2018 ANNUAL REPORT
& FORM 10-K
> LETTER FROM THE CHAIRMAN, CEO AND PRESIDENT
American Equity delivered another year of
strong financial performance: we reported
record non-GAAP operating earnings,
continued to grow policyholder funds under
management and kept investment impairments
low while realigning our investment
portfolio. Some key highlights include:
• 5.5 percent increase in policyholder
funds under management.
• Record non-GAAP operating income1 of
$426 million or $4.66 per diluted share.
• Non-GAAP operating return1
on equity of 18.6 percent.
•
Investment impairment losses of 0.5
percent of average equity after the effects
of deferred acquisition costs, deferred
sales inducements and income taxes.
Independent agents are our most significant
distribution channel, and we remain one
of the top three providers of fixed index
annuities in this channel. We introduced two
highly successful products during the year
for distribution by independent agents for
American Equity Investment Life Insurance®.
To maintain our continued leadership in
the guaranteed lifetime income space, we
introduced the IncomeShield series of products.
The IncomeShield was designed to allow
policyholders to tailor their lifetime income
benefit rider to their specific time horizons
for guaranteed income. Since its introduction
in March 2018, the IncomeShield has
become our bestselling series of products.
For Americans more interested in growing
their assets and with less need for guaranteed
retirement income, we introduced the
AssetShield series of products in October. The
AssetShield is designed for pure accumulation
since a lifetime income benefit rider is not
available. In the short period of time since
its introduction, AssetShield has become our
second highest selling series of products.
While the independent agent channel remains
a key focus, growth in the fixed index annuity
market has been driven by expansion into the
bank and broker-dealer channels. Over the
last five years, sales by banks and broker-
dealers have increased at a compound
annual rate of 45 percent, albeit starting
from a very low base, compared to 4 percent
for the more mature, but still growing,
independent agent channel. Our sales of
fixed index annuities in the bank and broker-
dealer channels, through Eagle Life Insurance
Company®, increased 15 percent in 2018.
The company has taken important steps to
increase its penetration in banks and broker-
dealers. In the fourth quarter, we added a
new dedicated account acquisition specialist
to increase the number of institutions with
which we do business. We are building
out our employee wholesaling force — a
key initiative for Eagle Life in 2019. Our
employee wholesalers work with those financial
institutions that do not work with third party
wholesalers and can assist our third party
wholesalers by providing expertise and
additional outreach to the representatives
in bank and broker-dealer organizations.
We believe that transparent, easily understandable
products focused on the S&P 500® index
are best for consumers and our industry.
Unlike many of our competitors, we have
been unwilling to add hybrid multi-asset
class index strategies with little to no actual
1 For a reconciliation of net income to non-GAAP operating income, please see page 3. Net income return on average equity was 20.0%.
trading history to our fixed index annuities. We
believe such index strategies add unnecessary
complexity and will not offer any extra return
over the long run. We remain dedicated to
the principles that have distinguished us in the
fixed index annuity market for many years —
superior customer service, consistency in our
business practices and renewal rate integrity.
In 2018, we began an ambitious program
to realign our investment portfolio into
certain asset classes not traditionally invested
in by the company, such as collateralized
loan obligations and other forms of asset-
backed securities. We opportunistically
replaced approximately $2.1 billion of
book value of lower yielding fixed income
securities for a yield pick-up of roughly
170 basis points on these securities.
We have not taken on any material increase
in credit risk with this allocation strategy.
Below investment grade securities were 3.2
percent of fixed maturities at Dec. 31, 2018,
compared to 2.9 percent at the end of 2017.
We anticipate pursuing additional portfolio
realignment opportunities and look to expand
into other asset classes that historically
have not been represented in our portfolio.
However, we will not sacrifice the credit
quality of our investments. The safety of our
policyholders’ savings and your investment in
our company is of paramount importance.
In the wake of the order to vacate the
Department of Labor fiduciary rule, both
the National Association of Insurance
Commissioners (NAIC) and the Securities and
Exchange Commission (SEC) have begun
working on their own versions of an enhanced
suitability or best interest rule. We are actively
engaged in the NAIC process and monitoring
the SEC’s work, although it may not be
directly applicable to insurance producers.
We are a stronger and better company today
than a year ago, and we look forward to
a successful 2019. Our long-term outlook
remains favorable as the importance of
preserving retirement savings and securing a
life-long income source will only increase as
more Americans enter retirement. According
to a 2018 Insured Retirement Institute study,
guaranteed monthly income is the most
important benefit aging Baby Boomers look
for in retirement planning. To meet this need,
many Americans look beyond traditional
retirement income options for additional
financial stability. As a result, organizations like
American Equity offering long-term solutions
that can protect hard-earned retirement
savings, have an opportunity to help mitigate
longevity risk for millions of Americans by
securing income that lasts a lifetime.
On behalf of the board of directors,
our management team and our more
than 550 employees, thank you for
your ownership in American Equity.
JOHN M. MATOVINA
Chairman, Chief Executive
Officer and President
i
> FINANCIAL HIGHLIGHTS
YEARS ENDED DECEMBER 31
(Dollars in thousands, except for per share data)
2018
2017
2016
2015
2014
Total assets
Total stockholders’ equity
$ 61,625,564
$ 62,030,736
$ 56,053,472
$ 49,029,392
$ 43,976,689
$ 2,399,101
$ 2,850,157
$ 2,291,595
$ 1,944,535
$ 2,139,876
Accumulated other comprehensive (income) loss (AOCI)
52,432
(724,599)
(339,966)
(201,663)
(721,401)
Total stockholders’ equity excluding AOCI(b)
$ 2,451,533
$ 2,125,558
$ 1,951,629
$ 1,742,872
$ 1,418,475
Total annuity deposits
Net income
Non-GAAP operating income(a)
PER SHARE DATA
Earnings per common share—assuming dilution
Non-GAAP operating income(a) per common share—
assuming dilution
Book value per share including AOCI
Book value per share excluding AOCI(b)
NON-GAAP FINANCIAL MEASURES(a)
Reconciliation of net income to non-GAAP
operating income:
$ 4,404,963
$ 4,177,210
$ 7,128,199
$ 7,083,979
$ 4,184,585
$ 458,016
$ 425,740
$
$
$
$
5.01
4.66
26.55
27.13
$
$
$
$
$
$
174,645
285,050
$
$
83,243
122,344
$
$
219,830
195,820
$
$
126,023
190,646
1.93
$
0.97
$
2.72
$
1.58
3.16
$
1.43
$
2.42
$
2.39
31.91
23.79
$
$
26.04
22.17
$
$
23.83
21.36
$
$
27.93
18.52
Net income
$ 458,016
$
174,645
$
83,243
$
219,830
$
126,023
Net realized investment (gains) losses, including OTTI
45,450
(5,093)
7,188
5,737
4,429
Change in fair value of derivatives and embedded
derivatives — fixed index annuities
(72,181)
121,846
56,634
(44,055)
79,053
Change in fair value of derivatives — debt
(1,892)
(1,224)
(1,265)
1,296
——
——
——
——
——
(1,957)
——
——
(3,653)
(5,124)
(21,499)
13,012
(30,048)
104
12,503
(1,418)
Extinguishment of debt
Litigation reserve
Income taxes
Non-GAAP operating income
$ 425,740
$
285,050
$
122,344
$
195,820
$
190,646
(a) In addition to net income, we have consistently utilized non-GAAP operating income and non-GAAP operating income per common share—assuming dilution, non-GAAP financial measures commonly used
in the life insurance industry, as economic measures to evaluate our financial performance. Non-GAAP operating income equals net income adjusted to eliminate the impact of items that fluctuate from year
to year 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 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. In addition, 2017 includes a
$35.9 million adjustment to arrive at non-GAAP operating income resulting from the Tax Cuts and Jobs Act of 2017, which was enacted on December 22, 2017, and required a revaluation of our net
deferred tax assets from 35% to 21%. We believe the combined presentation and evaluation of non-GAAP operating income together with net income provides information that may enhance an investor’s
understanding of our underlying results and profitability. The amounts included in the reconciliation of net income to non-GAAP operating income are presented net of related adjustments to amortization of
deferred sales inducements and deferred policy acquisition costs.
(b) Total stockholders’ equity and book value per share excluding AOCI, non-GAAP financial measures, are based on stockholders’ equity excluding the effect of AOCI. Since AOCI fluctuates from quarter to quarter
due to unrealized changes in the fair value of available for sale investments, we believe these non-GAAP financial measures provide useful supplemental information.
ii
$200
$150
$100
$50
$0
DEC.
31, 2013
s
r
a
l
l
o
D
f
o
s
n
o
i
l
l
i
B
8
7
6
5
4
3
2
1
0
COMPARISON OF CUMULATIVE FIVE-YEAR TOTAL RETURN
JUNE
30, 2014
DEC.
31, 2014
JUNE
30, 2015
DEC.
31, 2015
JUNE
30, 2016
DEC.
31, 2016
JUNE
30, 2017
DEC.
31, 2017
JUNE
30, 2018
DEC.
31, 2018
American Equity Investment
Life Holding Co.
S&P 500 Index
S&P 500 Financials Index
TOTAL ANNUITY DEPOSITS
TOTAL ASSETS
7.1
7.1
4.2
4.2
4.4
2014
2015
2016
2017
2018
s
r
a
l
l
o
D
f
o
s
n
o
i
l
l
i
B
70
60
50
40
30
20
10
0
62.0
61.6
56.1
49.0
44.0
2014
2015
2016
2017
2018
CREDIT QUALITY OF FIXED MATURITY SECURITIES
NAIC 2
38.2%
NAIC 1
58.6%
NAIC 3
2.8%
NAIC 4
0.3%
NAIC 5
—%
NAIC 6
0.1%
iii
> THE ONE WHO WORKS FOR YOU ®
a IN THE INDUSTRY
Securing a lifelong income is one of
today’s top retirement goals. From day
one, American Equity has been committed
to developing and delivering safe money
alternatives to help Americans reach
that goal. Our annuity product line is
designed to protect retirement savings
and guarantee retirement income. As
a leading fixed index annuity provider,
we help fund more than half a million
retirements across the country.
As more Americans reach retirement age,
the demand for products that provide
principal protection, growth opportunities
and guaranteed lifetime income continues
to increase. American Equity is poised
to help retirees meet their income
needs with products they understand
and service they can depend on.
p IN THE WORKPLACE
Our company culture was founded on
a people-first philosophy, where quality
service is of paramount importance. That
legacy continues to thrive with more than
550 team members in our two West Des
Moines offices. We have been named a Top
Workplace in Iowa for eight consecutive
years. In the last two years, we were especially
honored to earn No. 6 and No. 5 rankings,
respectively, in the Large Company category.
, IN THE COMMUNITY
In addition to our role as one of the top
fixed index annuity providers, we are also a
proud corporate citizen. Our team members
take an active role in the community through
company-sponsored philanthropic initiatives
with local and national charities. Moreover,
our team members invest their own time in
charities they are passionate about through our
volunteer program, which allots eight hours
of paid volunteer time off for employees.
American Equity employees
volunteer at a Meals from the
Heartland meal-packing event
in West Des Moines, Iowa.
iv
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from to
Commission File Number: 001-31911
______________________________________________
American Equity Investment Life Holding Company
(Exact name of registrant as specified in its charter)
Iowa
(State or other jurisdiction of Incorporation)
6000 Westown Parkway
West Des Moines, Iowa
(Address of principal executive offices)
42-1447959
(I.R.S. Employer Identification No.)
