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AMERICAN EQUITY INVESTMENT LIFE HOLDING CO – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's discussion and analysis reviews our unaudited consolidated financial position atMarch 31, 2022 , and the unaudited consolidated results of operations for the three month periods endedMarch 31, 2022 and 2021, and where appropriate, factors that may affect future financial performance. This analysis should be read in conjunction with our unaudited consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q, and the audited consolidated financial statements, notes thereto and selected consolidated financial data appearing in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Interim operating results for the three months endedMarch 31, 2022 are not necessarily indicative of the results expected for the entire year. Preparation of financial statements requires use of management estimates and assumptions.
Cautionary Statement Regarding Forward-Looking Information
All statements, trend analysis and other information contained in this report and elsewhere (such as in filings by us with theSEC , press releases, presentations by us or management or oral statements) may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. Forward-looking statements give expectations or forecasts of future events and do not relate strictly to historical or current facts. They may relate to markets for our products, trends in our operations or financial results, strategic alternatives, future operations, strategies, plans, partnerships, investments, share buybacks and other financial developments. They use words and terms such as anticipate, assume, believe, can, continue, could, enable, estimate, expect, foreseeable, goal, improve, intend, likely, may, model, objective, opportunity, outlook, plan, potential, project, risk seek, should, strategy, sustainable, target, will, would, and other words and terms of similar meaning or that are otherwise tied to future periods or future performance, in each case in all forms of speech and derivative forms, or similar words, as well as any projections of future events or results. Forward-looking statements, by their nature, are subject to a variety of assumptions, risks, and uncertainties that could cause actual results to differ materially from the results projected. Many of these risks and uncertainties cannot be controlled by the Company. Factors that may cause our actual decisions or results to differ materially from those contemplated by these forward-looking statements include, among other things: • results differing from assumptions, estimates, and models. • interest rate condition changes. • investment losses or failures to grow as quickly as expected due to market, credit, liquidity, concentration, default, and other risks. • option costs increases. • counterparty credit risks. • third parties service-provider failures to perform or to comply with legal or regulatory requirements. • poor attraction and retention of customers or distributors due to competitors' greater resources, broader array of products, and higher ratings. • information technology and communication systems failures or security breaches. • credit or financial strength downgrades. • inability to raise additional capital to support our business and sustain our growth on favorable terms. •U.S. and global capital market and economic deterioration due to major public health issues, including the COVID-19 pandemic, political or social developments, or otherwise. • failure to authorize and pay dividends on our preferred stock. • subsidiaries' inability to pay dividends or make other payments to us. • failure at reinsurance, investment management, or third-party capital arrangements. • failure to prevent excessive risk-taking. • failure of policies and procedures to protect from operational risks. • increased litigation, regulatory examinations, and tax audits. • changes to laws, regulations, accounting, and benchmarking standards. • takeover or combination delays or deterrence by laws, corporate governance documents, or change-in-control agreements. • effects of climate changes, or responses to it. • failure of efforts to meet environmental, social, and governance standards and to enhance sustainability. For a detailed discussion of these and other factors that might affect our performance, see Item 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Forward-looking statements speak only as of the date the statement was made and the Company undertakes no obligation to update such forward-looking statements. There can be no assurance that other factors not currently disclosed or anticipated by the Company will not materially adversely affect our results of operations or plans. Investors are cautioned not to place undue reliance on any forward-looking statements made by us or on our behalf.
Our Business and Profitability
We specialize in the sale of individual annuities (primarily fixed and fixed
index deferred annuities) through independent marketing organizations ("IMOs"),
agents, banks and broker-dealers. Fixed and fixed index annuities are an
important product for Americans looking to fund their retirement needs as
annuities have the ability to provide retirees a paycheck for life.
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UnderU.S. GAAP, premium collections for deferred annuities are reported as deposit liabilities instead of as revenues. Similarly, cash payments to policyholders are reported as decreases in the liabilities for policyholder account balances and not as expenses. Sources of revenues for products accounted for as deposit liabilities are net investment income, surrender charges assessed against policy withdrawals and fees deducted from policyholder account balances for lifetime income benefit riders, net realized gains (losses) on investments and changes in fair value of derivatives. Components of expenses for products accounted for as deposit liabilities are interest sensitive and index product benefits (primarily interest credited to account balances and changes in the liability for lifetime income benefit riders), changes in fair value of embedded derivatives, amortization of deferred sales inducements and deferred policy acquisition costs, other operating costs and expenses and income taxes.
Our profitability depends in large part upon:
•the amount of assets under our management, •investment spreads we earn on our policyholder account balances, •our ability to manage our investment portfolio to maximize returns and minimize risks such as interest rate changes and defaults or credit losses, •our ability to appropriately price for lifetime income benefit riders offered on certain of our fixed rate and fixed index annuity policies, •our ability to manage interest rates credited to policyholders and costs of the options purchased to fund the annual index credits on our fixed index annuities, •our ability to manage the costs of acquiring new business (principally commissions paid to agents and distribution partners and bonuses credited to policyholders), •our ability to manage our operating expenses, and •income taxes. While the business looks considerably different today than it did when it was started back in 1995, the themes have been consistent. We offer our customers simple fixed and fixed index annuity products, which we primarily sell through independent insurance agents in the IMO distribution channel. We have consistently been a leader in the IMO market. We benefit from two secular trends: the demographic trends of people retiring or getting close to retirement who want to accumulate wealth through index based investing while protecting their principal and the need of retirees and pre-retirees to have a way to deaccumulate their wealth into income for life. A traditional brokerage based equity bond portfolio can't really meet these unique needs, but a fixed index annuity can as part of holistic financial plan. Finally, there is a scarcity value to what we do: that is originating billions of dollars of annuity funding each year at scale from the IMO channel, which is generally longer term funding than that achieved through sales in the bank and broker dealer channel. In the past decade, the fixed and fixed index annuity market has seen many new entrants and as a result has become more competitive. Adding to that, low interest rates have made it more difficult for traditional, core investment grade fixed income asset allocations to support return expectations on annuity liabilities. With these changes in the macro environment, we began to implement an updated strategy, referred to as AEL 2.0, after having undertaken a thorough review of our business in 2020. AEL 2.0 is designed to capitalize on the scarcity value of our annuity origination and couple it with an "open architecture" investment management platform for investing the annuity assets. Our approach to investment management is to partner with best in class investment management firms across a wide array of asset classes and capture part of the asset management value chain economics for our shareholders. This will enable us to operate at the intersection of both asset management and insurance. Our updated strategy focuses on four key pillars: Go-to-Market, Investment Management, Capital Structure and Foundational Capabilities.
During the first quarter of 2022, we continued to make significant progress in
the execution of the AEL 2.0 strategy. Key areas of progress include the
following:
•We transitioned the management of assets for ourBermuda reinsurer toConning, Inc. In addition, we continued to re-tool our investment management platform, expanded our underwriting and risk capital allocation lens for additional sectors, and expanded our capabilities in multi-family real estate investing through a new joint venture. We also continued to create and expand relationships with specialty asset managers to target certain sub-sectors and began leveraging those partnerships to invest in private assets. As ofMarch 31, 2022 , we have approximately$8.4 billion invested in private assets with a clear path to our goal of ramping to a 30% to 40% allocation to private assets over time. •We executed an agreement with North End Re (Cayman) SPC ("North End Re"), a wholly owned subsidiary of Brookfield Reinsurance to expand our income products that will fund the additional$6 billion in capacity that exists under the reinsurance treaty signed with North End Re in 2021.
•We repurchased 4.5 million shares of Company common stock at an average price
of
•We established a new five-year credit agreement for$300 million in unsecured delayed draw term loan commitments. This agreement is part of our plans for access to liquidity for general corporate purposes as we continue to implement AEL 2.0. There have been no loans drawn on this agreement to date. In the next few years, we expect to migrate to a capital efficient business model with increased fee-like earnings. We will scale our investments into higher returning private assets, grow reinsured liabilities to side-cars to grow return on asset earnings, and write new business that converts us from the traditional spread based return on equity model to a "fee like" return on assets model through reinsurance. 33
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During the first quarter of 2022, an additional 6,775,000 shares were issued to
Brookfield at
combined ownership to approximately 16% of the Company's common stock.
