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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 atJune 30, 2022 , and the unaudited consolidated results of operations for the three and six month periods endedJune 30, 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 and six months endedJune 30, 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 and any disclosure in Item 1A of our Quarterly Reports on Form 10-Q. 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 a 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 six months 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 continued to increase our allocation of investments to private assets. As ofJune 20, 2022 , approximately$9.1 billion or 16.6% of our investment portfolio consisted of private assets. •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 9.4 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. InJuly 2022 , we borrowed$300 million under the unsecured delayed draw term loan and are using the proceeds for general corporate purposes. 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.
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.
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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 throughJune 30, 2022 , we have repurchased approximately 18.5 million shares of our common stock at an average price of$34.20 per common share.
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 Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Average yield on invested assets 4.33% 3.51% 4.24% 3.54%
Aggregate cost of money 1.69% 1.56% 1.66% 1.57%
Aggregate investment spread 2.64% 1.95% 2.58% 1.97%
Impact of:
Investment yield - additional prepayment
income 0.05% 0.10% 0.04% 0.11%
Cost of money benefit from over hedging 0.02% 0.04% 0.02% 0.03%
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 ended December 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 ended December 31, 2021 .
Average yields on invested assets increased primarily as a result of 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. See Net investment income. The aggregate cost of money increased
primarily due to increases in options costs as compared to prior periods. We
have the flexibility to reduce our crediting rates if necessary and could
decrease our cost of money by approximately 69 basis points if we reduce current
rates to guaranteed minimums.
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Results of Operations for the Three and Six Months Ended
Annuity deposits by product type collected during the three and six months ended
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
(Dollars in thousands)
American Equity Investment Life Insurance
Company :
Fixed index annuities $ 671,696 $ 702,605 $ 1,427,676 $ 1,219,600
Annual reset fixed rate annuities 1,140 1,656 2,202 3,823
Multi-year fixed rate annuities 485 47,674 2,830 834,866
Single premium immediate annuities 3,073 15,430 16,526 29,389
676,394 767,365 1,449,234 2,087,678
Eagle Life Insurance Company :
Fixed index annuities 104,374 184,520 231,128 333,356
Annual reset fixed rate annuities - 175 7 337
Multi-year fixed rate annuities 123 228,197 2,463 1,193,622
104,497 412,892 233,598 1,527,315
Consolidated:
Fixed index annuities 776,070 887,125 1,658,804 1,552,956
Annual reset fixed rate annuities 1,140 1,831 2,209 4,160
Multi-year fixed rate annuities 608 275,871 5,293 2,028,488
Single premium immediate annuities 3,073 15,430 16,526 29,389
Total before coinsurance ceded 780,891 1,180,257 1,682,832 3,614,993
Coinsurance ceded 215,452 3,702 429,015 6,750
Net after coinsurance ceded $ 565,439 $ 1,176,555
Annuity deposits before and after coinsurance ceded decreased 34% and 52%, respectively, during the second quarter of 2022 compared to the same period in 2021 and decreased 53% and 65%, respectively, during the six months endedJune 30, 2022 compared to the same period in 2021. The decreases in sales for the three and six months endedJune 30, 2022 compared to the same periods in 2021 were primarily driven by a reduction in sales of multi-year fixed rate annuity products at bothAmerican Equity Life and Eagle Life, which is in line with our 2022 sales strategy of focusing on sales of fixed index annuities. The decreases in sales of fixed index annuities for the three and six months endedJune 30, 2022 compared to the same periods in 2021 was driven by our choice to maintain operational discipline over chasing the market as interest rates fluctuated. 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 and six months endedJune 30, 2022 compared to the same periods in 2021. Net income (loss) available to common stockholders increased to$349.7 million in the second quarter of 2022 and increased to$905.0 million for the six months endedJune 30, 2022 compared to$(65.6) million and$206.2 million for the same periods in 2021.
The increases in net income (loss) available to common stockholders for the
three and six months ended
net investment income, decreases in the change in fair value of embedded
derivatives and decreases in interest sensitive and index product benefits.
