Business Context and Reporting Period
The filing is an unaudited Form 10-Q for American Equity Investment Life Holding Company for the quarter and nine months ended September 30, 2011. The request metadata names American National Group Inc., but the filing identifies American Equity Investment Life Holding Company as the registrant.
The company specializes in individual annuities, primarily deferred fixed-index and fixed-rate annuities, and also sells life insurance. Annuity deposits are generally recorded as deposit liabilities rather than revenue under GAAP.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Net income (loss) | $(13.1) million, versus $20.5 million | $36.5 million, versus $33.9 million |
| Operating income | $41.5 million, versus $27.6 million | $101.1 million, versus $82.6 million |
| Total revenues | $(30.8) million, versus $383.5 million | $717.1 million, versus $801.2 million |
| Net investment income | $305.5 million, versus $260.5 million | $894.5 million, versus $758.2 million |
| Net cash from operating activities | Not separately provided | $100.0 million, versus $135.7 million |
| Basic earnings (loss) per share | $(0.22), versus $0.35 | $0.62, versus $0.58 |
| Diluted earnings (loss) per share | $(0.22), versus $0.33 | $0.59, versus $0.56 |
- Total assets were $29.9 billion at September 30, 2011, up from $26.4 billion at December 31, 2010.
- Stockholders’ equity was $1.36 billion, up from $938.0 million, primarily reflecting $372.9 million of after-tax net unrealized investment gains and nine-month net income.
- Cash and cash equivalents were $572.3 million, compared with $597.8 million at year-end 2010. Net cash used in investing was $2.41 billion, largely offset by $2.29 billion of financing cash inflows.
- Total investments were $23.4 billion, including $20.2 billion of fixed maturity securities and $2.84 billion of commercial mortgage loans.
- Policy benefit reserves were $26.9 billion, compared with $23.7 billion at December 31, 2010. Notes payable were $340.6 million and subordinated debentures were $268.6 million.
- The aggregate investment spread was 2.95% for the quarter and 3.04% for the nine months, compared with 3.09% and 3.16%, respectively, in 2010. Average invested-asset yields declined to 5.70% and 5.81% from 5.98% and 6.08%.
- Approximately 99% of the fixed maturity portfolio was investment grade under NAIC classifications. Gross unrealized investment losses declined to $173.1 million from $342.7 million at December 31, 2010.
Material Changes Versus the Prior Comparable Period
- Third-quarter net income declined to a loss because derivative fair-value losses increased substantially. The change in fair value of derivatives was a loss of $333.6 million, compared with a gain of $94.0 million in the third quarter of 2010.
- Third-quarter change in fair value of embedded derivatives was a loss of $205.6 million, compared with a gain of $114.8 million. These losses were partially offset by higher investment income and growth in the investment spread measured in dollars.
- Nine-month net income increased modestly despite derivative volatility. Operating income increased 50% for the quarter and 22% for the nine months, reflecting growth in the annuity business and favorable unlocking adjustments.
- Annuity deposits before coinsurance increased 4% in the quarter and 19% for the nine months, to $1.27 billion and $3.72 billion. Net deposits after coinsurance were $1.17 billion and $3.49 billion.
- Average annuity account values increased 24% for both the quarter and nine months. Interest-sensitive and index product benefits increased 40% in the quarter and 6% for the nine months.
- Net OTTI losses recognized in operations increased to $8.9 million for the quarter and $17.7 million for the nine months, from $4.0 million and $8.0 million, respectively. The 2011 impairments related entirely to residential mortgage-backed securities.
- Mortgage-loan impairment losses increased to $16.0 million for the quarter and $20.9 million for the nine months, compared with $0.4 million and $4.5 million in the prior-year periods. The allowance for probable mortgage-loan losses increased to $30.8 million from $16.2 million at year-end 2010.
- A prior-period error involving single-premium immediate annuity reserves was corrected in the first quarter of 2011. Policy benefit reserves and related benefits decreased by $4.2 million, increasing nine-month after-tax net income by $2.7 million.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management reduced rates on fixed-interest strategies and caps and participation rates on indexed strategies by 0.40% to 0.50% beginning with applications received after October 7, 2011. Renewal-rate adjustments on $23.4 billion of annuity account values were scheduled to begin after November 14, 2011.
- Management stated that existing statutory capital and expected internal statutory earnings should support higher sales than in 2010 and 2009, but sales capacity is not unlimited. External capital may be required if growth exceeds internally generated capital.
- The company had a $160 million revolving credit facility with no borrowings outstanding at September 30, 2011. Holders could require repurchase of $74.5 million of 2024 notes on December 15, 2011. The company reported $55 million of investment securities and cash available for that obligation and did not intend to call the notes in 2011.
- Liquidity was described as adequate, supported by annuity deposits and investment income. Parent-company liquidity depends substantially on dividends and other permitted payments from insurance subsidiaries, which are subject to regulatory and rating-agency restrictions.
- Interest-rate risk is significant. A modeled 10% increase in market interest rates, equivalent to 29 basis points at the reporting date, was estimated to reduce fixed maturity securities’ fair value by approximately $539.0 million and stockholders’ equity by approximately $152.9 million after applicable offsets.
- Commercial mortgage risks include tenant vacancies, reduced property cash flows, declining collateral values, workouts, delinquencies, foreclosures, and troubled debt restructurings. At September 30, 2011, loans in workout, delinquent, or collateral-dependent status totaled approximately $108.5 million in outstanding principal.
- The company was a defendant in a purported class action concerning alleged improper sales practices involving annuities sold to persons over age 65. No class had been certified, settlement discussions were ongoing, and management could not estimate a possible loss.
- Results are materially affected by interest rates, equity and credit markets, derivative valuations, investment impairments, policyholder behavior, competition, regulation, tax law, and the company’s ability to maintain desired financial-strength ratings.
Most Important Facts an Investor Should Verify
- Confirm the correct registrant, since the supplied metadata refers to American National Group Inc. while the filing is for American Equity Investment Life Holding Company.
- Reconcile GAAP net income with operating income and assess the recurring versus market-sensitive effects of derivative and embedded-derivative fair-value changes.
- Evaluate sustainability of annuity deposit growth and the effect of lower crediting rates, caps, participation rates, and declining investment spreads.
- Review the quality, duration, unrealized losses, OTTI exposure, and reinvestment risk of the fixed maturity and residential mortgage-backed securities portfolios.
- Assess commercial mortgage-loan workouts, delinquencies, foreclosures, troubled debt restructurings, and the adequacy of related allowances.
- Verify liquidity and capital availability for the December 15, 2011 potential repurchase of the 2024 notes and the restrictions on distributions from insurance subsidiaries.
- Monitor the unresolved purported class action and any related regulatory inquiries or settlement developments.