Filing scope and business context
Important name discrepancy: The submitted filing is American Equity Investment Life Holding Company, not American National Group Inc. It is a Form 10-K for the fiscal year ended December 31, 2019, filed February 25, 2020; the source includes quarterly information for the fourth quarter but is not a standalone Q4 filing.
The company operates one segment focused on fixed index and fixed-rate annuities, distributed through independent agents, national marketing organizations, broker/dealers, banks and registered investment advisers. Products are issued through American Equity Life, American Equity Life of New York and Eagle Life Insurance Company.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenues | $3.464 billion | $1.547 billion | Significant increase, primarily from derivative fair-value changes |
| Net income | $246.1 million | $458.0 million | Down 46% |
| Diluted EPS | $2.68 | $5.01 | Down 47% |
| Non-GAAP operating income | $548.2 million | $425.7 million | Up 29% |
| Net investment income | $2.308 billion | $2.148 billion | Up 7% |
| Operating cash flow | $3.351 billion | $43.2 million | Substantial increase |
| Annuity deposits before coinsurance | $4.963 billion | $4.405 billion | Up 13% |
| Net annuity deposits after coinsurance | $4.673 billion | $3.992 billion | Up 17% |
| Aggregate investment spread | 2.68% | 2.60% | Expanded 8 basis points |
The 2019 net income decline reflects the comparison with unusually favorable 2018 derivative fair-value results and a $315.4 million increase in lifetime income benefit rider liabilities from assumption revisions. The company reported $18.7 million of net other-than-temporary impairment losses in 2019, versus $36.7 million in 2018.
At December 31, 2019, total investments were $56.9 billion, total assets were $69.7 billion, policy benefit reserves were $61.9 billion, and stockholders’ equity was $4.6 billion. Annuity account value, net of coinsurance, was $53.2 billion.
The investment portfolio was predominantly fixed income: $51.6 billion of fixed maturity securities, including 97.8% rated investment grade under the NRSRO presentation. The commercial mortgage loan portfolio had $3.46 billion of principal outstanding; all loans were reported as performing at year-end.
Debt, capital and liquidity
- Notes payable totaled $495.1 million, consisting primarily of $500 million of 5.0% senior notes due 2027.
- Subordinated debentures totaled $157.3 million after redemptions during December 2019; additional redemptions occurred in January and February 2020.
- The company had no borrowings under its $150 million revolving credit facility at December 31, 2019.
- Parent-company cash and cash equivalents were $332.5 million. Consolidated cash and cash equivalents were $2.293 billion.
- In November 2019, the company issued $400 million of 5.95% fixed-rate reset non-cumulative preferred stock, receiving net proceeds of $388.9 million. A portion was used to redeem subordinated debentures.
- American Equity Life’s statutory capital and surplus was $3.49 billion, and its risk-based capital ratio was 372%, compared with 360% in 2018. Up to $349.0 million could be distributed by American Equity Life in 2020 without prior regulatory approval, subject to applicable restrictions.
- Approximately 94% of annuity liabilities were subject to surrender penalties, with a weighted-average remaining surrender-charge period of 6.7 years and a weighted-average remaining charge of 10.8%.
Material changes versus the prior comparable period
- Sales increased, led by fixed index annuities. Consolidated fixed index annuity deposits rose to $4.706 billion from $4.221 billion, while multi-year guaranteed annuity deposits rose to $234.2 million from $112.7 million.
- Net investment income increased with growth in invested assets and a higher average yield. Average yield on invested assets increased to 4.52% from 4.47%, while aggregate cost of money declined to 1.84% from 1.87%.
- Derivative results reversed from a $777.8 million loss in 2018 to a $906.9 million gain in 2019. Embedded derivative results also reversed from a $1.389 billion benefit in 2018 to a $1.454 billion expense in 2019.
- Interest-sensitive and index product benefits decreased to $1.288 billion from $1.611 billion, but lifetime income benefit rider expense increased to $495.3 million from $103.7 million because of assumption changes and a larger rider population.
- Deferred policy acquisition costs declined to $2.923 billion from $3.536 billion, and deferred sales inducements declined to $1.967 billion from $2.517 billion, partly because of changes in unrealized investment gains and losses.
- Accumulated other comprehensive income increased to $1.498 billion from a $52.4 million loss, primarily due to higher fair values of available-for-sale fixed maturity securities as interest rates declined and credit spreads tightened.
- The company implemented an enhanced actuarial valuation system during 2019 and revised lapse, rider-utilization and crediting-rate assumptions. Ultimate utilization assumptions for certain older policies were reduced from 75% to 60% for fee riders and from 37.5% to 30% for no-fee riders.
Outlook, risks and unusual items
Management expects continued demand for principal-protected retirement products and lifetime income solutions, but describes the market as highly competitive. The company intends to expand distribution, introduce competitive products, manage spreads and improve operating efficiency. Beginning in 2020, Eagle Life expected most new-account acquisition to shift from third-party wholesalers to an internal wholesaling force.
- Low interest rates: Prolonged low yields may reduce investment income, compress spreads, limit product competitiveness and increase reinvestment risk. Management estimated that reducing current crediting rates to contractual minimums could lower cost of money by approximately 59 basis points.
- Interest-rate and surrender risk: Rising rates could increase policy surrenders and require asset sales at losses, while falling rates could reduce reinvestment yields and increase reserve values.
- Derivative and actuarial volatility: Fair-value accounting for options and embedded derivatives can cause substantial reported earnings volatility. Key assumptions include discount rates, future option costs, lapse rates and lifetime-income rider utilization.
- Reinsurance exposure: The company remains liable to policyholders if Athene or EquiTrust fails to perform. Athene reinsurance was secured by trust assets, while EquiTrust balances were not secured in the same manner.
- Investment and credit risk: The company recognized $18.7 million of 2019 OTTI losses, primarily on corporate securities with offshore drilling exposure. Future defaults, commercial mortgage losses or additional impairments could reduce earnings and capital.
- Regulatory and legal risk: State examinations were ongoing, and changes involving annuity suitability or best-interest standards, cybersecurity, privacy, taxation and insurance capital requirements could increase costs or restrict sales.
- Accounting transition: The company expected adoption of the current expected credit loss standard in 2020 to reduce pretax retained earnings by approximately $6 million to $13 million, based on preliminary estimates.
Most important facts for investors to verify
- Confirm the issuer identity because the provided metadata names American National Group Inc., while the filing identifies American Equity Investment Life Holding Company.
- Reconcile GAAP net income of $246.1 million with non-GAAP operating income of $548.2 million, including the derivative and embedded-derivative adjustments.
- Review the sensitivity of embedded derivative and lifetime-income rider liabilities to discount rates, option costs, lapse rates and rider utilization.
- Evaluate the credit quality, unrealized losses and sector exposures of the $51.6 billion fixed maturity portfolio, particularly energy and structured securities.
- Assess statutory capital, the 372% RBC ratio, dividend restrictions and the effect of reinsurance counterparty risk on subsidiary liquidity.
- Review the November 2019 preferred issuance, subordinated-debt redemptions and remaining parent-company obligations.
- Verify fourth-quarter results separately because quarterly earnings were materially affected by derivative fair-value movements, including a $220.2 million fourth-quarter net income figure after a $30.0 million first-quarter loss.