These changes were offset by decreases 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 and six months endedJune 30, 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 5.9% to$52.9 billion for the second quarter of 2022 and 4.7% to$53.0 billion for the six months endedJune 30, 2022 compared to$56.2 billion and$55.6 billion for the same periods in 2021. Our investment spread measured in dollars was$362.5 million for the second quarter of 2022 and$708.9 million for the six months endedJune 30, 2022 compared to$277.2 million and$552.8 million for the same periods in 2021. Investment income for the three and six months endedJune 30, 2022 was positively impacted by strong returns on partnerships and other mark to market assets, lower cash balances and an increase in private assets. Our investment spread had 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. 39
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Net income (loss) was 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 (loss) for the three and six months endedJune 30, 2022 was positively impacted by decreases 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 net increases in the discount rates used to estimate the fair value of our embedded derivative liabilities, the impacts of which were partially offset by decreases in the change in fair value of derivatives and increases in amortization of deferred policy acquisition costs and deferred sales inducements related to changes in fair value of derivatives and embedded derivatives. Net income (loss) for the three and six months endedJune 30, 2021 was negatively impacted by net decreases in the discount rates used to estimate the fair value of our embedded derivative liabilities, the impact of which was partially offset by decreases 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, decreased to$91.1 million in the second quarter of 2022 and increased to$181.0 million for the six months endedJune 30, 2022 compared to$93.8 million and$135.2 million for the same periods in 2021. In addition to net income (loss) 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 (loss) 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 (loss) 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 (loss) 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 (loss) available to common stockholders as part of their review of our overall financial results. The adjustments made to net income (loss) available to common stockholders to arrive at non-GAAP operating income available to common stockholders for the three and six months endedJune 30, 2022 and 2021 are set forth in the table that follows: Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 (Dollars in thousands) Reconciliation from net income (loss) available to common stockholders to non-GAAP operating income available to common stockholders: Net income (loss) available toAmerican Equity Investment Life Holding Company common stockholders$ 349,661 $ (65,613) $ 904,965 $ 206,152 Adjustments to arrive at non-GAAP operating income available to common stockholders: Net realized losses on financial assets, including credit losses 31,572 2,912 41,857 6,428 Change in fair value of derivatives and embedded derivatives (367,145) 200,767 (970,499) (96,867) Income taxes 77,056 (44,278) 204,717 19,516 Non-GAAP operating income available to common stockholders$ 91,144 $ 93,788
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.
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The decrease in non-GAAP operating income available to common stockholders for the three months endedJune 30, 2022 compared to the same period in 2021 was primarily attributable to a greater increase in the liability for future benefits to be paid for lifetime income benefit riders and increases in amortization of deferred sales inducements and deferred policy acquisition costs partially offset by an increase in aggregate investment spread as previously noted. The increase in non-GAAP operating income available to common stockholders for the six months endedJune 30, 2022 compared to the same period in 2021 was primarily attributable to an increase in aggregate investment spread partially offset by a greater increase in the liability for future benefits to be paid for lifetime income benefit riders and increases in amortization of deferred sales inducements and deferred policy acquisition costs. See Net investment income, Interest sensitive and index product benefits, Amortization of deferred sales inducements and Amortization of deferred policy acquisition costs. Annuity product charges (surrender charges assessed against policy withdrawals and fees deducted from policyholder account balances for lifetime income benefit riders) decreased 13% to$55.5 million in the second quarter of 2022 and 13% to$107.9 million for the six months endedJune 30, 2022 compared to$63.8 million and$123.8 million for the same periods in 2021. The components of annuity product charges are set forth in the table that follows: Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 (Dollars