Business Context and Reporting Period
American Equity Investment Life Holding Company and subsidiaries reported unaudited results for the three months ended March 31, 2022. The filing identifies the registrant as American Equity Investment Life Holding Company, which differs from the supplied company name, American National Group Inc.
The company specializes in fixed and fixed index deferred annuities distributed through independent marketing organizations, agents, banks and broker-dealers. Management continued executing its “AEL 2.0” strategy, focused on annuity origination, expanded private-asset investing, reinsurance and more fee-like earnings.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 / Dec. 31, 2021 |
|---|---|---|
| Total revenues | $147.8 million | $962.2 million |
| Net income | $566.2 million | $282.7 million |
| Net income available to common stockholders | $555.3 million | $271.8 million |
| Diluted EPS | $5.67 | $2.82 |
| Non-GAAP operating income available to common stockholders | $89.9 million | $41.4 million |
| Net cash provided by operating activities | $99.9 million | $471.9 million |
| Total assets | $74.9 billion | $78.3 billion |
| Stockholders’ equity | $5.2 billion | $6.3 billion |
| Cash and cash equivalents | $1.9 billion | $4.5 billion |
| Notes payable | $496.4 million | $496.3 million |
Net income benefited substantially from fair-value changes in derivatives and embedded derivatives and therefore is not directly indicative of recurring operating profitability. Reported revenue was also distorted by these valuation changes.
Net investment income increased 14% to $567.4 million from $497.2 million. The average yield on invested assets increased to 4.15% from 3.58%, while the aggregate investment spread increased to 2.51% from 2.00%. The investment portfolio totaled $58.5 billion, including $49.7 billion of fixed maturity securities, $5.7 billion of mortgage loans and $2.0 billion of other investments.
Approximately 98% of fixed maturity securities were investment grade. Unrealized losses on fixed maturity securities increased materially as interest rates rose, while accumulated other comprehensive income declined to $63.7 million from $1.85 billion.
Material Changes Versus the Prior Comparable Period
- Net income available to common stockholders more than doubled, primarily because of higher net investment income and favorable changes in embedded derivative valuations.
- Non-GAAP operating income increased 117% to $89.9 million, principally due to the higher investment spread.
- Total annuity deposits before coinsurance declined 63% to $901.9 million, and net deposits after coinsurance declined 72% to $688.4 million. Multi-year fixed-rate annuity sales fell sharply, while fixed index annuity sales increased 33%.
- Net cash from operating activities fell to $99.9 million from $471.9 million. Investing activities used $2.45 billion, compared with $120.7 million provided in the prior-year period, reflecting substantially higher purchases of investments.
- Cash and cash equivalents decreased by $2.58 billion during the quarter, ending at $1.93 billion.
- Other comprehensive loss was $1.79 billion, compared with $698.3 million in the prior-year period, primarily from declines in unrealized investment gains.
- The company issued 6.775 million common shares to Brookfield at $37.33 per share, increasing Brookfield’s ownership to approximately 16%. It also repurchased 4.5 million shares for $179.4 million during the quarter.
- American Equity Life joined the Federal Home Loan Bank of Des Moines and had $200 million of FHLB funding agreements outstanding, collateralized by approximately $940.7 million of fixed maturity securities.
Guidance, Outlook, Risks and Unusual Items
- Management expects other operating costs and expenses to settle near $60 million per quarter as it continues implementing AEL 2.0.
- The company reported approximately $8.4 billion invested in private assets and described a long-term objective of increasing private assets to 30%–40% of the investment portfolio.
- Management expects to expand reinsured liabilities, increase private-asset investments and transition toward a more capital-efficient, fee-like return model. No formal earnings guidance was provided.
- Interest-rate risk is significant. A modeled 10% increase in market interest rates, equivalent to 24 basis points at March 31, 2022, was estimated to reduce fixed maturity fair value by approximately $1.01 billion and accumulated other comprehensive income by approximately $416.6 million, subject to model assumptions.
- Derivative and embedded derivative valuations are highly sensitive to interest rates, equity-market performance, option costs, lapse assumptions and policyholder behavior. A 100-basis-point increase in embedded-derivative discount rates would reduce the related liability by approximately $499.4 million but would also affect deferred-cost amortization.
- Investment risks include rising rates, credit losses, liquidity, concentration, private-asset valuation and counterparty risk. The allowance for credit losses on fixed maturity securities increased to $6.6 million from $2.8 million.
- Mortgage loan commitments totaled $444.2 million, and the company had $1.2 billion of unfunded commitments to limited partnerships. There were 34 mortgage loans in non-accrual status at March 31, 2022, versus 13 at year-end 2021.
- The company disclosed ongoing exposure to litigation, regulatory examinations, proposed insurance-capital changes, and proposed SEC climate, cybersecurity, Rule 10b5-1 and repurchase-disclosure rules.
- The company is evaluating the significant accounting standard for long-duration insurance and investment contracts, which becomes effective January 1, 2023 with a January 1, 2021 transition date.
Most Important Facts for Investors to Verify
- Confirm the issuer identity, because the filing is for American Equity Investment Life Holding Company rather than American National Group Inc.
- Assess recurring operating performance using non-GAAP operating income and investment spread, rather than relying solely on GAAP net income affected by derivative valuations.
- Monitor the effect of rising interest rates on accumulated other comprehensive income, capital, liquidity and investment values.
- Review the sustainability and risk-adjusted returns of the planned 30%–40% private-asset allocation.
- Track annuity sales mix, policyholder withdrawals, reinsurance growth and the effect of the North End Re treaty on future earnings and liquidity.
- Evaluate the increase in unrealized investment losses, credit-loss allowances and non-accrual mortgage loans.
- Review regulatory capital, dividend capacity and the ability of insurance subsidiaries to upstream cash to the holding company.
- Consider the potential accounting impact of the long-duration contract standard effective in 2023.