50266
(Zip Code)
Registrant's telephone number, including area code: (515) 221-0002
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock, par value $1
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and
"emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting
company
Emerging growth
company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes
No
Aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $3,203,746,848 based on
the closing price of $36.00 per share, the closing price of the common stock on the New York Stock Exchange on June 29, 2018.
Shares of common stock outstanding as of February 18, 2019: 90,502,491
Documents incorporated by reference: Portions of the registrant's definitive proxy statement for the annual meeting of shareholders to be
held June 6, 2019, which will be filed within 120 days after December 31, 2018, are incorporated by reference into Part III of this report.
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2018
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Consolidated Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
PART I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
Item 6.
Item 7.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III.
PART IV.
Item 15.
SIGNATURES
Consolidated Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
The information required by Items 10 through 14 is incorporated by reference from our definitive
proxy statement to be filed with the Commission pursuant to Regulation 14A within 120 days after
December 31, 2018.
Exhibits and Financial Statement Schedules
Index to Consolidated Financial Statements and Schedules
Exhibit 21.2
Subsidiaries of American Equity Investment Life Holding Company
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
Exhibit 31.1
Certification
Exhibit 31.2
Certification
Exhibit 32.1
Certification
Exhibit 32.2
Certification
1
8
15
15
15
15
16
17
19
46
48
48
48
48
48
49
52
F-1
Item 1. Business
Introduction
PART I
We are a leader in the development and sale of fixed index and fixed rate annuity products. We were incorporated in the state of Iowa on
December 15, 1995. We issue fixed annuity products through our wholly-owned life insurance subsidiaries, American Equity Investment Life
Insurance Company ("American Equity Life"), American Equity Investment Life Insurance Company of New York and Eagle Life Insurance
Company ("Eagle Life"). We have one business segment which represents our core business comprised of the sale of fixed index and fixed rate
annuities. Our business strategy is focused on growing our policyholder funds and earning predictable returns by managing investment spreads
and investment risk. We are licensed to sell our products in 50 states and the District of Columbia. Throughout this report, unless otherwise
specified or the context otherwise requires, all references to "American Equity", the "Company", "we", "our" and similar references are to
American Equity Investment Life Holding Company and its consolidated subsidiaries.
Investor related information, including periodic reports filed on Forms 10-K, 10-Q and 8-K and any amendments may be found on our website
at www.american-equity.com as soon as reasonably practicable after such reports are filed with the Securities and Exchange Commission ("SEC").
In addition, we have available on our website our: (i) code of business conduct and ethics; (ii) audit committee charter; (iii) compensation
committee charter; (iv) nominating and corporate governance committee charter and (v) corporate governance guidelines. The information
incorporated herein by reference is also electronically accessible from the SEC's website at www.sec.gov.
Annuity Market Overview
Our target market includes the group of individuals ages 45-75 who are seeking to accumulate tax-deferred savings or create guaranteed lifetime
income. We believe that significant growth opportunities exist for annuity products because of favorable demographic and economic trends.
According to the U.S. Census Bureau, there were approximately 39 million Americans age 65 and older in 2010, representing 13% of the U.S.
population and this group has grown to 49.2 million in 2016. By 2030, this sector of the population is expected to increase to 20% of the total
population. Our fixed index and fixed rate annuity products are particularly attractive to this group due to their principal protection, competitive
rates of credited interest, tax-deferred growth, guaranteed lifetime income and alternative payout options. Our competitive fixed index and fixed
rate annuity products have enabled us to enjoy favorable growth in recent years and since our formation.
According to Wink's Sales and Market Report published by Wink, Inc., total industry sales of fixed index annuities increased 22% to $49.3
billion for the first three quarters of 2018 from $40.4 billion for the first three quarters of 2017. Total industry sales of fixed index annuities
have increased 40% over the five-year period from 2012 to 2017 (data provided in the following table according to Wink's Sales and Market
Report published by Wink, Inc.), which we believe is attributable to more Americans reaching retirement age and seeking products that will
provide principal protection and guaranteed lifetime income.
Total industry sales of fixed index annuities
$53,992,850
$ 58,235,265
$ 53,069,850
$ 46,896,350
$ 38,646,864
2017
2016
2015
2014
2013
For the Year Ended December 31,
(Dollars in thousands)
(4,242,415)
5,165,415
6,173,500
8,249,486
4,671,422
(7.3)%
9.7%
13.2 %
21.3%
13.7%
Increase (decrease) from prior year
Increase (decrease) from prior year
Strategy
Key elements of executing our strategy include the following:
Expand and Enhance our Distribution Network. We currently distribute through several distribution channels, including independent
agents, broker/dealers, banks and registered investment advisors. American Equity Life has relationships with 32 national marketing
organizations, through which nearly 24,000 independent agents are under contract. Our objective is to improve the productivity and
efficiency of our independent agent distribution channel by focusing our marketing and recruiting efforts on those independent agents
capable of selling $1 million or more of annuity premium annually. We will also be alert for opportunities to establish relationships
with successful national marketing organizations and agents not presently associated with us. Eagle Life has relationships with 12
third party wholesale distribution partners, through which there are 70 selling agreements and more than 7,300 representatives. Thirteen
of these selling agreements are with broker/dealers affiliated with banks. We are also building out our employee wholesaling model.
Our employee wholesalers will work with those accounts who do not work with third party wholesalers. According to Wink's Sales
and Market Report published by Wink, Inc., sales of fixed index annuities through broker/dealers and banks represented 38% of
industry sales in the third quarter of 2018. Eagle Life is focused solely on the broker/dealer, bank and registered investment advisor
channel and is developing a network of broker/dealers, banks and registered investment advisors that have the ability to distribute
fixed index and fixed rate annuity products in large volume. We also offer broker/dealer and bank friendly products for those broker/
dealers and banks that choose to associate with us through American Equity Life. We continue to strive to provide all of our distribution
partners with the highest quality service possible.
1
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2018
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Consolidated Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Consolidated Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
The information required by Items 10 through 14 is incorporated by reference from our definitive
proxy statement to be filed with the Commission pursuant to Regulation 14A within 120 days after
December 31, 2018.
PART IV.
Item 15.
SIGNATURES
Exhibits and Financial Statement Schedules
Index to Consolidated Financial Statements and Schedules
Exhibit 21.2
Subsidiaries of American Equity Investment Life Holding Company
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
Exhibit 31.1
Certification
Exhibit 31.2
Certification
Exhibit 32.1
Certification
Exhibit 32.2
Certification
1
8
15
15
15
15
16
17
19
46
48
48
48
48
48
49
52
F-1
Item 1. Business
Introduction
PART I
We are a leader in the development and sale of fixed index and fixed rate annuity products. We were incorporated in the state of Iowa on
December 15, 1995. We issue fixed annuity products through our wholly-owned life insurance subsidiaries, American Equity Investment Life
Insurance Company ("American Equity Life"), American Equity Investment Life Insurance Company of New York and Eagle Life Insurance
Company ("Eagle Life"). We have one business segment which represents our core business comprised of the sale of fixed index and fixed rate
annuities. Our business strategy is focused on growing our policyholder funds and earning predictable returns by managing investment spreads
and investment risk. We are licensed to sell our products in 50 states and the District of Columbia. Throughout this report, unless otherwise
specified or the context otherwise requires, all references to "American Equity", the "Company", "we", "our" and similar references are to
American Equity Investment Life Holding Company and its consolidated subsidiaries.
Investor related information, including periodic reports filed on Forms 10-K, 10-Q and 8-K and any amendments may be found on our website
at www.american-equity.com as soon as reasonably practicable after such reports are filed with the Securities and Exchange Commission ("SEC").
In addition, we have available on our website our: (i) code of business conduct and ethics; (ii) audit committee charter; (iii) compensation
committee charter; (iv) nominating and corporate governance committee charter and (v) corporate governance guidelines. The information
incorporated herein by reference is also electronically accessible from the SEC's website at www.sec.gov.
Annuity Market Overview
Our target market includes the group of individuals ages 45-75 who are seeking to accumulate tax-deferred savings or create guaranteed lifetime
income. We believe that significant growth opportunities exist for annuity products because of favorable demographic and economic trends.
According to the U.S. Census Bureau, there were approximately 39 million Americans age 65 and older in 2010, representing 13% of the U.S.
population and this group has grown to 49.2 million in 2016. By 2030, this sector of the population is expected to increase to 20% of the total
population. Our fixed index and fixed rate annuity products are particularly attractive to this group due to their principal protection, competitive
rates of credited interest, tax-deferred growth, guaranteed lifetime income and alternative payout options. Our competitive fixed index and fixed
rate annuity products have enabled us to enjoy favorable growth in recent years and since our formation.
According to Wink's Sales and Market Report published by Wink, Inc., total industry sales of fixed index annuities increased 22% to $49.3
billion for the first three quarters of 2018 from $40.4 billion for the first three quarters of 2017. Total industry sales of fixed index annuities
have increased 40% over the five-year period from 2012 to 2017 (data provided in the following table according to Wink's Sales and Market
Report published by Wink, Inc.), which we believe is attributable to more Americans reaching retirement age and seeking products that will
provide principal protection and guaranteed lifetime income.
Total industry sales of fixed index annuities
$53,992,850
$ 58,235,265
$ 53,069,850
$ 46,896,350
$ 38,646,864
2017
2016
2015
2014
2013
For the Year Ended December 31,
(Dollars in thousands)
Increase (decrease) from prior year
Increase (decrease) from prior year
Strategy
Key elements of executing our strategy include the following:
(4,242,415)
5,165,415
6,173,500
8,249,486
4,671,422
(7.3)%
9.7%
13.2 %
21.3%
13.7%
Expand and Enhance our Distribution Network. We currently distribute through several distribution channels, including independent
agents, broker/dealers, banks and registered investment advisors. American Equity Life has relationships with 32 national marketing
organizations, through which nearly 24,000 independent agents are under contract. Our objective is to improve the productivity and
efficiency of our independent agent distribution channel by focusing our marketing and recruiting efforts on those independent agents
capable of selling $1 million or more of annuity premium annually. We will also be alert for opportunities to establish relationships
with successful national marketing organizations and agents not presently associated with us. Eagle Life has relationships with 12
third party wholesale distribution partners, through which there are 70 selling agreements and more than 7,300 representatives. Thirteen
of these selling agreements are with broker/dealers affiliated with banks. We are also building out our employee wholesaling model.
Our employee wholesalers will work with those accounts who do not work with third party wholesalers. According to Wink's Sales
and Market Report published by Wink, Inc., sales of fixed index annuities through broker/dealers and banks represented 38% of
industry sales in the third quarter of 2018. Eagle Life is focused solely on the broker/dealer, bank and registered investment advisor
channel and is developing a network of broker/dealers, banks and registered investment advisors that have the ability to distribute
fixed index and fixed rate annuity products in large volume. We also offer broker/dealer and bank friendly products for those broker/
dealers and banks that choose to associate with us through American Equity Life. We continue to strive to provide all of our distribution
partners with the highest quality service possible.
1
Continue to Introduce Innovative and Competitive Products. We intend to be at the forefront of the fixed index and fixed rate annuity
industry in developing and introducing innovative and competitive products. We were one of the first companies to offer a fixed index
annuity that allows a choice among interest crediting strategies including both equity and bond indices as well as a traditional fixed
rate strategy. We were one of the first companies to include a lifetime income benefit rider with our fixed index annuities and first to
have a lifetime income benefit rider with gender-based income payments. We believe that our continued focus on anticipating and
being responsive to the product needs of the ever-growing population of retirees will lead to increased customer loyalty, revenues and
profitability.
