Filing context and reporting period
This Form 10-Q covers American Equity Investment Life Holding Company and subsidiaries for the quarter and six months ended June 30, 2020. The supplied metadata identifies American National Group Inc., but the filing’s registrant is American Equity Investment Life Holding Company, traded as AEL. The company primarily sells individual annuities, particularly fixed index deferred annuities.
Key financial metrics
| Metric | Three months ended June 30, 2020 | Six months ended June 30, 2020 |
|---|---|---|
| Total revenues | $919.9 million | $596.2 million |
| Net income (loss) | $(247.4) million | $(4.5) million |
| Net income (loss) available to common stockholders | $(253.4) million | $(17.0) million |
| Loss per common share | $(2.76) | $(0.19) |
| Net investment income | $543.7 million | $1.117 billion |
| Net cash provided by operating activities | Not separately provided for the quarter | $(327.9) million |
| Non-GAAP operating income available to common stockholders | $93.1 million | $247.2 million |
The six-month revenue figure was reduced by a $614.2 million loss from changes in derivative fair values. The quarter included a $327.7 million derivative fair-value gain, partly offset by a $1.127 billion increase in the fair value of embedded derivative liabilities.
Balance sheet, liquidity and capital
- Total assets were $68.6 billion at June 30, 2020, compared with $69.7 billion at December 31, 2019.
- Total investments were $55.8 billion, including $50.7 billion of fixed maturity securities and $4.0 billion of mortgage loans.
- Cash and cash equivalents were $2.409 billion; management reported approximately $1.4 billion of unencumbered cash.
- Total liabilities were $63.5 billion and stockholders’ equity was $5.062 billion, compared with $4.570 billion at year-end 2019.
- Notes payable were $495.4 million, principally $500 million of 5.0% senior notes due 2027. Subordinated debentures declined to $78.0 million after repayments.
- The parent had $349.0 million of cash and a $150 million revolving credit facility with no borrowings outstanding.
- The estimated risk-based capital ratio was 389% at June 30, 2020, compared with 372% at December 31, 2019.
Material changes versus the prior comparable period
- Second-quarter net income available to common stockholders declined from $18.6 million to a loss of $253.4 million. The six-month loss improved from $11.4 million to $17.0 million available to common stockholders, although the company remained unprofitable on a GAAP basis.
- Second-quarter revenue increased from $706.4 million to $919.9 million, while six-month revenue declined from $1.707 billion to $596.2 million, primarily because derivative fair-value movements reversed relative to the prior year.
- Net investment income decreased 5% in the quarter and 1% year to date, reflecting lower yields, increased cash holdings, lower floating-rate returns and investment partnership valuation losses.
- The average investment spread narrowed to 2.39% in the quarter and 2.51% year to date, from 2.63% and 2.60%, respectively.
- Net annuity deposits declined 61% in the quarter and 52% year to date after coinsurance, primarily because COVID-19 disrupted face-to-face distribution and intensified competition.
- Net cash used in operating activities was $327.9 million, compared with $1.871 billion of operating cash flow in the first six months of 2019. Policyholder cash flows were negative $518.4 million after coinsurance.
- The company issued Series B preferred stock for approximately $290.3 million of net proceeds in June 2020. Preferred dividends totaled $12.6 million in the first six months.
- The company adopted the current expected credit loss standard on January 1, 2020, increasing credit-loss allowances and reducing retained earnings by $9.3 million.
Outlook, risks and unusual items
- Management stated that COVID-19 created significant uncertainty, disrupted independent-agent distribution and could continue to suppress sales and produce net policyholder cash outflows.
- The fixed maturity portfolio was 96.7% investment grade under rating-agency categories, while 97% was investment grade under NAIC designations. However, unrealized losses increased to $987.7 million, and the company recorded a $50.2 million allowance for credit losses.
- Credit losses included exposure to offshore drilling, commercial mortgage-backed securities, residential mortgage-backed securities and an airline-related private placement. Management identified COVID-19-related stress in credit markets, travel and underlying collateral performance.
- Management expects low interest rates to pressure investment yields and spreads, but retains flexibility to reduce policyholder crediting rates. Approximately 99% of annuity liabilities were subject to annual crediting-rate adjustment, subject to contractual minimums.
- A 100-basis-point decrease in embedded-derivative discount rates would increase the embedded-derivative liability by approximately $967.6 million before related deferred-cost effects; a 100-basis-point increase would decrease it by approximately $868.6 million.
- Management revised the derivation of the embedded-derivative discount rate, reducing the second-quarter net loss by approximately $106.5 million.
- The six-month effective tax rate was 90.2%, affected by a $30.8 million CARES Act tax benefit related to net operating loss carrybacks. Excluding discrete items, management reported an effective rate of approximately 22.0%.
- Unfunded commitments included $65.1 million of mortgage-loan commitments and $41.2 million to limited partnerships. Litigation and regulatory matters are monitored, but the filing does not identify a material accrued contingency.
- Rating agencies maintained insurance financial-strength ratings of A-; S&P and Fitch revised certain outlooks to negative, while A.M. Best maintained a stable outlook.
Investor verification points
- Confirm the registrant identity because the supplied metadata names American National Group Inc., whereas the filing is for American Equity Investment Life Holding Company.
- Reconcile GAAP net income with non-GAAP operating income and isolate derivative, embedded-derivative and deferred-cost volatility.
- Monitor annuity sales, surrender activity, policyholder cash outflows and the effect of COVID-19 on distribution channels.
- Review investment credit quality, unrealized losses, allowance levels and exposures to offshore drilling, travel-related assets and structured securities.
- Assess the sustainability of the investment spread under prolonged low interest rates and the potential impact of lower crediting rates.
- Verify statutory capital, RBC requirements, dividend capacity and the ability of insurance subsidiaries to upstream cash to the parent.
- Evaluate sensitivity to interest rates, credit spreads, policy lapses, withdrawals and assumptions used to value embedded derivatives.