American Equity Investment Life Holding Company — Form 10-Q Summary
Filing identity: The supplied filing is for American Equity Investment Life Holding Company, not American National Group Inc. Investors should verify the issuer before relying on this summary.
Business Context and Reporting Period
The unaudited Form 10-Q covers the three and nine months ended September 30, 2013, with comparison periods ended September 30, 2012. The company primarily sells individual deferred annuities, especially fixed index annuities, and also sells life insurance. Annuity deposits are generally recorded as deposit liabilities rather than revenue under GAAP.
The filing states that interim results are not necessarily indicative of full-year results. Management’s principal earnings drivers are invested-asset growth, investment spreads, policyholder crediting rates, option costs supporting index credits, acquisition costs and investment performance.
Key Financial Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenues | $572.9 million | $503.9 million | $1.747 billion | $1.297 billion |
| Income before taxes | $85.7 million | $(12.4) million | $310.0 million | $32.4 million |
| Net income | $56.2 million | $(7.8) million | $202.3 million | $21.4 million |
| Diluted EPS | $0.75 | $(0.13) | $2.79 | $0.34 |
| Operating income, non-GAAP | $59.8 million | $22.2 million | $123.6 million | $79.3 million |
| Operating spread | 2.80% | 2.62% | 2.73% | 2.76% |
- Net investment income increased 11% year over year in Q3 to $354.1 million and 6% in the first nine months to $1.020 billion.
- Change in fair value of derivatives contributed $193.0 million in Q3 and $631.0 million in the first nine months, compared with $161.1 million and $269.4 million, respectively, in the prior-year periods.
- Q3 income benefited from a $19.1 million increase in net income from retrospective unlocking of deferred sales inducement and deferred acquisition cost assumptions. The nine-month benefit was also $19.1 million.
- Average annuity liabilities, net of coinsurance, increased 14% to $30.0 billion in Q3 and 13% to $29.0 billion for the nine-month period.
- Net annuity deposits after coinsurance were $1.012 billion in Q3 and $2.990 billion for the first nine months, up 7% and 10%, respectively, from the comparable periods based on the reported figures.
Financial Position, Cash Flow, Debt and Liquidity
| Balance-sheet item | September 30, 2013 | December 31, 2012 |
|---|---|---|
| Total assets | $38.713 billion | $35.133 billion |
| Total investments | $29.781 billion | $27.537 billion |
| Cash and cash equivalents | $934.9 million | $1.269 billion |
| Total liabilities | $37.318 billion | $33.413 billion |
| Notes payable | $691.5 million | $309.9 million |
| Stockholders’ equity | $1.395 billion | $1.720 billion |
- Operating cash flow for the first nine months was $604.4 million, down from $829.6 million in 2012.
- Investing activities used $3.319 billion, principally because purchases of available-for-sale fixed maturity securities exceeded sales, maturities and repayments.
- Financing activities provided $2.381 billion, including $415.0 million of note proceeds, $148.2 million of repurchase-agreement borrowings and net policyholder funding.
- Cash and cash equivalents declined by $333.6 million during the first nine months to $934.9 million.
- The company issued $400 million of 6.625% senior unsecured notes due 2021 in July 2013. It used $15 million to repay its revolving credit facility and expected to use remaining proceeds toward convertible-note tenders, redemptions or repurchases.
- The $160 million revolving credit facility had no borrowings outstanding at September 30, 2013 and was available through January 2014. The parent reported $421.3 million of cash and cash equivalents, including approximately $376 million of remaining senior-note proceeds.
- American Equity Life could distribute up to $165.6 million in 2013 without prior approval of the Iowa Insurance Commissioner, subject to statutory and contractual restrictions. Statutory earned surplus was $876.3 million at September 30, 2013.
Material Changes Versus Prior Comparable Period
- Net income improved from a Q3 2012 loss of $7.8 million to Q3 2013 income of $56.2 million; nine-month net income rose from $21.4 million to $202.3 million.