Use our Expertise to Achieve Targeted Spreads on Annuity Products. We have had a successful track record in achieving the targeted
spreads on our annuity products. This historical success has been challenged in the current extended low interest rate environment.
However, we intend to continue to leverage our experience and expertise in managing the investment spread during a range of interest
rate environments to achieve, or work towards achieving, our targeted spreads.
Maintain our Profitability Focus and Improve Operating Efficiency. We are committed to improving our profitability by advancing
the scope and sophistication of our investment management and spread capabilities and continuously seeking out efficiencies within
our operations. The expanded use of technological resources will continue to allow us to improve our processes, scalability and response
times.
similar characteristics.
Fixed Rate Annuities
Take Advantage of the Growing Popularity of Index Products. We believe the growing popularity of fixed index annuity products
that allow equity market participation without the risk of loss of the premium deposit presents an attractive opportunity to grow our
business. The popularity of fixed index annuity products has increased in recent years with the availability of lifetime income benefit
riders that provide an attractive alternative for converting accumulated retirement savings into lifetime income. We intend to capitalize
on our reputation as a leading provider of fixed index annuities in this expanding segment of the annuity market.
Focus on High Quality Service to Agents and Policyholders. We have maintained high quality personal service as one of our highest
priorities since our inception and continue to strive for an unprecedented level of timely and accurate service to both our agents and
policyholders. Examples of our high quality service include a live person answering phone calls and issuing policies within 24 hours
of receiving the application if the paperwork is in good order. We also continue to focus on technological advancements to enable us
to maintain high quality service to agents and policyholders. Our goal is to achieve digital service on par with the high quality personal
service provided by our employees. We believe high quality service is one of our strongest competitive advantages.
Be Proactive in the Changing Regulatory Environment. We have been a strong and vocal defender of our products and our industry
through continued regulatory challenges and have long been an advocate for appropriate regulation. We intend to remain flexible and
responsive to the ever changing regulatory environment and will continue to engage with our key regulators to ensure policyholder
protections are in place and adequate while permitting continued access to our much needed retirement products.
Products
Annuities offer our policyholders a tax-deferred means of accumulating retirement savings, as well as a reliable source of income during the
payout period. When our policyholders deposit cash to annuities, we account for these receipts as policy benefit reserves in the liability section
of our consolidated balance sheet. The annuity deposits collected, by product type, during the three most recent fiscal years are as follows:
Product Type
Year Ended December 31,
2018
2017
2016
Deposits
Collected
Deposits
as a % of
Total
Deposits
Collected
Deposits
as a % of
Total
(Dollars in thousands)
Deposits
Collected
Deposits
as a % of
Total
Fixed index annuities
$
4,221,282
96 % $
3,966,839
95 % $
5,724,758
Annual reset fixed rate annuities
Multi-year fixed rate annuities
Single premium immediate annuities
47,191
112,677
23,813
1 %
3 %
— %
74,829
110,596
24,946
2 %
3 %
— %
64,317
1,303,273
35,851
$
4,404,963
100 % $
4,177,210
100 % $
7,128,199
80%
1%
18%
1%
100%
Fixed Index Annuities
Fixed index annuities allow policyholders to earn index credits based on the performance of a particular index without the risk of loss of their
account value. Most of these products allow policyholders to transfer funds once a year among several different crediting strategies, including
one or more index based strategies and a traditional fixed rate strategy. Bonus products represented 81%, 87% and 88% of our net annuity account
values at December 31, 2018, 2017 and 2016, respectively. The initial annuity deposit on these policies is increased at issuance by a specified
premium bonus ranging from 3% to 10%. Generally, the surrender charge and bonus vesting provisions of our policies are structured such that
we have comparable protection from early termination between bonus and non-bonus products.
The annuity contract value is equal to the sum of premiums paid, premium bonuses and interest credited ("index credits" for funds allocated to
an index based strategy), which is based upon an overall limit (or "cap") or a percentage (the "participation rate") of the appreciation (based in
certain situations on monthly averages or monthly point-to-point calculations) in a recognized index or benchmark. Caps and participation rates
limit the amount of interest the policyholder may earn in any one contract year and may be adjusted by us annually subject to stated minimums.
Caps generally range from 1% to 12% and participation rates range from 10% to 175%. In addition, some products have a spread or "asset fee"
generally ranging from 0.75% to 4.5%, which is deducted from interest to be credited. For products with asset fees, if the appreciation in the
index does not exceed the asset fee, the policyholder's index credit is zero. The minimum guaranteed surrender values are equal to no less than
87.5% of the premium collected plus interest credited at an annual rate ranging from 1% to 3%.
The initial caps and participation rates are largely a function of the cost of the call options we purchase to fund the index credits, the interest rate
we can earn on invested assets acquired with new annuity deposits and the rates offered on similar products by our competitors. For subsequent
adjustments to caps and participation rates, we take into account the cost of the call options we purchase to fund the index credits, yield on our
investment portfolio, annuity surrender and withdrawal assumptions and crediting rate history for particular groups of annuity policies with
Fixed rate deferred annuities include annual reset and multi-year rate guaranteed products. Our annual reset fixed rate annuities have an annual
interest rate (the "crediting rate") that is guaranteed for the first policy year. After the first policy year, we have the discretionary ability to change
the crediting rate once annually to any rate at or above a guaranteed minimum rate. Our multi-year rate guaranteed annuities are similar to our
annual reset products except that the initial crediting rate is guaranteed for up to seven years before it may be changed at our discretion. The
minimum guaranteed rate on our annual reset fixed rate deferred annuities ranges from 1% to 4% and the initial guaranteed rate on our multi-
year rate guaranteed policies ranges from 1.7% to 3.35%.
The initial crediting rate is largely a function of the interest rate we can earn on invested assets acquired with new annuity deposits and the rates
offered on similar products by our competitors. For subsequent adjustments to crediting rates, we take into account the yield on our investment
portfolio, annuity surrender and withdrawal assumptions and crediting rate history for particular groups of annuity policies with similar
characteristics. As of December 31, 2018, crediting rates on our outstanding fixed rate deferred annuities generally ranged from 1.0% to 4.0%.
The average crediting rates on our outstanding annual reset and multi-year rate guaranteed fixed rate deferred annuities at December 31, 2018
were 1.82% and 2.74%, respectively.
We also sell single premium immediate annuities ("SPIAs"). Our SPIAs provide a series of periodic payments for a fixed period of time or for
life, according to the policyholder's choice at the time of issue. The amounts, frequency and length of time of the payments are fixed at the
outset of the annuity contract. SPIAs are often purchased by persons at or near retirement age who desire a steady stream of payments over a
future period of years.
Withdrawal Options - Fixed Index and Fixed Rate Annuities
Policyholders are typically permitted penalty-free withdrawals up to 10% of the contract value in each year after the first year, subject to
limitations. Withdrawals in excess of allowable penalty-free amounts are assessed a surrender charge during a penalty period which ranges from
5 to 17 years for fixed index annuities and 5 to 15 years for fixed rate annuities from the date the policy is issued. This surrender charge initially
ranges from 5% to 20% for fixed index annuities and 8% to 20% for fixed rate annuities of the contract value and generally decreases by
approximately one-half to two percentage points per year during the surrender charge period. For certain policies, the premium bonus is considered
in the establishment of the surrender charge percentages. For other policies, there is a vesting schedule ranging from 10 to 14 years that applies
to the premium bonus and any interest earned on that premium bonus. Surrender charges and bonus vesting are set at levels aimed at protecting
us from loss on early terminations and reducing the likelihood of policyholders terminating their policies during periods of increasing interest
rates. This practice enhances our ability to maintain profitability on such policies. Policyholders may elect to take the proceeds of the annuity
either in a single payment or in a series of payments for life, for a fixed number of years or a combination of these payment options. Information
on surrender charge protection and net account values are as follows:
Annuity Surrender Charges:
Average years at issue
Average years remaining
Average surrender charge percentage remaining
Annuity Account Value (net of coinsurance)
2018
2016
December 31,
2017
(Dollars in thousands)
13.2
7.5
12.1%
13.4
8.1
13.0%
13.5
8.6
13.8%
$
51,053,450
$
48,400,755
$
45,204,015
2
3
Continue to Introduce Innovative and Competitive Products. We intend to be at the forefront of the fixed index and fixed rate annuity
industry in developing and introducing innovative and competitive products. We were one of the first companies to offer a fixed index
annuity that allows a choice among interest crediting strategies including both equity and bond indices as well as a traditional fixed
rate strategy. We were one of the first companies to include a lifetime income benefit rider with our fixed index annuities and first to
have a lifetime income benefit rider with gender-based income payments. We believe that our continued focus on anticipating and
being responsive to the product needs of the ever-growing population of retirees will lead to increased customer loyalty, revenues and
profitability.
times.
Use our Expertise to Achieve Targeted Spreads on Annuity Products. We have had a successful track record in achieving the targeted
spreads on our annuity products. This historical success has been challenged in the current extended low interest rate environment.
However, we intend to continue to leverage our experience and expertise in managing the investment spread during a range of interest
rate environments to achieve, or work towards achieving, our targeted spreads.
Maintain our Profitability Focus and Improve Operating Efficiency. We are committed to improving our profitability by advancing
the scope and sophistication of our investment management and spread capabilities and continuously seeking out efficiencies within
our operations. The expanded use of technological resources will continue to allow us to improve our processes, scalability and response
Take Advantage of the Growing Popularity of Index Products. We believe the growing popularity of fixed index annuity products
that allow equity market participation without the risk of loss of the premium deposit presents an attractive opportunity to grow our
business. The popularity of fixed index annuity products has increased in recent years with the availability of lifetime income benefit
riders that provide an attractive alternative for converting accumulated retirement savings into lifetime income. We intend to capitalize
on our reputation as a leading provider of fixed index annuities in this expanding segment of the annuity market.
Focus on High Quality Service to Agents and Policyholders. We have maintained high quality personal service as one of our highest
priorities since our inception and continue to strive for an unprecedented level of timely and accurate service to both our agents and
policyholders. Examples of our high quality service include a live person answering phone calls and issuing policies within 24 hours
of receiving the application if the paperwork is in good order. We also continue to focus on technological advancements to enable us
to maintain high quality service to agents and policyholders. Our goal is to achieve digital service on par with the high quality personal
service provided by our employees. We believe high quality service is one of our strongest competitive advantages.
The annuity contract value is equal to the sum of premiums paid, premium bonuses and interest credited ("index credits" for funds allocated to
an index based strategy), which is based upon an overall limit (or "cap") or a percentage (the "participation rate") of the appreciation (based in
certain situations on monthly averages or monthly point-to-point calculations) in a recognized index or benchmark. Caps and participation rates
limit the amount of interest the policyholder may earn in any one contract year and may be adjusted by us annually subject to stated minimums.
Caps generally range from 1% to 12% and participation rates range from 10% to 175%. In addition, some products have a spread or "asset fee"
generally ranging from 0.75% to 4.5%, which is deducted from interest to be credited. For products with asset fees, if the appreciation in the
index does not exceed the asset fee, the policyholder's index credit is zero. The minimum guaranteed surrender values are equal to no less than
87.5% of the premium collected plus interest credited at an annual rate ranging from 1% to 3%.
