Business Context and Reporting Period
The filing is American Equity Investment Life Holding Company’s unaudited Form 10-Q for the three months ended March 31, 2023. The provided request metadata identifies American National Group Inc., but the filing’s registrant is American Equity Investment Life Holding Company; this entity mismatch should be verified.
The company specializes in fixed and fixed-index deferred annuities sold primarily through independent marketing organizations, agents, banks and broker-dealers. Management continued executing its “AEL 2.0” strategy, including expansion of private-asset investing, reinsurance activity and shareholder returns.
Key Financial Metrics
Unless otherwise noted, amounts are in thousands.
| Metric | Q1 2023 | Q1 2022 | Change or context |
|---|---|---|---|
| Total revenues | $662.5 million | $148.0 million | Improved primarily because prior-year derivative fair-value changes were substantially negative |
| Net income (loss) | $(155.9) million | $679.5 million | Material decline |
| Net income (loss) available to common stockholders | $(166.9) million | $668.5 million | EPS was $(2.00) versus $6.90 |
| Non-GAAP operating income available to common stockholders | $124.3 million | $107.1 million | Increased 16.1%; excludes volatile fair-value and investment items |
| Net investment income | $561.3 million | $567.4 million | Decreased 1% |
| Aggregate investment spread | 2.67% | 2.51% | Improved 16 basis points |
| Operating cash flow | $865.0 million | $99.9 million | Significant increase |
| Cash and cash equivalents at period end | $2.8 billion | $1.9 billion at Dec. 31, 2022 | Increased from year-end |
| Total assets | $74.5 billion | $73.2 billion at Dec. 31, 2022 | Increased 1.8% |
| Total stockholders’ equity | $2.6 billion | $2.4 billion at Dec. 31, 2022 | Increased, primarily due to other comprehensive income |
Annuity deposits before coinsurance were $1.37 billion, up 52% from $901.9 million in Q1 2022. Net deposits after coinsurance were $733.1 million, up 6%. Fixed-index annuity sales were $964.4 million, up 9% year over year. The company ceded $638.0 million of annuity deposits through coinsurance, including $228 million of flow multi-year guaranteed annuity business under an amended AeBe reinsurance agreement.
Average annuity account balances, net of ceded liabilities, declined 11.1% to $47.3 billion. The average yield on invested assets increased to 4.48% from 4.15%, while the aggregate cost of money increased to 1.81% from 1.64%.
The investment portfolio totaled $51.4 billion at March 31, 2023. Fixed maturity securities were $39.6 billion at fair value, mortgage loans were $7.2 billion, and private assets represented approximately $12.0 billion, or 24.2% of the investment portfolio. Approximately 98% of fixed maturity securities were investment grade.
Total debt consisted principally of $500 million of 5.0% senior notes due 2027 and a $300 million floating-rate term loan due 2027. Notes and loan payable were $790.4 million at March 31, 2023. The company also had $78.8 million of subordinated debentures and $100 million of FHLB funding agreements.
Material Changes Versus the Prior Comparable Period
- Net income available to common stockholders changed from $668.5 million of income to $166.9 million of loss. The primary drivers were unfavorable changes in embedded-derivative fair values, higher operating expenses, realized investment losses and slightly lower net investment income.
- Derivative fair-value changes swung to a $45.9 million gain from a $477.5 million loss. Embedded-derivative expense was $404.4 million versus a $1.394 billion benefit in Q1 2022, producing substantial period-to-period earnings volatility.
- Interest-sensitive and index-product benefits decreased to $57.9 million from $287.9 million, principally because index credits fell to $3.5 million from $224.4 million.
- Market-risk-benefit expense decreased modestly to $183.7 million from $191.9 million, reflecting reinsurance benefits, higher policy surrenders and lower lifetime-income-rider utilization effects, partly offset by higher interest rates.
- Other operating costs increased 28% to $74.0 million, driven by a strategic incentive award, stock-repurchase excise tax, legal expenses and software costs.
