Filing Overview
Filing identity: The supplied 10-Q is for American Equity Investment Life Holding Company, not American National Group Inc. Investors should verify the company and filing before relying on this summary. The report covers the quarter ended March 31, 2018, with comparative results for the quarter ended March 31, 2017. The financial statements are unaudited.
Business Context and Reporting Period
The company specializes in individual annuities, primarily fixed index deferred annuities. Premium collections for deferred annuities are generally recorded as deposit liabilities rather than revenue. Profitability depends principally on invested assets, investment spreads, policyholder crediting rates, option costs, acquisition costs, operating expenses and income taxes.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 or prior period |
|---|---|---|
| Total revenue | $118.9 million | $927.3 million |
| Income before taxes | $177.6 million | $81.5 million |
| Net income | $141.0 million | $53.9 million |
| Diluted earnings per share | $1.55 | $0.60 |
| Non-GAAP operating income | $77.7 million | $59.6 million |
| Effective tax rate | 20.6% | 33.8% |
| Aggregate investment spread | 2.54% | 2.71% |
| Net cash used in operating activities | $443.2 million | Net cash provided of $498.0 million |
Reported revenue and expense totals were materially affected by changes in the fair values of derivatives and embedded derivatives. Net income benefited from increases in discount rates used to value embedded derivative liabilities and from the lower tax rate following Tax Reform.
Balance Sheet, Investments and Capital
- Total assets were $61.3 billion at March 31, 2018, compared with $62.0 billion at December 31, 2017.
- Total investments were $49.7 billion, including $45.6 billion of fixed maturity securities and $2.7 billion of commercial mortgage loans.
- Cash and cash equivalents declined to $723.8 million from $1.434 billion at year-end.
- Stockholders’ equity declined to $2.547 billion from $2.850 billion, primarily reflecting $452.2 million of other comprehensive loss, partly offset by net income and a $127.6 million tax-effect reclassification.
- Policy benefit reserves were $56.1 billion. Notes payable were $494.2 million, subordinated debentures were $242.7 million, and repurchase agreement borrowings were $137.2 million.
- Approximately 96.7% of fixed maturity securities were investment grade under the company’s NRSRO rating presentation; 97% were investment grade under NAIC designations.
- The estimated risk-based capital ratio was 383% at March 31, 2018, compared with 378% at December 31, 2017.
Material Changes Versus the Prior Comparable Period
- Net income increased 161% to $141.0 million, while diluted EPS increased to $1.55 from $0.60.
- Non-GAAP operating income increased 30% to $77.7 million.
- Annuity deposits before coinsurance declined 4% to $1.031 billion; net deposits after coinsurance declined 7% to $941.4 million. Management attributed the decline to competitive pressures, low interest rates and strong equity markets.
- Average net annuity account balances increased 7% to $48.8 billion, and investment spread dollars increased to $283.6 million from $278.6 million.
- Net investment income increased 5% to $510.8 million, although average investment yield declined to 4.36% from 4.48%.
- Interest-sensitive and index product benefits increased 23% to $514.1 million, primarily due to higher index credits.
- The fair-value impact of derivatives shifted from a $386.5 million gain in Q1 2017 to a $451.1 million loss in Q1 2018. The fair-value impact of embedded derivatives shifted from a $224.2 million expense to an $867.2 million benefit.
- Operating cash flow changed from $498.0 million of inflow to $443.2 million of outflow, influenced significantly by a $784.9 million change in collateral held for derivatives.
- Interest expense on notes and loan payable decreased 17% to $6.4 million following repayment of a $100 million term loan and refinancing of $400 million of 6.625% notes with 5.0% senior notes due 2027.
- Gross unrealized losses on available-for-sale fixed maturity securities increased to $624.0 million from $268.9 million, primarily due to higher interest rates and wider credit spreads. Management concluded the losses were temporary.
Guidance, Outlook, Risks and Unusual Items
- No specific earnings or sales guidance is provided in the filing. Management expects results to remain sensitive to interest rates, equity and credit markets, competition, policyholder behavior and derivative valuations.
- Management continues to face an extended low-interest-rate environment that pressures investment spreads, although it retains flexibility to reduce policyholder crediting rates toward guaranteed minimums.
- The company reported that competition in distribution channels has slowed annuity sales. The Department of Labor fiduciary rule was vacated by the Fifth Circuit, with the filing stating that the decision was expected to become effective around May 8, 2018.
- Derivative and embedded derivative accounting creates substantial quarter-to-quarter volatility. A 100-basis-point increase in the embedded-derivative discount rate would have reduced the related liability by an estimated $529.0 million and increased the combined amortization impact on deferred acquisition costs and sales inducements by $321.0 million.
- The company recognized $0.9 million of other-than-temporary impairment on a corporate security during the quarter.
- The commercial mortgage loan portfolio had no loans delinquent by 60 days or more at quarter-end. Commitments included $51.7 million to fund commercial mortgage loans, $48.4 million to limited partnerships and $6.2 million to secured bank loans.
- Parent-company cash was $22.9 million, and a $150 million revolving credit facility had no borrowings outstanding. Distributions from insurance subsidiaries are subject to statutory, regulatory and credit-rating constraints.
- Management identified interest-rate risk as the primary market risk. A modeled 30-basis-point increase in rates would reduce fixed maturity security fair value by approximately $1.1 billion and reduce stockholders’ equity by approximately $380.3 million after specified offsets.
- Management stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Most Important Facts to Verify
- Verify that this filing belongs to American Equity Investment Life Holding Company rather than American National Group Inc.
- Reconcile GAAP net income with non-GAAP operating income and assess the recurring versus derivative-related components of earnings.
- Review liquidity effects of the operating cash outflow, derivative collateral movements and the decline in cash balances.
- Assess sensitivity to interest rates, credit spreads, option costs, policyholder lapses, withdrawals and annuity sales competition.
- Review the quality and duration of the fixed maturity portfolio, including the increase in unrealized losses and the company’s temporary-impairment conclusions.
- Confirm statutory capital, RBC requirements, subsidiary dividend capacity and holding-company debt obligations.