OnOctober 18, 2020 , the Company's Board of Directors approved a$500 million share repurchase program. OnNovember 19, 2021 , the Company's Board of Directors authorized the repurchase of an additional$500 million of Company common stock. The purpose of the share repurchase program is to both offset dilution from the issuance of shares to Brookfield and to institute a regular capital return program for shareholders. From the 2020 inception of the share repurchase program throughMarch 31, 2022 , we have repurchased approximately 13.6 million shares of our common stock at an average price of$32.73 per common share. ThroughApril 30, 2022 , we have repurchased approximately 15.3 million shares of our common shares at an average price of$33.43 per common share and have approximately$489 million remaining under our share repurchase program.
Earnings from products accounted for as deposit liabilities are primarily
generated from the excess of net investment income earned over the interest
credited or the cost of providing index credits to the policyholder, or the
"investment spread." Our investment spread is summarized as follows:
Three Months Ended
March 31,
2022 2021
Average yield on invested assets 4.15% 3.58%
Aggregate cost of money 1.64% 1.58%
Aggregate investment spread 2.51% 2.00%
Impact of:
Investment yield - additional prepayment income 0.03% 0.11%
Cost of money benefit from over hedging
0.03% 0.02%
The cost of money for fixed index annuities and average crediting rates for fixed rate annuities are computed based upon policyholder account balances and do not include the impact of amortization of deferred sales inducements. See Critical Accounting Policies - Deferred Policy Acquisition Costs and Deferred Sales Inducements included in Management's Discussion and Analysis in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . With respect to our fixed index annuities, the cost of money includes the average crediting rate on amounts allocated to the fixed rate strategy and expenses we incur to fund the annual index credits. Proceeds received upon expiration of call options purchased to fund annual index credits are recorded as part of the change in fair value of derivatives, and are largely offset by an expense for interest credited to annuity policyholder account balances. See Critical Accounting Policies - Policy Liabilities for Fixed Index Annuities and Financial Condition - Derivative Instruments included in Management's Discussion and Analysis in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Average yield on invested assets increased primarily as a result of strong returns on partnerships and other mark to market assets, lower cash balances and the ramp in private assets partly offset by lower prepayment income. See Net investment income. The aggregate cost of money increased primarily due to an increase in options costs as compared to the prior period. We have the flexibility to reduce our crediting rates if necessary and could decrease our cost of money by approximately 68 basis points if we reduce current rates to guaranteed minimums. 34
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Results of Operations for the Three Months Ended
Annuity deposits by product type collected during the three months ended
Three Months Ended
March 31,
2022 2021
(Dollars in thousands)
Fixed index annuities
$ 755,980 $ 516,995 Annual reset fixed rate annuities 1,062 2,167 Multi-year fixed rate annuities 2,345 787,192 Single premium immediate annuities 13,453 13,959 772,840 1,320,313Eagle Life Insurance Company : Fixed index annuities 126,754 148,836 Annual reset fixed rate annuities 7 162 Multi-year fixed rate annuities 2,340 965,425 129,101 1,114,423
Consolidated:
Fixed index annuities 882,734 665,831 Annual reset fixed rate annuities 1,069 2,329 Multi-year fixed rate annuities 4,685 1,752,617 Single premium immediate annuities 13,453 13,959 Total before coinsurance ceded 901,941 2,434,736 Coinsurance ceded 213,563 3,048 Net after coinsurance ceded $
688,378
Annuity deposits before and after coinsurance ceded decreased 63% and 72%, respectively, during the first quarter of 2022 compared to the same period in 2021. The decrease in sales for the three months endedMarch 31, 2022 compared to the same period in 2021 was driven by a reduction in sales of multi-year fixed rate annuity products at bothAmerican Equity Life and Eagle Life. Sales of fixed index annuities increased by 33% as compared to the same period in 2021. The growth in fixed index annuity sales follows the product refreshes at bothAmerican Equity Life and Eagle Life during the second half of 2021. Our 2022 sales strategy is to focus on sales of fixed index annuities. Prior toJanuary 1, 2021 , we had been ceding 80% of the annuity deposits received from certain multi-year rate guaranteed annuities and 20% of certain fixed index annuities sold by Eagle Life through broker/dealers and banks to an unaffiliated reinsurer. BeginningJanuary 1, 2021 , no new business is being ceded to the unaffiliated reinsurer. EffectiveJuly 1, 2021 , we ceded 100% of an in-force block of fixed index annuities and began ceding 75% of certain fixed index annuities issued afterJuly 1, 2021 to North End Re which caused the increase in coinsurance ceded premiums for the three months endedMarch 31, 2022 compared to the same period in 2021. Net income available to common stockholders increased to$555.3 million in the first quarter of 2022 compared to$271.8 million for the same period in 2021. The increase in net income available to common stockholders for the three months endedMarch 31, 2022 was driven primarily by an increase in net investment income, a decrease in the change in fair value of embedded derivatives and a decrease in interest sensitive and index product benefits. These changes were offset by a decrease in the change in fair value of derivatives and increases in amortization of deferred sales inducements and deferred policy acquisition costs. Net income available to common stockholders for the three months endedMarch 31, 2022 was positively impacted by an increase in the aggregate investment spread as previously noted. Net income, in general, is impacted by the volume of business in force and the investment spread earned on this business. The average amount of annuity account balances outstanding (net of annuity liabilities ceded under coinsurance agreements) decreased 3% to$53.2 billion for the first quarter of 2022 compared to$54.9 billion for the same period in 2021. Our investment spread measured in dollars was$346.4 million for the first quarter of 2022 compared to$275.6 million for the same period in 2021. Investment income for the first quarter of 2022 was positively impacted by strong returns on partnerships and other mark to market assets, lower cash balances and the ramp in private assets. Our investment spread has been negatively impacted by the extended low interest rate environment and by holding higher levels of cash and cash equivalents (see Net investment income). The higher levels of cash and cash equivalent holdings decreased in the fourth quarter of 2021 and the first quarter of 2022 with the execution of the reinsurance treaty with North End Re and the investment of cash balances above our target levels. 35
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Net income is also impacted by the change in fair value of derivatives and embedded derivatives, which fluctuates from period to period based upon changes in fair values of call options purchased to fund the annual index credits for fixed index annuities and changes in interest rates used to discount the embedded derivative liability. Net income for the three months endedMarch 31, 2022 was positively impacted by a decrease in expected index credits on the next policy anniversary dates resulting from decreases in the fair value of the call options acquired to fund these index credits and a net increase in the discount rates use to estimate the fair value of our embedded derivative liabilities, the impact of which was partially offset by increases in amortization of deferred policy acquisition costs and deferred sales inducements related to the change in fair value of derivatives and embedded derivatives. Net income for the three months endedMarch 31, 2021 was positively impacted by a net increase in the discount rates used to estimate the fair value of our embedded derivative liabilities, the impact of which was partially offset by increases in amortization of deferred policy acquisition costs and deferred sales inducements related to the change in fair value of derivatives and embedded derivatives. See Change in fair value of derivatives, Change in fair value of embedded derivatives, Amortization of deferred sales inducements and Amortization of deferred policy acquisition costs. Non-GAAP operating income available to common stockholders, a non-GAAP financial measure, increased to$89.9 million in the first quarter of 2022 compared to$41.4 million for the same period in 2021. In addition to net income available to common stockholders, we have consistently utilized non-GAAP operating income available to common stockholders, a non-GAAP financial measure commonly used in the life insurance industry, as an economic measure to evaluate our financial performance. Non-GAAP operating income available to common stockholders equals net income available to common stockholders adjusted to eliminate the impact of items that fluctuate from quarter to quarter in a manner unrelated to core operations, and we believe measures excluding their impact are useful in analyzing operating trends. The most significant adjustments to arrive at non-GAAP operating income available to common stockholders eliminate the impact of fair value accounting for our fixed index annuity business and are not economic in nature but rather impact the timing of reported results. We believe the combined presentation and evaluation of non-GAAP operating income available to common stockholders together with net income available to common stockholders provides information that may enhance an investor's understanding of our underlying results and profitability. Non-GAAP operating income available to common stockholders is not a substitute for net income available to common stockholders determined in accordance with GAAP. The adjustments made to derive non-GAAP operating income available to common stockholders are important to understand our overall results from operations and, if evaluated without proper context, non-GAAP operating income available to common stockholders possesses material limitations. As an example, we could produce a low level of net income available to common stockholders or a net loss available to common stockholders in a given period, despite strong operating performance, if in that period we experience significant net realized losses from our investment portfolio. We could also produce a high level of net income available to common stockholders in a given period, despite poor operating performance, if in that period we generate significant net realized gains from our investment portfolio. As an example of another limitation of non-GAAP operating income available to common stockholders, it does not include the decrease in cash flows expected to be collected as a result of credit losses on financial assets. Therefore, our management reviews net realized investment gains (losses) and analyses of our net investment income, including impacts related to credit losses, in connection with their review of our investment portfolio. In addition, our management examines net income available to common stockholders as part of their review of our overall financial results. The adjustments made to net income available to common stockholders to arrive at non-GAAP operating income available to common stockholders for the three months endedMarch 31, 2022 and 2021 are set forth in the table that follows: Three Months Ended March 31, 2022 2021 (Dollars in thousands) Reconciliation from net income available to common stockholders to non-GAAP operating income available to common stockholders: Net income available to American Equity Investment Life Holding Company common stockholders$ 555,304 $ 271,765
