American National Group Inc. quarterly report, Q2 FY2023

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, 2023. The source text identifies the registrant as American Equity Investment Life Holding Company, not American National Group Inc. The company primarily sells fixed and fixed index deferred annuities through independent marketing organizations, agents, banks and broker-dealers.

The company continued its “AEL 2.0” strategy, emphasizing annuity origination, private-asset investment management, reinsurance and capital management. Management reported consolidated annuity sales of $2.0 billion in the second quarter and $3.4 billion for the first six months, with fixed index annuities representing $1.9 billion and $2.8 billion, respectively.

Financial Highlights

Metric	Three months ended June 30, 2023	Three months ended June 30, 2022	Six months ended June 30, 2023	Six months ended June 30, 2022
Total revenues	$851.6 million	$121.6 million	$1.514 billion	$269.6 million
Income before income taxes	$450.8 million	$974.7 million	$258.9 million	$1.839 billion
Net income	$355.1 million	$763.3 million	$199.3 million	$1.443 billion
Net income available to common stockholders	$344.4 million	$752.4 million	$177.5 million	$1.421 billion
Diluted earnings per share	$4.36	$8.06	$2.17	$14.86
Non-GAAP operating income available to common stockholders	$127.6 million	$151.2 million	$252.0 million	$258.3 million
Net cash provided by operating activities	Not separately presented	Not separately presented	$3.247 billion	$312.4 million

Reported earnings were highly affected by fair-value changes in derivatives, embedded derivatives and market risk benefits. The filing does not provide a conventional operating margin; total revenues and expenses include substantial market-driven fair-value items and are therefore not directly comparable to an operating margin measure.

Balance Sheet, Liquidity and Capital

Total assets were $77.645 billion at June 30, 2023, compared with $73.184 billion at December 31, 2022.
Total investments were $51.519 billion, including $38.680 billion of available-for-sale fixed maturity securities, $7.374 billion of mortgage loans and $1.650 billion of limited partnerships and limited liability companies.
Cash and cash equivalents increased to $5.001 billion from $1.920 billion at year-end 2022.
Total liabilities were $75.050 billion and total stockholders’ equity was $2.595 billion at June 30, 2023.
Policy benefit reserves were $59.857 billion, while market risk benefit liabilities were $2.673 billion.
Notes and loan payable totaled $788.8 million, consisting primarily of $500 million of 5.0% senior notes due 2027 and a $300 million term loan due 2027. Subordinated debentures totaled $78.9 million.
The parent holding company had $390.3 million of cash and cash equivalents. Management stated that expected subsidiary dividends and other permitted payments should satisfy foreseeable parent-level obligations, subject to insurance regulatory restrictions.
American Equity Life had $1.9 billion of statutory earned surplus and $4.1 billion of total adjusted capital. Up to $369.3 million could be distributed in 2023 without prior Iowa Insurance Commissioner approval, although actual distributions may be constrained by regulatory and rating considerations.
Operating cash flow was $3.247 billion, investing activities provided $581.3 million, and financing activities used $747.8 million during the first six months. Cash increased by $3.081 billion.

Material Changes Versus Prior Comparable Period

Second-quarter net income available to common stockholders declined 54% to $344.4 million; six-month net income declined 88% to $177.5 million.
Non-GAAP operating income declined 16% in the second quarter but only 2% for the six-month period.
Revenue increased substantially because 2022 included large negative derivative fair-value changes; the 2023 periods included positive derivative changes. This benefit did not translate into higher earnings because embedded-derivative and market-risk-benefit results also changed materially.
Net investment income decreased 8% in the second quarter and 5% for the six-month period, primarily because average invested assets and annuity balances were lower following prior in-force reinsurance transactions. Higher portfolio yields partly offset the volume decline.
The aggregate investment spread was 2.57% in the second quarter and 2.62% for the first six months, compared with 2.64% and 2.58%, respectively, in 2022.
Annuity product charges increased 29% in the second quarter and 24% year to date, while interest-sensitive and index product benefits decreased 13% and 58%, respectively.
Other operating costs increased 26% in the second quarter and 27% year to date, mainly because of higher salary, strategic incentive and equity and cash incentive compensation expenses.
The company repurchased approximately 7.3 million shares during the first six months, including 4.8 million shares delivered under a $200 million accelerated share repurchase agreement. Approximately $276 million remained under the broader repurchase authorization at June 30, 2023.
Private assets increased to $12.335 billion, or 24.9% of the investment portfolio, from $10.976 billion, or 22.0%, at December 31, 2022.

Guidance, Outlook, Risks and Unusual Items

No formal earnings or sales guidance is provided in the filing. Management cautions that interim results are not necessarily indicative of full-year results.
Management expects annuity demand to benefit from demand for guaranteed retirement income and continued execution of the AEL 2.0 strategy. Future profitability depends on investment spreads, asset growth, option costs, policyholder behavior, credit performance, reinsurance and expense management.
The company entered into a July 4, 2023 merger agreement with Brookfield Reinsurance. Each common share would receive $38.85 in cash plus Brookfield Asset Management Class A shares, with total consideration targeted between $54.00 and $56.50 per share. Preferred shares would remain outstanding and unaffected.
The merger requires shareholder, regulatory, antitrust, exchange-listing and registration approvals, among other conditions. Closing may not occur before January 5, 2024, and the agreement may be terminated after April 4, 2024, subject to extensions. A $102 million termination fee may apply in specified circumstances.
Merger-related risks include failure or delay of closing, management distraction, restrictions on pursuing alternatives, employee and business-partner disruption, litigation and potential stock-price volatility.
The fixed maturity portfolio was 98.1% investment grade. Gross unrealized losses were $4.813 billion at June 30, 2023, although management stated it did not intend to sell the affected securities and expected recovery of amortized cost except where credit losses were recognized.
The company recognized $46.2 million of credit losses in the second quarter and $47.1 million year to date, primarily related to securities in the regional banking sector. The allowance for credit losses on fixed maturity securities was $4.1 million.
Mortgage loans totaled $7.374 billion after valuation allowances. There were 93 loans in non-accrual status at June 30, 2023, compared with 59 at December 31, 2022; residential mortgage loans accounted for most past-due balances.
Unfunded commitments included $794.7 million to limited partnerships, $1.1 billion for fixed maturity securities, $693.0 million of mortgage loan commitments and $52.3 million for other investments.
A 100-basis-point increase in discount rates used for fixed index annuity embedded derivatives would reduce their fair value by an estimated $347.7 million; a 100-basis-point decrease would increase fair value by an estimated $400.2 million.
The company identifies interest rates, credit and liquidity conditions, market volatility, option costs, counterparty performance, reinsurance, regulatory changes, cybersecurity, litigation and climate-related developments as material risks.

Most Important Facts to Verify

Confirm the intended issuer: the supplied filing is for American Equity Investment Life Holding Company rather than American National Group Inc.
Verify the status, consideration range, regulatory approvals and potential termination fee associated with the Brookfield merger.
Assess earnings excluding volatile derivative, embedded-derivative and market-risk-benefit fair-value effects, while reconciling those measures to GAAP results.
Review the sustainability of the 2.57% to 2.62% investment spread as asset balances, crediting rates and option costs change.
Evaluate exposure to unrealized investment losses, regional banking credit losses, private assets, mortgage delinquencies and Level 3 fair-value assumptions.
Confirm statutory capital, dividend capacity, rating-agency actions and the ability of insurance subsidiaries to fund parent-company debt service and dividends.
Review the impact of the ASR settlement completed July 13, 2023 and any additional share repurchases after the reporting date.