Business Context and Reporting Period
The filing is a Form 10-K for the fiscal year ended December 31, 2017. The source filing identifies the registrant as American Equity Investment Life Holding Company, not American National Group Inc.; investors should verify the company identity and filing metadata.
The company operates one segment focused on fixed index and fixed rate annuities, distributed through independent agents, 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 | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenues | $3.892 billion | $2.220 billion | +75% |
| Income before taxes | $316.3 million | $130.2 million | +143% |
| Net income | $174.6 million | $83.2 million | +110% |
| Diluted EPS | $1.93 | $0.97 | +99% |
| Non-GAAP operating income | $285.1 million | $122.3 million | +133% |
| Net cash provided by operating activities | $1.922 billion | $1.414 billion | +36% |
| Total investments | $50.301 billion | $44.758 billion | +12% |
| Total assets | $62.031 billion | $56.053 billion | +11% |
| Policy benefit reserves | $56.143 billion | $51.637 billion | +9% |
| Stockholders’ equity | $2.850 billion | $2.292 billion | +24% |
Net margin was approximately 4.5% in 2017 versus 3.7% in 2016. The investment spread increased to 2.72% from 2.61%, despite lower average invested-asset yields of 4.46% versus 4.51%; aggregate cost of money declined to 1.74% from 1.90%.
- Gross annuity deposits were $4.177 billion, down 41% from 2016; net deposits after coinsurance were $3.790 billion, down 30%.
- Fixed index annuities represented 95% of gross deposits in 2017.
- Annuity account value, net of coinsurance, increased to $48.401 billion from $45.204 billion.
- Cash and cash equivalents increased to $1.434 billion from $791.3 million. Parent-company cash was $21.0 million in the MD&A liquidity discussion.
- Fixed maturity securities comprised approximately 90% of total investments, and 96.7% were rated investment grade by NRSRO ratings.
- Debt consisted primarily of $500 million of 5.0% senior notes due 2027, $242.6 million of subordinated debentures and no borrowings under the $150 million revolving credit facility.
- The annual common dividend increased to $0.26 per share from $0.24.
Material Changes Versus the Prior Comparable Period
- Reported revenue and earnings rose sharply, primarily because of substantially higher gains on call options and other derivatives associated with fixed index annuities. The change in fair value of derivatives was $1.678 billion versus $164.2 million in 2016, while interest sensitive and index product benefits increased to $2.024 billion from $725.5 million.
- Strong equity-market performance produced higher index credits and option proceeds, but also increased related policyholder benefit expense and embedded-derivative liabilities. Derivative fair-value accounting creates significant earnings volatility and does not necessarily reflect current-period economic profitability.
- Net investment income increased 8% to $1.992 billion as invested assets grew, but average asset yield declined. Management noted continued pressure from low interest rates and lower yields on new investments.
- Net income benefited from favorable 2017 assumption unlocking, which increased net income by $39.2 million, including lower amortization of deferred policy acquisition costs and sales inducements. The comparable 2016 unlocking reduced net income by $81.2 million.
- Sales declined because of competitive pressure, an industry-wide slowdown in fixed index annuities, strong equity markets and uncertainty surrounding the Department of Labor fiduciary rule.
- The company issued $500 million of 2027 senior notes, prepaid a $100 million term loan and redeemed $400 million of 2021 notes. The redemption generated an $18.4 million pretax loss on extinguishment of debt.
- Tax expense included a $35.9 million charge from revaluing deferred tax assets after the Tax Cuts and Jobs Act reduced the federal rate from 35% to 21%. The reported effective tax rate was 44.8%; excluding tax reform, management stated it was 32.3%.
Outlook, Commentary, Risks and Unusual Items
Management expects continued growth in invested assets and operating income but emphasized that sales and profitability remain sensitive to interest rates, investment spreads, option costs, competition, distributor relationships and policyholder behavior. No quantitative earnings or sales guidance was provided.
- Interest-rate and spread risk: Persistently low rates may reduce investment yields and compress spreads. Rising rates could increase surrenders and withdrawals, creating disintermediation and liquidity pressure.
- Market and credit risk: Defaults, impairments, widening credit spreads, commercial mortgage losses and declines in investment values could reduce earnings, equity and regulatory capital.
- Derivative and assumption volatility: Results depend heavily on fair values of call options and embedded derivatives, as well as assumptions for lapses, withdrawals, mortality, index credits, discount rates and lifetime income rider elections.
- Regulatory risk: The DOL fiduciary rule, state suitability or best-interest standards, insurance regulation, capital requirements and product-approval rules could increase compliance costs or reduce annuity sales.
- Reinsurance exposure: The company remains liable to policyholders if Athene or EquiTrust fail to perform. Athene reinsurance covered approximately $4.2 billion and EquiTrust approximately $0.6 billion of policy benefit reserves.
- Capital and liquidity: American Equity Life’s risk-based capital ratio was 378%, compared with 342% in 2016. Up to $377.1 million could be distributed by American Equity Life in 2018 without prior regulatory approval, subject to statutory and covenant constraints.
- Unrealized losses and impairments: Gross unrealized losses on fixed maturity securities declined to $269.5 million from $584.7 million. OTTI losses recognized in operations declined to $4.6 million from $22.7 million.
- Contingencies: The company is subject to ordinary-course litigation, regulatory inquiries and examinations. The filing states that no material tax contingencies required recognition, but future litigation or regulatory matters could materially affect results.
Important Facts for Investors to Verify
- Confirm that the filing belongs to American Equity Investment Life Holding Company rather than American National Group Inc.
- Separate recurring operating performance from volatile derivative fair-value gains, index credits, assumption unlocking and other non-GAAP adjustments.
- Assess whether declining annuity sales can be offset by growth in in-force account values, fees and investment spreads.
- Review sensitivity to interest rates, including the disclosed impact of a 100-basis-point change in embedded-derivative discount rates.
- Evaluate reinsurance counterparty exposure and the company’s continuing liability for ceded policy obligations.
- Monitor statutory capital, dividend capacity, debt covenants and the parent company’s reliance on subsidiary distributions and fees.
- Track implementation and potential revision of the DOL fiduciary rule and related state insurance standards.