Adjustments to arrive at non-GAAP operating income available
to common stockholders:
Net realized losses on financial assets, including credit
losses
10,285 3,516 Change in fair value of derivatives and embedded derivatives (603,354) (297,634) Income taxes 127,661 63,794 Non-GAAP operating income available to common stockholders$ 89,896 $ 41,441 The amounts disclosed in the reconciliation above are presented net of related adjustments to amortization of deferred sales inducements and deferred policy acquisition costs and accretion of lifetime income benefit rider reserves where applicable. The increase in non-GAAP operating income available to common stockholders for the three months endedMarch 31, 2022 compared to the same period in 2021 was primarily attributable to an increase in aggregate investment spread as previously noted. The increase in investment spread was partially offset by a greater increase in the liability for future benefits to be paid for lifetime income benefit riders and an increase in other operating costs and expenses during the three months endedMarch 31, 2022 compared to the same period in 2021. See Net investment income, Interest sensitive and index product benefits and Other operating costs and expenses. 36
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Annuity product charges (surrender charges assessed against policy withdrawals and fees deducted from policyholder account balances for lifetime income benefit riders) decreased 13% to$52.4 million in the first quarter of 2022 compared to$60.1 million for the same period in 2021. The components of annuity product charges are set forth in the table that follows: Three Months Ended March 31, 2022 2021 (Dollars in thousands) Surrender charges$ 15,541 $ 19,481 Lifetime income benefit riders (LIBR) fees 36,814 40,601 $
52,355
Withdrawals from annuity policies subject to surrender
charges
$
267,336
Average surrender charge collected on withdrawals subject
to surrender charges
5.8 % 7.5 % Fund values on policies subject to LIBR fees$ 4,558,943 $ 5,304,479 Weighted average per policy LIBR fee 0.81 % 0.77 % The decrease in annuity product charges is attributable to lower average surrender charges collected on withdrawals subject to surrender charges and a decrease in fees assessed for lifetime income benefit riders due to a smaller volume of business in force subject to the fee slightly offset by an increase in the average fees being charged as compared to the prior period. The smaller volume of business subject to the fee is primarily due to the execution of the North End Re reinsurance treaty which was effective onJuly 1, 2021 . See Interest sensitive and index product benefits below for corresponding expense recognized on lifetime income benefit riders. Net investment income increased 14% to$567.4 million in the first quarter of 2022 compared to$497.2 million for the same period in 2021. The increase was principally attributable to an increase in the average yield earned on average invested assets during the three months endedMarch 31, 2022 compared to the same period in 2021.. Average invested assets excluding derivative instruments (on an amortized cost basis) decreased 2% to$54.7 billion for the first quarter of 2022 compared to$55.7 billion for the same period in 2021. The average yield earned on average invested assets was 4.15% for the first quarter of 2022 compared to 3.58% for the same period in 2021. The increase in yield earned on average invested assets for the three months endedMarch 31, 2022 compared to the same period in 2021 was primarily due to strong returns on partnerships and other mark to market assets, lower average cash balances and the ramp in private assets partly offset by lower prepayment income. Cash and cash equivalents holdings averaged$1.7 billion during the three months endedMarch 31, 2022 , compared to$8.6 billion during the three months endedMarch 31, 2021 . As ofMarch 31, 2022 , we held approximately$576 million of cash and cash equivalents in our investment portfolios which is towards the low end of our stated target portfolio allocation of 1% to 2% of our investment portfolio in cash and cash equivalents. The expected return on investments purchased during the three months endedMarch 31, 2022 was 3.58%, net of third-party investment management expenses, including$887 million of privately sourced assets with an expected return of 5.41%. Change in fair value of derivatives primarily consists of call options purchased to fund annual index credits on fixed index annuities. The components of change in fair value of derivatives are as follows: Three Months Ended March 31, 2022 2021 (Dollars in thousands) Call options:
Gain on option expiration $
51,787
Change in unrealized gains/losses (530,235) 218,210
Warrants 929 29
$ (477,519) $ 396,305
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The differences between the change in fair value of derivatives between periods for call options are primarily due to the performance of the indices upon which our call options are based which impacts the level of gains on call option expirations, the fair values of those call options and changes in the fair values of those call options between periods. The change in gain on option expiration and unrealized gains/losses on call options for the three months endedMarch 31, 2022 compared to the same period in 2021 is due to equity market performance in the first quarter of 2022 compared to the same period in 2021. A substantial portion of our call options are based upon the S&P 500 Index with the remainder based upon other equity and bond market indices. The range of index appreciation (after applicable caps, participation rates and asset fees) for options expiring during the three months endedMarch 31, 2022 and 2021 is as follows: Three Months Ended March 31, 2022 2021 S&P 500 Index Point-to-point strategy 0.6% - 12.5% 0.0% - 42.6% Monthly average strategy 1.0% - 8.6% 0.0% - 29.4% Monthly point-to-point strategy 0.0% - 12.9% 0.0% - 21.7% Volatility control index point-to-point strategy 0.0% - 7.3% 0.0% - 8.1% Fixed income (bond index) strategies 0.0% - 5.1% 0.0% - 10.0% The change in fair value of derivatives is also influenced by the aggregate cost of options purchased. The aggregate cost of options for the three months endedMarch 31, 2022 was higher than for the same period in 2021 as option costs increased during the first quarter of 2022. The aggregate cost of options is also influenced by the amount of policyholder funds allocated to the various indices and market volatility which affects option pricing. See Critical Accounting Policies - Policy Liabilities for Fixed Index Annuities included in Management's Discussion and Analysis in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Net realized gains (losses) on investments includes gains and losses on the sale of securities and other investments and changes in allowances for credit losses on our securities and mortgage loans on real estate. Net realized gains (losses) on investments fluctuate from year to year primarily due to changes in the interest rate and economic environment and the timing of the sale of investments. See Note 3 - Investments and Note 4 - Mortgage Loans on Real Estate to our unaudited consolidated financial statements and Financial Condition - Credit Losses for a detailed presentation of the types of investments that generated the gains (losses) as well as discussion of credit losses on our securities recognized during the periods presented and Financial Condition - Investments and Note 4 - Mortgage Loans on Real Estate to our unaudited consolidated financial statements for discussion of credit losses recognized on mortgage loans on real estate. Securities sold at losses are generally due to our long-term fundamental concern with the issuers' ability to meet their future financial obligations or to improve our risk or duration profiles as they pertain to our asset liability management. Other revenue was$8.6 million for the three months endedMarch 31, 2022 and primarily consists of$2.9 million related to asset liability management fees and$5.7 million of amortization related to the deferred gain associated with the cost of reinsurance. Both of these items are associated with theNorth End Re reinsurance treaty which was effectiveJuly 1, 2021 . Interest sensitive and index product benefits decreased 22% to$372.7 million in the first quarter of 2022 compared to$476.6 million for the same period in 2021. The components of interest sensitive and index product benefits are summarized as follows: Three Months Ended March 31, 2022 2021 (Dollars in thousands) Index credits on index policies$ 224,385 $ 345,737
Interest credited (including changes in minimum guaranteed
interest for fixed index annuities)
62,791 58,123
Lifetime income benefit riders 85,486 72,735
$ 372,662 $ 476,595
The decrease in index credits for the three months ended March 31, 2022 compared
to the same period in 2021 was due to changes in the level of appreciation of
the underlying indices (see discussion above under Change in fair value of
derivatives) and the amount of funds allocated by policyholders to the
respective index options. Total proceeds received upon expiration of the call
options purchased to fund the annual index credits were $228.1 million for the
three months ended March 31, 2022 , compared to $349.1 million for the same
period in 2021. The increase in interest credited for the three months ended
March 31, 2022 compared to the same period in 2021 was due to increases in
single premium deferred annuity products that receive a fixed rate of interest
partially offset by a reduction in interest credited to funds allocated to the
fixed option within our fixed index annuities due to a decrease in the net
average balance allocated to the fixed option. The increase in benefits
recognized for lifetime income benefit riders for the three months ended
March 31, 2022 compared to the same period in 2021 was primarily due to the
impact on the calculation of the lifetime income benefit rider reserve of actual
results compared to expected results for items such as gross profits, lifetime
income benefit rider election rates and the level of index credits. The net
impact of updating expected results with actual results led to a larger increase
in the lifetime income benefit rider reserve for the three months ended March
31, 2022 compared to the same period in 2021. This was partially offset by a
decrease in fund value of policies with lifetime income benefit riders as a
result of the North End Re reinsurance treaty, which correlates to the decrease
in fees discussed in Annuity product charges.
