Business Context and Reporting Period
This Form 10-Q covers American Equity Investment Life Holding Company and subsidiaries for the three months ended March 31, 2021, compared with the same period in 2020. The company primarily sells fixed and fixed-index deferred annuities through independent marketing organizations, agents, banks and broker-dealers. The request metadata identifies American National Group Inc., but the filing identifies the registrant as American Equity Investment Life Holding Company.
Financial Highlights
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenues | $962.2 million | $(323.7) million | Improved, primarily from derivative fair-value changes |
| Income before income taxes | $361.2 million | $270.2 million | Increased |
| Net income | $282.7 million | $242.9 million | Increased 16% |
| Net income available to common stockholders | $271.8 million | $236.3 million | Increased 15% |
| Diluted earnings per share | $2.82 | $2.57 | Increased |
| Operating income available to common stockholders, non-GAAP | $41.4 million | $154.1 million | Decreased 73% |
| Net cash provided by operating activities | $471.9 million | $(1.16) billion | Improved |
| Cash and cash equivalents at period end | $11.09 billion | $1.83 billion | Increased |
Reported net income benefited materially from changes in the fair value of derivatives and embedded derivatives. Net investment income declined 13% to $497.2 million from $573.3 million, while the aggregate investment spread declined to $275.6 million from $339.1 million. The investment spread margin declined to 2.00% from 2.64%; average invested-asset yield declined to 3.58% from 4.36%, and aggregate cost of money declined to 1.58% from 1.72%.
At March 31, 2021, total assets were $72.68 billion, total liabilities were $66.75 billion and stockholders’ equity was $5.93 billion. Policy benefit reserves were $63.52 billion. Notes payable were $495.8 million, consisting primarily of $500 million of 5.0% senior notes due 2027; subordinated debentures were $78.2 million. No repurchase-agreement borrowings were outstanding during the quarter.
Material Changes Versus the Prior Comparable Period
- Net annuity deposits increased to $2.43 billion from $687.2 million, primarily because of strong multi-year fixed-rate annuity sales introduced in 2020.
- Management reported total 2021 annuity sales of $5 billion to $6 billion as its target. Multi-year fixed-rate sales are expected to decrease after first-quarter rate changes, with greater emphasis on refreshed fixed-index products.
- Change in fair value of derivatives was a gain of $396.3 million versus a loss of $941.9 million in Q1 2020. Change in fair value of embedded derivatives was a loss of $282.4 million versus a loss of $1.25 billion.
- Interest-sensitive and index-product benefits increased 19% to $476.6 million, while amortization of deferred sales inducements increased to $123.0 million from $73.6 million and amortization of deferred policy acquisition costs increased to $203.8 million from $120.7 million.
- Other operating costs increased 28% to $55.9 million, reflecting higher staffing, incentive compensation, risk charges, legal and consulting costs, and technology expenses associated with the AEL 2.0 strategy.
- The 2020 comparison included a $30.8 million discrete tax benefit under the CARES Act. The Q1 2021 effective tax rate was 21.7%, compared with 10.1% in Q1 2020.
- Accumulated other comprehensive income declined to $1.51 billion from $2.20 billion, primarily because of a $698.3 million after-tax comprehensive loss from unrealized investment losses.
- The company repurchased approximately 649,000 shares during the quarter and had repurchased approximately 6.1 million shares for $168.5 million at March 31, 2021. Approximately $332 million remained under the $500 million repurchase authorization.
- Management revised prior-year financial statements for an immaterial error affecting policy reserves, deferred acquisition costs, deferred sales inducements, deferred taxes and accumulated other comprehensive income. The revision did not affect prior-period net income or cash flows.
Liquidity, Capital and Investment Profile
Net cash flows from annuity deposits and funds returned to policyholders were $1.39 billion in Q1 2021, compared with $(211.0) million in Q1 2020. Parent-company cash and cash equivalents were $495.5 million, and a $150 million revolving credit facility had no borrowings outstanding.
American Equity Life could distribute up to $372.9 million in 2021 without prior approval from the Iowa Insurance Commissioner, subject to statutory and contractual limitations. Its statutory earned surplus was $2.1 billion, and its risk-based capital ratio was 372% at December 31, 2020; the filing states that the applicable credit agreement requires a minimum RBC ratio of 275%.
Fixed maturity securities represented 87.2% of investments at March 31, 2021, and 97.3% were investment grade. The portfolio had $197.7 million of gross unrealized losses, net of a $59.7 million credit-loss allowance. Mortgage loans totaled $4.29 billion, with $110.9 million of unfunded mortgage-loan commitments. Three mortgage loans were in non-accrual status, and no troubled debt restructurings were reported.
Guidance, Outlook, Risks and Unusual Items
- The AEL 2.0 strategy is intended to combine annuity origination with an open-architecture investment platform, greater use of reinsurance and third-party capital, and increased investment in higher-yielding alternative assets.
- Management characterized 2021 as a transition year while migrating from a traditional fixed-income strategy toward lower asset leverage, reinsurance-based capital efficiency and approximately $2 billion of additional alpha-producing assets annually.
- Management expects operating costs to trend higher as AEL 2.0 infrastructure is built and expects costs to reach the high-$40 million range after refinancing existing AG33 redundant-reserve financing facilities.
- Management was working to complete reinsurance transactions with Värde/Agam and Brookfield during 2021. The second Brookfield investment, of up to an additional 10% ownership interest, remained subject to the proposed reinsurance transaction, regulatory approvals and other conditions.
- Low interest rates and low yields remain a headwind to investment spreads. Management stated that crediting rates could be reduced toward guaranteed minimums, potentially lowering cost of money by approximately 57 basis points.
- COVID-19 continued to affect credit markets and contributed to unrealized losses and watch-list exposures, particularly in travel, airlines, oil drilling, senior living and certain mortgage-backed and asset-backed securities.
- Interest-rate risk is significant. A modeled 24-basis-point increase in rates was estimated to reduce fixed-maturity fair value by approximately $790 million and stockholders’ equity by approximately $334.5 million, although actual results could differ materially.
- Other risks include annuity surrender and lapse behavior, investment defaults and credit losses, derivative-counterparty performance, regulatory restrictions on subsidiary dividends, competition, tax-law changes and additional compliance obligations under new Department of Labor fiduciary guidance.
- Fitch affirmed the company’s ratings in April 2021 and revised the outlook to stable from negative.
Investor Verification Priorities
- Verify the registrant identity and ticker because the supplied metadata names American National Group Inc., while the filing is for American Equity Investment Life Holding Company, ticker AEL.
- Separate recurring operating performance from volatile GAAP derivative fair-value gains and losses; in particular, reconcile the $271.8 million of GAAP earnings available to common stockholders with $41.4 million of non-GAAP operating income.
- Monitor investment spread compression, cash balances held at low yields, crediting-rate actions and the effect of reinvestment yields on future profitability.
- Confirm the closing, economics and regulatory approvals for the Värde/Agam and Brookfield reinsurance transactions and the second Brookfield equity investment.
- Assess investment-portfolio credit quality, watch-list securities, unrealized losses, allowance adequacy and COVID-19-related exposures.
- Track statutory capital, RBC ratios, dividend capacity and the effect of share repurchases and reinsurance on capital flexibility.