Business Context and Reporting Period
This unaudited Form 10-Q is for American Equity Investment Life Holding Company, not American National Group Inc., for the quarter and six months ended June 30, 2016. The company primarily sells individual deferred annuities and, to a lesser extent, life insurance policies. Annuity deposits are generally recorded as deposit liabilities rather than revenue.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenues | $549.8 million, versus $441.1 million | $967.4 million, versus $850.1 million |
| Income before taxes | $22.7 million, versus $126.6 million | Loss of $46.4 million, versus income of $135.6 million |
| Net income (loss) | $14.7 million, versus $82.8 million | $(30.1) million, versus $88.7 million |
| Operating income | $50.1 million, versus $50.9 million | $71.1 million, versus $99.8 million |
| Net investment income | $459.8 million, versus $418.2 million | $910.7 million, versus $817.8 million |
| Operating cash flow | Not separately presented | $422.4 million, versus $265.5 million |
- Investment spread was 2.62% for the quarter and 2.64% for the six months, down from 2.84% and 2.80%, respectively.
- Average yield on invested assets declined to 4.54% for the quarter and 4.56% for the six months, while aggregate cost of money was 1.92% in both periods.
- Annuity deposits before coinsurance increased 17% in the quarter and 35% for the six months. Net deposits after coinsurance were $1.51 billion and $3.14 billion, respectively.
- At June 30, total assets were $53.7 billion, investments were $43.3 billion, cash and cash equivalents were $1.55 billion, and stockholders’ equity was $2.61 billion.
- Policy benefit reserves were $49.4 billion. Notes payable were $393.7 million and subordinated debentures were $241.7 million.
- The $140 million revolving credit facility had no borrowings outstanding. The filing also reports $31.9 million of parent-company cash.
Material Changes Versus Prior Comparable Period
- Quarterly net income declined primarily because of unfavorable changes in the fair value of embedded derivatives, higher deferred-cost amortization effects, and lower investment spreads. Six-month results moved from net income of $88.7 million to a net loss of $30.1 million.
- Change in fair value of embedded derivatives was an expense of $284.3 million in the quarter and $550.2 million for the six months, compared with benefits of $219.6 million and $168.4 million in the prior-year periods.
- Interest-sensitive and index-product benefits fell 64% for the quarter and 65% for the six months, largely because index credits were substantially lower than in 2015.
- Other-than-temporary impairment losses recognized in operations increased to $4.4 million for the quarter and $10.1 million for the six months, versus $0.8 million and $1.0 million.
- Accumulated other comprehensive income increased to $893.2 million from $201.7 million at year-end 2015, mainly from higher unrealized investment gains.
- The company completed settlement of forward sale agreements on August 1, 2016, issuing approximately 5.6 million shares and receiving $134.7 million of net proceeds for contribution to American Equity Life’s capital and surplus.
Guidance, Outlook, Risks and Unusual Items
- Management expects sales to moderate in the second half of 2016, particularly multi-year guaranteed annuity sales, after record first-half gross sales.
- Management identified sustained low interest rates and lower new-investment yields as significant pressure on investment spreads. Approximately $16 billion to $17 billion of policyholder account values were scheduled for renewal-rate adjustments beginning September 1, 2016, with another $7.4 billion subject to evaluation for adjustments beginning December 6, 2016.
- Following the Brexit-related decline in market yields, management reported investing approximately $875 million in July at a weighted average rate of 3.33% and expected further pressure on spreads and product terms.
- The Department of Labor fiduciary rule effective in April 2017 could adversely affect fixed-index annuity sales to qualified accounts, particularly through independent insurance agents.
- The estimated risk-based capital ratio declined to 312% at June 30, 2016 from 336% at December 31, 2015; pro forma for the August equity settlement, management estimated 328%.
- A proposed reinsurance transaction was suspended because lower investment yields negatively affected pricing. Management was considering additional debt financing within rating-agency parameters.
- The investment portfolio was 97% investment grade under NAIC designations. Unrealized losses were concentrated in sectors affected by energy and metals-and-mining volatility; management considered the losses temporary, but acknowledged risks of further price declines and credit downgrades.
- Commercial mortgage loans totaled $2.45 billion, including $66.5 million of unfunded commitments. One loan was classified as collateral dependent, and non-accrual loans totaled $7.8 million.
- The company estimated an $11.1 million litigation liability for the settled Los Angeles annuity-practices case. It also had unfunded commitments of $36.5 million to limited partnerships and $13.5 million to secured bank loans.
- Disclosure controls were not effective at June 30, 2016 because a previously reported material weakness in internal control over financial reporting remained outstanding. The weakness involved controls over code changes used to calculate lifetime income benefit reserves.
Most Important Facts to Verify
- Confirm the issuer identity: the supplied filing is for American Equity Investment Life Holding Company, whereas the request metadata names American National Group Inc.
- Assess the sustainability of the 2.64% six-month investment spread against the company’s 3.00% target and the effect of lower reinvestment yields.
- Review sensitivity of earnings and equity to embedded-derivative discount rates, interest rates, equity-index performance and policyholder behavior.
- Evaluate the effect of the DOL fiduciary rule on qualified-account annuity sales and the company’s product and distribution response.
- Monitor investment impairments, energy and metals-and-mining exposure, commercial mortgage credit quality and the $7.8 million of non-accrual loans.
- Confirm remediation and operating-effectiveness testing of the material weakness affecting lifetime income benefit reserve calculations.