American National Group Inc. quarterly report, Q2 FY2021

Business Context and Reporting Period

Filing discrepancy: The supplied Form 10-Q identifies the registrant as American Equity Investment Life Holding Company, not American National Group Inc. The filing covers the quarter and six months ended June 30, 2021, with comparisons to June 30, 2020 and December 31, 2020.

The company sells individual fixed and fixed-index deferred annuities through independent marketing organizations, agents, banks, broker-dealers and other distribution channels. Premiums for deferred annuities are generally recorded as deposit liabilities rather than revenue.

Key Financial Metrics

Metric	Three months ended June 30, 2021	Six months ended June 30, 2021	Comparable period
Total revenues	$1,075.4 million	$2,037.6 million	$919.9 million and $596.2 million
Income before taxes	$(70.4) million	$290.8 million	$(315.9) million and $(45.7) million
Net income	$(54.7) million	$228.0 million	$(247.4) million and $(4.5) million
Net income available to common stockholders	$(65.6) million	$206.2 million	$(253.4) million and $(17.0) million
Diluted earnings per share	$(0.69)	$2.15	$(2.76) and $(0.19)
Net investment income	$499.3 million	$996.5 million	$543.7 million and $1,117.0 million
Net cash from operating activities	Not separately provided for the quarter	$624.2 million	$(327.9) million
Net cash from investing activities	Not separately provided for the quarter	$450.5 million	$777.8 million
Net cash from financing activities	Not separately provided for the quarter	$1,354.0 million	$(334.7) million

Amounts are in thousands in the filing. Total revenues and earnings were materially affected by fair-value changes in derivatives and embedded derivatives. The filing does not present a conventional operating margin; based on reported totals, net income available to common stockholders represented approximately (6.1%) of quarterly revenue and 10.1% of six-month revenue.

Balance Sheet, Debt and Liquidity

Total assets were $73.9 billion at June 30, 2021, compared with $71.7 billion at December 31, 2020.
Policy benefit reserves were $64.6 billion, compared with $62.4 billion at year-end 2020.
Stockholders’ equity was $6.3 billion, compared with $6.35 billion at year-end 2020.
Cash and cash equivalents were $11.5 billion, including $382.1 million held by the parent holding company. Management stated that approximately $10 billion was held in cash and cash equivalents at quarter-end, substantially above the intended long-term level of 1% to 2% of the investment portfolio.
Debt included $496.0 million of senior notes due 2027 and $78.3 million of subordinated debentures. No repurchase-agreement borrowings were outstanding at quarter-end.
The parent had a $150 million revolving credit facility with no borrowings outstanding through September 2021.
American Equity Life’s reported RBC ratio was 372% at December 31, 2020, compared with a 275% minimum under a line-of-credit covenant. Up to $372.9 million could be distributed by American Equity Life in 2021 without prior Iowa regulatory approval, subject to statutory and other constraints.
The fixed-maturity portfolio totaled $46.7 billion, of which 97% was investment grade under NAIC designations. Mortgage loans totaled $4.3 billion.

Material Changes Versus Prior Comparable Period

Net income available to common stockholders improved from a $253.4 million quarterly loss to a $65.6 million loss, while six-month results improved from a $17.0 million loss to $206.2 million of income.
Quarterly net investment income declined 8% and six-month net investment income declined 11%, primarily because of lower portfolio yields and substantially higher cash holdings.
Aggregate investment spread declined to 1.95% for the quarter and 1.97% for the six months, versus 2.39% and 2.51%, respectively. Dollar investment spread declined to $277.2 million and $552.8 million from $308.9 million and $648.0 million.
Net annuity deposits increased 111% in the quarter and 191% for the six months, driven primarily by multi-year fixed-rate annuity products introduced in late 2020 and higher fixed-index annuity sales.
Consolidated annuity deposits before coinsurance were $1.18 billion for the quarter and $3.61 billion for the six months. Management targeted total 2021 sales of $5 billion to $6 billion.
Other operating costs increased 55% in the quarter and 41% for the six months, reflecting higher staffing, incentive compensation, talent transition, legal and consulting costs, and implementation of the AEL 2.0 strategy.
Share repurchases totaled approximately 9.1 million shares at an average price of approximately $29.02 through June 30; approximately $237 million remained under the $500 million authorization at June 30.
The company began consolidating a real-estate investment-company VIE in the second quarter, adding $258.2 million of residential real estate investments and $16.4 million of liabilities without creditor recourse to the company.

