American Equity Investment Life pany(AEL) - 2021 Q2 - Quarterly Report

Part I: Financial Information Financial Statements This section presents the unaudited consolidated financial statements for American Equity Investment Life Holding Company, covering balance sheets, income, and cash flows, with detailed notes on accounting and investments Consolidated Financial Statements Overview For the six months ended June 30, 2021, the company reported a net income of $228.0 million, a significant turnaround from a net loss of $4.5 million in the prior-year period, with total assets growing to $73.9 billion Key Financial Highlights (Six Months Ended June 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | | Total Revenues | $2,037,647 | $596,245 | | Net Income (Loss) | $227,990 | $(4,482) | | Net Income (Loss) to Common Stockholders | $206,152 | $(17,043) | | EPS - Diluted | $2.15 | $(0.19) | Balance Sheet Summary | Account | June 30, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :--- | :--- | :--- | | Total Assets | $73,882,299 | $71,688,579 | | Total Liabilities | $67,586,564 | $65,339,591 | | Total Stockholders' Equity | $6,295,735 | $6,348,988 | Cash Flow Summary (Six Months Ended June 30) | Activity | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | | Net Cash from Operating Activities | $624,244 | $(327,896) | | Net Cash from Investing Activities | $450,516 | $777,846 | | Net Cash from Financing Activities | $1,353,983 | $(334,707) | | Increase in Cash | $2,428,743 | $115,243 | Note 2: Revision of Immaterial Misstatement The company corrected an immaterial error in its December 31, 2020 financial statements, impacting reserves, deferred costs, and comprehensive income, with no effect on operations or cash flows Impact of Revision on Dec 31, 2020 Balance Sheet (in thousands) | Account | As Reported | Adjustment | As Revised | | :--- | :--- | :--- | :--- | | Deferred policy acquisition costs | $2,045,812 | $179,387 | $2,225,199 | | Deferred sales inducements | $1,328,857 | $119,518 | $1,448,375 | | Policy benefit reserves | $61,768,246 | $584,636 | $62,352,882 | | Accumulated other comprehensive income | $2,429,285 | $(225,728) | $2,203,557 | Note 4: Investments As of June 30, 2021, the $46.7 billion fixed maturity portfolio was 97% investment grade, with gross unrealized losses significantly decreasing to $96.2 million Fixed Maturity Securities by NAIC Designation (Fair Value, June 30, 2021) | NAIC Designation | Fair Value (in thousands) | Percent of Total | | :--- | :--- | :--- | | 1 (Highest Quality) | $25,937,900 | 55.6% | | 2 (High Quality) | $19,387,062 | 41.6% | | Total Investment Grade | $45,324,962 | 97.2% | | 3 - 6 (Below Investment Grade) | $1,334,294 | 2.8% | | Total | $46,659,256 | 100.0% | - Gross unrealized losses on fixed maturity securities (net of allowance for credit losses) decreased from $250.8 million at Dec 31, 2020 to $96.2 million at June 30, 2021. 82% of these unrealized losses are on securities rated investment grade[90][93] Rollforward of Allowance for Credit Loss on Fixed Maturity Securities (Six Months Ended June 30, 2021, in thousands) | | Amount | | :--- | :--- | | Beginning Balance (Jan 1, 2021) | $64,771 | | Additions for credit losses | $816 | | Change in allowance on existing securities | $797 | | Reduction for securities sold | $(50,758) | | Recoveries | $(1,436) | | Ending Balance (June 30, 2021) | $14,190 | Note 5: Mortgage Loans on Real Estate The mortgage loan portfolio grew to $4.3 billion as of June 30, 2021, maintaining high credit quality with a decreased valuation allowance for credit losses Mortgage Loan Portfolio (Carrying Value) | Loan Type | June 30, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :--- | :--- | :--- | | Commercial | $3,435,972 | $3,553,359 | | Agricultural | $276,265 | $243,043 | | Residential | $587,708 | $369,087 | | Total | $4,299,945 | $4,165,489 | - As of June 30, 2021, the commercial mortgage loan portfolio had an average Loan-to-Value (LTV) ratio of 59%. The portfolio is diversified, with the largest property type concentrations in Retail (32.3%), Apartment (27.4%), and Industrial/Warehouse (26.3%)[117][130] - The portfolio's credit performance is strong, with no commercial mortgage loans past due as of June 30, 2021. The residential portfolio had $8.9 million in loans over 90 days past due or in non-accrual status[138] Note 7: Derivative Instruments The company uses derivatives, primarily call options, to hedge fixed index annuity risk, with $1.46 billion in derivative assets and $8.38 billion in embedded derivative liabilities Derivative Fair Values (in thousands) | Instrument | June 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Assets (Call Options) | $1,459,754 | $1,310,954 | | Liabilities (FIA Embedded Derivatives) | $8,384,764 | $7,938,281 | - The company held $1.4 billion in cash and other investments as collateral from derivative counterparties as of June 30, 2021, limiting the maximum economic loss due to credit risk to $31.5 million[152] - The notional amount of call options totaled $39.1 billion as of June 30, 2021, spread across multiple high-credit-quality counterparties like Bank of America, Barclays, and Canadian Imperial Bank of Commerce[151] Note 10: Stockholders’ Equity and Strategic Transactions This note details Brookfield's strategic equity investment and the company's $500 million share repurchase program, with 9.1 million shares repurchased as of June 30, 2021 - Brookfield Asset Management acquired a 9.9% equity interest for $37.00 per share and has an agreement for a second purchase of up to an additional 10.0%, pending regulatory approvals[165] - The Board approved a $500 million share repurchase