The initial caps and participation rates are largely a function of the cost of the call options we purchase to fund the index credits, the interest rate
we can earn on invested assets acquired with new annuity deposits and the rates offered on similar products by our competitors. For subsequent
adjustments to caps and participation rates, we take into account the cost of the call options we purchase to fund the index credits, yield on our
investment portfolio, annuity surrender and withdrawal assumptions and crediting rate history for particular groups of annuity policies with
similar characteristics.
Fixed Rate Annuities
Fixed rate deferred annuities include annual reset and multi-year rate guaranteed products. Our annual reset fixed rate annuities have an annual
interest rate (the "crediting rate") that is guaranteed for the first policy year. After the first policy year, we have the discretionary ability to change
the crediting rate once annually to any rate at or above a guaranteed minimum rate. Our multi-year rate guaranteed annuities are similar to our
annual reset products except that the initial crediting rate is guaranteed for up to seven years before it may be changed at our discretion. The
minimum guaranteed rate on our annual reset fixed rate deferred annuities ranges from 1% to 4% and the initial guaranteed rate on our multi-
year rate guaranteed policies ranges from 1.7% to 3.35%.
The initial crediting rate is largely a function of the interest rate we can earn on invested assets acquired with new annuity deposits and the rates
offered on similar products by our competitors. For subsequent adjustments to crediting rates, we take into account the yield on our investment
portfolio, annuity surrender and withdrawal assumptions and crediting rate history for particular groups of annuity policies with similar
characteristics. As of December 31, 2018, crediting rates on our outstanding fixed rate deferred annuities generally ranged from 1.0% to 4.0%.
The average crediting rates on our outstanding annual reset and multi-year rate guaranteed fixed rate deferred annuities at December 31, 2018
were 1.82% and 2.74%, respectively.
Be Proactive in the Changing Regulatory Environment. We have been a strong and vocal defender of our products and our industry
through continued regulatory challenges and have long been an advocate for appropriate regulation. We intend to remain flexible and
responsive to the ever changing regulatory environment and will continue to engage with our key regulators to ensure policyholder
protections are in place and adequate while permitting continued access to our much needed retirement products.
We also sell single premium immediate annuities ("SPIAs"). Our SPIAs provide a series of periodic payments for a fixed period of time or for
life, according to the policyholder's choice at the time of issue. The amounts, frequency and length of time of the payments are fixed at the
outset of the annuity contract. SPIAs are often purchased by persons at or near retirement age who desire a steady stream of payments over a
future period of years.
Products
Withdrawal Options - Fixed Index and Fixed Rate Annuities
Annuities offer our policyholders a tax-deferred means of accumulating retirement savings, as well as a reliable source of income during the
payout period. When our policyholders deposit cash to annuities, we account for these receipts as policy benefit reserves in the liability section
of our consolidated balance sheet. The annuity deposits collected, by product type, during the three most recent fiscal years are as follows:
Product Type
Deposits
Collected
Deposits
as a % of
Total
Deposits
Collected
Deposits
as a % of
Total
2018
2017
2016
Year Ended December 31,
Deposits
Collected
Deposits
as a % of
Total
(Dollars in thousands)
Fixed index annuities
$
4,221,282
96 % $
3,966,839
95 % $
5,724,758
Annual reset fixed rate annuities
Multi-year fixed rate annuities
Single premium immediate annuities
47,191
112,677
23,813
1 %
3 %
— %
74,829
110,596
24,946
2 %
3 %
— %
64,317
1,303,273
35,851
$
4,404,963
100 % $
4,177,210
100 % $
7,128,199
80%
1%
18%
1%
100%
Fixed Index Annuities
Fixed index annuities allow policyholders to earn index credits based on the performance of a particular index without the risk of loss of their
account value. Most of these products allow policyholders to transfer funds once a year among several different crediting strategies, including
one or more index based strategies and a traditional fixed rate strategy. Bonus products represented 81%, 87% and 88% of our net annuity account
values at December 31, 2018, 2017 and 2016, respectively. The initial annuity deposit on these policies is increased at issuance by a specified
premium bonus ranging from 3% to 10%. Generally, the surrender charge and bonus vesting provisions of our policies are structured such that
we have comparable protection from early termination between bonus and non-bonus products.
Policyholders are typically permitted penalty-free withdrawals up to 10% of the contract value in each year after the first year, subject to
limitations. Withdrawals in excess of allowable penalty-free amounts are assessed a surrender charge during a penalty period which ranges from
5 to 17 years for fixed index annuities and 5 to 15 years for fixed rate annuities from the date the policy is issued. This surrender charge initially
ranges from 5% to 20% for fixed index annuities and 8% to 20% for fixed rate annuities of the contract value and generally decreases by
approximately one-half to two percentage points per year during the surrender charge period. For certain policies, the premium bonus is considered
in the establishment of the surrender charge percentages. For other policies, there is a vesting schedule ranging from 10 to 14 years that applies
to the premium bonus and any interest earned on that premium bonus. Surrender charges and bonus vesting are set at levels aimed at protecting
us from loss on early terminations and reducing the likelihood of policyholders terminating their policies during periods of increasing interest
rates. This practice enhances our ability to maintain profitability on such policies. Policyholders may elect to take the proceeds of the annuity
either in a single payment or in a series of payments for life, for a fixed number of years or a combination of these payment options. Information
on surrender charge protection and net account values are as follows:
Annuity Surrender Charges:
Average years at issue
Average years remaining
Average surrender charge percentage remaining
Annuity Account Value (net of coinsurance)
2018
December 31,
2017
(Dollars in thousands)
2016
13.2
7.5
12.1%
13.4
8.1
13.0%
13.5
8.6
13.8%
$
51,053,450
$
48,400,755
$
45,204,015
2
3
Beginning in July 2007 a significant amount of our fixed index annuity policies and many of our annual reset fixed rate deferred annuities were
issued with a lifetime income benefit rider. This rider provides an additional liquidity option to policyholders. With the lifetime income benefit
rider, a policyholder can elect to receive guaranteed payments for life from their contract without requiring them to annuitize their contract value.
The amount of the lifetime income benefit available is determined by the growth in the policy's income account value and the policyholder's
age at the time the policyholder elects to begin receiving lifetime income benefit payments. The growth in the policy's income account value
is based on the growth rate specified in the policy which ranges from 3.0% to 8.5% and the time period over which that growth rate is applied
which ranges from 5 to 20 years for the majority of these policies. Generally, the time period consists of an initial period of up to 10 years and
the policyholder has the option to elect to continue the time period for an additional period of up to 10 years. We have the option to either
increase the rider fee or decrease the specified growth rate depending on the specifics of the policy at the time the policyholder elects to continue
the time period. Lifetime income benefit payments may be stopped and restarted at the election of the policyholder. During 2013, we introduced
new versions of our lifetime income benefit rider that had an optional wellbeing benefit or optional death benefit. Policyholders have the choice
of selecting a rider with a base level of benefit for no explicit fee or paying a fee for a rider that has a higher level of benefits, and beginning in
2013 we introduced products where the addition of a rider to the policy is completely optional. Rider fees range from 0.15% to 1.20% of the
policy's account value. The additional value to the policyholder provided by this rider through the income account value is not transferable to
other contracts and we believe will improve the persistency of the contract.
Investments/Spread Management
Investment activities are an integral part of our business, and net investment income is a significant component of our total revenues. Profitability
of our annuity products is significantly affected by spreads between interest yields on investments, the cost of options to fund the index credits
on our fixed index annuities and rates credited on our fixed rate annuities and the fixed rate strategy in our fixed index annuities. We manage
the index-based risk component of our fixed index annuities by purchasing call options on the applicable indices to fund the index credits on
these annuities and by adjusting the caps, participation rates and asset fees on policy anniversary dates to reflect the change in the cost of such
options which varies based on market conditions. All options are purchased on the respective policy anniversary dates, and new options are
purchased on each of the anniversary dates to fund the next index credits. All credited rates on annual reset fixed rate deferred annuities and
the fixed rate strategy in fixed index annuities may be changed annually, subject to minimum guarantees. Changes in caps, participation rates
and asset fees on fixed index annuities and crediting rates on fixed rate and fixed index annuities may not be sufficient to maintain targeted
investment spreads in all economic and market environments. In addition, competition and other factors, including the potential for increases
in surrenders and withdrawals, may limit our ability to adjust or to maintain caps, participation rates, asset fees and crediting rates at levels
necessary to avoid narrowing of spreads under certain market conditions.
For additional information regarding the composition of our investment portfolio and our interest rate risk management, see Management's
Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Investments, Quantitative and Qualitative
Disclosures About Market Risk and Note 3 to our audited consolidated financial statements.
Marketing/Distribution
We market our products through a variable cost distribution network, including independent agents through national marketing organizations,
broker/dealers, banks and registered investment advisors. We emphasize high quality service to our agents, distribution partners and policyholders
along with the prompt payment of commissions to our agents and distribution partners. We believe this has been significant in building excellent
relationships with our distribution network.
Our independent agents and agencies range in profile from national sales organizations to personal producing general agents. We actively recruit
new agents and terminate those agents who have not produced business for us in recent periods and are unlikely to sell our products in the future.
In our recruitment efforts, we emphasize that agents have direct access to our senior leadership, giving us an edge in recruiting over larger and
foreign-owned competitors. We also emphasize our products, service and our focused fixed annuity expertise. We also have favorable relationships
with our national marketing organizations, which have enabled us to efficiently sell through an expanded number of independent agents.
The independent agent distribution system is comprised of insurance brokers and marketing organizations. We are pursuing a strategy to increase
the efficiency of our independent agent distribution network by strengthening our relationships with key national and regional marketing
organizations and are alert for opportunities to establish relationships with organizations not presently associated with us. These organizations
typically recruit agents for us by advertising our products and our commission structure through direct mail advertising or seminars for insurance
agents and brokers. These organizations bear most of the cost incurred in marketing our products. We compensate marketing organizations by
paying them a percentage of the commissions earned on new annuity policy sales generated by the agents recruited by such organizations. We
generally do not enter into exclusive arrangements with these marketing organizations.
Agents contracted with us through two national marketing organizations accounted for more than 34% of the annuity deposits and insurance
premiums collected during 2018 by American Equity Life, and we expect these organizations to continue as marketers for American Equity Life
with a focus on selling our products. The states with the largest share of direct premium collected during 2018 were: Florida (8.8%), Texas
(8.0%), Pennsylvania (6.4%), North Carolina (5.1%) and California (5.0%).
Eagle Life's fixed index and fixed rate annuities are distributed pursuant to selling agreements with broker/dealers, banks and registered investment
advisors. Relationships with these firms are facilitated by third party wholesalers who promote Eagle Life and are compensated based upon the
sales of the firms that they have contracted with Eagle Life. We are also building out our employee wholesaling model. Our employee wholesalers
will work with those accounts that do not work with third party wholesalers. American Equity Life to a lesser extent also sells through broker/
dealers and we have introduced products specifically for this distribution channel.
Competition and Ratings
We operate in a highly competitive industry. Our annuity products compete with fixed index, fixed rate and variable annuities sold by other
insurance companies and also with mutual fund products, traditional bank products and other investment and retirement funding alternatives
offered by asset managers, banks, and broker/dealers. Our insurance products compete with products of other insurance companies, financial
intermediaries and other institutions based on a number of features, including crediting rates, index options, policy terms and conditions, service
provided to distribution channels and policyholders, ratings, reputation and distributor compensation.