in thousands) Surrender charges$ 15,345 $ 18,057 $ 30,886 $ 37,538 Lifetime income benefit riders (LIBR) fees 40,169 45,702 76,983 86,303$ 55,514 $ 63,759 $ 107,869 $ 123,841 Withdrawals from annuity policies subject to surrender charges$ 190,117 $ 300,831 $ 457,453 $ 561,489 Average surrender charge collected on withdrawals subject to surrender charges 8.1 % 6.0 % 6.8 % 6.7 % Fund values on policies subject to LIBR fees$ 5,200,583 $ 6,019,984 $ 9,757,799 $ 11,324,365 Weighted average per policy LIBR fee 0.77 % 0.76 % 0.79 % 0.76 % The decreases in annuity product charges for the three and six month periods endedJune 30, 2022 compared to the same periods in 2021 were attributable to decreases in withdrawals from annuity policies subject to surrender charges and decreases in fees assessed for lifetime income benefit riders due to a smaller volume of business in force subject to the fee. 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 19% to$592.3 million in the second quarter of 2022 and 16% to$1,159.7 million for the six months endedJune 30, 2022 compared to$499.3 million and$996.5 million for the same periods in 2021. The increases were principally attributable to increases in the average yield earned on average invested assets during the three and six months endedJune 30, 2022 compared to the same periods in 2021. Average invested assets excluding derivative instruments (on an amortized cost basis) decreased 4% to$54.8 billion for the second quarter of 2022 and 3% to$54.7 billion for the six months endedJune 30, 2022 compared to$57.0 billion and$56.4 billion for the same periods in 2021. The average yield earned on average invested assets was 4.33% for the second quarter of 2022 and 4.24% for the six months endedJune 30, 2022 compared to 3.51% and 3.54% for the same periods in 2021. The increases in yield earned on average invested assets for the three and six months endedJune 30, 2022 compared to the same periods in 2021 were primarily due to strong returns on partnerships and other mark to market assets, lower average cash balances and an increase private assets partly offset by lower prepayment income. Cash and cash equivalents holdings averaged$526 million during the three months endedJune 30, 2022 , compared to$10.0 billion during the three months endedJune 30, 2021 . As ofJune 30, 2022 , we held approximately$544 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 and six months endedJune 30, 2022 was 4.88% and 3.97%, net of third-party investment management expenses, including$1.4 billion of privately sourced assets with an expected return of 5.10% and$2.3 billion of privately sourced assets with an expected return of 5.22% for the three and six months endedJune 30, 2022 , respectively. The expected return on investments purchased during the three and six months endedJune 30, 2021 was 4.15% and 3.99%, net of third-party investment management expenses. 41
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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 Six Months Ended
June 30, June 30,
2022 2021 2022 2021
(Dollars in thousands)
Call options:
Gain on option expiration $ (46,777) $ 533,412 $ 5,010 $ 711,478
Change in unrealized gains/losses (454,988) (32,619) (985,223) 185,591
Warrants (750) 87 179 116
Interest rate swaps (3,666) - (3,666) -
$ (506,181) $ 500,880 $ (983,700) $ 897,185
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 changes in gain on option
expiration and unrealized gains/losses on call options for the three and six
months ended June 30, 2022 compared to the same periods in 2021 are due to
equity market performance for the three and six months ended June 30, 2022
compared to the same periods 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 and
six months ended June 30, 2022 and 2021 is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
S&P 500 Index
Point-to-point strategy 0.0% - 7.0% 1.0% - 34.5% 0.0% - 12.5% 0.0% - 42.6%
Monthly average strategy 0.0% - 8.0% 1.0% - 23.7% 0.0% - 8.6% 0.0% - 29.4%
Monthly point-to-point strategy 0.0% - 3.0% 0.6% - 21.7% 0.0% - 12.9% 0.0% - 21.7%
Volatility control index point-to-point
strategy 0.0% - 2.4% 0.0% - 9.7% 0.0% - 7.3% 0.0% - 9.7%
Fixed income (bond index) strategies 0.0% - 6.5% 0.0% - 5.9% 0.0% - 6.5% 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 and six months
ended June 30, 2022 was higher than for the same periods in 2021 as option costs
increased during the first half 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 ended
December 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 $9.2 million and $17.8 million for the three and six months
ended June 30, 2022 and primarily consists of $3.0 million and $5.9 million
related to asset liability management fees for the three and six months ended
June 30, 2022 and $6.2 million and $11.9 million of amortization related to the
deferred gain associated with the cost of reinsurance for the three and six
months ended June 30, 2022 . Both of these items are associated with the North
End Re reinsurance treaty which was effective July 1, 2021 .