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The liability (net of coinsurance ceded) for lifetime income benefit riders was$2.5 billion and$2.8 billion atMarch 31, 2022 andDecember 31, 2021 , respectively which includes the impact of unrealized gains and losses on available for sale securities on the liability for lifetime income benefit riders of$64.6 million and$482.8 million atMarch 31, 2022 andDecember 31, 2021 , respectively. Amortization of deferred sales inducements is based on historical, current and future expected gross profits. The changes in amortization from period to period are the result of differences in actual gross profits compared to expected or modeled gross profits and changes to the underlying business. The increase in amortization after gross profit adjustments for the three months endedMarch 31, 2022 compared to the same period in 2021 was primarily due to an increase in actual gross profits for the three months endedMarch 31, 2022 compared to the same period in 2021. Bonus products represented 64% and 75% of our net annuity account values atMarch 31, 2022 andMarch 31, 2021 , respectively. The amount of amortization is affected by amortization associated with fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business and amortization associated with net realized gains (losses) on investments. Fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business creates differences in the recognition of revenues and expenses from derivative instruments including the embedded derivative liabilities in our fixed index annuity contracts. The change in fair value of the embedded derivatives will not correspond to the change in fair value of the derivatives (purchased call options), because the purchased call options are one-year options while the options valued in the fair value of embedded derivatives cover the expected lives of the contracts which typically exceed ten years.
Amortization of deferred sales inducements is summarized as follows:
Three Months Ended
March 31,
2022 2021
(Dollars in thousands)
Amortization of deferred sales inducements before gross
profit adjustments
$ 53,184 $ 53,187
Gross profit adjustments:
Fair value accounting for derivatives and embedded
derivatives
91,337 70,245 Net realized losses on investments (976) (457)
Amortization of deferred sales inducements after gross
profit adjustments
$ 143,545 $ 122,975 Change in fair value of embedded derivatives includes changes in the fair value of our fixed index annuity embedded derivatives (see Note 6 - Derivative Instruments to our unaudited consolidated financial statements). The components of change in fair value of embedded derivatives are as follows: Three Months Ended March 31, 2022 2021 (Dollars in thousands) Fixed index annuities - embedded derivatives $
(1,308,123)
Other changes in difference between policy benefit reserves
computed using derivative accounting vs. long-duration
contracts accounting
116,918 94,708
Reinsurance related embedded derivative (202,444) -
$ (1,393,649) $ (282,413)
The change in fair value of the fixed index annuity embedded derivatives
resulted from (i) changes in the expected index credits on the next policy
anniversary dates, which are related to the change in fair value of the call
options acquired to fund those index credits discussed above in Change in fair
value of derivatives; (ii) changes in the expected annual cost of options we
will purchase in the future to fund index credits beyond the next policy
anniversary; (iii) changes in the discount rates used in estimating our embedded
derivative liabilities; and (iv) the growth in the host component of the policy
liability. The amounts presented as "Other changes in difference between policy
benefit reserves computed using derivative accounting vs. long-duration
contracts accounting" represent the total change in the difference between
policy benefit reserves for fixed index annuities computed under the derivative
accounting standard and the long-duration contracts accounting standard at each
balance sheet date, less the change in fair value of our fixed index annuities
embedded derivative. See Critical Accounting Policies - Policy Liabilities for
Fixed Index Annuities included in Management's Discussion and Analysis in our
Annual Report on Form 10-K for the year ended December 31, 2021 .
The primary reason for the decrease in the change in fair value of the fixed
index annuity embedded derivatives during the three months ended March 31, 2022
compared to the same period of 2021 was due to a decrease in expected index
credits on the next policy anniversary dates resulting from a decrease in the
fair value of the call options acquired to fund the index credits during the
three months ended March 31, 2022 compared to an increase in the expected index
credits resulting from an increase in the fair value of the call options
acquired to fund these index credits during the three months ended March 31,
2021 and a larger increase in the net discount rate during the three months
ended March 31, 2022 compared to the same period in 2021. The discount rates
used in estimating our embedded derivative liabilities fluctuate based on the
changes in the general level of risk free interest rates and our own credit
spread.
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The reinsurance agreement executed in 2021 with North End Re to cede certain fixed index annuity product liabilities on a modified coinsurance basis contains an embedded derivative. The fair value of this embedded derivative is based on the unrealized gains and losses of the underlying assets held in the modified coinsurance portfolio which decreased during the three months endedMarch 31, 2022 . See Note 6 - Derivative Instruments for discussion on this embedded derivative. Amortization of deferred policy acquisition costs is based on historical, current and future expected gross profits. The changes in amortization from period to period are the result of differences in actual gross profits compared to expected or modeled gross profits and changes to the underlying business. The increase in amortization after gross profit adjustments for the three months endedMarch 31, 2022 compared to the same period in 2021 was primarily due to an increase in actual gross profits for the three months endedMarch 31, 2022 compared to the same period in 2021. The amount of amortization is affected by amortization associated with fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business and amortization associated with net realized gains (losses) on investments. As discussed above, fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business creates differences in the recognition of revenues and expenses from derivative instruments including the embedded derivative liabilities in our fixed index annuity contracts.
Amortization of deferred policy acquisition costs is summarized as follows:
Three Months Ended
March 31,
2022 2021
(Dollars in thousands)
Amortization of deferred policy acquisition costs before
gross profit adjustments
$ 74,633 $ 78,657
Gross profit adjustments:
Fair value accounting for derivatives and embedded
derivatives
152,516 125,920 Net realized losses on investments (1,723) (754)
Amortization of deferred policy acquisition costs after
gross profit adjustments
$ 225,426 $ 203,823 Other operating costs and expenses increased 4% to$58.1 million in the first quarter of 2022 compared to$55.9 million for the same period in 2021 and are summarized as follows: Three Months Ended March 31, 2022 2021 (Dollars in thousands) Salary and benefits$ 36,187 $ 27,953 Risk charges 2,880 12,042 Other 19,053 15,870 Total other operating costs and expenses$ 58,120 $ 55,865 Salary and benefits for the three months endedMarch 31, 2022 increased$8.2 million compared to the same period in 2021. This increase was primarily a result of an increase in salary and benefits of$6.3 million and an increase of$1.7 million related to expense recognized under our equity and cash incentive compensation programs ("incentive compensation programs") for the three months endedMarch 31, 2022 compared to the same period in 2021. The increase in salary and benefits was primarily due to an increased number of employees related to our continued growth and implementation of AEL 2.0. The increase in expenses related to our incentive compensation programs was primarily due to an increase in the expected payouts due to a larger number of employees participating in the programs. Risk charges decreased for the three months endedMarch 31, 2022 compared to the same period in 2021. The decrease in risk charge expense for the three months endedMarch 31, 2022 is due to the recapture of an existing reinsurance agreement which was replaced with a new agreement with a lower risk charge. Other expenses increased for the three months endedMarch 31, 2022 compared to the same period in 2021 primarily as a result of increases in travel and agent conference related expenses as we continue to emerge from the COVID-19 pandemic, non-deferrable marketing and sales expenses, depreciation and maintenance expenses primarily related to software and hardware assets and premium taxes. We expect the level of other operating costs and expenses to settle into the$60 million per quarter range for the foreseeable future as we continue to execute on the AEL 2.0 strategy. Income tax expense was$155.1 million in the first quarter of 2022 compared to$78.5 million for the same period in 2021. The changes in income tax expense were primarily due to changes in income before income taxes as well as changes in the effective income tax rates. The effective income tax rates were 21.5% and 21.7% for the three months endedMarch 31, 2022 and 2021, respectively. 40
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Income tax expense and the resulting effective tax rate are based upon two
components of income (loss) before income taxes ("pretax income") that are taxed
at different tax rates. Life insurance income is generally taxed at a statutory
rate of approximately 21.5% reflecting the absence of state income taxes for
substantially all of the states that the life insurance subsidiaries do business
in. The income (loss) for the parent company and other non-life insurance
subsidiaries (the "non-life insurance group") is generally taxed at a statutory
tax rate of 28.7% reflecting the combined federal and state income tax rates.