- Operating income increased 170% in Q3 and 56% for the first nine months.
- Fixed index annuity index credits increased to $233.3 million in Q3 and $610.5 million for nine months, compared with $152.2 million and $253.5 million, respectively, in 2012.
- Amortization of deferred sales inducements increased substantially to $34.6 million in Q3 and $184.0 million for nine months, versus $7.7 million and $50.4 million.
- Amortization of deferred policy acquisition costs increased to $50.0 million in Q3 and $265.5 million for nine months, versus $26.0 million and $105.1 million.
- Other operating expenses decreased largely because the company had recorded a $17.5 million litigation liability in Q3 2012. The company also recorded $8.5 million of guaranty-fund assessments in 2013.
- Accumulated other comprehensive income declined to $163.7 million from $686.8 million, principally because of a $523.1 million nine-month other comprehensive loss driven by higher interest rates and lower unrealized investment values.
- Gross unrealized losses on investments increased to approximately $656.7 million from $83.9 million at year-end 2012. Management attributed the increase primarily to higher ten-year Treasury yields.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide formal quantitative earnings guidance. It stated an objective of restoring the investment spread to a 3.00% target and estimated approximately 0.60% of remaining room to reduce policy crediting rates before reaching minimum guarantees across the book.
- Management reported that excess liquidity from called government-agency bonds was eliminated during Q3 2013 and that the investment portfolio had returned to a fully invested position.
- Interest-rate risk is material. A modeled 10% increase in rates, described as 37 basis points from September 30 levels, would reduce fixed-maturity fair value by approximately $853.2 million and reduce accumulated other comprehensive income and stockholders’ equity by approximately $212.0 million, based on the company’s assumptions.
- Approximately 94.5% of fixed-maturity securities were investment grade under the NRSRO presentation; 98% were NAIC Class 1 or 2. The portfolio nevertheless had $656.7 million of gross unrealized losses at September 30.
- Net OTTI losses recognized in operations were $0.2 million in Q3 and $6.2 million for nine months. Management noted that impairment determinations depend on interest rates, credit spreads, issuer performance, expected cash flows and the intent or ability to hold securities.
- Commercial mortgage loans totaled $2.6 billion. The portfolio had $81.2 million of unfunded commitments, 17 troubled debt restructurings with $41.9 million of principal outstanding, and $30.7 million of loans in workout status. No loans were 60 or more days past due at the reporting date.
- The company carried a $17.5 million estimated liability for the Los Angeles annuity-practices class action. A settlement received preliminary court approval in September 2013, but final approval and the ultimate claims liability remained uncertain.
- Other unfunded commitments included $30.1 million to limited partnerships and $19.7 million to secured bank loans.
- Subsequent to quarter-end, the company received $20.3 million from settling 50% of certain 2015 note hedges and warrants. It also exchanged $72.3 million of 2015 notes and $29.6 million of 2029 notes for cash and common stock, recognizing post-quarter-end net-of-tax losses of $8.1 million and $3.3 million, respectively.
- Key ongoing risks include low interest rates, reinvestment risk, spread compression, policyholder withdrawals, market and credit losses, derivative valuation volatility, regulatory capital requirements, litigation and competition in annuity distribution.
Investor Verification Checklist
- Confirm that the filing belongs to American Equity Investment Life Holding Company rather than American National Group Inc.
- Reconcile GAAP net income with non-GAAP operating income and isolate the effects of derivatives, embedded derivatives, unlocking, investment impairments and litigation items.
- Review the sensitivity of investment spreads, policy crediting rates and option costs to interest-rate and equity-index changes.
- Assess the increase in unrealized investment losses, the composition and credit quality of the fixed-income portfolio, and potential future OTTI charges.
- Review debt maturities, the intended use of senior-note proceeds and the post-quarter-end convertible-note exchanges.
- Monitor statutory capital, risk-based capital, dividend capacity and restrictions on upstreaming cash from insurance subsidiaries.
- Track final court approval and claims experience for the Los Angeles class-action settlement.