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Interest sensitive and index product benefits decreased 71% to$234.9 million in the second quarter of 2022 and 53% to$607.5 million for the six months endedJune 30, 2022 compared to$813.0 million and$1,289.6 million for the same periods in 2021. The components of interest sensitive and index product benefits are summarized as follows: Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 (Dollars in thousands) Index credits on index policies$ 72,398 $ 714,291 $ 296,783 $ 1,060,028 Interest credited (including changes in minimum guaranteed interest for fixed index annuities) 68,689 64,519 131,480 122,642 Lifetime income benefit riders 93,768 34,171 179,254 106,906$ 234,855 $ 812,981 $ 607,517 $ 1,289,576 The decreases in index credits for the three and six months endedJune 30, 2022 compared to the same periods in 2021 were 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$75.1 million and$303.2 million for the three and six months endedJune 30, 2022 , compared to$720.5 million and$1,069.6 million for the same periods in 2021. The increases in interest credited for the three and six months endedJune 30, 2022 compared to the same periods in 2021 were 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 increases in benefits recognized for lifetime income benefit riders for the three and six months endedJune 30, 2022 compared to the same periods in 2021 were primarily due to the impacts 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 larger increases in the lifetime income benefit rider reserve for the three and six months endedJune 30, 2022 compared to the same periods 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. The liability (net of coinsurance ceded) for lifetime income benefit riders was$2.2 billion and$2.8 billion atJune 30, 2022 andDecember 31, 2021 , respectively which includes the impact of unrealized gains and losses on available for sale securities on the liability for lifetime income benefit riders of$(324.1) million and$482.8 million atJune 30, 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 increases in amortization after gross profit adjustments for the three and six months endedJune 30, 2022 compared to the same periods in 2021 were primarily due to increases in actual gross profits for the three and six months endedJune 30, 2022 compared to the same periods in 2021. Bonus products represented 67% and 73% of our net annuity account values atJune 30, 2022 andJune 30, 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 Six Months Ended
June 30, June 30,
2022 2021 2022 2021
(Dollars in thousands)
Amortization of deferred sales inducements
before gross profit adjustments $ 53,267 $ 39,554 $ 106,451 $ 92,741
Gross profit adjustments:
Fair value accounting for derivatives and
embedded derivatives 38,824 (52,106) 130,161 18,139
Net realized losses on investments (1,645) 32 (2,621) (425)
Amortization of deferred sales inducements
after gross profit adjustments $ 90,446 $ (12,520) $ 233,991 $ 110,455
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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 Six Months Ended
June 30, June 30,
2022 2021 2022 2021
(Dollars in thousands)
Fixed index annuities - embedded
derivatives $ (884,009) $ 126,084 $ (2,192,132) $ (251,037)
Other changes in difference between policy
benefit reserves computed using derivative
accounting vs. long-duration contracts
accounting 197,447 147,629 314,365 242,337
Reinsurance related embedded derivative (199,422) - (401,866) -
$ (885,984) $ 273,713 $ (2,279,633) $ (8,700)
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 reasons for the decreases in the change in fair value of the fixed
index annuity embedded derivatives during the three and six months ended
June 30, 2022 compared to the same periods of 2021 were due to decreases in
expected index credits on the next policy anniversary dates resulting from
decreases in the fair value of the call options acquired to fund the index
credits during the three and six months ended June 30, 2022 compared to
increases in the expected index credits resulting from increases in the fair
value of the call options acquired to fund these index credits during the three
and six months ended June 30, 2021 and larger increases in the net discount
rates used in the calculation during the three and months ended June 30, 2022
compared to the same periods 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.
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 and six months ended June
30, 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
increases in amortization after gross profit adjustments for the three and six
months ended June 30, 2022 compared to the same periods in 2021 were primarily
due to increases in actual gross profits for the three and six months ended June
30, 2022 compared to the same periods 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 Six Months Ended
June 30, June 30,
2022 2021 2022 2021
(Dollars in thousands)
Amortization of deferred policy
acquisition costs before gross profit
adjustments $ 80,134 $ 61,496 $ 154,767 $ 140,153
Gross profit adjustments:
Fair value accounting for derivatives and
embedded derivatives 64,844 (78,395) 217,360 47,525
Net realized losses on investments (2,624) (7) (4,347) (761)
Amortization of deferred policy
acquisition costs after gross profit
adjustments $ 142,354 $ (16,906) $ 367,780 $ 186,917