The effective income tax rates resulting from the combination of the income tax
provisions for the life and non-life sources of income (loss) vary from period
to period based primarily on the relative size of pretax income from the two
sources.
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Table of Contents Financial Condition Investments Our investment strategy is to maximize current income and total investment return through active management while maintaining a responsible asset allocation strategy containing high credit quality investments and providing adequate liquidity to meet our cash obligations to policyholders and others. Our investment strategy is also reflective of insurance statutes, which regulate the type of investments that our life subsidiaries are permitted to make and which limit the amount of funds that may be used for any one type of investment. As previously noted, as part of our AEL 2.0 investment pillar, we intend to ramp up our allocation to private assets in part by partnering with proven asset managers in our focus expansion sectors of commercial real estate, residential real estate including mortgages and single family rental homes, infrastructure debt and equity, middle market lending and lending to revenue, technology and software sector companies.
The composition of our investment portfolio is summarized as follows:
March 31, 2022 December 31, 2021
Carrying Carrying
Amount Percent Amount Percent
(Dollars in thousands)
Fixed maturity securities:
United States Government full faith and
credit $ 38,666 0.1 % $ 37,793 0.1 %
United States Government sponsored
agencies 174,845 0.3 % 1,040,953 1.7 %
United States municipalities, states and
territories 3,812,510 6.5 % 3,927,201 6.5 %
Foreign government obligations 405,166 0.7 % 402,545 0.7 %
Corporate securities 33,873,527 57.8 % 34,660,234 57.4 %
Residential mortgage backed securities 1,210,559 2.1 % 1,125,049 1.9 %
Commercial mortgage backed securities 4,769,867 8.1 % 4,840,311 8.0 %
Other asset backed securities 5,376,980 9.2 % 5,271,857 8.7 %
Total fixed maturity securities 49,662,120 84.8 % 51,305,943 85.0 %
Mortgage loans on real estate 5,734,872 9.8 % 5,687,998 9.4 %
Real estate investments 510,188 0.9 % 337,939 0.6 %
Derivative instruments 642,413 1.1 % 1,277,480 2.1 %
Other investments 1,999,113 3.4 % 1,767,144 2.9 %
$ 58,548,706 100.0 % $ 60,376,504 100.0 %
Our fixed maturity security portfolio is managed to minimize risks such as interest rate changes and defaults or credit losses while earning a sufficient and stable return on our investments. The largest portion of our fixed maturity securities are in investment grade (typically NAIC designation 1 or 2) publicly traded or privately placed corporate securities.
A summary of our fixed maturity securities by NRSRO ratings is as follows:
March 31, 2022 December 31, 2021
Carrying Percent of Fixed Carrying Percent of Fixed
Rating Agency Rating Amount Maturity Securities Amount Maturity Securities
(Dollars in thousands)
Aaa/Aa/A $ 27,771,213 55.9 % $ 28,275,431 55.2 %
Baa 20,986,780 42.3 % 21,875,939 42.6 %
Total investment grade 48,757,993 98.2 % 50,151,370 97.8 %
Ba 711,175 1.4 % 930,384 1.8 %
B 104,496 0.2 % 118,065 0.2 %
Caa 32,177 0.1 % 39,354 0.1 %
Ca and lower 56,279 0.1 % 66,770 0.1 %
Total below investment grade 904,127 1.8 % 1,154,573 2.2 %
$ 49,662,120 100.0 % $ 51,305,943 100.0 %
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The NAIC's Securities Valuation Office ("SVO") is responsible for the day-to-day
credit quality assessment of securities owned by state regulated insurance
companies. The purpose of such assessment and valuation is for determining
regulatory capital requirements and regulatory reporting. Insurance companies
report ownership to the SVO when such securities are eligible for regulatory
filings. The SVO conducts credit analysis on these securities for the purpose of
assigning a NAIC designation and/or unit price. Typically, if a security has
been rated by an NRSRO, the SVO utilizes that rating and assigns a NAIC
designation based upon the following system:
NAIC Designation NRSRO Equivalent Rating
1 Aaa/Aa/A
2 Baa
3 Ba
4 B
5 Caa
6 Ca and lower
The NAIC introduced 20 NAIC designation modifiers that are applied to each NAIC
designation to determine a security's NAIC designation category. New risk-based
capital charges for each of the 20 designated categories for reporting were
effective beginning December 31, 2021 .
For most of the bonds held in our portfolio the NAIC designation matches the
NRSRO equivalent rating. However, for certain loan-backed and structured
securities, as defined by the NAIC, the NAIC rating is not always equivalent to
the NRSRO rating presented in the previous table. The NAIC has adopted revised
rating methodologies for certain loan-backed and structured securities comprised
of non-agency residential mortgage backed securities ("RMBS") and commercial
mortgage backed securities ("CMBS"). The NAIC's objective with the revised
rating methodologies for these structured securities is to increase the accuracy
in assessing expected losses and use the improved assessment to determine a more
appropriate capital requirement for such structured securities. The revised
methodologies reduce regulatory reliance on rating agencies and allow for
greater regulatory input into the assumptions used to estimate expected losses
from structured securities.
The use of this process by the SVO may result in certain non-agency RMBS and
CMBS being assigned an NAIC designation that is different than the equivalent
NRSRO rating. The NAIC designations for non-agency RMBS and CMBS are based on
security level expected losses as modeled by an independent third party (engaged
by the NAIC) and the statutory carrying value of the security, including any
purchase discounts or impairment charges previously recognized. Evaluation of
non-agency RMBS and CMBS held by insurers using the NAIC rating methodologies is
performed on an annual basis.
Our fixed maturity security portfolio is managed to minimize risks such as
defaults or impairments while earning a sufficient and stable return on our
investments. Our strategy with respect to our fixed maturity securities
portfolio has been to invest primarily in investment grade securities.
Investment grade is NAIC 1 and 2 securities and Baa3/BBB- and better securities
on the NRSRO scale. We expect this strategy to meet the objective of minimizing
risk while also managing asset capital charges on a regulatory capital basis.
A summary of our fixed maturity securities by NAIC designation is as follows:
March 31, 2022 December 31, 2021
Percent Percent
of Total of Total
Amortized Carrying Carrying Amortized Carrying Carrying
NAIC Designation Cost Fair Value Amount Amount Cost Fair Value Amount Amount
(Dollars in thousands) (Dollars in thousands)
1 $ 27,701,587 $ 28,064,072 $ 28,064,072 56.5 % $ 26,157,531 $ 28,785,839 $ 28,785,839 56.1 %
2 20,740,585 20,701,013 20,701,013 41.7 % 19,758,594 21,396,020 21,396,020 41.7 %
3 772,726 748,881 748,881 1.6 % 909,311 941,210 941,210 1.9 %
4 117,725 122,867 122,867 0.2 % 133,070 147,160 147,160 0.3 %
5 3,259 3,259 3,259 - % 16,496 15,357 15,357 - %
6 29,033 22,028 22,028 - % 24,181 20,357 20,357 - %
$ 49,364,915 $ 49,662,120 $ 49,662,120 100.0 % $ 46,999,183 $ 51,305,943 $ 51,305,943 100.0 %
The amortized cost and fair value of fixed maturity securities at
2022
unaudited consolidated financial statements in this Form 10-Q, which is
incorporated by reference in this Item 2.
