Business Context and Reporting Period
The filing is a Form 10-Q for the quarter and six months ended June 30, 2011, filed August 5, 2011. 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 annuities, and also sells life insurance. The financial statements are unaudited and prepared under U.S. GAAP.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2011 | Three Months Ended June 30, 2010 | Six Months Ended June 30, 2011 | Six Months Ended June 30, 2010 |
|---|---|---|---|---|
| Total revenues | $294.9 million | $67.3 million | $747.8 million | $417.7 million |
| Income before taxes | $27.9 million | $(2.7) million | $76.2 million | $20.0 million |
| Net income | $18.3 million | $(1.5) million | $49.6 million | $13.4 million |
| Diluted earnings per share | $0.28 | $(0.03) | $0.77 | $0.23 |
| Operating income | $29.0 million | $29.2 million | $59.6 million | $55.0 million |
| Net cash provided by operating activities | Not separately reported for the quarter | $185.5 million | $14.3 million |
- Net investment income was $296.9 million for the quarter and $589.0 million for the six months, up from $254.8 million and $497.8 million, respectively.
- Investment spread was 3.05% for the quarter and 3.10% for the six months, compared with 3.23% and 3.21% in the prior-year periods.
- Annuity deposits before coinsurance were $1.1 billion for the quarter and $2.5 billion for the six months, increases of 6% and 29%, respectively.
- Total assets were $28.6 billion at June 30, 2011, compared with $26.4 billion at December 31, 2010. Stockholders’ equity was $1.04 billion, compared with $938.0 million.
- Cash and cash equivalents were $949.5 million at June 30, 2011, compared with $597.8 million at year-end 2010.
- Total investments were $21.25 billion, including $17.82 billion of fixed maturity securities and $2.80 billion of commercial mortgage loans.
- Notes payable were $337.2 million and subordinated debentures were $268.5 million. No borrowings were outstanding under the $160 million revolving credit facility.
Material Changes Versus the Prior Comparable Period
- Net income improved from a loss of $1.5 million to income of $18.3 million in the second quarter and increased from $13.4 million to $49.6 million for the six-month period.
- Reported revenue benefited substantially from changes in derivative fair values. The six-month derivative adjustment changed from a $126.7 million loss in 2010 to a $126.6 million gain in 2011.
- Operating income was broadly stable in the quarter, declining slightly from $29.2 million to $29.0 million, while increasing 8% for the six months.
- Average annuity account values increased 25% in both the quarter and six-month period, supporting higher investment income and dollar investment spread.
- Average investment yields declined to 5.78% for the quarter and 5.87% for the six months, from 6.14% in both prior-year periods.
- Amortization of deferred sales inducements increased to $20.3 million for the quarter and $51.0 million for the six months, compared with $3.2 million and $16.3 million.
- Amortization of deferred policy acquisition costs increased to $38.9 million for the quarter and $94.1 million for the six months, compared with $0.9 million and $28.2 million.
- Net other-than-temporary impairment losses recognized in operations were $2.2 million for the quarter and $8.8 million for the six months, primarily related to residential mortgage-backed securities.
- Unrealized investment losses declined to $277.4 million at June 30, 2011, from $342.7 million at December 31, 2010.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected statutory capital and internally generated statutory surplus to support a higher level of new business than in 2010 and 2009, but stated that sales growth is constrained by available capital and desired financial strength ratings.
- The company entered into a $50 million financing reinsurance transaction in the first quarter of 2011, generating an initial after-tax statutory surplus benefit of $31.8 million.
- Management expected parent-company liquidity sources to be adequate for current and reasonably foreseeable obligations through the remainder of 2011. The company could redeem or be required to repurchase $74.5 million of 2024 notes during 2011.
- American Equity Life had $1.5 billion of statutory capital and surplus and could distribute up to $187.5 million of dividends without prior regulatory approval, subject to applicable restrictions and covenants.
- The company disclosed significant exposure to interest-rate risk. A modeled 10% increase in market interest rates, equivalent to 44 basis points, would reduce the fair value of fixed maturity securities by approximately $717.4 million and reduce accumulated other comprehensive income and stockholders’ equity by approximately $176.2 million.
- Fixed maturity securities were 93% investment grade by NRSRO ratings, while 7% were below investment grade. Residential mortgage-backed securities had a fair value of $2.83 billion, including $424.8 million of Alt-A securities; the company reported no subprime RMBS exposure.
- Commercial mortgage loans totaled $2.8 billion, with $70.0 million of unfunded commitments. Loans in workout, delinquent, or collateral-dependent status totaled approximately $130.1 million in principal, and the company recorded a $19.2 million loan-loss allowance.
- The company is defending a purported class action alleging improper annuity sales practices involving older purchasers. No class had been certified, and management could not estimate a potential loss.
- A separate class-action settlement was approved in May 2011. It provided $36 million to policyholders, $11 million in attorneys’ fees, $950,000 in litigation expenses, and representative incentives. The net after-tax charge of $27.3 million was recorded in 2010 and settled in the second quarter of 2011.
- A prior-period error involving reserves for single-premium immediate annuities was corrected in the first quarter of 2011, increasing six-month net income by $2.7 million after tax.
- Management stated that disclosure controls and procedures were effective as of June 30, 2011, with no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the intended company identity: the supplied filing is for American Equity Investment Life Holding Company, despite the request metadata naming American National Group Inc.
- Assess the sustainability of earnings excluding volatile derivative fair-value changes and other non-core items; operating income was materially different from GAAP net income.
- Monitor the narrowing investment spread, declining portfolio yields, reinvestment risk from callable securities, and sensitivity to interest-rate changes.
- Review RMBS credit-loss assumptions, unrealized losses, OTTI charges, and commercial mortgage loan workouts and foreclosures.
- Evaluate capital adequacy, dividend capacity from insurance subsidiaries, debt maturities, and compliance with revolving-credit covenants.
- Track the unresolved annuity sales-practices litigation and any subsequent developments affecting potential loss exposure.