The sales agents for our products use the ratings assigned to an insurer by independent rating agencies as one factor in determining which insurer's
annuity to market. The degree to which ratings adjustments have affected and will affect our sales and persistency is unknown. Following is a
summary of American Equity Life's financial strength ratings:
Financial Strength Rating
Outlook Statement
A.M. Best Company, Inc.
January 2011 - current
S&P Global
August 2015 - current
June 2013 - August 2015
October 2011 - June 2013
Fitch Ratings Ltd.
September 2018 - current
May 2013 - September 2018
A-
A-
BBB+
BBB+
BBB+
BBB+
Stable
Stable
Positive
Stable
Positive
Stable
Financial strength ratings generally involve quantitative and qualitative evaluations by rating agencies of a company's financial condition and
operating performance. Generally, rating agencies base their ratings upon information furnished to them by the insurer and upon their own
investigations, studies and assumptions. Ratings are based upon factors of concern to policyholders, agents and intermediaries and are not
directed toward the protection of investors and are not recommendations to buy, sell or hold securities.
In addition to the financial strength ratings, rating agencies use an "outlook statement" to indicate a medium or long-term trend which, if continued,
may lead to a rating change. A positive outlook indicates a rating may be raised and a negative outlook indicates a rating may be lowered. A
stable outlook is assigned when ratings are not likely to be changed. Outlook statements should not be confused with expected stability of the
insurer's financial or economic performance. A rating may have a "stable" outlook to indicate that the rating is not expected to change, but a
"stable" outlook does not preclude a rating agency from changing a rating at any time without notice.
In December 2018, A.M. Best changed its rating outlook on the U.S. life/annuity sector to 'stable' from 'negative', reflecting its view that the
sector is well-capitalized and insurers balance sheets are expected to benefit from the lower effective corporate tax rate resulting from the Tax
Cuts and Jobs Act of 2017 ("Tax Reform"), and that operating performance is benefiting from improved product pricing, modest increases in
interest rates and a decline in regulatory uncertainty. In November 2018, Fitch affirmed its rating outlook on the U.S. life insurance sector as
'stable', reflecting its view that financial performance will benefit from a continued benign credit environment and reduced pressure from low
interest rates and will be relatively stable across the industry in 2019. In January 2019, S&P affirmed its rating outlook on the U.S. life insurance
sector as 'stable', reflecting its view that insurers continue to exhibit strong capitalization and liquidity.
A.M. Best financial strength ratings currently range from "A++" (superior) to "F" (in liquidation), and include 16 separate ratings categories.
Within these categories, "A++" (superior) and "A+" (superior) are the highest, followed by "A" (excellent) and "A-" (excellent) then followed
by "B++" (good) and "B+" (good). Publications of A.M. Best indicate that the "A-" rating is assigned to those companies that, in A.M. Best's
opinion, have demonstrated an excellent ability to meet their ongoing obligations to policyholders.
S&P financial strength ratings currently range from "AAA" (extremely strong) to "R" (under regulatory supervision), and include 21 separate
ratings categories, while "NR" indicates that S&P has no opinion about the insurer's financial strength. Within these categories, "AAA" and
"AA" are the highest, followed by "A" and "BBB". Publications of S&P indicate that an insurer rated "A-" is regarded as having strong financial
security characteristics, but is somewhat more likely to be affected by adverse business conditions than are higher rated insurers.
Fitch financial strength ratings currently range from "AAA" (exceptionally strong) to "C" (distressed). Ratings of "BBB-" and higher are
considered to be "secure," and those of "BB+" and lower are considered to be "vulnerable."
A.M. Best, S&P and Fitch review their ratings of insurance companies from time to time. There can be no assurance that any particular rating
will continue for any given period of time or that it will not be changed or withdrawn entirely if, in their judgment, circumstances so warrant.
If our ratings were to be negatively adjusted for any reason, we could experience a material decline in the sales of our products and the persistency
of our existing business, as well as an increase in the cost of debt or equity financing.
4
5
Beginning in July 2007 a significant amount of our fixed index annuity policies and many of our annual reset fixed rate deferred annuities were
issued with a lifetime income benefit rider. This rider provides an additional liquidity option to policyholders. With the lifetime income benefit
rider, a policyholder can elect to receive guaranteed payments for life from their contract without requiring them to annuitize their contract value.
The amount of the lifetime income benefit available is determined by the growth in the policy's income account value and the policyholder's
age at the time the policyholder elects to begin receiving lifetime income benefit payments. The growth in the policy's income account value
is based on the growth rate specified in the policy which ranges from 3.0% to 8.5% and the time period over which that growth rate is applied
which ranges from 5 to 20 years for the majority of these policies. Generally, the time period consists of an initial period of up to 10 years and
the policyholder has the option to elect to continue the time period for an additional period of up to 10 years. We have the option to either
increase the rider fee or decrease the specified growth rate depending on the specifics of the policy at the time the policyholder elects to continue
the time period. Lifetime income benefit payments may be stopped and restarted at the election of the policyholder. During 2013, we introduced
new versions of our lifetime income benefit rider that had an optional wellbeing benefit or optional death benefit. Policyholders have the choice
of selecting a rider with a base level of benefit for no explicit fee or paying a fee for a rider that has a higher level of benefits, and beginning in
2013 we introduced products where the addition of a rider to the policy is completely optional. Rider fees range from 0.15% to 1.20% of the
policy's account value. The additional value to the policyholder provided by this rider through the income account value is not transferable to
other contracts and we believe will improve the persistency of the contract.
Investments/Spread Management
Investment activities are an integral part of our business, and net investment income is a significant component of our total revenues. Profitability
of our annuity products is significantly affected by spreads between interest yields on investments, the cost of options to fund the index credits
on our fixed index annuities and rates credited on our fixed rate annuities and the fixed rate strategy in our fixed index annuities. We manage
the index-based risk component of our fixed index annuities by purchasing call options on the applicable indices to fund the index credits on
these annuities and by adjusting the caps, participation rates and asset fees on policy anniversary dates to reflect the change in the cost of such
options which varies based on market conditions. All options are purchased on the respective policy anniversary dates, and new options are
purchased on each of the anniversary dates to fund the next index credits. All credited rates on annual reset fixed rate deferred annuities and
the fixed rate strategy in fixed index annuities may be changed annually, subject to minimum guarantees. Changes in caps, participation rates
and asset fees on fixed index annuities and crediting rates on fixed rate and fixed index annuities may not be sufficient to maintain targeted
investment spreads in all economic and market environments. In addition, competition and other factors, including the potential for increases
in surrenders and withdrawals, may limit our ability to adjust or to maintain caps, participation rates, asset fees and crediting rates at levels
necessary to avoid narrowing of spreads under certain market conditions.
For additional information regarding the composition of our investment portfolio and our interest rate risk management, see Management's
Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Investments, Quantitative and Qualitative
Disclosures About Market Risk and Note 3 to our audited consolidated financial statements.
Marketing/Distribution
We market our products through a variable cost distribution network, including independent agents through national marketing organizations,
broker/dealers, banks and registered investment advisors. We emphasize high quality service to our agents, distribution partners and policyholders
along with the prompt payment of commissions to our agents and distribution partners. We believe this has been significant in building excellent
relationships with our distribution network.
Our independent agents and agencies range in profile from national sales organizations to personal producing general agents. We actively recruit
new agents and terminate those agents who have not produced business for us in recent periods and are unlikely to sell our products in the future.
In our recruitment efforts, we emphasize that agents have direct access to our senior leadership, giving us an edge in recruiting over larger and
foreign-owned competitors. We also emphasize our products, service and our focused fixed annuity expertise. We also have favorable relationships
with our national marketing organizations, which have enabled us to efficiently sell through an expanded number of independent agents.
The independent agent distribution system is comprised of insurance brokers and marketing organizations. We are pursuing a strategy to increase
the efficiency of our independent agent distribution network by strengthening our relationships with key national and regional marketing
organizations and are alert for opportunities to establish relationships with organizations not presently associated with us. These organizations
typically recruit agents for us by advertising our products and our commission structure through direct mail advertising or seminars for insurance
agents and brokers. These organizations bear most of the cost incurred in marketing our products. We compensate marketing organizations by
paying them a percentage of the commissions earned on new annuity policy sales generated by the agents recruited by such organizations. We
generally do not enter into exclusive arrangements with these marketing organizations.
Agents contracted with us through two national marketing organizations accounted for more than 34% of the annuity deposits and insurance
premiums collected during 2018 by American Equity Life, and we expect these organizations to continue as marketers for American Equity Life
with a focus on selling our products. The states with the largest share of direct premium collected during 2018 were: Florida (8.8%), Texas
(8.0%), Pennsylvania (6.4%), North Carolina (5.1%) and California (5.0%).
Eagle Life's fixed index and fixed rate annuities are distributed pursuant to selling agreements with broker/dealers, banks and registered investment
advisors. Relationships with these firms are facilitated by third party wholesalers who promote Eagle Life and are compensated based upon the
sales of the firms that they have contracted with Eagle Life. We are also building out our employee wholesaling model. Our employee wholesalers
will work with those accounts that do not work with third party wholesalers. American Equity Life to a lesser extent also sells through broker/
dealers and we have introduced products specifically for this distribution channel.
Competition and Ratings
We operate in a highly competitive industry. Our annuity products compete with fixed index, fixed rate and variable annuities sold by other
insurance companies and also with mutual fund products, traditional bank products and other investment and retirement funding alternatives
offered by asset managers, banks, and broker/dealers. Our insurance products compete with products of other insurance companies, financial
intermediaries and other institutions based on a number of features, including crediting rates, index options, policy terms and conditions, service
provided to distribution channels and policyholders, ratings, reputation and distributor compensation.
The sales agents for our products use the ratings assigned to an insurer by independent rating agencies as one factor in determining which insurer's
annuity to market. The degree to which ratings adjustments have affected and will affect our sales and persistency is unknown. Following is a
summary of American Equity Life's financial strength ratings:
Financial Strength Rating
Outlook Statement
A.M. Best Company, Inc.
January 2011 - current
S&P Global
August 2015 - current
June 2013 - August 2015
October 2011 - June 2013
Fitch Ratings Ltd.
September 2018 - current
May 2013 - September 2018
A-
A-
BBB+
BBB+
BBB+
BBB+
Stable
Stable
Positive
Stable
Positive
Stable
Financial strength ratings generally involve quantitative and qualitative evaluations by rating agencies of a company's financial condition and
operating performance. Generally, rating agencies base their ratings upon information furnished to them by the insurer and upon their own
investigations, studies and assumptions. Ratings are based upon factors of concern to policyholders, agents and intermediaries and are not
directed toward the protection of investors and are not recommendations to buy, sell or hold securities.
In addition to the financial strength ratings, rating agencies use an "outlook statement" to indicate a medium or long-term trend which, if continued,
may lead to a rating change. A positive outlook indicates a rating may be raised and a negative outlook indicates a rating may be lowered. A
stable outlook is assigned when ratings are not likely to be changed. Outlook statements should not be confused with expected stability of the
insurer's financial or economic performance. A rating may have a "stable" outlook to indicate that the rating is not expected to change, but a
"stable" outlook does not preclude a rating agency from changing a rating at any time without notice.