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Unrealized Losses
The amortized cost and fair value of fixed maturity securities that were in an
unrealized loss position were as follows:
Unrealized
Number of Amortized Losses, Net of Allowance for
Securities Cost Allowance Credit Losses Fair Value
(Dollars in thousands)
March 31, 2022
Fixed maturity securities, available
for sale:
United States Government full faith
and credit 13 $ 28,723
United States Government sponsored
agencies
1 13,692 (2,224) - 11,468United States municipalities, states and territories 242 1,276,496 (94,613) (2,009) 1,179,874 Foreign government obligations 24 273,503 (21,236) - 252,267 Corporate securities 2,003 13,927,731 (984,070) (3,825) 12,939,836 Residential mortgage backed securities 136 557,515 (22,822) (743) 533,950 Commercial mortgage backed securities 519 3,432,873 (127,451) - 3,305,422 Other asset backed securities 843 4,350,056 (114,585) - 4,235,471 3,781$ 23,860,589 $ (1,367,725) $ (6,577) $ 22,486,287 December 31, 2021 Fixed maturity securities, available for sale: United States Government full faith and credit 2$ 1,041
$ (34) $ -
United States Government sponsored
agencies
6 760,060 (90) - 759,970United States municipalities, states and territories 42 190,471 (3,042) (2,776) 184,653 Foreign government obligations 3 43,704 (843) - 42,861 Corporate securities 600 2,530,864 (38,442) - 2,492,422 Residential mortgage backed securities 74 280,044 (2,093) (70) 277,881 Commercial mortgage backed securities 108 944,407 (17,719) - 926,688 Other asset backed securities 592 3,172,613 (50,107) - 3,122,506 1,427$ 7,923,204 $ (112,370) $ (2,846) $ 7,807,988 The unrealized losses atMarch 31, 2022 are principally related to the timing of the purchases of certain securities, which carry less yield than those available atDecember 31, 2021 , and the continued impact the COVID-19 pandemic had on credit markets. Approximately 97% and 85% of the unrealized losses on fixed maturity securities shown in the above table forMarch 31, 2022 andDecember 31, 2021 , respectively, are on securities that are rated investment grade, defined as being the highest two NAIC designations. The increase in unrealized losses fromDecember 31, 2021 toMarch 31, 2022 was primarily due to an increase in treasury yields during the three months endedMarch 31, 2022 . The 10-yearU.S. Treasury yields atMarch 31, 2022 andDecember 31, 2021 were 2.32% and 1.52%, respectively. The 30-yearU.S. Treasury yields atMarch 31, 2022 andDecember 31, 2021 were 2.44% and 1.90%, respectively. 44
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The following table sets forth the composition by credit quality (NAIC
designation) of fixed maturity securities with gross unrealized losses:
Carrying Value of
Securities with Gross
Gross Unrealized Percent of Unrealized Percent of
NAIC Designation Losses Total Losses (1) Total
(Dollars in thousands)
March 31, 2022
1 $ 12,448,541 55.4 % $ (712,830) 52.1 %
2 9,452,120 42.0 % (616,967) 45.1 %
3 512,724 2.3 % (32,628) 2.4 %
4 55,444 0.2 % (3,564) 0.3 %
5 - - % - - %
6 17,458 0.1 % (1,736) 0.1 %
$ 22,486,287 100.0 % $ (1,367,725) 100.0 %
December 31, 2021
1 $ 4,174,438 53.5 % $ (37,884) 33.7 %
2 3,197,575 41.0 % (57,354) 51.0 %
3 376,996 4.8 % (13,723) 12.2 %
4 33,229 0.4 % (1,083) 1.0 %
5 9,506 0.1 % (1,140) 1.0 %
6 16,244 0.2 % (1,186) 1.1 %
$ 7,807,988 100.0 % $ (112,370) 100.0 %
(1)Gross unrealized losses have been adjusted to reflect the allowance for
credit loss of
Our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities (consisting of 3,781 and 1,427 securities, respectively) have been in a continuous unrealized loss position atMarch 31, 2022 andDecember 31, 2021 , along with a description of the factors causing the unrealized losses is presented in Note 3 - Investments to our unaudited consolidated financial statements in this Form 10-Q, which is incorporated by reference in this Item 2. 45
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The amortized cost and fair value of fixed maturity securities in an unrealized
loss position and the number of months in a continuous unrealized loss position
(fixed maturity securities that carry an NRSRO rating of BBB/Baa or higher are
considered investment grade) were as follows:
Gross
Amortized Unrealized
Number of Cost, Net of Losses, Net of
Securities Allowance (1) Fair Value Allowance (1)
(Dollars in thousands)
March 31, 2022
Fixed maturity securities, available for
sale:
Investment grade:
Less than six months 3,331 $
21,283,120
Six months or more and less than twelve
months
47 229,623 211,037 (18,586)
Twelve months or greater 297 1,717,713 1,639,158 (78,555)
Total investment grade 3,675 23,230,456 21,900,658 (1,329,798)
Below investment grade:
Less than six months 37 229,114 218,192 (10,922)
Six months or more and less than twelve
months 3 4,968 3,959 (1,009)
Twelve months or greater 66 389,474 363,478 (25,996)
Total below investment grade 106 623,556 585,629 (37,927)
3,781 $ 23,854,012 $ 22,486,287 $ (1,367,725)
December 31, 2021
Fixed maturity securities, available for
sale:
Investment grade:
Less than six months 1,024 $
5,582,431
Six months or more and less than twelve
months
39 132,110 130,156 (1,954)
Twelve months or greater 281 1,752,779 1,705,640 (47,139)
Total investment grade 1,344 7,467,320 7,372,012 (95,308)
Below investment grade:
Less than six months 12 43,808 43,057 (751)
Six months or more and less than twelve
months 7 28,544 25,706 (2,838)
Twelve months or greater 64 380,686 367,213 (13,473)
Total below investment grade 83 453,038 435,976 (17,062)
1,427 $ 7,920,358 $ 7,807,988 $ (112,370)
(1)Amortized cost and gross unrealized losses have been adjusted to reflect the
allowance for credit loss of $6.6 million and $2.8 million as of March 31, 2022
and December 31, 2021 , respectively.
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The amortized cost and fair value of fixed maturity securities (excluding United
States Government and United States Government sponsored agency securities)
segregated by investment grade (NRSRO rating of BBB/Baa or higher) and below
investment grade that had unrealized losses greater than 20% and the number of
months in a continuous unrealized loss position were as follows:
Gross
Amortized Unrealized
Number of Cost, Net of Fair Losses, Net of
Securities Allowance (1) Value Allowance (1)
(Dollars in thousands)
March 31, 2022
Investment grade:
Less than six months 1 $ 10,646 $ 5,855 $ (4,791)
Six months or more and less than twelve
months - - - -
Twelve months or greater - - - -
Total investment grade 1 10,646 5,855 (4,791)
Below investment grade:
Less than six months 70 514,567 422,904 (91,663)
Six months or more and less than twelve
months - - - -
Twelve months or greater - - - -
Total below investment grade 70 514,567 422,904 (91,663)
71 $ 525,213 $ 428,759 $ (96,454)
December 31, 2021
Investment grade:
Less than six months - $ - $ - $ -
Six months or more and less than twelve
months - - - -
Twelve months or greater - - - -
Total investment grade - - - -
Below investment grade:
Less than six months - - - -
Six months or more and less than twelve
months - - - -
Twelve months or greater - - - -
Total below investment grade - - - -
- $ - $ - $ -
(1) Amortized cost and gross unrealized losses have been adjusted to reflect the
allowance for credit loss of $6.6 million and $2.8 million as of March 31, 2022
and December 31, 2021 , respectively.
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The amortized cost and fair value of fixed maturity securities, by contractual
maturity, that were in an unrealized loss position are shown below. Actual
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties. All of our mortgage and other asset backed securities provide for
periodic payments throughout their lives, and are shown below as a separate
line.