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Other operating costs and expenses decreased 8% to$59.9 million in the second quarter of 2022 and 2% to$118.0 million for the six months endedJune 30, 2022 compared to$65.1 million and$120.9 million for the same periods in 2021 and are summarized as follows: Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 (Dollars in thousands) Salary and benefits$ 33,060 $ 35,755 $ 69,247 $ 63,708 Risk charges 2,943 11,754 5,823 23,796 Other 23,920 17,541
42,973 33,411
Total other operating costs and expenses
Salary and benefits decreased$2.7 million for the three months endedJune 30, 2022 and increased$5.5 million for the six months endedJune 30, 2022 , respectively, compared to the same periods in 2021. Employee salaries and related benefits increased$1.1 million and$7.4 million for the three and six months endedJune 30, 2022 as compared to the same periods in 2021. The increases in salary and benefits were primarily due to an increased number of employees related to our continued growth and implementation of AEL 2.0. Expenses recognized under our equity and cash incentive compensation programs ("incentive compensation programs") decreased$4.0 million and$2.3 for the three and six months endedJune 30, 2022 compared to the same periods in 2021. The decreases in expenses related to our incentive compensation programs were primarily due to decreases in expense associated with talent transformation as part of the implementation of the AEL 2.0 strategy partially offset by increases in the expected payouts due to a larger number of employees participating in the programs. Salary and benefits for both the three and six months endedJune 30, 2021 included$5.1 million of expense associated with talent transition as part of the implementation of the AEL 2.0 strategy. Risk charges decreased for the three and six months endedJune 30, 2022 compared to the same periods in 2021. The decreases in risk charges expense for the three and six months endedJune 30, 2022 are 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 and six months endedJune 30, 2022 compared to the same periods 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, professional fees, 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 (benefit) was$104.3 million in the second quarter of 2022 and$259.4 million for the six months endedJune 30, 2022 compared to$(15.7) million and$62.8 million for the same periods in 2021. The changes in income tax expense (benefit) were primarily due to changes in income (loss) before income taxes as well as changes in the effective income tax rates. The effective income tax rates for the three and six months endedJune 30, 2022 were 22.4% and 21.9%, respectively, and 22.3% and 21.6% for the same periods in 2021, respectively. Income tax expense (benefit) 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. 45
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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:
June 30, 2022 December 31, 2021
Carrying Carrying
Amount Percent Amount Percent
(Dollars in thousands)
Fixed maturity securities:
U.S. Government and agencies $ 186,491 0.3 % $ 1,078,746 1.8 %
States, municipalities and territories 4,390,844 8.0 % 3,927,201 6.5 %
Foreign corporate securities and foreign
governments 969,883 1.8 % 402,545 0.7 %
Corporate securities 29,825,798 54.7 % 34,660,234 57.4 %
Residential mortgage backed securities 1,391,707 2.6 % 1,125,049 1.9 %
Commercial mortgage backed securities 4,188,392 7.7 % 4,840,311 8.0 %
Other asset backed securities 4,370,660 8.0 % 5,271,857 8.7 %
Total fixed maturity securities 45,323,775 83.1 % 51,305,943 85.0 %
Mortgage loans on real estate 6,228,616 11.4 % 5,687,998 9.4 %
Real estate investments 672,475 1.2 % 337,939 0.6 %
Derivative instruments 200,781 0.4 % 1,277,480 2.1 %
Other investments 2,112,169 3.9 % 1,767,144 2.9 %
$ 54,537,816 100.0 % $ 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:
June 30, 2022 December 31, 2021
Percent of Fixed
Carrying Maturity Securities Carrying Percent of Fixed
Rating Agency Rating Amount (a) (a) Amount Maturity Securities
(Dollars in thousands)
Aaa/Aa/A $ 25,316,525 58.6 % $ 28,275,431 55.2 %
Baa 17,099,172 39.5 % 21,875,939 42.6 %
Total investment grade 42,415,697 98.1 % 50,151,370 97.8 %
Ba 629,536 1.5 % 930,384 1.8 %
B 104,137 0.2 % 118,065 0.2 %
Caa 23,137 0.1 % 39,354 0.1 %
Ca and lower 65,576 0.1 % 66,770 0.1 %
Total below investment
grade 822,386 1.9 % 1,154,573 2.2 %
$ 43,238,083 100.0 % $ 51,305,943 100.0 %
(a)Excludes fixed maturity securities related to reinsurance business ceded
under a modified coinsurance agreement of
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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:
June 30, 2022 December 31, 2021
Percent Percent
of Total of Total
Amortized Carrying Carrying Amortized Carrying Carrying
NAIC Designation Cost (a) Fair Value (a) Amount (a) Amount Cost Fair Value Amount Amount
(Dollars in thousands) (Dollars in thousands)
1 $ 26,879,226 $ 25,453,818 $ 25,453,818 58.9 % $ 26,157,531 $ 28,785,839 $ 28,785,839 56.1 %
2 18,180,556 16,967,885 16,967,885 39.2 % 19,758,594 21,396,020 21,396,020 41.7 %
3 706,018 630,715 630,715 1.5 % 909,311 941,210 941,210 1.9 %
4 124,688 117,336 117,336 0.2 % 133,070 147,160 147,160 0.3 %
5 56,931 40,995 40,995 0.1 % 16,496 15,357 15,357 - %
6 34,570 27,334 27,334 0.1 % 24,181 20,357 20,357 - %
$ 45,981,989 $ 43,238,083 $ 43,238,083 100.0 % $ 46,999,183 $ 51,305,943 $ 51,305,943 100.0 %
(a)Excludes fixed maturity securities related to reinsurance business ceded
under a modified coinsurance agreement with an amortized cost of
a fair value and carry value of 2,085,692.