Guidance, Outlook, Risks and Unusual Items

Strategy and Outlook

The company described 2021 as a transition year for its “AEL 2.0” strategy, which combines annuity origination with third-party asset-management partnerships, higher allocations to private assets and greater use of reinsurance.
Management planned to add $1 billion to $2 billion of private assets during 2021 and ultimately build private assets to at least 30% of the portfolio, with the transition expected to occur over multiple years.
Management expected to invest most excess cash above target levels into traditional fixed-income securities during the remainder of 2021.
The company reached agreement with Brookfield on a reinsurance transaction covering a portion of in-force and new business. Regulatory approval remained pending; the second stage of Brookfield’s equity investment was expected after approval and closing conditions.
Management expected operating costs to trend higher during the coming quarters and settle in the high-$40 million range per quarter beginning in 2022, after refinancing existing reserve-financing facilities.

Risks and Contingencies

Results are sensitive to interest rates, investment spreads, credit losses, equity and credit-market performance, policy lapses, withdrawals, option costs and the fair value of derivatives and embedded derivatives.
A 21-basis-point increase in interest rates was estimated to reduce the fair value of fixed-maturity securities by approximately $711.9 million and accumulated other comprehensive income by approximately $311.5 million, after related tax and insurance-accounting adjustments.
Fixed-index annuity embedded-derivative valuations are highly sensitive to discount rates. A 100-basis-point increase in discount rates was estimated to reduce the embedded-derivative liability by $624.7 million and increase related amortization by $255.1 million; a 100-basis-point decrease had the opposite effect with different estimated magnitudes.
COVID-19 continued to affect credit markets and contributed to securities on the investment watch list, particularly in travel, airlines, structured securities and senior-living-related municipal exposure.
There were ten mortgage loans in non-accrual status at June 30, 2021, compared with one at December 31, 2020. No mortgage loans were classified as troubled debt restructurings at either date.
Unfunded commitments included $177.6 million of mortgage-loan commitments, $39.6 million to limited partnerships and $1.0 million to fixed-maturity securities.
Pending and future litigation, regulatory examinations, insurance regulation, Department of Labor fiduciary-rule developments, competition and tax-law changes could adversely affect results. The filing does not identify a specific material litigation accrual.

Unusual and Accounting Items

The six-month 2021 result benefited from $897.2 million of derivative fair-value gains, compared with a $614.2 million loss in the prior-year period. These volatile gains were substantially offset by policy benefits and embedded-derivative accounting effects.
The company revised 2020 financial statements for an immaterial prior-period 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.
The six-month 2020 comparison included a $30.8 million discrete tax benefit related to CARES Act net operating-loss carrybacks.
All derivatives were accounted for through current-period fair value changes; none qualified for hedge accounting.

Important Facts for Investors to Verify

Confirm the registrant identity: the supplied filing is for American Equity Investment Life Holding Company, despite the request identifying American National Group Inc.
Verify the timing, regulatory approval and final economics of the Brookfield reinsurance transaction and related second-stage equity investment.
Assess normalized earnings using investment spread and non-GAAP operating income, rather than relying solely on GAAP earnings affected by derivative fair-value volatility.
Monitor the unusually high cash balance, its reinvestment yield and the timing of the planned migration toward private and other higher-yielding assets.
Evaluate exposure to interest-rate movements, credit losses, policyholder behavior, annuity lapses and embedded-derivative valuation assumptions.
Review statutory capital, RBC ratios, dividend capacity and rating-agency requirements before assuming that holding-company liquidity is fully transferable from insurance subsidiaries.
Track the $500 million share-repurchase authorization, remaining capacity and the impact of repurchases on common shares outstanding and capital.