Available for sale
Amortized
Cost Fair Value
(Dollars in thousands)
March 31, 2022
Due in one year or less $ 23,087 $ 22,766
Due after one year through five years 2,296,021 2,217,092
Due after five years through ten years 3,441,123 3,276,775
Due after ten years through twenty years 3,268,371 3,025,381
Due after twenty years
6,491,543 5,869,430
15,520,145 14,411,444
Residential mortgage backed securities 557,515 533,950
Commercial mortgage backed securities 3,432,873 3,305,422
Other asset backed securities 4,350,056 4,235,471
$ 23,860,589 $ 22,486,287
December 31, 2021
Due in one year or less $ 762,035 $ 761,590
Due after one year through five years 509,458 505,312
Due after five years through ten years 546,453 535,258
Due after ten years through twenty years 638,205 627,275
Due after twenty years 1,069,989 1,051,478
3,526,140 3,480,913
Residential mortgage backed securities 280,044 277,881
Commercial mortgage backed securities 944,407 926,688
Other asset backed securities 3,172,613 3,122,506
$ 7,923,204 $ 7,807,988
International Exposure
We hold fixed maturity securities with international exposure. As of March 31,
2022 , 11.5% of the carrying value of our fixed maturity securities was comprised
of corporate debt securities of issuers based outside of the United States and
debt securities of foreign governments. Our fixed maturity securities with
international exposure are primarily denominated in U.S. dollars. Our investment
professionals analyze each holding for credit risk by economic and other factors
of each country and industry. The following table presents our international
exposure in our fixed maturity portfolio by country or region:
March 31, 2022
Percent
of Total
Amortized Carrying Amount/ Carrying
Cost Fair Value Amount
(Dollars in thousands)
Europe $ 2,417,640 $ 2,447,197 4.9 %
Asia/Pacific 461,785 469,183 0.9 %
Latin America 271,796 273,595 0.6 %
Non-U.S. North America 1,456,147 1,471,361 3.0 %
Australia & New Zealand 365,755 361,059 0.7 %
Other 718,852 714,793 1.4 %
$ 5,691,975 $ 5,737,188 11.5 %
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All of the securities presented in the table above are investment grade (NAIC
designation of either 1 or 2), except for the following:
March 31, 2022
Carrying Amount/
Amortized Cost Fair Value
(Dollars in thousands)
Europe $ 27,540 $ 26,690
Asia/Pacific 90 85
Latin America 31,657 33,002
Non-U.S. North America 39,820 39,469
Australia & New Zealand 59 55
Other 42,129 42,728
$ 141,295 $ 142,029
Watch List
At each balance sheet date, we identify invested assets which have
characteristics (i.e., significant unrealized losses compared to amortized cost
and industry trends) creating uncertainty as to our future assessment of credit
losses. As part of this assessment, we review not only a change in current price
relative to its amortized cost but the issuer's current credit rating and the
probability of full recovery of principal based upon the issuer's financial
strength. For corporate issuers, we evaluate the financial stability and quality
of asset coverage for the securities relative to the term to maturity for the
issues we own. For asset-backed securities, we evaluate changes in factors such
as collateral performance, default rates, loss severities and expected cash
flows. At March 31, 2022 , the amortized cost and fair value of securities on the
watch list (all fixed maturity securities) are as follows:
Amortized Cost, Net Unrealized
Number of Amortized Allowance for Net of Losses, Fair
General Description Securities Cost Credit Losses Allowance Net of Allowance Value
(Dollars in thousands)
Corporate securities - Public
securities 2 $ 726 $ - $ 726 $ (600) $ 126
Corporate securities - Private
placement securities 1 10,646 (3,825) 6,821 (966) 5,855
Residential mortgage backed
securities 16 29,030 (743) 28,287 (1,424) 26,863
Commercial mortgage backed
securities 12 143,502 - 143,502 (875) 142,627
Other asset backed securities 1 3,259 - 3,259 -
3,259
United States municipalities, states and territories 5 19,062 (2,009) 17,053 - 17,053 37$ 206,225 $ (6,577) $ 199,648 $ (3,865)$ 195,783 We expect to recover the unrealized losses, net of allowances, as we did not have the intent to sell and it was not more likely than not that we would be required to sell these securities prior to recovery of the amortized cost basis, net of allowances. Our analysis of these securities and their credit performance atMarch 31, 2022 is as follows:
Corporate securities: The corporate securities included on the watch list
primarily include a security in the utilities industry that is under financial
stress due to the impact of power outages.
Structured securities: The structured securities included on the watch list have
generally experienced higher levels of stress due to the impact COVID-19 is
having on the economy.
these securities, which are related to senior living facilities in the
Southeastern region of
strain COVID-19 is having on this industry.
Credit Losses
We have a policy and process to identify securities in our investment portfolio for which we recognize credit loss. See Note 3 - Investments to our unaudited consolidated financial statements. During the three months endedMarch 31, 2022 , we recognized$7.4 million of credit losses which includes$3.8 million of credit loss on a corporate security and$3.7 million on structured securities on which we had the intent to sell such securities as ofMarch 31, 2022 partially offset by a$0.1 million net reduction in credit losses on certain other securities. During the three months endedMarch 31, 2021 , we recognized$1.4 million of credit losses which includes$2 million of credit losses on corporate securities partially offset by a$0.6 million net reduction in credit losses on residential mortgage back securities. 49
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Several factors led us to believe that full recovery of amortized cost is not expected on the securities for which we recognized credit losses. A discussion of these factors, our policy and process to identify securities that could potentially have credit loss is presented in Note 3 - Investments to our unaudited consolidated financial statements in this Form 10-Q, which is incorporated by reference in this Item 2.
Mortgage Loans on Real Estate
Our financing receivables consist of three mortgage loan portfolio segments: commercial mortgage loans, agricultural mortgage loans and residential mortgage loans. Our commercial mortgage loan portfolio consists of loans with an outstanding principal balance of$3.6 billion and$3.6 billion as ofMarch 31, 2022 andDecember 31, 2021 , respectively. This portfolio consists of mortgage loans collateralized by the related properties and diversified as to property type, location and loan size. Our mortgage lending policies establish limits on the amount that can be loaned to one borrower and other criteria to attempt to reduce the risk of default. Our agricultural mortgage loan portfolio consists of loans with an outstanding principal balance of$464.4 million and$408.1 million as ofMarch 31, 2022 andDecember 31, 2021 , respectively. These loans are collateralized by agricultural land and are diversified as to location withinthe United States . Our residential mortgage loan portfolio consists of loans with an outstanding principal balance of$1.7 billion and$1.7 billion as ofMarch 31, 2022 andDecember 31, 2021 , respectively. These loans are collateralized by the related properties and diversified as to location withinthe United States . Mortgage loans on real estate are generally reported at cost adjusted for amortization of premiums and accrual of discounts, computed using the interest method and net of valuation allowances. AtMarch 31, 2022 andDecember 31, 2021 , the largest principal amount outstanding for any single commercial mortgage loan was$83.0 million and$81.5 million , respectively, and the average loan size was$5.3 million and$5.3 million , respectively. In addition, the average loan-to-value ratio for commercial and agricultural mortgage loans combined was 51.9% and 52.3% atMarch 31, 2022 andDecember 31, 2021 , respectively, based upon the underwriting and appraisal at the time the loan was made. This loan-to-value ratio is indicative of our conservative underwriting policies and practices for originating mortgage loans and may not be indicative of collateral values at the current reporting date. Our current practice is to only obtain market value appraisals of the underlying collateral at the inception of the loan unless we identify indicators of impairment in our ongoing analysis of the portfolio, in which case, we either calculate a value of the collateral using a capitalization method or obtain a third party appraisal of the underlying collateral. The commercial mortgage loan portfolio is summarized by geographic region and property type in Note 4 - Mortgage Loans on Real Estate to our unaudited consolidated financial statements in this Form 10-Q, incorporated by reference in this Item 2. In the normal course of business, we commit to fund mortgage loans up to 90 days in advance. AtMarch 31, 2022 , we had commitments to fund commercial mortgage loans totaling$132.9 million , with interest rates ranging from 3.43% to 4.30%. During 2022 and 2021, due to historically low interest rates, the commercial mortgage loan industry has been very competitive. This competition has resulted in a number of borrowers refinancing with other lenders. For the three months endedMarch 31, 2022 , we received$34.9 million in cash for loans being paid in full compared to$56.2 million for the three months endedMarch 31, 2021 . Some of the loans being paid off have either reached their maturity or are nearing maturity; however, some borrowers are paying the prepayment fee and refinancing at a lower rate. AsMarch 31, 2022 , we had commitments to fund agricultural mortgage loans totaling$89.5 million with interest rates ranging from 3.65% to 4.73%, and had commitments to fund residential mortgage loans totaling$221.8 million with interest rates ranging from 7.00% to 12.00%. See Note 4 - Mortgage Loans on Real Estate to our unaudited consolidated financial statements, incorporated by reference, for a presentation of our valuation allowance, foreclosure activity and troubled debt restructure analysis. We have a process by which we evaluate the credit quality of each of our mortgage loans. This process utilizes each loan's loan-to-value and debt service coverage ratios as primary metrics. See Note 4 - Mortgage Loans on Real Estate to our unaudited consolidated financial statements, incorporated by reference, for a summary of our portfolio by loan-to-value and debt service coverage ratios. We closely monitor loan performance for our commercial, agricultural and residential mortgage loan portfolios. Commercial, agricultural and residential loans are considered nonperforming when they are 90 days or more past due. Aging of financing receivables is summarized in the following table: 30-59 days 60-89 days Over 90 days Current past due past due past due Total As of March 31, 2022: (Dollars in thousands) Commercial mortgage loans$ 3,605,999 $ - $ - $ -$ 3,605,999 Agricultural mortgage loans 463,087 - - - 463,087 Residential mortgage loans 1,565,375 88,914 28,303 12,463 1,695,055 Total mortgage loans$ 5,634,461 $ 88,914 $ 28,303 $ 12,463 $ 5,764,141 As ofDecember 31, 2021 : Commercial mortgage loans$ 3,628,502 $ - $ - $ -$ 3,628,502 Agricultural mortgage loans 406,999 - - - 406,999 Residential mortgage loans 1,631,999 34,447 3,030 7,045 1,676,521 Total mortgage loans$ 5,667,500 $ 34,447 $ 3,030 $ 7,045 $ 5,712,022 50
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Derivative Instruments
Our derivative instruments primarily consist of call options purchased to provide the income needed to fund the annual index credits on our fixed index annuity products. The fair value of the call options is based upon the amount of cash that would be required to settle the call options obtained from the counterparties adjusted for the nonperformance risk of the counterparty. The nonperformance risk for each counterparty is based upon its credit default swap rate. We have no performance obligations related to the call options. None of our derivatives qualify for hedge accounting, thus, any change in the fair value of the derivatives is recognized immediately in the consolidated statements of operations. A presentation of our derivative instruments along with a discussion of the business strategy involved with our derivatives is included in Note 6 - Derivative Instruments to our unaudited consolidated financial statements in this Form 10-Q, which is incorporated by reference in this Item 2.