The amortized cost and fair value of fixed maturity securities atJune 30, 2022 , by contractual maturity, are 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. 47
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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)
June 30, 2022
Fixed maturity securities,
available for sale:
U.S. Government and agencies 12 $ 40,457 $ (1,115) $ - $ 39,342
States, municipalities and
territories 417 2,844,871 (330,161) (1,834) 2,512,876
Foreign corporate securities and
foreign governments 45 604,574 (61,711) - 542,863
Corporate securities 2,304 23,604,278 (2,646,478) (3,743) 20,954,057
Residential mortgage backed
securities 169 976,889 (61,349) (610) 914,930
Commercial mortgage backed
securities 369 4,215,069 (256,262) - 3,958,807
Other asset backed securities 546 4,609,956 (314,568) - 4,295,388
3,862 $ 36,896,094 $ (3,671,644) $ (6,187) $ 33,218,263
December 31, 2021
Fixed maturity securities,
available for sale:
U.S. Government and agencies 8 $ 761,101 $ (124) $ - $ 760,977
States, municipalities and
territories 42 190,471 (3,042) (2,776) 184,653
Foreign corporate securities and
foreign governments 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 at June 30, 2022 are principally related to the timing of
the purchases of certain securities, which carry less yield than those available
at June 30, 2022 , 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 for June 30, 2022 and December 31, 2021 ,
respectively, are on securities that are rated investment grade, defined as
being the highest two NAIC designations.
The increase in unrealized losses from December 31, 2021 to June 30, 2022 was
primarily due to an increase in treasury yields during the six months ended June
30, 2022 . The 10-year U.S. Treasury yields at June 30, 2022 and December 31,
2021 were 2.98% and 1.52%, respectively. The 30-year U.S. Treasury yields at
June 30, 2022 and December 31, 2021 were 3.14% and 1.90%, respectively. In
addition, credit spreads widened during the six months ended June 30, 2022 which
also contributed to the increase in unrealized losses.
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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 (2) Total (2) Losses (1) Total
(Dollars in thousands)
June 30, 2022
1 $ 18,219,160 58.4 % $ (1,811,434) 55.4 %
2 12,246,740 39.3 % (1,352,334) 41.3 %
3 552,198 1.8 % (76,501) 2.3 %
4 106,676 0.3 % (13,282) 0.4 %
5 38,065 0.1 % (15,935) 0.5 %
6 23,343 0.1 % (1,660) 0.1 %
$ 31,186,182 100.0 % $ (3,271,146) 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
(2)Excludes fixed maturity securities related to reinsurance business ceded under a modified coinsurance agreement. The carry value of securities related to the business ceded that have unrealized losses was$2.0 billion and the gross unrealized losses on these securities was$400.5 million as ofJune 30, 2022 . Our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities (consisting of 3,862 and 1,427 securities, respectively) have been in a continuous unrealized loss position atJune 30, 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. 49
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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)
June 30, 2022
Fixed maturity securities, available for
sale:
Investment grade:
Less than six months 2,954 $
31,045,531
Six months or more and less than twelve
months
616 3,440,810 2,891,430 (549,380)
Twelve months or greater 194 1,575,906 1,426,525 (149,381)
Total investment grade 3,764 36,062,247 32,497,980 (3,564,267)
Below investment grade:
Less than six months 41 427,290 379,669 (47,621)
Six months or more and less than twelve
months 3 35,082 30,036 (5,046)
Twelve months or greater 54 365,288 310,578 (54,710)
Total below investment grade 98 827,660 720,283 (107,377)
3,862 $ 36,889,907 $ 33,218,263 $ (3,671,644)
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 $6.2 million and $2.8 million as of June 30, 2022
and December 31, 2021 , respectively.