- Operating cash flow increased substantially, while investing activities generated $804.5 million of cash compared with a $2.446 billion use in Q1 2022. Financing activities used $811.4 million, including $293.2 million for treasury stock purchases.
- Accumulated other comprehensive loss improved by $709.8 million during the quarter, primarily from reduced unrealized investment losses as interest rates declined.
- The company repurchased 7.3 million common shares for approximately $293.2 million, including 4.8 million shares initially delivered under a $200 million accelerated share repurchase agreement. Approximately $276 million remained authorized at March 31, 2023.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal full-year earnings guidance in the filing. Management stated that other operating costs were expected to settle near $62.5 million per quarter for the foreseeable future. The filing cautions that first-quarter results are not necessarily indicative of full-year results.
- The company expects to benefit from retirement-income demand and continued annuity origination, while pursuing broader private-asset and investment-management capabilities.
- Management estimated that reducing discretionary crediting rates to contractual minimums could reduce the cost of money by approximately 83 basis points. Approximately 90% of annuity liabilities were subject to annual crediting-rate adjustment, and approximately 14% were at minimum guaranteed rates.
- Interest-rate, spread, equity-market, option-cost, lapse, withdrawal, mortality, credit, liquidity and counterparty assumptions materially affect earnings and capital. A 100-basis-point increase in discount rates used for fixed-index-annuity embedded derivatives would decrease their fair value by approximately $342.7 million; a 100-basis-point decrease would increase it by approximately $394.1 million.
- At March 31, 2023, fixed maturity securities had $4.5 billion of gross unrealized losses, although approximately 97% of such losses were on investment-grade securities. Management stated it did not intend, and was not required, to sell these securities before recovery of amortized cost, except for securities subject to recognized credit losses.
- Mortgage loans totaled $7.2 billion net of allowances, with $40.7 million over 90 days past due, primarily residential and agricultural loans. The mortgage-loan allowance for credit losses was $45.6 million.
- Unfunded commitments included approximately $442.6 million for mortgage loans, $0.8 billion to limited partnerships and $1.1 billion to fixed maturity securities. Litigation and regulatory matters are monitored; no specific material accrued contingency is quantified in the filing.
- Subsequent to quarter-end, management expected a loss on a regional-bank security. The security had a March 31 fair value of $24 million; a complete loss would reduce stockholders’ equity by approximately $16 million, net of tax.
- Risk disclosures highlight insurance and investment regulation, accounting changes, capital and rating requirements, reinsurance and counterparty performance, cybersecurity, climate-related risks, liquidity, market volatility and strained shareholder relations involving Brookfield Reinsurance.
- The company adopted long-duration insurance contract accounting guidance, ASU 2018-12, effective January 1, 2023. Prior-period amounts were recast, and the adoption materially affects presentation and volatility of policy liabilities, market-risk benefits, deferred acquisition costs and deferred sales inducements.
Important Facts for Investors to Verify
- Confirm that the intended issuer is American Equity Investment Life Holding Company rather than American National Group Inc.
- Reconcile GAAP net loss of $166.9 million attributable to common stockholders with non-GAAP operating income of $124.3 million, including the treatment of derivative, market-risk-benefit and realized-investment adjustments.
- Assess the sensitivity of earnings and equity to interest rates, embedded-derivative discount rates, equity markets, option costs, policyholder behavior and credit spreads.
- Review the quality, liquidity and concentration of the $51.4 billion investment portfolio, including $12.0 billion of private assets and $4.5 billion of unrealized fixed-maturity losses.
- Evaluate reinsurance dependence, including the AeBe and North End Re arrangements, ceded deposits and the effect of reinsurance on policyholder liabilities, earnings and liquidity.
- Verify the capacity and timing of the $200 million accelerated share repurchase settlement and the remaining $276 million authorization.
- Monitor the regional-bank security loss expected in Q2 2023, mortgage-loan delinquencies, unfunded commitments and the company’s ability to receive dividends from regulated insurance subsidiaries.
- Review the effect of ASU 2018-12 recast results when comparing 2023 with prior periods.