Liquidity and Capital Resources
Our insurance subsidiaries generally have adequate cash flows from annuity deposits and investment income to meet their policyholder and other obligations. Net cash flows from annuity deposits and funds returned to policyholders as surrenders, withdrawals and death claims were$(316.8) million for the three months endedMarch 31, 2022 compared to$1,389.5 million for the three months endedMarch 31, 2021 , with the decrease attributable to a$1,742.8 million decrease in net annuity deposits after coinsurance and a$36.5 million (after coinsurance) decrease in funds returned to policyholders. We continue to invest the net proceeds from policyholder transactions and investment activities in high quality fixed maturity securities and mortgage loans. We have a highly liquid investment portfolio that can be used to meet policyholder and other obligations as needed. In addition, we intend to hold approximately 1% to 2% of our investment portfolio in cash and cash equivalents. We, as the parent company, are a legal entity separate and distinct from our subsidiaries, and have no business operations. We need liquidity primarily to service our debt (senior notes and subordinated debentures issued to a subsidiary trust), pay operating expenses and pay dividends to common and preferred stockholders. Our assets consist primarily of the capital stock and surplus notes of our subsidiaries. Accordingly, our future cash flows depend upon the availability of dividends, surplus note interest payments and other statutorily permissible payments from our subsidiaries, such as payments under our investment advisory agreements and tax allocation agreement with our subsidiaries. We expect these sources provide adequate cash flow for us to meet our current and reasonably foreseeable future obligations. The ability of our life insurance subsidiaries to pay dividends or distributions, including surplus note payments, will be limited by applicable laws and regulations of the states in which our life insurance subsidiaries are domiciled, which subject our life insurance subsidiaries to significant regulatory restrictions. These laws and regulations require, among other things, our insurance subsidiaries to maintain minimum solvency requirements and limit the amount of dividends these subsidiaries can pay. Currently,American Equity Life may pay dividends or make other distributions without the prior approval of the Iowa Insurance Commissioner, unless such payments, together with all other such payments within the preceding twelve months, exceed the greater of (1)American Equity Life's net gain from operations for the preceding calendar year, or (2) 10% ofAmerican Equity Life's statutory capital and surplus at the precedingDecember 31 . For 2022, up to$407.9 million can yet be distributed as dividends byAmerican Equity Life without prior approval of the Iowa Insurance Commissioner. In addition, dividends and surplus note payments may be made only out of statutory earned surplus, and all surplus note payments are subject to prior approval by regulatory authorities in the life subsidiary's state of domicile.American Equity Life had$2.5 billion of statutory earned surplus atMarch 31, 2022 . The maximum distribution permitted by law or contract is not necessarily indicative of an insurer's actual ability to pay such distributions, which may be constrained by business and regulatory considerations, such as the impact of such distributions on surplus, which could affect the insurer's ratings or competitive position, the amount of premiums that can be written and the ability to pay future dividends or make other distributions. Further, state insurance laws and regulations require that the statutory surplus of our life subsidiaries following any dividend or distribution must be reasonable in relation to their outstanding liabilities and adequate for their financial needs. Along with solvency regulations, the primary driver in determining the amount of capital used for dividends is the level of capital needed to maintain desired financial strength ratings from rating agencies. Both regulators and rating agencies could become more conservative in their methodology and criteria, including increasing capital requirements for our insurance subsidiaries which, in turn, could negatively affect the cash available to us from insurance subsidiaries. As ofMarch 31, 2022 , we estimateAmerican Equity Life has sufficient statutory capital and surplus, combined with capital available to the holding company, to maintain its insurer financial strength rating. However, this capital may not be sufficient if significant future losses are incurred or a rating agency modifies its rating criteria and access to additional capital could be limited. Cash and cash equivalents of the parent holding company atMarch 31, 2022 , were$474.4 million . We also have the ability to issue equity, debt or other types of securities through one or more methods of distribution. The terms of any offering would be established at the time of the offering, subject to market conditions. OnFebruary 15, 2022 , we established a new five-year credit agreement for$300 million in unsecured delayed draw term loan commitments. This agreement is part of our plans for access to liquidity for general corporate purposes as we continue to implement our strategic transformation to an at-scale origination, spread and capital light fee-based business, and to manage capital to grow as well as produce returns for shareholders. There have been no loans drawn on this agreement to date. InJanuary 2022 ,American Equity Life became a member of theFederal Home Loan Bank of Des Moines ("FHLB") which provides access to collateralized borrowings and other FHLB products. We may also issue funding agreements to the FHLB. Both the collateralized borrowings and funding agreements require us to pledge qualified assets as collateral. Obligations arising from funding agreements, which totaled$200 million as ofMarch 31, 2022 are used in investment spread activities. 51
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New Accounting Pronouncements
See Note 1 - Significant Accounting Policies to our unaudited consolidated
financial statements in this Form 10-Q, which is incorporated by reference in
this Item 2.
Regulatory Developments Financial Strength RatingsStandard & Poor's ("S&P") has proposed insurance company capital analysis changes. S&P proposes to discount the value of certain assets that have no S&P rating, and more heavily discount the value of assets without a rating from either of two of its competitors, Moody's or Fitch, as well. If S&P adopts these changes, we may need to re-evaluate and restructure our assets, raise capital, hold more capital, change our investment strategies, or suffer a ratings change.
Investments Regulation
The Iowa Insurance Division has proposed streamlining and clarifying changes toIowa law on admitted assets. The changes would, if approved by the legislature, conformIowa law more closely to NAIC models. For example, it would allow certain currently-excluded assets to be admitted, eliminate certainIowa -specific valuation formulae, and eliminate some limitations on securities and real estate investments. If the legislature enacts these changes, we would review and reconfigure our investments in light of the new requirements and opportunities they pose. We do not expect legislative consideration, if any, until at least 2023. Privacy and Cybersecurity TheSEC has proposed new cybersecurity disclosure rules for public companies. Under the proposed rule, registrants would have to disclose information about material cybersecurity incidents on a Current Report on Form 8-K within four days of concluding that the incident is material, and update that disclosure at points of its analysis and response to the incident. Registrants would also have to disclose aspects of cybersecurity risk management annually, including governance processes and Board and management responsibilities, and director cybersecurity expertise.
Other
TheSEC has proposed new climate-related disclosure rules for public companies. Among other things, the proposed rules would require registrant disclosure on (1) governance of climate-related risks; (2) climate-related impacts on strategy, business model and outlook; (3) climate-related risk management; (4) greenhouse gas ("GHG") emissions; and (5) any internal carbon price or climate-related targets and goals. Large accelerated filers, such as us, would also have to obtain attestation by an independent third party of certain of their GHG emissions metrics. The proposed rules would also require registrants to include climate-related financial statement metrics (which would consist of disaggregated climate-related impacts on existing financial statement line items) and related disclosures in a note to audited financial statements, subject to adequate internal controls and to audit by an independent registered public accounting firm. Depending on the ultimate rules theSEC adopts, the cost and other impacts of such a rule on us may be significant. TheSEC has proposed new rules related to trading plans under Rule 10b5-1. The rules would require a registrant 30-day "cooling off" period between plan adoption and the first transaction under the plan; limit registrants to a single plan for a class of securities, such as common stock, at any given time. TheSEC has also proposed new daily registrant disclosure of securities repurchases. Depending on the ultimate rules theSEC adopts, the cost and other impacts of such rules on us may be significant.
BROWN & BROWN, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
TREAN INSURANCE GROUP, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
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