries but does not identify a specific material accrued loss.
Facts an Investor Should Verify
- Verify the issuer identity because the request names American National Group Inc., while the filing names American Equity Investment Life Holding Company.
- Reconcile reported GAAP net income with non-GAAP operating income and assess the effect of derivative fair-value changes, index credits, and deferred-cost amortization.
- Review the sustainability of annuity sales and net deposits given the substantial year-over-year declines and ongoing competitive and DOL-related pressures.
- Evaluate interest-rate sensitivity, including the embedded-derivative liability, investment spread, reinvestment risk, and potential unrealized investment losses.
- Confirm post-quarter-end debt balances and the third-quarter recognition of the $18.4 million loss from redeeming the 2021 notes.
- Assess investment-credit quality, below-investment-grade exposure, watch-list securities, unrealized losses, and the adequacy of impairment allowances.
- Verify statutory capital, dividend capacity, regulatory restrictions, and compliance with the minimum 275% risk-based capital covenant.