In December 2018, A.M. Best changed its rating outlook on the U.S. life/annuity sector to 'stable' from 'negative', reflecting its view that the
sector is well-capitalized and insurers balance sheets are expected to benefit from the lower effective corporate tax rate resulting from the Tax
Cuts and Jobs Act of 2017 ("Tax Reform"), and that operating performance is benefiting from improved product pricing, modest increases in
interest rates and a decline in regulatory uncertainty. In November 2018, Fitch affirmed its rating outlook on the U.S. life insurance sector as
'stable', reflecting its view that financial performance will benefit from a continued benign credit environment and reduced pressure from low
interest rates and will be relatively stable across the industry in 2019. In January 2019, S&P affirmed its rating outlook on the U.S. life insurance
sector as 'stable', reflecting its view that insurers continue to exhibit strong capitalization and liquidity.
A.M. Best financial strength ratings currently range from "A++" (superior) to "F" (in liquidation), and include 16 separate ratings categories.
Within these categories, "A++" (superior) and "A+" (superior) are the highest, followed by "A" (excellent) and "A-" (excellent) then followed
by "B++" (good) and "B+" (good). Publications of A.M. Best indicate that the "A-" rating is assigned to those companies that, in A.M. Best's
opinion, have demonstrated an excellent ability to meet their ongoing obligations to policyholders.
S&P financial strength ratings currently range from "AAA" (extremely strong) to "R" (under regulatory supervision), and include 21 separate
ratings categories, while "NR" indicates that S&P has no opinion about the insurer's financial strength. Within these categories, "AAA" and
"AA" are the highest, followed by "A" and "BBB". Publications of S&P indicate that an insurer rated "A-" is regarded as having strong financial
security characteristics, but is somewhat more likely to be affected by adverse business conditions than are higher rated insurers.
Fitch financial strength ratings currently range from "AAA" (exceptionally strong) to "C" (distressed). Ratings of "BBB-" and higher are
considered to be "secure," and those of "BB+" and lower are considered to be "vulnerable."
A.M. Best, S&P and Fitch review their ratings of insurance companies from time to time. There can be no assurance that any particular rating
will continue for any given period of time or that it will not be changed or withdrawn entirely if, in their judgment, circumstances so warrant.
If our ratings were to be negatively adjusted for any reason, we could experience a material decline in the sales of our products and the persistency
of our existing business, as well as an increase in the cost of debt or equity financing.
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5
Reinsurance
We follow the industry practice of reinsuring a portion of our annuity risks with unaffiliated reinsurers. Our reinsurance agreements play a part
in managing our regulatory capital.
Coinsurance
American Equity Life has three coinsurance agreements with Athene Life Re Ltd. ("Athene"), an unauthorized life reinsurer domiciled in
Bermuda. One agreement ceded 20% of certain of American Equity Life's fixed index annuities issued from January 1, 2009 through March 31,
2010. The business reinsured under this agreement is no longer eligible for recapture. The second agreement ceded 80% of American Equity
Life's multi-year rate guaranteed annuities issued from July 1, 2009 through December 31, 2013 and 80% of Eagle Life's multi-year rate guaranteed
annuities issued from November 20, 2013 through December 31, 2013. The business reinsured under this agreement may not be recaptured.
The third agreement cedes 80% of American Equity Life's and Eagle Life's multi-year rate guaranteed annuities issued on or after January 1,
2014, 80% of Eagle Life's fixed index annuities issued prior to January 1, 2017, 50% of Eagle Life's fixed index annuities issued from January
1, 2017 through December 31, 2018 and 80% of certain of American Equity Life's fixed index annuities issued from August 1, 2016 through
December 31, 2016. The reinsurance agreement specifies that the coinsurance percentage for Eagle Life's fixed index annuities decreases to
20% for policies issued on or after January 1, 2019. The business reinsured under this agreement may not be recaptured. American Equity Life
is an intermediary for reinsurance of Eagle Life's business ceded to Athene. American Equity Life and Eagle Life remain liable to policyholders
with respect to the policy liabilities ceded to Athene should Athene fail to meet the obligations it has coinsured. The annuity deposits that have
been ceded to Athene are held in trusts and American Equity Life is named as the sole beneficiary of the trusts. The assets in the trusts are
required to remain at a value that is sufficient to support the current balance of policy benefit liabilities of the ceded business on a statutory basis.
If the value of the trust accounts would ever be less than the amount of the ceded policy benefit liabilities on a statutory basis, Athene is required
to either establish a letter of credit or deposit securities in the trusts for the amount of any shortfall. Athene has received a financial strength
rating of "A" (Excellent) with a stable outlook from A.M. Best. None of the coinsurance deposits with Athene are deemed by management to
be uncollectible.
American Equity Life has two coinsurance agreements with EquiTrust Life Insurance Company ("EquiTrust"), covering 70% of certain of
American Equity Life's fixed index and fixed rate annuities issued from August 1, 2001 through December 31, 2001, 40% of those contracts
issued during 2002 and 2003, and 20% of those contracts issued from January 1, 2004 to July 31, 2004. The business reinsured under these
agreements may not be recaptured. We remain liable to policyholders with respect to the policy liabilities ceded to EquiTrust should EquiTrust
fail to meet the obligations it has coinsured. EquiTrust has received a financial strength rating of "B++" (Good) with a stable outlook from A.M.
Best. None of the coinsurance deposits with EquiTrust are deemed by management to be uncollectible.
Financing Arrangements
American Equity Life has a reinsurance agreement with Hannover Life Reassurance Company of America, ("Hannover"), which is treated as
reinsurance under statutory accounting practices and as a financing arrangement under U.S. generally accepted accounting principles ("GAAP").
The statutory surplus benefit under this agreement is eliminated under GAAP and the associated charges are recorded as risk charges and included
in other operating costs and expenses in the consolidated statements of operations. The agreement became effective July 1, 2013 and is a yearly
renewable term reinsurance agreement for statutory purposes covering 45.6% of waived surrender charges related to penalty free withdrawals,
deaths and lifetime income benefit rider payments as well as lifetime income benefit rider payments in excess of policy fund values on certain
business. We may recapture the risks reinsured under this agreement as of the end of any quarter after December 31, 2020 and the agreement,
as amended, makes it punitive to us if we do not recapture the business ceded by the first quarter of 2021.
Our life subsidiaries are subject to periodic examinations by state regulatory authorities. In 2015, the Iowa Insurance Division completed financial
examinations of American Equity Life and Eagle Life for the five-year period ending December 31, 2013. There were no adjustments to American
Equity Life's or Eagle Life's statutory financial statements as a result of these examinations. In 2017, the New York Insurance Department
completed its financial examination of American Equity Investment Life Insurance Company of New York for the three-year period ending
December 31, 2013. There were no adjustments to American Equity Investment Life Insurance Company of New York's statutory financial
statements as a result of this examination.
The payment of dividends or the distributions, including surplus note payments, by our life subsidiaries is subject to regulation by each subsidiary's
state of domicile's insurance department. 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 statutory net gain from operations for the preceding calendar year, or (2) 10% of American
Equity Life's statutory surplus at the preceding December 31. For 2019, up to $325.2 million can be distributed as dividends by American Equity
Life without prior approval of the Iowa Insurance Commissioner. In addition, dividends and surplus note payments may be made only out of
earned surplus, and all surplus note payments are subject to prior approval by regulatory authorities. American Equity Life had $1.9 billion of
statutory earned surplus at December 31, 2018.
Most states have also enacted regulations on the activities of insurance holding company systems, including acquisitions, extraordinary dividends,
the terms of surplus notes, the terms of affiliate transactions and other related matters. We are registered pursuant to such legislation in Iowa.
A number of state legislatures have also considered or have enacted legislative proposals that alter and, in many cases, increase the authority of
state agencies to regulate insurance companies and holding company systems.
Most states, including Iowa and New York where our life subsidiaries are domiciled, have enacted legislation or adopted administrative regulations
affecting the acquisition of control of insurance companies as well as transactions between insurance companies and persons controlling them.
The nature and extent of such legislation and regulations currently in effect vary from state to state. However, most states require administrative
approval of the direct or indirect acquisition of 10% or more of the outstanding voting securities of an insurance company incorporated in the
state. The acquisition of 10% of such securities is generally deemed to be the acquisition of "control" for the purpose of the holding company
statutes and requires not only the filing of detailed information concerning the acquiring parties and the plan of acquisition, but also administrative
approval prior to the acquisition. In many states, the insurance authority may find that "control" in fact does not exist in circumstances in which
a person owns or controls more than 10% of the voting securities.
Historically, the federal government has not directly regulated the business of insurance. However, federal legislation and administrative policies
in several areas, including pension regulation, age and sex discrimination, financial services regulation, securities regulation and federal taxation
can significantly affect the insurance business. Additionally, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the
"Dodd-Frank Act") generally provides for enhanced federal supervision of financial institutions, including insurance companies in certain
circumstances, and financial activities that represent a systemic risk to financial stability or the U.S. economy. Under the Dodd-Frank Act, a
Federal Insurance Office has been established within the U.S. Treasury Department to monitor all aspects of the insurance industry and its
authority may extend to our business, although the Federal Insurance Office is not empowered with any general regulatory authority over insurers.
The director of the Federal Insurance Office serves in an advisory capacity to the Financial Stability Oversight Council ("FSOC").
State insurance regulators and the National Association of Insurance Commissioners ("NAIC") are continually reexamining existing laws and
regulations and developing new legislation for passage by state legislatures and new regulations for adoption by insurance authorities. Proposed
laws and regulations or those still under development pertain to insurer solvency and market conduct and in recent years have focused on:
For more information regarding reinsurance, see Note 7 to our audited consolidated financial statements. For risks involving reinsurance see
"Item 1A. Risk Factors."
risk-based capital ("RBC") guidelines, which consist of regulatory targeted surplus levels based on the relationship of statutory capital
and surplus, with prescribed adjustments, to the sum of stated percentages of each element of a specified list of company risk exposures;
Regulation
the implementation of non-statutory guidelines and the circumstances under which dividends may be paid;
Life insurance companies are subject to regulation and supervision by the states in which they transact business. State insurance laws establish
supervisory agencies with broad regulatory authority, including the power to:
own risk solvency and enterprise risk management assessment;
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•
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•
•
•
•
•
•
•
•
•
•
grant and revoke licenses to transact business;
regulate and supervise trade practices and market conduct;
establish guaranty associations;
license agents;
approve policy forms;
approve premium rates for some lines of business;
establish reserve requirements;
prescribe the form and content of required financial statements and reports;
determine the reasonableness and adequacy of statutory capital and surplus;
perform financial, market conduct and other examinations;
define acceptable accounting principles for statutory reporting;
regulate the type and amount of permitted investments; and
limit the amount of dividends and surplus note payments that can be paid without obtaining regulatory approval.
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7
•
•
•
•
•
•
•
•
•
•
•
insurance company investments;
suitability/best interest standard;
principles-based reserving;
cybersecurity assessments;
product approvals;
agent licensing;
underwriting and suitability practices; and
life insurance and annuity sales practices.
The NAIC's RBC requirements are intended to be used by insurance regulators as an early warning tool to identify deteriorating or weakly
capitalized insurance companies for the purpose of initiating regulatory action. The RBC formula defines a minimum capital standard which
supplements low, fixed minimum capital and surplus requirements previously implemented on a state-by-state basis. Such requirements are not
designed as a ranking mechanism for adequately capitalized companies.
