Business Context and Reporting Period
The filing is an unaudited Form 10-Q for the three months ended March 31, 2019. The filing identifies the registrant as American Equity Investment Life Holding Company, specializing in individual annuities, primarily fixed index deferred annuities. The request metadata identifies American National Group Inc.; this discrepancy should be verified.
Premium collections for deferred annuities are generally recorded as deposit liabilities rather than revenue. Core earnings are driven principally by investment income, investment spreads, annuity charges, policyholder benefits, acquisition costs, and derivative-related fair-value changes.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 / Prior Period |
|---|---|---|
| Total revenues | $1.001 billion | $118.9 million |
| Income before income taxes | $(39.5) million | $177.6 million |
| Net income (loss) | $(30.0) million | $141.0 million |
| Diluted earnings per share | $(0.33) | $1.55 |
| Non-GAAP operating income | $89.4 million | $77.7 million |
| Net cash provided by operating activities | $1.112 billion | $(443.2) million |
| Cash and cash equivalents at March 31 | $1.116 billion | $723.8 million |
| Total assets at March 31 | $64.482 billion | $61.626 billion at December 31, 2018 |
| Stockholders' equity at March 31 | $2.940 billion | $2.399 billion at December 31, 2018 |
Net investment income increased 9% to $558.4 million. The average investment yield was 4.48%, aggregate cost of money was 1.90%, and aggregate investment spread was 2.58%, compared with 2.54% in the prior-year quarter.
Net annuity deposits after coinsurance were $1.182 billion, up 26% from $941.4 million. Average annuity account balances, net of ceded liabilities, increased 5% to $51.3 billion. The investment spread measured in dollars increased to $308.8 million from $283.6 million.
Investments totaled $52.205 billion at March 31, 2019, including $48.037 billion of fixed maturity securities and $3.050 billion of commercial mortgage loans. Approximately 96.7% of fixed maturity securities were investment grade based on the rating presentation in the filing; 97% were investment grade based on NAIC designations.
Debt included $494.7 million of senior notes, $243.1 million of subordinated debentures, and $243.3 million of repurchase agreements. The company also had a $150 million revolving credit facility with no borrowings outstanding. The parent holding company reported $80.7 million of cash.
Material Changes Versus the Prior Comparable Period
- GAAP net income changed from $141.0 million of profit to a $30.0 million loss, primarily because of volatile fair-value accounting for derivatives and embedded derivatives.
- Change in fair value of derivatives shifted to a $384.5 million gain from a $451.1 million loss, while change in fair value of embedded derivatives shifted to a $766.3 million expense from an $867.2 million benefit.
- Interest sensitive and index product benefits declined 73% to $136.7 million, primarily because index credits fell to $55.9 million from $423.9 million.
- Amortization of deferred sales inducements declined to $33.3 million from $100.4 million, and deferred policy acquisition cost amortization declined to $45.1 million from $140.6 million, reflecting fair-value-related adjustments.
- Other operating expenses increased 25% to $39.0 million, driven by higher salary, incentive compensation, risk charges, legal, consulting, and technology expenses.
- Annuity deposits before coinsurance increased 20% to $1.236 billion, supported by new products and continued competitiveness, partially offset by competitive pressures.
- Operating cash flow improved from an outflow of $443.2 million to an inflow of $1.112 billion. Investing cash use increased to $925.1 million from $661.3 million, while financing cash provided increased to $584.6 million from $394.2 million.
- Accumulated other comprehensive income increased to $513.7 million from a $52.4 million loss at December 31, 2018, primarily because of higher unrealized investment gains.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management did not provide formal earnings guidance in the filing. Management expects continued growth in invested assets and non-GAAP operating income, while maintaining a predominantly investment-grade portfolio and avoiding significant investment impairments.
- The prolonged low-interest-rate environment pressures investment yields and investment spreads. Management stated that crediting rates could be reduced toward guaranteed minimums, potentially lowering the cost of money by approximately 61 basis points.
- Approximately 99% of annuity liabilities were subject to annual crediting-rate adjustment, and approximately 16% were at minimum guaranteed rates at March 31, 2019.
- Interest-rate and fair-value sensitivity is significant. A modeled 10% increase in market interest rates, equivalent to 28 basis points, would reduce the estimated fair value of fixed maturity securities by approximately $962.8 million and reduce accumulated other comprehensive income and stockholders' equity by approximately $361.0 million.
- The fair value of fixed index annuity embedded derivatives was $8.876 billion. A 100-basis-point increase in the discount rate would reduce that fair value by an estimated $552.2 million; a 100-basis-point decrease would increase it by an estimated $613.0 million, with corresponding deferred acquisition cost and sales inducement effects.
- There were no other-than-temporary impairment charges in Q1 2019, compared with $0.9 million in Q1 2018. Unrealized losses on fixed maturity securities totaled $580.5 million, but management concluded they were temporary.
- Commercial mortgage loans totaled $3.059 billion. No loans were delinquent by 60 days or more, in workout status, non-accrual, collateral-dependent, or classified as troubled debt restructurings at March 31, 2019. Unfunded commitments included $69.3 million for mortgage loans and additional commitments to limited partnerships, secured bank loans, and privately placed securities.
- Key risks include interest-rate movements, spread compression, option costs, policyholder lapse and withdrawal behavior, investment defaults and impairments, competition in annuity distribution, regulatory restrictions, litigation, counterparty performance, and changes in tax or insurance regulation.
- The estimated risk-based capital ratio was 352% at March 31, 2019, compared with 360% at December 31, 2018. Transfers from insurance subsidiaries are subject to statutory restrictions and rating-agency capital considerations.
- The company adopted lease accounting on January 1, 2019, recognizing a $3.7 million lease asset and liability. The expected-credit-loss standard was scheduled for adoption in 2020, and long-duration insurance contract amendments in 2021; management was evaluating their effects.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2019, with no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Verify the issuer identity: the supplied metadata names American National Group Inc., while the filing names American Equity Investment Life Holding Company and trades under ticker AEL.
- Reconcile the $30.0 million GAAP loss with the $89.4 million non-GAAP operating income and review the company’s adjustment methodology.
- Assess the sensitivity of earnings and equity to interest rates, credit spreads, index performance, lapse assumptions, and embedded-derivative discount rates.
- Review statutory capital, risk-based capital requirements, dividend capacity, debt covenants, and the availability of cash from regulated insurance subsidiaries.
- Evaluate the credit quality, unrealized losses, below-investment-grade exposure, and concentration of the fixed maturity and commercial mortgage loan portfolios.
- Monitor annuity sales, retention and surrender activity, option costs, crediting-rate actions, and the sustainability of the reported investment spread.
- Review pending or potential litigation and regulatory examinations, as well as the company’s unfunded commitments and securities-lending counterparty exposure.