American Equity Investment Life Holding Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020. The supplied filing identifies the registrant as American Equity Investment Life Holding Company, not American National Group Inc. The company sells primarily fixed and fixed-index deferred annuities through independent marketing organizations, agents, banks and broker-dealers.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenues | $798.7 million | $643.4 million | $1.395 billion | $2.351 billion |
| Net income | $667.2 million | $37.4 million | $662.7 million | $25.9 million |
| Net income available to common stockholders | $661.3 million | $37.4 million | $644.2 million | $25.9 million |
| Diluted EPS | $7.17 | $0.41 | $7.00 | $0.28 |
| Net investment income | $543.3 million | $590.4 million | $1.660 billion | $1.719 billion |
| Operating cash flow | Not separately provided | Not separately provided | $355.2 million | $2.288 billion |
| Investment spread | $318.2 million | $344.0 million | $966.3 million | $975.3 million |
| Non-GAAP operating income available to common stockholders | $(249.8) million | $233.4 million | $(2.6) million | $422.3 million |
- Average investment spread declined to 2.44% in Q3 and 2.49% for nine months, compared with 2.75% and 2.66%, respectively, in the prior-year periods.
- Average invested assets excluding derivatives increased to approximately $53.0 billion in Q3 and $52.8 billion for nine months, while average asset yields declined to 4.10% and 4.20% from 4.59% and 4.53%.
- Total assets were $68.665 billion at September 30, 2020, versus $69.697 billion at December 31, 2019. Stockholders’ equity increased to $6.119 billion from $4.570 billion.
- Cash and cash equivalents were $2.657 billion, including approximately $2.2 billion of unencumbered cash cited by management. Parent-company cash was $353.4 million.
- Fixed maturity securities totaled $51.701 billion, or 90.7% of investments; 96.3% were investment grade based on NRSRO ratings. Mortgage loans totaled $3.927 billion.
- Notes payable were $495.5 million, consisting primarily of $500 million of 5.0% senior notes due 2027. Subordinated debentures declined to $78.0 million following redemptions.
Material changes versus the prior comparable period
- Reported earnings increased sharply, primarily because of third-quarter 2020 actuarial assumption updates and changes in the fair value of embedded derivatives. The filing cautions that these items can create significant period-to-period volatility and do not necessarily reflect recurring operating performance.
- Q3 2020 included a $663.1 million favorable net-income effect from assumption updates; the nine-month effect was $769.6 million. Updates reduced expected investment spreads, changed crediting-rate assumptions and revised lapse and partial-withdrawal assumptions.
- Non-GAAP operating income deteriorated to a loss despite GAAP profitability, reflecting the removal of fair-value effects and investment gains or losses from the operating measure.
- Net annuity deposits after coinsurance declined 53% to $567.9 million in Q3 and 53% to $1.808 billion for nine months. Management attributed the decline primarily to COVID-19 restrictions on face-to-face meetings, distribution disruption and competitive pressure.
- Interest-sensitive and index product benefits increased 15% in Q3 and 37% for nine months, while net investment income declined 8% and 3%, respectively.
- Unrealized losses on fixed maturity securities increased materially amid COVID-19-related credit-market disruption. The company recorded a $61.6 million allowance for credit losses at September 30, 2020 and recognized $68.5 million of net realized investment losses for nine months.
- Operating cash flow fell to $355.2 million from $2.288 billion. Policyholder activity generated a net cash outflow of approximately $806 million for nine months, as returned funds exceeded new annuity deposits.
- The company issued Series B preferred stock for approximately $290.3 million of net proceeds in June 2020 and contributed $200 million to American Equity Life during May 2020.
Guidance, outlook, risks and unusual items
- Management targets operating return on equity of 11%–14% over the next few years and above 15% on average over the long term.
- The company expects to return $250 million–$300 million of capital to shareholders annually beginning in 2021 and approved a $500 million share repurchase program, initiated October 30, 2020.
- Management expects proposed reinsurance and strategic transactions with Värde Partners/Agam and Brookfield to close in the first half of 2021. The transactions are expected to cede approximately $5 billion of existing annuity liabilities each, with estimated capital release of approximately $350 million for the Värde transaction and $320 million–$350 million for the Brookfield transaction. Completion remains subject to approvals and other conditions.
- Brookfield agreed in principle to acquire up to a 19.9% ownership interest, beginning with a proposed 9.9% purchase at $37.00 per share, subject to regulatory approval and closing conditions.
- The estimated risk-based capital ratio was 382% at September 30, 2020, compared with 372% at December 31, 2019. Management intends to operate near 400% in normal conditions and may allow the ratio to decline toward approximately 320% during adverse conditions.
- COVID-19 remains a significant uncertainty affecting annuity sales, policyholder behavior, investment valuations, credit losses, liquidity and operating assumptions. Low interest rates are pressuring investment yields and spreads.
- At September 30, 2020, 1,344 securities had unrealized losses totaling $743.9 million before considering the credit-loss allowance. The company identified $1.007 billion of amortized-cost securities on its watch list and recognized credit losses concentrated in corporate, commercial mortgage-backed and residential mortgage-backed securities.
- Mortgage loan commitments were $106.1 million; additional unfunded commitments included $41.9 million to limited partnerships and $56.4 million to fixed maturity securities. No mortgage loans were nonaccrual or classified as troubled-debt restructurings.
- The company disclosed no material changes to previously reported risk factors other than the continuing COVID-19 and regulatory matters described in prior filings. Management concluded disclosure controls were effective as of September 30, 2020.
Important facts for investors to verify
- Confirm the issuer identity, because the supplied filing is for American Equity Investment Life Holding Company rather than American National Group Inc.
- Separate recurring operating performance from the $663.1 million Q3 assumption-update benefit and the substantial fair-value effects on derivatives and embedded derivatives.
- Monitor annuity sales, policyholder withdrawals and liquidity, particularly because nine-month policyholder cash flows were a net outflow and sales declined more than 50% year over year.
- Review credit migration, unrealized losses, the $61.6 million securities allowance and exposure to commercial mortgage-backed, asset-backed, energy and travel-related securities.
- Assess the effect of sustained low interest rates on investment yields, investment spreads, crediting rates and the company’s ability to meet its return-on-equity targets.
- Verify closing conditions, regulatory approvals, capitalization effects and reinsurance economics for the proposed Värde and Brookfield transactions.
- Reconcile GAAP net income with non-GAAP operating income, which was negative for both Q3 and the first nine months of 2020.