Filing Scope and Business Context
Filing mismatch: The supplied Form 10-Q is for American Equity Investment Life Holding Company, not American National Group Inc. The filing covers the three months ended March 31, 2020, and was filed May 11, 2020. The company specializes in individual annuities, primarily fixed-index deferred annuities.
The interim financial statements are unaudited and prepared under U.S. GAAP. Results for the quarter are not necessarily indicative of full-year results, particularly given the COVID-19 disruption.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 / Prior Period |
|---|---|---|
| Total revenues | $(323.7) million | $1,000.7 million |
| Income before income taxes | $270.2 million | $(39.5) million |
| Net income | $242.9 million | $(30.0) million |
| Net income available to common stockholders | $236.3 million | $(30.0) million |
| Diluted earnings per share | $2.57 | $(0.33) |
| Non-GAAP operating income available to common stockholders | $154.1 million | $89.4 million |
| Net investment income | $573.3 million | $558.4 million |
| Aggregate investment spread | 2.64% | 2.58% |
| Net cash provided by operating activities | $(1,164.7) million | $1,112.0 million |
| Cash and cash equivalents at period end | $1,833.1 million | $1,115.9 million at March 31, 2019 |
Reported GAAP earnings were substantially affected by fair-value changes in derivatives and embedded derivatives. Derivative fair-value revenue was a loss of $941.9 million, while the change in fair value of embedded derivatives was a benefit of $1,250.1 million. Comprehensive loss was $(1,035.0) million, including other comprehensive loss of $(1,277.9) million.
Financial Position, Debt and Liquidity
- Total assets were $65.5 billion at March 31, 2020, down from $69.7 billion at December 31, 2019.
- Total investments were $52.1 billion, including $47.7 billion of fixed maturity securities and $3.7 billion of commercial mortgage loans.
- Approximately 98% of the fixed maturity portfolio was investment grade. However, gross unrealized losses increased to $2.4 billion from $292.1 million at year-end, primarily because of COVID-19-related credit-spread widening and market illiquidity.
- Stockholders’ equity declined to $3.5 billion from $4.6 billion, principally because of the $1.3 billion other comprehensive loss.
- Debt included $495.3 million of senior notes due 2027, $77.9 million of subordinated debentures and $186.1 million of repurchase-agreement borrowings.
- The company reported $258.1 million of parent-company cash and a $150 million revolving credit facility with no borrowings outstanding. Management stated that it held approximately $1.3 billion of unencumbered cash at March 31, 2020.
- Net cash flows from annuity deposits and policyholder payments were $(211.0) million, compared with $454.5 million of net inflows in Q1 2019.
- The estimated March 31, 2020 risk-based capital ratio was 396% on a pro forma basis after a $200 million capital contribution made to American Equity Life on May 4, 2020. The December 31, 2019 ratio was 372%.
Material Changes Versus the Prior Comparable Period
- Net income available to common stockholders improved from a $30.0 million loss to $236.3 million of income. Results benefited from favorable changes in embedded-derivative valuations and a $30.8 million discrete tax benefit related to the CARES Act.
- Non-GAAP operating income increased 72% to $154.1 million, principally due to lower deferred policy acquisition cost and deferred sales inducement amortization, partly offset by higher lifetime income benefit rider liabilities.
- Net annuity deposits after coinsurance fell 42% to $687.2 million. Total deposits before coinsurance declined 43% to $704.9 million, reflecting competitive pressures and disruption to distribution channels.
- Interest-sensitive and index-product benefits increased 193% to $400.2 million, driven by higher index credits and lifetime income benefit rider costs.
- Average invested assets increased 5% to $52.6 billion, but average yield declined to 4.36% from 4.48%. The average yield on newly purchased fixed-income securities and newly funded commercial mortgage loans declined to 3.49% from 4.69%.
- Credit losses on available-for-sale fixed maturity securities were $31.4 million, compared with none in Q1 2019. The company also increased mortgage-loan credit-loss allowances.
- Operating cash flow changed from a $1.1 billion inflow to a $1.2 billion outflow, largely reflecting collateral movements and lower net policyholder cash inflows.
- The company adopted the current expected credit loss standard on January 1, 2020, reducing retained earnings by $9.3 million after tax.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide formal earnings guidance. It expects annuity sales to remain subdued while social-distancing measures disrupt agents and other distribution channels.
- Management began reducing caps and crediting rates on $29.7 billion of policyholder funds in January 2020 and planned to reduce renewal participation rates on an additional $4.3 billion beginning in June. It estimated that reducing current crediting rates to guaranteed minimums could lower the cost of money by approximately 63 basis points.
- COVID-19 may reduce new annuity sales, increase withdrawals and lapses, impair investment values, increase credit losses and restrict access to capital. The duration and ultimate financial impact were stated to be uncertain.
- Low interest rates and lower yields on new investments create pressure on investment spreads. Equity-market volatility also affects option costs and derivative valuations.
- Unrealized losses affected 2,475 fixed maturity securities at March 31, 2020, compared with 1,033 at December 31, 2019. Management stated that it did not intend to sell the affected securities and generally expected recovery of amortized cost, except for securities with recognized credit-loss allowances.
- Unfunded commitments included $247.5 million of commercial mortgage-loan commitments, $41.4 million to limited partnerships and $102.7 million to fixed maturity securities.
- S&P and Fitch affirmed key ratings but revised their outlooks from stable to negative due to COVID-19-related market and credit concerns.
- The company’s interest-rate sensitivity analysis estimated that a 13-basis-point parallel increase in rates would reduce fixed maturity security fair value by approximately $459.3 million and reduce accumulated other comprehensive income by approximately $196.3 million after related adjustments.
Investor Verification Priorities
- Verify the issuer identity: the supplied filing is for American Equity Investment Life Holding Company, not American National Group Inc.
- Reconcile GAAP net income with non-GAAP operating income and separately assess the effects of derivative valuations, embedded derivatives and the $30.8 million CARES Act tax benefit.
- Monitor COVID-19 effects on annuity sales, surrender and lapse rates, liquidity, collateral requirements and policyholder cash outflows.
- Review credit performance of the fixed maturity portfolio, including the $2.4 billion of unrealized losses, $31.4 million of recognized credit losses and exposure to energy, commercial mortgage-backed and other asset-backed securities.
- Assess the sustainability of the 2.64% investment spread amid declining new-money yields, low interest rates and rising option costs.
- Confirm statutory capital, RBC calculations, rating-agency outlooks and the availability of dividends or other distributions from insurance subsidiaries.