American National Group Inc. annual report, FY2021

Filing Overview

Entity mismatch: The supplied filing is for American Equity Investment Life Holding Company, not American National Group Inc. It is a Form 10-K for the fiscal year ended December 31, 2021, filed March 1, 2022. The filing reports one operating segment focused on fixed index and fixed rate annuities.

Business Context and Reporting Period

American Equity issues annuity products through American Equity Life, American Equity Life of New York and Eagle Life. Products are distributed through independent marketing organizations, agents, banks, broker-dealers and registered investment advisors. The company is pursuing its “AEL 2.0” strategy, combining annuity origination with expanded private-asset investment management and greater use of reinsurance to transition toward a more capital-efficient, fee-like return-on-assets model.

Fiscal year ended December 31, 2021; comparisons primarily are with 2020.
Approximately 800 full-time employees at year-end.
Financial statements received unqualified audit opinions, and management and the auditor concluded internal control over financial reporting was effective.

Key Financial Metrics

Metric	2021	2020	Change
Annuity deposits before coinsurance	$5.97 billion	$3.68 billion	+62%
Net annuity deposits after coinsurance	$5.55 billion	$3.65 billion	+52%
Total revenues	$3.69 billion	$2.42 billion	+52%
Net investment income	$2.04 billion	$2.18 billion	-7%
Income before income taxes	$602.7 million	$816.0 million	-26%
Net income	$474.0 million	$671.5 million	-29%
Net income available to common stockholders	$430.3 million	$637.9 million	-33%
Diluted earnings per share	$4.55	$6.90	-34%
Non-GAAP operating income	$290.5 million	$69.1 million	+320%
Non-GAAP operating income excluding notable items	$368.5 million	$379.2 million	-3%
Operating cash flow	$4.23 billion	$1.30 billion	+224%

Balance Sheet, Margins and Capital

Total assets increased to $78.35 billion from $71.69 billion.
Total investments increased to $60.38 billion from $53.61 billion; fixed maturity securities represented $51.31 billion, or 85% of investments.
Policy benefit reserves increased to $65.48 billion from $62.35 billion.
Stockholders’ equity was $6.32 billion, compared with $6.35 billion in 2020.
The aggregate investment spread narrowed to 2.18% from 2.43%; average invested-asset yield declined to 3.73% from 4.12%, while aggregate cost of money declined to 1.55% from 1.69%.
The effective income tax rate was 21.4%, compared with 17.7% in 2020.
American Equity Life’s risk-based capital ratio increased to 400% from 372%; statutory capital and surplus increased to $4.08 billion from $3.73 billion.
At year-end, the company had $496.3 million of senior notes payable and $78.4 million of subordinated debentures. The senior notes bear interest at 5% and mature in 2027.

Material Changes Versus the Prior Comparable Period

Sales accelerated, principally from multi-year guaranteed annuities introduced in late 2020, refreshed fixed index products and an improved sales environment.
Investment spread and net investment income declined because of low interest rates, lower floating-rate yields and higher cash holdings, partly offset by lower policyholder crediting costs.
Interest-sensitive and index product benefits rose 74% to $2.68 billion, primarily because of higher index credits. Index credits increased to $1.98 billion from $747.5 million.
Other operating costs increased 33% to $243.7 million, driven by higher staffing, incentive compensation, legal and consulting costs, technology expenses and resumed agent conferences. Management expects quarterly costs to settle near $60 million.
Net income was affected by actuarial assumption updates, including lower assumed investment spreads, revised lapse and mortality assumptions and changes in lifetime income benefit rider utilization. The reported after-tax impact of notable assumption updates was $78.0 million in 2021, compared with $340.9 million in 2020.
Other comprehensive income changed from a gain of $849.2 million to a loss of $354.8 million, primarily reflecting lower unrealized investment gains.
American Equity completed the North End Re reinsurance transaction with Brookfield Reinsurance. Approximately $4.3 billion of in-force fixed index annuity liabilities was reinsured, and 75% of certain post-effective-date fixed index annuity sales is ceded.
The company repurchased approximately 9.1 million shares for $264 million through December 31, 2021, and had approximately $736 million authorized for repurchases at year-end. The common dividend increased to $0.34 per share from $0.32.

Guidance, Outlook, Risks and Unusual Items

Outlook and Management Commentary

Management expects aggregate portfolio yield to reach close to or above 4% in 2022 and intends to increase private assets from approximately 15% of the portfolio at year-end 2021 to 30%–40% over time.
Private-asset investments of $3.4 billion made in 2021 had expected returns of approximately 5.1%–5.2%.
Management expects to continue shifting new business toward fixed index annuities and reinsured liabilities that can generate fee-like earnings.
The company expects parent-company cash resources and permissible subsidiary distributions to fund foreseeable 2022 obligations. American Equity Life could distribute up to $407.9 million in 2022 without prior Iowa regulatory approval, subject to statutory and business constraints.
After year-end, the company issued 6.775 million shares to Brookfield at $37.33 per share and entered into a new $300 million five-year delayed-draw term loan facility; no borrowings had been made under the facility as of the filing.

Principal Risks and Contingencies

Interest-rate changes may compress investment spreads, reduce asset values or increase policy surrenders and liquidity needs.
Investment portfolio risks include credit losses, spread widening, defaults, illiquidity and increased exposure to private assets, mortgage loans and structured securities.
Reinsurance counterparties may fail to perform; the company remains liable to policyholders for ceded obligations if reinsurers default.
Profitability and reserves are highly sensitive to lapse, mortality, policyholder utilization, investment spread, discount-rate and future option-cost assumptions.
Fixed index annuity embedded derivatives and related reserves involve substantial Level 3 valuation judgments. The filing reports a $40.8 billion embedded derivative liability net of coinsurance ceded in the critical audit matter discussion.
COVID-19, market volatility, inflation, geopolitical developments, cybersecurity events, regulatory changes, tax law changes and rating downgrades could adversely affect sales, investments, liquidity and capital.
The company had $370.4 million of mortgage loan commitments, $439.6 million of unfunded limited-partnership commitments and $26.4 million of unfunded fixed-maturity-security commitments at year-end.
The filing states that the company is involved from time to time in litigation, regulatory inquiries and examinations but does not identify a material accrued litigation contingency.

Investor Verification Checklist

Verify the issuer identity: the supplied document is American Equity Investment Life Holding Company, not American National Group Inc.
Reconcile GAAP net income of $474.0 million with non-GAAP operating income of $290.5 million and understand the effects of derivatives and actuarial assumption updates.
Assess whether the 2.18% investment spread can stabilize or expand as rates change and as private-asset allocations increase.
Review the North End Re reinsurance terms, collateral protections, deferred gain and remaining exposure to reinsurer credit risk.
Evaluate the liquidity implications of $65.5 billion of policy benefit reserves, potential surrender activity and the company’s large investment commitments.
Test the sensitivity of reserves and earnings to option costs, discount rates, lapse rates and lifetime income benefit rider utilization.
Confirm the effect of the January 2022 Brookfield share issuance and subsequent share repurchases on ownership, share count and per-share metrics.
Review the pending adoption of long-duration insurance accounting guidance effective January 1, 2023 and its expected effect on reported earnings, equity and reserves.