Business Context and Reporting Period
This Form 10-Q covers American Equity Investment Life Holding Company and subsidiaries for the quarter and nine months ended September 30, 2021. The company specializes in individual fixed and fixed-index deferred annuities distributed through independent marketing organizations, banks, broker-dealers and agents. The filing identifies the registrant as American Equity Investment Life Holding Company, not American National Group Inc.
Management is implementing its “AEL 2.0” strategy, which combines annuity origination, expanded private-asset investing, reinsurance, third-party capital and asset-management partnerships.
Key Financial Metrics
| Metric | Three months ended Sept. 30, 2021 | Three months ended Sept. 30, 2020 | Nine months ended Sept. 30, 2021 | Nine months ended Sept. 30, 2020 |
|---|---|---|---|---|
| Total revenues | $542.6 million | $798.7 million | $2.580 billion | $1.395 billion |
| Income before taxes | $197.6 million | $851.8 million | $488.4 million | $806.0 million |
| Net income | $152.9 million | $667.2 million | $380.9 million | $662.7 million |
| Net income available to common stockholders | $141.9 million | $661.3 million | $348.1 million | $644.2 million |
| Diluted EPS | $1.53 | $7.17 | $3.67 | $7.00 |
| Operating income available to common stockholders, non-GAAP | $79.5 million | $(249.8) million | $214.7 million | $(2.6) million |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $637.3 million | $355.2 million |
Investment spread was 2.40% in the third quarter and 2.16% for the first nine months, compared with 2.44% and 2.49%, respectively, in the prior-year periods. Average yield on invested assets declined to 3.91% for the quarter and 3.71% year to date, while aggregate cost of money declined to 1.51% and 1.55%.
- Total assets were $78.3 billion at September 30, 2021, versus $71.7 billion at December 31, 2020.
- Investments totaled $52.3 billion, including $45.7 billion of fixed-maturity securities and $4.3 billion of mortgage loans.
- Cash and cash equivalents were $12.7 billion, compared with $9.1 billion at year-end 2020.
- Policy benefit reserves were $64.8 billion, compared with $62.4 billion at year-end 2020.
- Stockholders’ equity was $6.4 billion, essentially unchanged from $6.3 billion at year-end 2020.
- Debt included $496.1 million of senior notes and $78.3 million of subordinated debentures.
- Approximately 97% of the fixed-maturity portfolio was investment grade at September 30, 2021.
Material Changes Versus Prior Comparable Period
- Net income available to common stockholders declined 79% in the third quarter and 46% year to date, primarily because the prior-year periods benefited from more favorable actuarial assumption updates and fair-value movements.
- Non-GAAP operating income improved to $79.5 million in the quarter and $214.7 million year to date, compared with losses in the prior-year comparable periods.
- Annuity deposits before coinsurance increased 128% in the quarter and 168% year to date. Net deposits after coinsurance increased 95% and 161%, respectively, driven by multi-year fixed-rate products and higher fixed-index annuity sales.
- Net investment income declined 3% in the quarter and 8% year to date because of lower asset yields and elevated cash balances.
- Interest-sensitive and index-product benefits increased 42% in the quarter and 73% year to date, primarily due to higher index credits.
- Other operating costs increased 32% in the quarter and 38% year to date, reflecting higher staffing, incentive compensation, consulting, technology and AEL 2.0 implementation costs.
- The company repurchased approximately 9.1 million common shares at an average price of $29.04 per share through September 30, 2021, fully offsetting shares issued to Brookfield under the company’s stated program.
Guidance, Outlook, Risks and Unusual Items
- Management targeted total 2021 annuity sales of $5 billion to $6 billion.
- Management expects operating costs to remain elevated during the transition and to settle in the high-$40 million range per quarter beginning in 2022, after refinancing existing reserve-financing facilities.
- The company expects to reduce excess cash following the North End Re transaction and invest amounts above target cash levels in fixed income and privately sourced assets. Its long-term goal is an allocation of approximately 30% to 40% to private assets.
- Effective July 1, 2021, the company entered into a Brookfield reinsurance arrangement covering approximately $4.3 billion of in-force fixed-index annuity liabilities and 75% of certain post-effective-date fixed-index annuity business. The transaction closed on October 8, 2021, after the balance-sheet date.
- The reinsurance arrangement generated a deferred gain of $292.9 million at September 30, 2021 and resulted in approximately $4.2 billion owed under related modco, trust and reinsurance arrangements. American Equity Life remains liable to policyholders if the reinsurer fails to perform.
- Brookfield held approximately 9.5% of common stock and had an agreement to acquire up to a 19.9% interest, subject to regulatory approvals and other conditions. The filing states that the pending investment could be terminated under specified circumstances.
- Key risks include interest-rate and credit-market movements, low investment yields, policyholder lapses and withdrawals, COVID-19 effects, competition, regulatory changes, reinsurance counterparty performance and the ability to maintain insurer financial-strength ratings.
- The company allowed its revolving credit facility to expire and planned to establish alternative financing arrangements to support AEL 2.0 initiatives and potential transactions.
- Management identified and revised an immaterial prior-period error affecting certain balance-sheet and comprehensive-income amounts; it had no impact on previously reported net income or cash flows.
Investor Verification Checklist
- Confirm the filing entity and ticker: the supplied filing is for American Equity Investment Life Holding Company, ticker AEL.
- Evaluate the sustainability of reported earnings after excluding volatile derivative fair-value changes, assumption updates and realized investment gains or losses.
- Assess the effect of the North End Re transaction on capital, liquidity, policyholder reserves, fee income and residual counterparty exposure.
- Monitor investment spread compression, cash redeployment, private-asset growth and credit-loss trends.
- Review Brookfield’s remaining equity investment rights, regulatory approvals and related governance or strategic implications.
- Verify the company’s planned replacement financing after expiration of the revolving credit facility and the resulting liquidity profile.
- Track annuity sales, surrender activity, lapse assumptions and lifetime-income-benefit-rider utilization, which materially affect future profitability.