The NAIC's RBC requirements provide for four levels of regulatory attention depending on the ratio of a company's total adjusted capital to its
RBC. Adjusted capital is defined as the total of statutory capital and surplus, asset valuation reserve and certain other adjustments. Calculations
using the NAIC formula at December 31, 2018, indicated that American Equity Life's ratio of total adjusted capital to the highest level at which
regulatory action might be initiated was 360%.
We follow the industry practice of reinsuring a portion of our annuity risks with unaffiliated reinsurers. Our reinsurance agreements play a part
Reinsurance
Coinsurance
in managing our regulatory capital.
American Equity Life has three coinsurance agreements with Athene Life Re Ltd. ("Athene"), an unauthorized life reinsurer domiciled in
Bermuda. One agreement ceded 20% of certain of American Equity Life's fixed index annuities issued from January 1, 2009 through March 31,
2010. The business reinsured under this agreement is no longer eligible for recapture. The second agreement ceded 80% of American Equity
Life's multi-year rate guaranteed annuities issued from July 1, 2009 through December 31, 2013 and 80% of Eagle Life's multi-year rate guaranteed
annuities issued from November 20, 2013 through December 31, 2013. The business reinsured under this agreement may not be recaptured.
The third agreement cedes 80% of American Equity Life's and Eagle Life's multi-year rate guaranteed annuities issued on or after January 1,
2014, 80% of Eagle Life's fixed index annuities issued prior to January 1, 2017, 50% of Eagle Life's fixed index annuities issued from January
1, 2017 through December 31, 2018 and 80% of certain of American Equity Life's fixed index annuities issued from August 1, 2016 through
December 31, 2016. The reinsurance agreement specifies that the coinsurance percentage for Eagle Life's fixed index annuities decreases to
20% for policies issued on or after January 1, 2019. The business reinsured under this agreement may not be recaptured. American Equity Life
is an intermediary for reinsurance of Eagle Life's business ceded to Athene. American Equity Life and Eagle Life remain liable to policyholders
with respect to the policy liabilities ceded to Athene should Athene fail to meet the obligations it has coinsured. The annuity deposits that have
been ceded to Athene are held in trusts and American Equity Life is named as the sole beneficiary of the trusts. The assets in the trusts are
required to remain at a value that is sufficient to support the current balance of policy benefit liabilities of the ceded business on a statutory basis.
If the value of the trust accounts would ever be less than the amount of the ceded policy benefit liabilities on a statutory basis, Athene is required
to either establish a letter of credit or deposit securities in the trusts for the amount of any shortfall. Athene has received a financial strength
rating of "A" (Excellent) with a stable outlook from A.M. Best. None of the coinsurance deposits with Athene are deemed by management to
be uncollectible.
American Equity Life has two coinsurance agreements with EquiTrust Life Insurance Company ("EquiTrust"), covering 70% of certain of
American Equity Life's fixed index and fixed rate annuities issued from August 1, 2001 through December 31, 2001, 40% of those contracts
issued during 2002 and 2003, and 20% of those contracts issued from January 1, 2004 to July 31, 2004. The business reinsured under these
agreements may not be recaptured. We remain liable to policyholders with respect to the policy liabilities ceded to EquiTrust should EquiTrust
fail to meet the obligations it has coinsured. EquiTrust has received a financial strength rating of "B++" (Good) with a stable outlook from A.M.
Best. None of the coinsurance deposits with EquiTrust are deemed by management to be uncollectible.
Financing Arrangements
American Equity Life has a reinsurance agreement with Hannover Life Reassurance Company of America, ("Hannover"), which is treated as
reinsurance under statutory accounting practices and as a financing arrangement under U.S. generally accepted accounting principles ("GAAP").
The statutory surplus benefit under this agreement is eliminated under GAAP and the associated charges are recorded as risk charges and included
in other operating costs and expenses in the consolidated statements of operations. The agreement became effective July 1, 2013 and is a yearly
renewable term reinsurance agreement for statutory purposes covering 45.6% of waived surrender charges related to penalty free withdrawals,
deaths and lifetime income benefit rider payments as well as lifetime income benefit rider payments in excess of policy fund values on certain
business. We may recapture the risks reinsured under this agreement as of the end of any quarter after December 31, 2020 and the agreement,
as amended, makes it punitive to us if we do not recapture the business ceded by the first quarter of 2021.
For more information regarding reinsurance, see Note 7 to our audited consolidated financial statements. For risks involving reinsurance see
"Item 1A. Risk Factors."
Regulation
Life insurance companies are subject to regulation and supervision by the states in which they transact business. State insurance laws establish
supervisory agencies with broad regulatory authority, including the power to:
grant and revoke licenses to transact business;
regulate and supervise trade practices and market conduct;
establish guaranty associations;
license agents;
approve policy forms;
approve premium rates for some lines of business;
establish reserve requirements;
prescribe the form and content of required financial statements and reports;
determine the reasonableness and adequacy of statutory capital and surplus;
perform financial, market conduct and other examinations;
define acceptable accounting principles for statutory reporting;
regulate the type and amount of permitted investments; and
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•
•
•
•
•
•
•
•
•
•
•
•
limit the amount of dividends and surplus note payments that can be paid without obtaining regulatory approval.
Our life subsidiaries are subject to periodic examinations by state regulatory authorities. In 2015, the Iowa Insurance Division completed financial
examinations of American Equity Life and Eagle Life for the five-year period ending December 31, 2013. There were no adjustments to American
Equity Life's or Eagle Life's statutory financial statements as a result of these examinations. In 2017, the New York Insurance Department
completed its financial examination of American Equity Investment Life Insurance Company of New York for the three-year period ending
December 31, 2013. There were no adjustments to American Equity Investment Life Insurance Company of New York's statutory financial
statements as a result of this examination.
The payment of dividends or the distributions, including surplus note payments, by our life subsidiaries is subject to regulation by each subsidiary's
state of domicile's insurance department. 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 statutory net gain from operations for the preceding calendar year, or (2) 10% of American
Equity Life's statutory surplus at the preceding December 31. For 2019, up to $325.2 million can be distributed as dividends by American Equity
Life without prior approval of the Iowa Insurance Commissioner. In addition, dividends and surplus note payments may be made only out of
earned surplus, and all surplus note payments are subject to prior approval by regulatory authorities. American Equity Life had $1.9 billion of
statutory earned surplus at December 31, 2018.
Most states have also enacted regulations on the activities of insurance holding company systems, including acquisitions, extraordinary dividends,
the terms of surplus notes, the terms of affiliate transactions and other related matters. We are registered pursuant to such legislation in Iowa.
A number of state legislatures have also considered or have enacted legislative proposals that alter and, in many cases, increase the authority of
state agencies to regulate insurance companies and holding company systems.
Most states, including Iowa and New York where our life subsidiaries are domiciled, have enacted legislation or adopted administrative regulations
affecting the acquisition of control of insurance companies as well as transactions between insurance companies and persons controlling them.
The nature and extent of such legislation and regulations currently in effect vary from state to state. However, most states require administrative
approval of the direct or indirect acquisition of 10% or more of the outstanding voting securities of an insurance company incorporated in the
state. The acquisition of 10% of such securities is generally deemed to be the acquisition of "control" for the purpose of the holding company
statutes and requires not only the filing of detailed information concerning the acquiring parties and the plan of acquisition, but also administrative
approval prior to the acquisition. In many states, the insurance authority may find that "control" in fact does not exist in circumstances in which
a person owns or controls more than 10% of the voting securities.
Historically, the federal government has not directly regulated the business of insurance. However, federal legislation and administrative policies
in several areas, including pension regulation, age and sex discrimination, financial services regulation, securities regulation and federal taxation
can significantly affect the insurance business. Additionally, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the
"Dodd-Frank Act") generally provides for enhanced federal supervision of financial institutions, including insurance companies in certain
circumstances, and financial activities that represent a systemic risk to financial stability or the U.S. economy. Under the Dodd-Frank Act, a
Federal Insurance Office has been established within the U.S. Treasury Department to monitor all aspects of the insurance industry and its
authority may extend to our business, although the Federal Insurance Office is not empowered with any general regulatory authority over insurers.
The director of the Federal Insurance Office serves in an advisory capacity to the Financial Stability Oversight Council ("FSOC").
State insurance regulators and the National Association of Insurance Commissioners ("NAIC") are continually reexamining existing laws and
regulations and developing new legislation for passage by state legislatures and new regulations for adoption by insurance authorities. Proposed
laws and regulations or those still under development pertain to insurer solvency and market conduct and in recent years have focused on:
•
•
•
•
•
•
•
•
•
•
•
insurance company investments;
risk-based capital ("RBC") guidelines, which consist of regulatory targeted surplus levels based on the relationship of statutory capital
and surplus, with prescribed adjustments, to the sum of stated percentages of each element of a specified list of company risk exposures;
suitability/best interest standard;
the implementation of non-statutory guidelines and the circumstances under which dividends may be paid;
principles-based reserving;
own risk solvency and enterprise risk management assessment;
cybersecurity assessments;
product approvals;
agent licensing;
underwriting and suitability practices; and
life insurance and annuity sales practices.
The NAIC's RBC requirements are intended to be used by insurance regulators as an early warning tool to identify deteriorating or weakly
capitalized insurance companies for the purpose of initiating regulatory action. The RBC formula defines a minimum capital standard which
supplements low, fixed minimum capital and surplus requirements previously implemented on a state-by-state basis. Such requirements are not
designed as a ranking mechanism for adequately capitalized companies.
The NAIC's RBC requirements provide for four levels of regulatory attention depending on the ratio of a company's total adjusted capital to its
RBC. Adjusted capital is defined as the total of statutory capital and surplus, asset valuation reserve and certain other adjustments. Calculations
using the NAIC formula at December 31, 2018, indicated that American Equity Life's ratio of total adjusted capital to the highest level at which
regulatory action might be initiated was 360%.
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Our life subsidiaries also may be required, under the solvency or guaranty laws of most states in which they do business, to pay assessments up
to certain prescribed limits to fund policyholder losses or liabilities of insolvent insurance companies. These assessments may be deferred or
forgiven under most guaranty laws if they would threaten an insurer's financial strength and, in certain instances, may be offset against future
premium taxes.
Federal Income Tax
The annuity and life insurance products that we market generally provide the policyholder with a federal income tax advantage, as compared to
certain other savings investments such as certificates of deposit and taxable bonds, in that federal income taxation on any increases in the contract
values (i.e., the "inside build-up") of these products is deferred until it is received by the policyholder. With other savings investments, the
increase in value is generally taxed each year as it is realized. Additionally, life insurance death benefits are generally exempt from income tax.
From time to time, various tax law changes have been proposed that could have an adverse effect on our business, including the elimination of
all or a portion of the income tax advantage described above for annuities and life insurance. If legislation were enacted to eliminate the tax
deferral for annuities, such a change would have an adverse effect on our ability to sell non-qualified annuities. Non-qualified annuities are
annuities that are not sold to an individual retirement account or other qualified retirement plan.
Employees
As of December 31, 2018, we had 554 full-time employees. We have experienced no work stoppages or strikes and consider our relations with
our employees to be excellent. None of our employees are represented by a union.
Item 1A. Risk Factors
We are exposed to significant financial and capital risk, including changing interest rates and credit spreads which could adversely affect
our business, financial condition, results of operations and cash flows.
Future changes in interest rates and credit spreads may result in fluctuations in the income derived from our investments. These and other factors
could have an adverse effect on our financial condition, results of operations or cash flows.
