American Equity Investment Life Holding Company — Form 10-Q Summary
Filing identity: The provided filing is for American Equity Investment Life Holding Company, not American National Group Inc. It covers the quarter and nine months ended September 30, 2023 and is unaudited. The company sells fixed-rate and fixed-index annuities primarily through independent marketing organizations, agents, banks and broker-dealers.
Business Context and Reporting Period
- The company operates one reportable segment focused on fixed-rate and fixed-index annuities.
- Management continued executing its “AEL 2.0” strategy, emphasizing annuity origination, private-asset investing, capital management and asset-management partnerships.
- On July 4, 2023, the company agreed to be acquired by Brookfield Reinsurance. Consideration is structured as $38.85 in cash plus Brookfield Asset Management Class A shares, with total consideration expected to range from $54.00 to $56.50 per AEL share.
Financial Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|
| Total revenues | $266.7 million | $491.9 million | $1.781 billion | $761.5 million |
| Income before taxes | $609.8 million | $566.3 million | $868.7 million | $2.406 billion |
| Net income attributable to common stockholders | $465.2 million | $434.0 million | $642.8 million | $1.855 billion |
| Diluted earnings per share | $5.82 | $4.90 | $7.92 | $19.89 |
| Non-GAAP operating income attributable to common stockholders | $195.5 million | $(8.7) million | $447.5 million | $249.6 million |
| Net cash provided by operating activities | Not separately presented | Not separately presented | $3.030 billion | $1.125 billion |
- Q3 revenue was reduced by a $383.0 million loss from changes in derivative fair values and a $44.7 million net realized investment loss.
- Q3 net income benefited from a $296.1 million market-risk-benefit gain and a $451.8 million gain from changes in embedded derivatives, presented as negative expenses.
- The aggregate investment spread was 2.73% in Q3 and 2.65% for the first nine months, compared with 2.73% and 2.64%, respectively, in the prior-year periods.
- Average yield on invested assets increased to 4.69% in Q3 and 4.52% year to date, while average invested assets declined approximately 9% year over year.
Financial Position, Liquidity and Debt
| Balance-sheet item | September 30, 2023 | December 31, 2022 |
|---|
| Total assets | $76.713 billion | $73.184 billion |
| Total investments | $44.587 billion | $51.325 billion |
| Cash and cash equivalents | $10.188 billion | $1.920 billion |
| Policy benefit reserves | $60.226 billion | $58.782 billion |
| Total liabilities | $74.636 billion | $70.813 billion |
| Total stockholders’ equity | $2.077 billion | $2.371 billion |
| Notes and loan payable | $787.1 million | $792.1 million |
- Cash increased substantially because of operating cash generation, investment sales and liquidity positioning. Management stated that approximately $6.0 billion of cash and cash equivalents was added during Q3 at a weighted-average yield of 5.47%.
- Debt consists primarily of $500 million of 5.0% senior notes due 2027 and a $300 million floating-rate term loan due 2027, net of principal amortization and issuance costs.
- At September 30, 2023, American Equity Life had approximately $1.8 billion of statutory earned surplus and $4.0 billion of total adjusted capital. Management estimated that up to $369.3 million could be distributed in 2023 without prior Iowa regulatory approval, subject to statutory and business constraints.
- The parent holding company had $480.8 million of cash and cash equivalents.
Material Changes Versus Prior Comparable Period
- Consolidated annuity deposits before coinsurance increased 197% in Q3 and 130% for the first nine months. Net deposits after coinsurance increased 174% and 87%, respectively.
- Fixed-index annuity sales were $2.214 billion in Q3 and $5.056 billion for the first nine months, increasing 203% and 112%, respectively, from the comparable periods.
- Net income attributable to common stockholders increased 7% in Q3 but declined 65% for the first nine months, largely because the prior-year nine-month result included unusually favorable fair-value movements.
- Non-GAAP operating income improved materially to $195.5 million in Q3 and $447.5 million year to date, compared with a Q3 operating loss of $8.7 million and year-to-date operating income of $249.6 million in 2022.
- Net unrealized losses reported in accumulated other comprehensive loss increased to $4.502 billion from $3.979 billion, primarily reflecting higher Treasury yields and credit-spread changes.
- Private assets increased to $12.599 billion, or 25.3% of the investment portfolio, from $10.976 billion, or 22.0%, at year-end 2022.
- The company repurchased approximately 7.3 million shares during the first nine months, including 4.8 million shares under a $200 million accelerated share repurchase agreement. Approximately $276 million remained under the repurchase program at September 30.
Guidance, Outlook, Risks and Unusual Items
- No formal quantitative earnings guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- The Brookfield transaction remains subject to shareholder, regulatory, exchange-listing, registration-statement and other closing conditions. It could close no earlier than January 5, 2024, unless waived by Brookfield’s parent, and has termination rights through April 4, 2024, subject to extensions.
- A $102 million termination fee may be payable under specified circumstances if the merger is terminated.
- Key operating sensitivities include interest rates, equity-market performance, option costs, policyholder lapses and withdrawals, lifetime-income-rider utilization, mortality, credit losses, investment liquidity, reinsurer and derivative-counterparty performance, and regulatory capital requirements.
- Fixed maturity securities had $5.803 billion of gross unrealized losses at September 30, 2023; approximately 98% of those losses related to investment-grade securities. Management stated it did not intend, and did not expect to be required, to sell most such securities before recovery.
- The company recognized $46.6 million of credit losses on investments during the first nine months, primarily related to securities in the regional banking sector.
- Mortgage-loan commitments totaled $750.5 million. Unfunded commitments to limited partnerships were $725.5 million and to fixed maturity securities were $1.1 billion.
- Management identified merger execution, market and credit losses, interest-rate volatility, liquidity, reinsurance, cybersecurity, regulatory changes, litigation and the ability of subsidiaries to upstream capital as material risks.
Most Important Facts for Investors to Verify
- Confirm the correct issuer: the supplied filing is AEL, not American National Group Inc.
- Review the Brookfield merger agreement, exchange-ratio mechanics, required approvals, closing timetable and potential $102 million termination fee.
- Reconcile GAAP net income with non-GAAP operating income and assess the recurring versus fair-value-driven components of earnings.
- Evaluate the effect of higher interest rates on accumulated other comprehensive loss, fixed-income valuations, embedded derivatives and market-risk benefits.
- Assess liquidity and capital adequacy after considering policyholder withdrawals, reinsurance flows, investment commitments and regulatory restrictions on subsidiary dividends.
- Review the quality, valuation and concentration of the growing private-asset portfolio and the $5.803 billion of unrealized fixed-income losses.
- Monitor mortgage-loan delinquencies, non-accrual loans, valuation allowances and exposure to commercial real estate and residential lending.