program in October 2020. As of June 30, 2021, the company has repurchased 9.1 million shares for approximately $263 million[166][167] Management's Discussion and Analysis (MD&A) Management discusses financial performance, highlighting the 'AEL 2.0' strategy, increased annuity deposits, narrowed investment spread, and the investment portfolio's credit quality and liquidity Business Strategy and Profitability (AEL 2.0) The 'AEL 2.0' strategy aims to enhance shareholder value through go-to-market, investment management, capital structure, and foundational capabilities, with strong Q2 2021 progress - The AEL 2.0 strategy aims to shift the business model from a traditional investment spread business to a combination spread and fee-based model using externally sourced risk capital[177][180] - The company plans to increase its allocation to private assets to 30% or more over a multi-year journey, with $1-2 billion in private asset additions planned for 2021[183] - Key Q2 2021 achievements include reaching a reinsurance agreement with Brookfield, investing over $800 million in privately-sourced alpha assets, and revitalizing fixed index annuity sales[184][185] Results of Operations Analysis Q2 2021 saw annuity deposits surge 113% to $1.18 billion, while the investment spread narrowed to 1.95%, and non-GAAP operating income remained stable at $93.8 million Annuity Deposits by Quarter (in thousands) | Product Type | Q2 2021 | Q2 2020 | | :--- | :--- | :--- | | Fixed index annuities | $887,125 | $545,270 | | Multi-year fixed rate annuities | $275,871 | $1,114 | | Total before coinsurance | $1,180,257 | $558,801 | Investment Spread Comparison | Metric | Q2 2021 | Q2 2020 | | :--- | :--- | :--- | | Average yield on invested assets | 3.51% | 4.12% | | Aggregate cost of money | 1.56% | 1.73% | | Aggregate investment spread | 1.95% | 2.39% | Non-GAAP Operating Income Reconciliation (Q2, in thousands) | | Q2 2021 | Q2 2020 | | :--- | :--- | :--- | | Net income (loss) available to common stockholders | $(65,613) | $(253,379) | | Adjustments for fair value accounting, etc. | $159,401 | $346,483 | | Non-GAAP operating income available to common stockholders | $93,788 | $93,104 | Financial Condition Analysis The $53.6 billion investment portfolio, primarily fixed maturity securities and mortgage loans, maintains high credit quality with 97.9% investment grade fixed maturities and stable mortgage loan performance Investment Portfolio Composition (June 30, 2021) | Asset Class | Carrying Amount (in thousands) | Percent | | :--- | :--- | :--- | | Fixed maturity securities | $46,659,256 | 87.0% | | Mortgage loans on real estate | $4,299,945 | 8.0% | | Real estate | $258,237 | 0.5% | | Derivative instruments | $1,459,965 | 2.7% | | Other investments | $962,305 | 1.8% | | Total Investments | $53,639,708 | 100.0% | - The fixed maturity portfolio's credit quality is strong, with 97.9% of securities rated investment grade (Baa/BBB or higher) by NRSROs[231] - International exposure in the fixed maturity portfolio was 16.1% of carrying value, or $7.5 billion, all denominated in U.S. dollars. The vast majority of these securities are investment grade[255][256] Liquidity and Capital Resources The company maintains strong liquidity, with $382.1 million in parent cash, access to a $150 million credit line, and a robust 372% RBC ratio for its main insurance subsidiary - The parent holding company had cash and cash equivalents of $382.1 million at June 30, 2021[280] - American Equity Life can pay up to an additional $372.9 million in dividends in 2021 without prior approval from the Iowa Insurance Commissioner[277] - The company's main insurance subsidiary, American Equity Life, maintained a strong RBC ratio of 372% at December 31, 2020[279] Market Risk Disclosures The company's primary market risk is interest rate risk, managed through asset-liability matching and product design, with a 10% rate increase potentially decreasing fixed maturity fair value by $711.9 million - Interest rate risk is the primary market risk. A 10% (21 basis point) increase in interest rates would decrease the fair value of fixed maturity securities by approximately $711.9 million, resulting in a $311.5 million decrease in accumulated other comprehensive income[288] - As of June 30, 2021, approximately 18% of annuity liabilities were at their minimum guaranteed crediting rates, indicating some but not unlimited flexibility to lower interest costs further[289] - The company manages the cost of call options for its fixed index annuity business by adjusting caps, participation rates, and asset fees on policy anniversaries, subject to contractual minimums[291] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2021[293] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2021[294] Part II: Other Information Legal Proceedings The company is involved in litigation and regulatory matters, accruing for probable and estimable loss contingencies while continuously monitoring outcomes - The company is involved in litigation and regulatory matters in the normal course of business and accrues for losses when they are probable and estimable[157][158] Share Repurchases Under its $500 million share repurchase program, the company repurchased 3.6 million shares in H1 2021, with $237 million remaining available as of June 30, 2021 Share Repurchase Activity (Q2 2021) | Period | Total Shares Purchased | Average Price Paid ($) | | :--- | :--- | :--- | | April 2021 | 44,559 | $30.92 | | May 2021 | 557,293 | $30.92 | | June 2021 | 2,383,418 | $32.08 | - As of June 30, 2021, approximately $237 million remained available for purchase under the $500 million share repurchase program[299][300]