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The amortized cost and fair value of fixed maturity securities (excludingU.S. Government and agencies) segregated by investment grade (NRSRO rating of BBB/Baa or higher) and below investment grade that had unrealized losses greater than 20% and the number of months in a continuous unrealized loss position were as follows: Gross Amortized Unrealized Number of Cost, Net of Fair Losses, Net of Securities Allowance (1) Value Allowance (1) (Dollars in thousands)June 30, 2022 Investment grade: Less than six months 558$ 5,397,616 $ 4,072,584 $ (1,325,032) Six months or more and less than twelve months 7 125,556 86,071 (39,485) Twelve months or greater - - - - Total investment grade 565 5,523,172 4,158,655 (1,364,517) Below investment grade: Less than six months 9 126,516 87,388 (39,128) Six months or more and less than twelve months - - - - Twelve months or greater - - - - Total below investment grade 9 126,516 87,388 (39,128) 574$ 5,649,688 $ 4,246,043 $ (1,403,645) 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$6.2 million and$2.8 million as ofJune 30, 2022 andDecember 31, 2021 , respectively. 51
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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)
June 30, 2022
Due in one year or less $ 301,203 $ 298,968
Due after one year through five years 4,855,029 4,677,768
Due after five years through ten years 4,943,241 4,525,739
Due after ten years through twenty years 6,594,406 5,892,903
Due after twenty years
10,400,301 8,653,760
27,094,180 24,049,138
Residential mortgage backed securities 976,889 914,930
Commercial mortgage backed securities 4,215,069 3,958,807
Other asset backed securities 4,609,956 4,295,388
$ 36,896,094 $ 33,218,263
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 June 30,
2022 , 7.6% 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:
June 30, 2022
Percent
of Total
Amortized Carrying Amount/ Carrying
Cost Fair Value Amount
(Dollars in thousands)
Europe $ 3,648,909 $ 3,387,611 7.5 %
Asia/Pacific 1,074 997 - %
Latin America - - - %
Non-U.S. North America 64,050 59,464 0.1 %
Australia & New Zealand 3,900 3,621 - %
Other 1,886 1,751 - %
$ 3,719,819 $ 3,453,444 7.6 %
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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:
June 30, 2022
Carrying Amount/
Amortized Cost Fair Value
(Dollars in thousands)
Europe $ 297,849 $ 254,199
Asia/Pacific 88 75
Latin America - -
Non-U.S. North America 5,228 4,462
Australia & New Zealand 318 272
Other 154 131
$ 303,637 $ 259,139
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 June 30, 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 Gains (Losses), Fair
General Description Securities Cost Credit Losses Allowance Net of Allowance Value
(Dollars in thousands)
States, municipalities and
territories 5 $ 19,062 $ (1,834) $ 17,228 $ 16 $ 17,244
Corporate securities - Public
securities 5 16,526 - 16,526 (731)
15,795
Corporate securities - Private
placement securities 1 10,417 (3,743) 6,674 (945) 5,729
Residential mortgage backed
securities 20 31,586 (610) 30,976 (1,882) 29,094
Commercial mortgage backed
securities 8 84,362 - 84,362 (1,934) 82,428
Other asset backed securities 32 48,739 - 48,739 (236) 48,503
71 $ 210,692 $ (6,187) $ 204,505 $ (5,712) $ 198,793
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
at June 30, 2022 is as follows:
States, municipalities and territories: The decline in value of these
securities, which are related to senior living facilities in the Southeastern
region of the United States , is primarily due to the financial strain COVID-19
is having on this industry.
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 and a security in the retail market
which is in an unrealized loss position and for which we have the intent to sell
as part of our risk reduction effort.
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. In addition, certain securities are included on the watch
list as they are in an unrealized loss position and we have the intent to sell
as part of our risk reduction effort.
