American Equity Investment Life Holding Company — Q1 2016 Form 10-Q Summary
Reporting period: Three months ended March 31, 2016, compared with the three months ended March 31, 2015. The filing identifies the registrant as American Equity Investment Life Holding Company, not American National Group Inc. The company specializes in individual annuities, primarily deferred and fixed index annuities, and also sells life insurance.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / Dec. 31, 2015 |
|---|---|---|
| Total revenues | $417.6 million | $409.0 million |
| Net income (loss) | $(44.8) million | $5.9 million |
| Diluted earnings (loss) per share | $(0.55) | $0.07 |
| Operating income, non-GAAP | $21.0 million | $48.8 million |
| Net cash provided by operating activities | $141.6 million | $(140.2) million |
| Cash and cash equivalents | $707.2 million | $397.7 million at Dec. 31, 2015 |
| Total assets | $51.3 billion | $49.0 billion at Dec. 31, 2015 |
| Stockholders’ equity | $2.23 billion | $1.94 billion at Dec. 31, 2015 |
- Annuity product charges increased 27% to $36.5 million, and net investment income increased 13% to $450.8 million.
- Annuity deposits before coinsurance increased 59% to $2.10 billion; net deposits after coinsurance increased to $1.63 billion from $1.21 billion.
- Average net annuity liabilities increased 17% to $41.9 billion, while investment spread dollars increased to $243.6 million from $217.7 million.
- The aggregate investment spread declined to 2.65% from 2.77%, reflecting lower investment yields. Average invested-asset yield declined to 4.58% from 4.74%.
- Total investments increased to $41.6 billion from $39.6 billion, including $38.5 billion of fixed maturity securities and $2.47 billion of commercial mortgage loans.
- Approximately 97% of the fixed maturity portfolio was investment grade under NAIC designations. Gross unrealized losses on available-for-sale fixed maturities declined to $541.3 million from $845.3 million at year-end.
- Debt included $393.5 million of notes payable and $241.6 million of subordinated debentures. No amounts were outstanding under the $140 million revolving credit facility.
Material changes from the prior comparable period
- Net income shifted to a $44.8 million loss from $5.9 million of income, despite higher revenue and stronger operating cash flow.
- Operating income fell 57%, primarily because of lower assumed future investment spreads and related unlocking, which increased amortization of deferred sales inducements and deferred policy acquisition costs and reduced operating income by approximately $28.6 million.
- Change in fair value of derivatives produced a $74.1 million loss versus a $31.1 million loss in Q1 2015. Change in fair value of embedded derivatives produced $265.9 million of expense versus $51.2 million.
- Interest-sensitive and index-product benefits declined 65% to $97.7 million, principally because index credits fell to $6.5 million from $197.6 million.
- Other-than-temporary impairment losses recognized in operations increased to $5.7 million from $0.1 million.
- Amortization of deferred sales inducements increased to $27.5 million from $11.0 million, and deferred policy acquisition cost amortization increased to $49.7 million from $14.3 million.
Outlook, commentary, risks and unusual items
- Management expects the prolonged low-interest-rate environment to pressure portfolio yields and investment spreads. The company reduced new-money rates on many products by approximately 10 basis points in April 2016 and planned further crediting-rate adjustments as market conditions change.
- Management stated that approximately 0.52% of room remained to reduce rates before reaching guaranteed rates on the entire March 31, 2016 in-force book.
- The Department of Labor fiduciary rule, scheduled to phase in beginning April 10, 2017, could adversely affect annuity sales to IRAs, particularly through independent agents. Potential effects include increased compliance costs, changes to compensation and products, litigation risk and sales disruption.
- The investment portfolio has exposure to energy, metals and mining, structured securities and international issuers. Management considered most unrealized losses temporary, but acknowledged that lower commodity prices, credit deterioration, spread widening and rating downgrades could produce additional impairments.
- The company recognized $3.9 million of OTTI on a Brazilian telecommunications security and additional losses on certain securities that management intended to sell or expected not to fully recover.
- Commercial mortgage loans totaled $2.48 billion. Three loans were delinquent at quarter-end, and $6.4 million was classified as non-accrual or collateral dependent. Unfunded commitments included $31.7 million of mortgage-loan commitments, $41.9 million to limited partnerships and $13.3 million to secured bank loans.
- The estimated litigation liability for the Los Angeles annuity-practices class action was $11.1 million. The Ninth Circuit denied rehearing in April 2016 and issued its mandate, but the ultimate claims liability remained uncertain.
- Disclosure controls were deemed ineffective because of a previously reported material weakness involving controls over code changes to lifetime income benefit reserve calculations. Enhanced controls were implemented, but management had not completed sufficient testing to declare the weakness remediated.
Important facts for investors to verify
- Confirm that the filing applies to American Equity Investment Life Holding Company rather than American National Group Inc.
- Reconcile GAAP net loss with non-GAAP operating income and assess the effects of derivative fair-value movements and the first-quarter unlocking adjustment.
- Monitor investment spread compression, guaranteed crediting rates and portfolio yield under continued low interest rates.
- Evaluate the credit quality and impairment sensitivity of energy, metals and mining, telecommunications, structured securities and commercial mortgage exposures.
- Track implementation costs and sales effects from the Department of Labor fiduciary rule.
- Confirm remediation and testing of the material weakness in internal control over financial reporting.
- Review the status and ultimate cost of the Los Angeles litigation settlement and other regulatory matters.