Business Context and Reporting Period
The filing is American Equity Investment Life Holding Company’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. The provided request metadata identifies American National Group Inc.; investors should verify the registrant because the filing text names American Equity Investment Life Holding Company.
The company specializes primarily in individual deferred annuities and, to a lesser extent, life insurance. Deferred annuity deposits are generally recorded as deposit liabilities rather than revenue under GAAP.
Financial Performance and Condition
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenues | $906.0 million | $630.1 million | $2.65 billion | $1.60 billion |
| Net income (loss) | $57.0 million | $(7.4) million | $137.8 million | $(37.6) million |
| Diluted EPS | $0.63 | $(0.09) | $1.53 | $(0.45) |
| Non-GAAP operating income (loss) | $87.2 million | $(4.7) million | $210.5 million | $66.4 million |
| Net investment income | $500.2 million | $463.6 million | $1.48 billion | $1.37 billion |
| Cash flow from operations | Not separately provided | Not separately provided | $1.26 billion | $944.5 million |
Reported net profit margins were approximately 6.3% in Q3 2017 and 5.2% for the first nine months, compared with negative margins in the comparable 2016 periods. Results included substantial fair-value gains on derivatives and related increases in index-product benefits.
- Investment spread was $290.1 million in Q3 and $855.6 million for nine months, compared with $252.7 million and $745.2 million, respectively, in 2016. Aggregate investment spread increased to 2.70% from 2.57% in Q3 and to 2.70% from 2.61% for nine months.
- Average yield on invested assets declined to 4.43% in Q3 and 4.45% for nine months, from 4.46% and 4.52%, respectively.
- Total assets were $60.38 billion at September 30, 2017, up from $56.05 billion at December 31, 2016. Stockholders’ equity was $2.76 billion, up from $2.29 billion.
- Cash and cash equivalents were $1.29 billion, compared with $791.3 million at year-end 2016.
- Investments totaled $48.85 billion, including $44.60 billion of available-for-sale fixed maturity securities and $2.61 billion of commercial mortgage loans.
- Approximately 96.8% of fixed maturity securities were investment grade based on NRSRO ratings; 97% were investment grade based on NAIC designations.
- Total debt and subordinated debentures were approximately $736.1 million, excluding repurchase agreements of $23.5 million.
- The parent had $44.5 million of cash and no borrowings under its $150 million revolving credit facility. Estimated risk-based capital was 375% at September 30, 2017, versus 342% at December 31, 2016.
Material Changes Versus the Prior Comparable Period
- Q3 net income improved by $64.4 million, from a $7.4 million loss to $57.0 million of income. Nine-month net income improved by $175.4 million.
- Total revenues increased 43.8% in Q3 and 66.1% for nine months, primarily reflecting higher derivative fair-value gains and increased net investment income.
- Derivative fair-value gains increased to $362.5 million in Q3 and $1.02 billion for nine months, compared with $103.8 million and $68.8 million, respectively.
- Interest-sensitive and index-product benefits increased to $501.0 million in Q3 and $1.39 billion for nine months, driven mainly by higher index credits.
- Net annuity deposits declined materially. Gross deposits fell 41% in Q3 and 45% for nine months; net deposits after coinsurance fell 26% and 32%, respectively.
- Average annuity account balances nevertheless increased 7% in Q3 and 8% for nine months, reaching $47.3 billion and $46.5 billion, respectively.
- The company issued $500 million of 5.0% senior unsecured notes due 2027, prepaid a $100 million term loan, and redeemed $400 million of 6.625% notes due 2021. The refinancing generated an $18.4 million pretax loss on debt extinguishment.
- Other-than-temporary impairment losses declined to $0.5 million in Q3 and $1.6 million for nine months, compared with $3.0 million and $13.1 million in the 2016 periods.
Outlook, Commentary, Risks, and Unusual Items
- Management stated that sales were pressured by increased competition, low interest rates, the equity-market environment, and uncertainty surrounding the Department of Labor fiduciary rule. No quantitative earnings or sales guidance was provided.
- Management expects continued pressure on investment spreads from the prolonged low-interest-rate environment, although reductions in policyholder crediting rates are intended to support spreads.
- Approximately $16 billion to $17 billion of account values began receiving renewal-rate adjustments in September 2016, followed by adjustments on approximately $7.4 billion beginning in December 2016. These actions were expected to reduce part of the differential between existing crediting rates and guaranteed minimum rates.
- Q3 results benefited from favorable assumption unlocking, including stronger-than-assumed index credits and improved persistency. The benefit was partly offset by revisions to lifetime income benefit rider reserves and higher estimated expenses under a reinsurance agreement.
- Derivative and embedded-derivative valuations are highly sensitive to interest rates, equity indices, policy lapses, withdrawals, mortality, and option costs. A 100-basis-point increase in the discount rate would have reduced the embedded-derivative liability by an estimated $542.4 million and reduced related deferred balances by $318.9 million; the opposite movement would have increased those amounts.
- Interest-rate risk is the primary market risk. A modeled 10% increase in rates, equivalent to 29 basis points, would have reduced fixed maturity securities’ fair value by approximately $1.0 billion and stockholders’ equity by approximately $317.5 million, after stated offsets.
- The investment portfolio had $280.5 million of unrealized losses at September 30, 2017, including $278.6 million on available-for-sale securities. Management considered these losses temporary, but future credit deterioration could result in additional impairments.
- Commercial mortgage loans totaled $2.62 billion, with $113.9 million of unfunded commitments. The portfolio included $2.2 million of non-accrual loans, two troubled debt restructurings, and $8.15 million of loan-loss allowances.
- Unfunded commitments also included $46.5 million to limited partnerships and $8.2 million to secured bank loans. Litigation and regulatory matters are monitored, but the filing does not identify a material accrued contingency.
- The company adopted share-based payment accounting guidance in 2017, producing income tax benefits of approximately $0.2 million in Q3 and $1.8 million for nine months. Several other accounting standards were pending; management did not expect a significant impact from most, while expected-credit-loss guidance may result in earlier recognition of commercial mortgage loan losses.
Important Facts for Investors to Verify
- Confirm the registrant and company identity because the request metadata and filing text do not match.
- Separate recurring operating performance from volatile derivative and embedded-derivative fair-value effects; reconcile GAAP net income with non-GAAP operating income.
- Monitor declining annuity sales and whether renewal-rate actions can offset pressure from low investment yields and competition.
- Assess sensitivity to interest rates, equity-index performance, policy lapses, withdrawals, option costs, and lifetime income benefit rider assumptions.
- Review investment credit quality, unrealized losses, watch-list securities, mortgage-loan impairments, and the potential for future OTTI charges.
- Verify debt refinancing terms, interest obligations, dividend restrictions, RBC requirements, and the availability of holding-company liquidity.
- Review regulatory and litigation developments, including Department of Labor fiduciary-rule implications and state insurance restrictions on subsidiary distributions.