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 endedJune 30, 2022 , we recognized$5.5 million of credit losses which includes$3.6 million of credit losses on structured securities primarily due to our intent to sell such securities as ofJune 30, 2022 and$2.0 million of credit losses on corporate securities primarily due to our intent to sell such securities as ofJune 30, 2022 partially offset by a$0.1 million net reduction in credit losses on certain other securities. During the six months endedJune 30, 2022 , we recognized$12.9 million of credit losses which includes$7.3 million of credit losses on structured securities primarily due to our intent to sell such securities and$5.8 million of credit losses on corporate securities due to$3.8 million of credit losses on a security and$2.0 million of credit losses on securities due to our intent to sell such securities as ofJune 30, 2022 partially offset by$0.2 reduction in credit losses on certain other securities. 53
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During the three months endedJune 30, 2021 , we recognized a benefit related to a reduction in the allowance for credit losses for our fixed maturity securities of$1.3 million which included recoveries on corporate securities and residential mortgage backed securities offset by additional credit losses realized on municipal securities. During the six months endedJune 30, 2021 , we recognized credit losses of$0.2 million which included credit losses on municipal securities and net credit losses on corporate securities partially offset by a net recovery on residential mortgage backed securities. 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 ofJune 30, 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$568.2 million and$408.1 million as ofJune 30, 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$2.1 billion and$1.7 billion as ofJune 30, 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. AtJune 30, 2022 andDecember 31, 2021 , the largest principal amount outstanding for any single commercial mortgage loan was$84.3 million and$81.5 million , respectively, and the average loan size was$5.6 million and$5.3 million , respectively. In addition, the average loan-to-value ratio for commercial and agricultural mortgage loans combined was 52.1% and 52.3% atJune 30, 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. AtJune 30, 2022 , we had commitments to fund commercial mortgage loans totaling$99.9 million , with interest rates ranging from 3.86% to 5.23%. 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 six months endedJune 30, 2022 , we received$211.1 million in cash for loans being paid in full compared to$111.2 million for the six months endedJune 30, 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. AsJune 30, 2022 , we had commitments to fund agricultural mortgage loans totaling$32.3 million with interest rates ranging from 5.42% to 5.89%, and had commitments to fund residential mortgage loans totaling$212.9 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. 54
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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 June 30, 2022: (Dollars in thousands)
Commercial mortgage loans $ 3,598,562 $ 4,716 $ - $ - $ 3,603,278
Agricultural mortgage loans 565,683 781 - - 566,464
Residential mortgage loans 2,002,351 56,046 12,613 20,252 2,091,262
Total mortgage loans $ 6,166,596 $ 61,543 $ 12,613 $ 20,252 $ 6,261,004
As of December 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
Derivative Instruments
Our derivative instruments consist of call options purchased to provide the
income needed to fund the annual index credits on our fixed index annuity
products and interest rate swaps used to hedge against changes in fair value due
to changes in interest rates. 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. The fair value of the pay fixed/receive float interest rate swaps are
determined using internal valuation models that generate discounted expected
future cash flows by constructing a projected Secure Overnight Financing Rate
(SOFR) curve over the term of the swap.
Our interest rate swaps qualify for hedge accounting and our call options do not
qualify for hedge accounting. 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 for both our derivatives
designated as hedging instruments and our derivatives not designated as hedging
instruments 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$(768.7) million for the six months endedJune 30, 2022 compared to$1,468.1 million for the six months endedJune 30, 2021 , with the decrease attributable to a$2,341.6 million decrease in net annuity deposits after coinsurance and a$104.8 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$2.4 billion of statutory earned surplus atJune 30, 2022 . 55
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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 ofJune 30, 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 atJune 30, 2022 , were$279.6 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 entered into a five-year,$300 million unsecured delayed draw term loan credit agreement. 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. OnJuly 6, 2022 , we borrowed$300 million under this agreement and are using the proceeds for general corporate purposes. 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$300.0 million as ofJune 30, 2022 are used in investment spread activities. 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 Ratings
proposal to discount the value of certain assets that have no rating.
Investments Regulation
The Iowa Insurance Division has proposed changes toIowa law on admitted assets to conformIowa law more closely to NAIC models in some respects. For example, it would change the amount of some assets an insurer could include as admitted. If the legislature enacts these changes, we would review and reconfigure our investments in light of the new requirements and the challenges and opportunities they pose. We do not expect legislative action, 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 56
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stock, at any given time. The
disclosure of securities repurchases. Depending on the ultimate rules the
adopts, the cost and other impacts of such rules on us may be significant.
Accounting for
See Note 1 - Significant Accounting Policies to our unaudited consolidated
financial statements in this Form 10-Q, which is incorporated here by reference.
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