Business Context and Reporting Period
The filing is American Equity Investment Life Holding Company’s unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The request metadata identifies American National Group Inc., but the filing text identifies the registrant as American Equity Investment Life Holding Company (NYSE: AEL). The company primarily sells individual annuities, particularly fixed index deferred annuities, through American Equity Life and Eagle Life.
Premium collections for deferred annuities are generally recorded as policyholder deposit liabilities rather than revenue. Core earnings are primarily driven by investment spreads, annuity product charges, policyholder account growth, investment performance and derivative results.
Financial Highlights
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenues | $706.4 million, versus $685.5 million | $1.707 billion, versus $804.3 million |
| Net income (loss) | $18.6 million, versus $93.9 million | $(11.4) million, versus $234.9 million |
| Diluted EPS | $0.20, versus $1.03 | $(0.13), versus $2.58 |
| Non-GAAP operating income | $99.6 million, versus $86.6 million | $189.0 million, versus $164.3 million |
| Net cash from operating activities | $1.871 billion, versus $(143.6) million |
- Net investment income increased 7% to $570.6 million in the quarter and 8% to $1.129 billion year to date, primarily from growth in invested assets.
- Aggregate investment spread was 2.63% in the quarter and 2.60% year to date, broadly comparable with the prior-year periods. Average invested asset yields were 4.51% and 4.49%, respectively.
- Net annuity deposits after coinsurance increased 33% to $1.427 billion in the quarter and 30% to $2.610 billion year to date.
- Fixed index annuity deposits increased 28% in the quarter and 25% year to date before coinsurance, driven by new products and improved competitive positioning.
- Assets totaled $66.371 billion at June 30, 2019, compared with $61.626 billion at December 31, 2018. Total investments were $54.785 billion, including $50.171 billion of available-for-sale fixed maturity securities.
- Cash and cash equivalents were $1.216 billion, compared with $344.4 million at December 31, 2018.
- Policy benefit reserves were $60.203 billion, compared with $57.606 billion at year-end 2018.
- Stockholders’ equity was $3.497 billion, compared with $2.399 billion at year-end 2018, primarily reflecting $1.102 billion of other comprehensive income from unrealized investment gains.
- Debt consisted primarily of $494.9 million of senior notes and $243.2 million of subordinated debentures. No repurchase-agreement balance remained outstanding at June 30, 2019.
Material Changes Versus the Prior Comparable Period
- GAAP net income declined substantially despite higher revenue. The six-month period moved to a net loss primarily because of unfavorable changes in the fair value of embedded derivatives and related accounting effects.
- For the six months, the change in fair value of embedded derivatives was a $1.094 billion expense, compared with a $969.2 million benefit in 2018. The change in fair value of derivatives was a $460.5 million benefit, compared with a $318.9 million loss in 2018.
- Interest-sensitive and index product benefits fell 41% in the quarter and 59% year to date, mainly because of lower index credits.
- Amortization of deferred sales inducements and deferred policy acquisition costs declined significantly because fair-value accounting adjustments reduced the amounts recognized in expense.
- Non-GAAP operating income increased 15% in the quarter and 15% year to date, indicating stronger underlying operating performance than reported GAAP net income.
- Comprehensive income was $554.9 million in the quarter and $1.091 billion year to date, compared with comprehensive losses of $125.7 million and $436.9 million in the prior-year periods, due primarily to changes in unrealized investment gains and losses.
- The investment portfolio strengthened as fixed maturity securities increased to $50.171 billion from $45.924 billion and net unrealized gains increased to $2.693 billion from a $207.5 million net unrealized loss at December 31, 2018.
Guidance, Outlook, Risks and Unusual Items
- No specific earnings or sales guidance was provided. Management expects continued growth in invested assets and non-GAAP operating income, subject to sales, retention, investment spreads and portfolio performance.
- Management described the prolonged low-interest-rate environment as a significant headwind to investment spreads. It retains the ability to reduce policyholder crediting rates toward guaranteed minimums, potentially reducing the cost of money by approximately 58 basis points.
- Market conditions were not conducive to additional portfolio realignment transactions in 2019, making further repositioning less likely during the year.
- Approximately 97% of the fixed maturity portfolio was investment grade at June 30, 2019. Gross unrealized losses were $302.7 million across 1,013 securities, compared with $1.351 billion across 2,715 securities at year-end. Management concluded the losses were temporary.
- Other-than-temporary impairment losses recognized in operations were $1.2 million in both the quarter and six-month period, compared with $2.4 million and $3.3 million, respectively, in 2018.
- Interest-rate risk is the primary market risk. A modeled 25-basis-point increase in rates would reduce the fair value of fixed maturity securities by approximately $904.6 million and reduce stockholders’ equity by approximately $354.6 million after specified adjustments.
- Estimated risk-based capital was 369% at June 30, 2019, compared with 360% at December 31, 2018. A credit agreement requires American Equity Life to maintain an RBC ratio of at least 275%.
- Parent-company cash was $36.2 million, and a $150 million revolving credit facility was available with no borrowings outstanding. The parent contributed $50 million to American Equity Life during the quarter.
- Liquidity depends substantially on annuity deposits, investment income and distributions from regulated insurance subsidiaries. Dividends and surplus-note payments are subject to insurance-law and regulatory restrictions.
- Commitments included $90.1 million of commercial mortgage-loan funding commitments, $33.0 million to limited partnerships and $122.5 million to fixed maturity securities.
- Risks include interest-rate and spread movements, investment impairments, annuity surrender and lapse behavior, competition, option-cost volatility, counterparty performance, regulatory changes, litigation and the effects of future accounting standards.
- The company adopted the lease accounting standard in 2019, recognizing a $3.9 million lease asset and liability. It is evaluating the expected-credit-loss standard effective January 1, 2020 and the long-duration insurance accounting standard, with a January 1, 2020 transition date and January 1, 2022 effective date.
Most Important Facts to Verify
- Confirm the issuer identity: the supplied metadata names American National Group Inc., while the filing is for American Equity Investment Life Holding Company.
- Reconcile GAAP net income with non-GAAP operating income, particularly the effects of derivative and embedded-derivative fair-value changes.
- Assess sustainability of the 2.60% year-to-date investment spread amid declining investment yields and low interest rates.
- Review the credit quality, unrealized losses and impairment assumptions underlying the $50.2 billion fixed maturity portfolio.
- Verify statutory capital, RBC compliance and the amount of dividends that regulated subsidiaries can distribute to the holding company.
- Evaluate sensitivity to policyholder lapses, withdrawals, surrender activity, index-credit costs and changes in discount-rate assumptions.
- Review the potential effects of the expected-credit-loss and long-duration insurance accounting standards on capital, earnings and reported liabilities.