Business Context and Reporting Period
The filing is a Form 10-Q for the quarter and nine months ended September 30, 2019, filed November 8, 2019. The filing identifies the registrant as American Equity Investment Life Holding Company, not American National Group Inc.; investors should verify the requested company identity.
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.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2019 | Year-over-Year Change | Nine Months Ended September 30, 2019 | Year-over-Year Change |
|---|---|---|---|---|
| Total revenues | $643.4 million | Down 46.1% | $2.35 billion | Up 17.6% |
| Net income | $37.4 million | Down 77.9% | $25.9 million | Down 93.6% |
| Diluted EPS | $0.41 | Down from $1.85 | $0.28 | Down from $4.42 |
| Non-GAAP operating income | $233.4 million | Up 36.4% | $422.3 million | Up 25.9% |
| Net investment income | $590.4 million | Up 7.5% | $1.72 billion | Up 7.9% |
| Aggregate investment spread | 2.75% | Up from 2.67% | 2.66% | Up from 2.62% |
| Operating cash flow | Not separately provided | Not clearly provided | $2.29 billion | Up from $586.2 million |
Net income was heavily affected by fair-value changes in derivatives and embedded derivatives, assumption updates, and deferred acquisition-cost and sales-inducement amortization. Non-GAAP operating income increased because it excludes or adjusts for several volatile items and is not a substitute for GAAP net income.
Total assets were $68.33 billion at September 30, 2019, compared with $61.63 billion at December 31, 2018. Stockholders’ equity increased to $4.13 billion from $2.40 billion, primarily reflecting $1.69 billion of other comprehensive income from unrealized investment gains.
Revenue, Profitability, Cash Flow, Debt and Liquidity
- Net annuity deposits increased 31% in the third quarter and 30% for the nine-month period, reaching $1.22 billion and $3.83 billion, respectively, after coinsurance.
- Average annuity account balances increased 5% to $52.7 billion in the third quarter and $52.0 billion for the nine-month period.
- Fixed maturity securities were $51.85 billion, or 91.4% of investments, at September 30, 2019. Approximately 98% of the portfolio was rated investment grade under NAIC designations.
- Cash and cash equivalents were $1.14 billion at the consolidated level. Parent-company cash was $57.7 million.
- Debt included $495.0 million of senior notes due 2027 and $243.3 million of subordinated debentures. Repurchase-agreement borrowings were $48.9 million at quarter-end.
- The company had a $150 million revolving credit facility with no borrowings outstanding, available through September 2021.
- The estimated risk-based capital ratio increased to 366% at September 30, 2019, from 360% at December 31, 2018.
- Net cash used in investing activities was $2.91 billion, principally reflecting purchases of fixed maturity securities, mortgage loans, derivatives and other investments. Financing activities provided $1.41 billion.
Material Changes Versus the Prior Comparable Period
- Third-quarter net income declined $131.9 million, while nine-month net income declined $378.3 million, despite stronger sales, investment income and operating income.
- Third-quarter derivative fair-value income fell to a $20.0 million loss from a $595.3 million gain in the prior-year quarter. For nine months, derivative fair-value income increased to $440.5 million from $276.4 million.
- Third-quarter embedded-derivative expense increased to $212.3 million from $383.7 million of expense in the prior-year presentation; for nine months, the expense was $1.31 billion versus a $585.5 million benefit in 2018.
- Interest-sensitive and index-product benefits increased 21% in the third quarter but decreased 34% for nine months, partly because of revisions to lifetime income benefit rider assumptions.
- Other comprehensive income was $1.69 billion for nine months, compared with a $781.9 million loss in 2018, reflecting substantially higher unrealized investment gains as interest rates declined and credit spreads tightened.
- Net OTTI losses recognized in operations declined to $0.1 million for the quarter and $1.3 million for nine months, compared with $14.4 million and $17.7 million, respectively, in 2018.
- The company lowered lapse assumptions and revised utilization assumptions for lifetime income benefit riders. These changes produced a reported $36.0 million decrease in net income but a $123.7 million benefit to non-GAAP operating income.
Guidance, Outlook, Risks and Unusual Items
No formal earnings or sales guidance is provided in the filing. Management expects continued growth in invested assets and non-GAAP operating income, but identifies the prolonged low-interest-rate environment as a significant headwind to investment spreads. Management stated that further portfolio realignment transactions during 2019 were unlikely because market conditions were not conducive.
- The company can reduce crediting rates toward guaranteed minimums and estimates approximately 59 basis points of potential cost-of-money reduction. Approximately 99% of annuity liabilities were subject to annual crediting-rate adjustment, while approximately 18% were already at minimum guaranteed rates.
- Lower interest rates, credit-spread changes, equity-market performance, policy lapses, withdrawals, competition, regulatory changes and investment impairments may materially affect results.
- A 10% increase in market interest rates, defined as 21 basis points at the reporting date, was estimated to reduce the fair value of fixed maturity securities by approximately $791.2 million and stockholders’ equity by approximately $359.4 million after specified offsets.
- The fair value of fixed index annuity embedded derivatives was $9.38 billion. A 100-basis-point increase in the applicable discount rates would reduce that fair value by approximately $902.0 million; a 100-basis-point decrease would increase it by approximately $1.1 billion, before related deferred-cost effects.
- The company had $173.3 million of commitments to fund commercial mortgage loans, $32.3 million of unfunded limited-partnership commitments and $138.5 million of unfunded fixed-maturity-security commitments.
- Management reported no material changes to previously disclosed risk factors other than the previously added securities-lending risk. Litigation and regulatory matters are monitored, but the filing does not identify a material accrued loss contingency.
- The company implemented an enhanced actuarial valuation system during the quarter. Management concluded that disclosure controls and procedures were effective as of September 30, 2019.
Most Important Facts for Investors to Verify
- Confirm that the filing corresponds to American Equity Investment Life Holding Company rather than American National Group Inc.
- Reconcile GAAP net income with non-GAAP operating income and understand the effects of derivative valuation, assumption unlocking and deferred-cost amortization.
- Assess sensitivity to interest rates, investment spreads, credit losses and the large fixed maturity and structured-securities portfolio.
- Review the assumptions supporting lifetime income benefit rider liabilities, lapse rates, utilization rates and embedded-derivative valuations.
- Verify insurance-subsidiary dividend capacity, statutory capital, RBC requirements and restrictions on transfers to the parent company.
- Evaluate liquidity against annuity surrenders, policyholder withdrawals, collateral requirements and the company’s investment commitments.