Filing Scope and Business Context
The provided filing is American Equity Investment Life Holding Company’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2022, not American National Group Inc. The company specializes in fixed and fixed-index deferred annuities sold through independent marketing organizations, agents, banks and broker-dealers.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total revenues | $491.9 million | $542.6 million | $761.0 million | $2.58 billion |
| Net income | $312.6 million | $152.9 million | $1.24 billion | $380.9 million |
| Net income available to common stockholders | $301.7 million | $141.9 million | $1.21 billion | $348.1 million |
| Diluted EPS | $3.41 | $1.53 | $12.94 | $3.67 |
| Net cash provided by operating activities | Not separately provided for the quarter | $1.13 billion | $637.3 million | |
| Cash and cash equivalents | September 30, 2022: $1.81 billion | December 31, 2021: $4.51 billion |
- Aggregate investment spread increased to 2.73% in Q3 and 2.64% for the first nine months, compared with 2.40% and 2.16%, respectively, in the prior-year periods.
- Average invested-asset yield increased to 4.48% in Q3 and 4.33% for nine months, compared with 3.91% and 3.71%.
- At September 30, 2022, total assets were $70.18 billion, total liabilities were $66.97 billion and stockholders’ equity was $3.21 billion.
- Fixed maturity securities were $41.09 billion at fair value, while mortgage loans were $6.60 billion and total investments were $51.42 billion.
- Notes and loan payable increased to $794.8 million from $496.3 million at year-end 2021, primarily because of a new $300 million term loan. The company also had $78.7 million of subordinated debentures.
- Interest-rate-sensitive and index-product benefits declined to $121.9 million in Q3 and $729.4 million for nine months, from $817.0 million and $2.11 billion.
- Non-GAAP operating income available to common stockholders was $114.0 million in Q3 and $295.0 million for nine months, compared with $79.5 million and $214.7 million.
Material Changes Versus Prior Comparable Period
- Net income available to common stockholders more than doubled in Q3 and increased substantially for the first nine months, primarily because of higher net investment income and lower interest-sensitive and index-product benefits.
- Net investment income rose 16% in both Q3 and the nine-month period, reflecting higher yields, stronger returns on partnerships and mark-to-market assets, higher short-term rates, lower cash balances and increased private-asset allocations.
- Derivative results deteriorated: the change in fair value of derivatives was a loss of $176.7 million in Q3 and $1.16 billion for nine months, compared with losses of $70.7 million and a gain of $826.5 million.
- Revenue declined despite higher earnings because derivative-related revenue and premiums were lower. Annuity deposits after coinsurance fell 55% in Q3 and 63% for nine months, primarily because of reduced multi-year fixed-rate sales and disciplined fixed-index sales.
- Comprehensive income was a loss of $513.8 million in Q3 and $2.82 billion for nine months, driven largely by unrealized investment losses. Accumulated other comprehensive income declined from a $1.85 billion gain at year-end 2021 to a $2.21 billion loss at September 30, 2022.
- The company repurchased 13.6 million shares during the first nine months at an average price of $38.37. Approximately $213 million remained under the repurchase authorization at September 30, 2022.
Guidance, Outlook, Risks and Unusual Items
- Management is implementing its “AEL 2.0” strategy, emphasizing private assets, third-party asset management relationships, reinsurance and a transition toward more fee-like return-on-assets earnings.
- Approximately $10.0 billion, or 18.4%, of the investment portfolio consisted of private assets at September 30, 2022.
- Effective October 1, 2022, the company ceded $4.3 billion of certain fixed-index and fixed-rate annuity liabilities to AeBe ISA LTD. Management estimated an initial capital release in excess of $250 million and said the expected impact on 2023 operating earnings would be immaterial.
- The company expects other operating costs and expenses to settle around $60 million per quarter while executing AEL 2.0.
- The company expects a material impact from adopting the long-duration insurance contracts accounting standard on January 1, 2023. It estimated a $1.5 billion to $2.0 billion increase in stockholders’ equity at the January 1, 2021 transition date, primarily through accumulated other comprehensive income.
- Investment-grade securities represented approximately 98% of the fixed maturity portfolio. However, fixed maturity securities had $5.67 billion of gross unrealized losses at September 30, 2022, compared with $112.4 million at year-end 2021, mainly because of higher Treasury yields and wider credit spreads.
- Primary risks include interest-rate movements, spread compression, investment and credit losses, private-asset and concentration risk, option-cost increases, derivative and reinsurance counterparty risk, liquidity requirements, regulatory restrictions, litigation, cybersecurity and changes in accounting or insurance regulations.
- Mortgage loan commitments totaled $367.3 million, unfunded commitments to limited partnerships were $1.5 billion, and fixed maturity security commitments were $9.5 million. FHLB funding agreements totaled $50 million and were supported by $1.2 billion of pledged fixed maturity securities.
- There were 68 mortgage loans in non-accrual status at September 30, 2022, versus 13 at December 31, 2021. No mortgage loans were classified as troubled debt restructurings at either date.
- Director Sachin Shah resigned on November 8, 2022; the filing states that his resignation letter expressed disagreements with the company.
Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for American Equity Investment Life Holding Company, while the request identifies American National Group Inc.
- Assess the sustainability of earnings excluding volatile fair-value changes in derivatives, embedded derivatives and investment gains or losses.
- Monitor the effect of rising rates and credit spreads on unrealized losses, statutory capital, liquidity and insurer ratings.
- Review the October 2022 $4.3 billion reinsurance transaction, including capital release, collateral, counterparty strength and future earnings effects.
- Evaluate the risks and expected returns associated with the growing private-asset allocation and consolidated variable-interest entities.
- Review the January 2023 long-duration accounting transition, including the final impact on equity, retained earnings, AOCI, reserves and comparability of future results.
- Verify capital availability at the holding company and the regulatory limits on dividends from insurance subsidiaries.