Business Context and Reporting Period
Filing entity: The source filing identifies the registrant as American Equity Investment Life Holding Company, not American National Group Inc. This summary therefore reflects the filing text provided. The company primarily sells individual annuities, especially deferred fixed index annuities, and also sells life insurance. The report covers the three months ended March 31, 2014, with comparative results for the three months ended March 31, 2013. Financial statements are unaudited.
Key Financial Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenues | $445.5 million | $745.6 million | Down 40% |
| Net income (loss) | $(9.8) million | $26.0 million | Declined to a loss |
| Operating income, non-GAAP | $37.5 million | $33.5 million | Up 12% |
| Net income (loss) per diluted share | $(0.13) | $0.38 | Declined |
| Net investment income | $370.0 million | $329.7 million | Up 12% |
| Operating cash flow | $48.2 million | $369.6 million | Down substantially |
| Investment spread | 2.77% | 2.68% | Improved 9 basis points |
| Average invested assets, excluding derivatives | $30.0 billion | $26.4 billion | Up 14% |
Net annuity deposits after coinsurance were $870.7 million, compared with $887.3 million in the prior-year quarter. Average annuity liabilities outstanding increased 14% to $31.9 billion. Annuity deposits before coinsurance declined 1% year over year.
Total assets were $40.5 billion at March 31, 2014, compared with $39.6 billion at December 31, 2013. Stockholders’ equity increased to $1.65 billion from $1.38 billion, principally because of $286.2 million of other comprehensive income, driven by higher unrealized investment gains. Cash and cash equivalents declined to $679.2 million from $897.5 million.
Total liabilities were $38.9 billion, including $36.7 billion of policy benefit reserves. Notes payable were $521.8 million and subordinated debentures were $246.1 million. The company had no borrowings outstanding under its $140 million revolving credit facility at March 31, 2014.
Material Changes Versus the Prior Comparable Period
- GAAP results deteriorated primarily because derivative and embedded-derivative fair-value effects were materially less favorable than in Q1 2013. The change in fair value of derivatives declined to $48.5 million from $374.0 million, while the change in fair value of embedded derivatives declined to $92.6 million from $363.3 million.
- Interest-sensitive and index product benefits increased 42% to $317.2 million, including index credits of $230.4 million versus $135.3 million.
- Amortization of deferred sales inducements fell to $0.7 million from $28.8 million, and amortization of deferred policy acquisition costs fell to $7.2 million from $46.2 million, largely reflecting fair-value accounting adjustments.
- Net investment income rose 12%, although the average yield on invested assets declined to 4.95% from 5.01% because new investments carried lower yields.
- Operating cash flow fell to $48.2 million from $369.6 million, while investing cash outflows improved to $626.6 million from $1.27 billion. Financing cash flow was $360.0 million, including $54.6 million of debt repayments.
- Accumulated other comprehensive income increased to $332.4 million from $46.2 million. Net unrealized gains on available-for-sale securities increased substantially as interest rates declined.
Guidance, Outlook, Risks and Unusual Items
Management reiterated a goal of restoring the investment spread to 3.00%. The company stated that the prolonged low-interest-rate environment continues to pressure portfolio yields and reinvestment returns. Subsequent to March 31, 2014, it initiated additional renewal crediting-rate reductions affecting approximately $15 billion of policyholder funds; management estimated that the cost of money could decline by approximately 0.20% when fully implemented. Management indicated an average of 0.61% of additional rate-reduction capacity remained before minimum guaranteed rates would be reached across the book.
The company’s fixed maturity portfolio totaled $28.4 billion, with approximately 95% rated investment grade by NRSRO ratings and 98% classified as investment grade under NAIC designations. Gross unrealized losses on fixed maturity securities declined to $410.8 million from $861.4 million at year-end. The company reported $0.9 million of net OTTI losses in operations, compared with $3.2 million in Q1 2013.
Interest-rate risk is the primary market risk. Management estimated that a 10% increase in market interest rates, equal to approximately 36 basis points at March 31, 2014, would reduce the fair value of fixed maturity securities by approximately $936.4 million and reduce stockholders’ equity by approximately $235.8 million after applicable tax and deferred-cost adjustments.
The company extinguished $31.3 million principal amount of 2029 notes during the quarter, paying $54.6 million in cash and issuing 946,793 common shares. The transaction produced a $2.3 million after-tax loss on debt extinguishment. Subsequent to quarter-end, the company reported additional extinguishment of $1.9 million of 2029 notes and $32.5 million of 2015 notes.
A litigation liability related to the Los Angeles annuity-practices class action was reduced by $2.3 million during the quarter, and $7.8 million of plaintiffs’ legal fees were paid. The remaining estimated litigation liability was $11.1 million at March 31, 2014. A class member had appealed approval of the settlement, and the ultimate claims liability remained uncertain.
Other risks include competition in annuity sales, regulatory changes, credit losses and impairments, counterparty risk on derivatives, policyholder surrenders, limitations on dividends from insurance subsidiaries, and the effect of interest rates on investment spreads and policy liabilities. Management stated that disclosure controls and procedures were effective as of March 31, 2014, and that there were no material changes in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Confirm the correct registrant: the provided filing is for American Equity Investment Life Holding Company, while the request metadata names American National Group Inc.
- Reconcile the GAAP net loss of $9.8 million with non-GAAP operating income of $37.5 million, particularly the derivative and embedded-derivative fair-value adjustments.
- Assess sensitivity to continued low interest rates, reinvestment at lower yields, crediting-rate reductions, and the company’s ability to maintain or restore its 3.00% investment-spread target.
- Review liquidity and capital constraints, including the $140 million undrawn credit facility, the $195 million amount of dividends potentially available from American Equity Life without prior approval, and applicable risk-based-capital covenants.
- Evaluate the $410.8 million of unrealized investment losses, $0.9 million of current-period OTTI losses, mortgage-loan workout and collateral-dependent exposures, and derivative counterparty exposure.
- Monitor the $11.1 million litigation liability and the pending appeal, as well as subsequent debt repurchases and related cash and share issuance.