Interest rate and credit spread risk. Our interest rate risk is related to market price and changes in cash flow. Substantial and sustained increases
and decreases in market interest rates can adversely affect the profitability of our products, our ability to earn predictable returns, the fair value
of our investments and the reported value of stockholders' equity. A rise in interest rates, in the absence of other countervailing changes, will
increase the unrealized loss position of our investment portfolio. With respect to our available for sale fixed maturity securities, declines in value
(net of income taxes and certain adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales
inducements) reduce our reported stockholders' equity and book value per share.
If interest rates rise dramatically within a short period of time, our business may be exposed to disintermediation risk. Disintermediation risk is
the risk that our policyholders may surrender all or part of their contracts in a rising interest rate environment, which may require us to sell assets
in an unrealized loss position. Alternatively, we may increase crediting rates to retain business and reduce the level of assets that may need to
be sold at a loss. However, such action would reduce our investment spread and net income.
Sustained declines in long-term interest rates may result in increased redemptions of our fixed maturity securities that are subject to call redemption
prior to maturity by the issuer or prepayments of commercial mortgage loans and expose us to reinvestment risk. If we are unable to reinvest
the proceeds from such redemptions into investments with credit quality and yield characteristics of the redeemed or prepaid investments, our
net income and overall financial performance may be adversely affected. We have a certain ability to mitigate this risk by lowering crediting
rates on our products subject to certain restrictions as discussed below.
Our exposure to credit spreads is related to market price and changes in cash flows related to changes in credit spreads. If credit spreads widen
significantly it could result in greater investment income on new investments but would also indicate growing concern about the ability of credit
issuers to service their debt which could result in additional other than temporary impairments. If credit spreads tighten significantly it could
result in reduced net investment income from new purchases of fixed maturity securities or funding of commercial mortgage loans.
Credit risk. We are subject to the risk that the issuers of our fixed maturity securities and other debt securities and borrowers on our commercial
mortgages will default on principal and interest payments, particularly if a major downturn in economic activity occurs. An increase in defaults
on our fixed maturity securities and commercial mortgage loan portfolios could harm our financial strength and reduce our profitability.
Credit and cash flow assumption risk is the risk that issuers of securities, mortgagees on mortgage loans or other parties, including derivatives
counterparties, default on their contractual obligations or experience adverse changes to their contractual cash flow streams. We attempt to
minimize the adverse impact of this risk by monitoring portfolio diversification and exposure by asset class, creditor, industry, and by complying
with investment limitations governed by state insurance laws and regulations as applicable. We also consider all relevant objective information
available in estimating the cash flows related to residential and commercial mortgage backed securities.
We use derivative instruments to fund the index credits on our fixed index annuities. We purchase derivative instruments, consisting primarily
of one-year call options, from a number of counterparties. Our policy is to acquire such options only from counterparties rated "A-"or better by
a nationally recognized rating agency and the maximum credit exposure to any single counterparty is subject to concentration limits. In addition,
we have entered into credit support agreements with our counterparties which allow us to require our counterparties to post collateral to secure
their obligations to us under the derivative instruments. If our counterparties fail to honor their obligations under the derivative instruments, our
revenues may not be sufficient to fund the index credits on our fixed index annuities. Any such failure could harm our financial strength and
reduce our profitability.
Liquidity risk. We could have difficulty selling certain investments such as privately placed securities, below investment grade securities and
mortgage loans because they are less liquid than our publicly traded securities. If we require significant amounts of cash on short notice, we
may have difficulty selling these securities and loans at attractive prices or in a timely manner, or both.
Fluctuations in interest rates and investment spread could adversely affect our business, financial condition, results of operations and
cash flows.
A key component of our net income is the investment spread. A narrowing of investment spreads may adversely affect operating results. Although
we have the right to adjust interest crediting rates (caps, participation or asset fee rates for fixed index annuities) on most products, changes to
crediting rates may not be sufficient to maintain targeted investment spreads in all economic and market environments. In general, our ability
to lower crediting rates is subject to minimum crediting rates filed with and approved by state regulators. In addition, competition and other
factors, including the potential for increases in surrenders and withdrawals, may limit our ability to adjust or maintain crediting rates at levels
necessary to avoid the narrowing of spreads under certain market conditions. Our policy structure generally provides for resetting of policy
crediting rates at least annually and imposes withdrawal penalties for withdrawals during the first 5 to 17 years a policy is in force.
We manage the index-based risk component of our fixed index annuities by purchasing call options on the applicable indices to fund the annual
index credits on these annuities and by adjusting the caps, participation rates and asset fees on policy anniversary dates to reflect changes in the
cost of such options which varies based on market conditions. The price of such options generally increases with increases in the volatility in
both the options and interest rates, which may either narrow the spread or cause us to lower caps or participation rates. Thus, the volatility of
the cost of the options adds an additional degree of uncertainty to the profitability of the index products. We attempt to mitigate this risk by
resetting caps, participation rates and asset fees annually on the policy anniversaries.
Persistent environment of low interest rates may adversely affect our business, financial condition, results of operations and cash flows.
Prolonged periods of low interest rates may have a negative impact on our ability to sell our fixed index annuities as consumers look for other
financial instruments with potentially higher returns to fund retirement. In times of low interest rates, such as we have been experiencing since
2010 and which we may continue to experience in 2019, it is difficult to offer attractive rates and benefits to customers while maintaining
profitability, which may limit sales growth of interest sensitive products.
Sustained declines in interest rates may subject us to lower returns on our invested assets, and we have had to and may have to continue to invest
the cash we receive from premiums and interest or return of principal on our investments in instruments with yields less than those we currently
own. This may reduce our future net investment income and compress the spread on our annuity products. Further, borrowers may prepay fixed
maturity securities and commercial mortgage loans in order to borrow at lower market rates. Any related prepayment fees are recorded in net
investment income and may create income statement volatility.
An environment of rising interest rates may adversely affect our business, financial condition, results of operations and cash flows.
Periods of rising interest rates may cause increased policy surrenders and withdrawals as policyholders seek financial instruments with higher
returns, commonly referred to as disintermediation. This may lead to net cash outflows and the resulting liquidity demands may require us to
sell investment assets when the prices of those assets are adversely affected by the increase in interest rates, which may result in realized investment
losses. Further, a portion of our investment portfolio consists of privately placed securities, below investment grade securities and commercial
mortgage loans, which are relatively illiquid, thus increasing our liquidity risk in the event of disintermediation. We may also be required to
accelerate the amortization of deferred policy acquisition costs and deferred sales inducements related to surrendered contracts, which would
adversely affect our results of operations.
During such times, we may offer higher crediting rates on new sales of annuity products and increase crediting rates on existing annuity products
to maintain or enhance product competitiveness. We may not be able to purchase enough higher yielding assets necessary to fund higher crediting
rates and maintain our desired spread, which could result in lower profitability on our business. Alternatively, if we seek to maintain profitability
of our products in rising interest rate environments it may be difficult to position our products to offer attractive rates and benefits to customers
which may limit sales growth of interest sensitive products.
8
9
Our life subsidiaries also may be required, under the solvency or guaranty laws of most states in which they do business, to pay assessments up
to certain prescribed limits to fund policyholder losses or liabilities of insolvent insurance companies. These assessments may be deferred or
forgiven under most guaranty laws if they would threaten an insurer's financial strength and, in certain instances, may be offset against future
premium taxes.
Federal Income Tax
Employees
Item 1A. Risk Factors
The annuity and life insurance products that we market generally provide the policyholder with a federal income tax advantage, as compared to
certain other savings investments such as certificates of deposit and taxable bonds, in that federal income taxation on any increases in the contract
values (i.e., the "inside build-up") of these products is deferred until it is received by the policyholder. With other savings investments, the
increase in value is generally taxed each year as it is realized. Additionally, life insurance death benefits are generally exempt from income tax.
From time to time, various tax law changes have been proposed that could have an adverse effect on our business, including the elimination of
all or a portion of the income tax advantage described above for annuities and life insurance. If legislation were enacted to eliminate the tax
deferral for annuities, such a change would have an adverse effect on our ability to sell non-qualified annuities. Non-qualified annuities are
annuities that are not sold to an individual retirement account or other qualified retirement plan.
As of December 31, 2018, we had 554 full-time employees. We have experienced no work stoppages or strikes and consider our relations with
our employees to be excellent. None of our employees are represented by a union.
We are exposed to significant financial and capital risk, including changing interest rates and credit spreads which could adversely affect
our business, financial condition, results of operations and cash flows.
Future changes in interest rates and credit spreads may result in fluctuations in the income derived from our investments. These and other factors
could have an adverse effect on our financial condition, results of operations or cash flows.
Interest rate and credit spread risk. Our interest rate risk is related to market price and changes in cash flow. Substantial and sustained increases
and decreases in market interest rates can adversely affect the profitability of our products, our ability to earn predictable returns, the fair value
of our investments and the reported value of stockholders' equity. A rise in interest rates, in the absence of other countervailing changes, will
increase the unrealized loss position of our investment portfolio. With respect to our available for sale fixed maturity securities, declines in value
(net of income taxes and certain adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales
inducements) reduce our reported stockholders' equity and book value per share.
If interest rates rise dramatically within a short period of time, our business may be exposed to disintermediation risk. Disintermediation risk is
the risk that our policyholders may surrender all or part of their contracts in a rising interest rate environment, which may require us to sell assets
in an unrealized loss position. Alternatively, we may increase crediting rates to retain business and reduce the level of assets that may need to
be sold at a loss. However, such action would reduce our investment spread and net income.
Sustained declines in long-term interest rates may result in increased redemptions of our fixed maturity securities that are subject to call redemption
prior to maturity by the issuer or prepayments of commercial mortgage loans and expose us to reinvestment risk. If we are unable to reinvest
the proceeds from such redemptions into investments with credit quality and yield characteristics of the redeemed or prepaid investments, our
net income and overall financial performance may be adversely affected. We have a certain ability to mitigate this risk by lowering crediting
rates on our products subject to certain restrictions as discussed below.
Our exposure to credit spreads is related to market price and changes in cash flows related to changes in credit spreads. If credit spreads widen
significantly it could result in greater investment income on new investments but would also indicate growing concern about the ability of credit
issuers to service their debt which could result in additional other than temporary impairments. If credit spreads tighten significantly it could
result in reduced net investment income from new purchases of fixed maturity securities or funding of commercial mortgage loans.
Credit risk. We are subject to the risk that the issuers of our fixed maturity securities and other debt securities and borrowers on our commercial
mortgages will default on principal and interest payments, particularly if a major downturn in economic activity occurs. An increase in defaults
on our fixed maturity securities and commercial mortgage loan portfolios could harm our financial strength and reduce our profitability.
Credit and cash flow assumption risk is the risk that issuers of securities, mortgagees on mortgage loans or other parties, including derivatives
counterparties, default on their contractual obligations or experience adverse changes to their contractual cash flow streams. We attempt to
minimize the adverse impact of this risk by monitoring portfolio diversification and exposure by asset class, creditor, industry, and by complying
with investment limitations governed by state insurance laws and regulations as applicable. We also consider all relevant objective information
available in estimating the cash flows related to residential and commercial mortgage backed securities.
We use derivative instruments to fund the index credits on our fixed index annuities. We purchase derivative instruments, consisting primarily
of one-year call options, from a number of counterparties. Our policy is to acquire such options only from counterparties rated "A-"or better by
a nationally recognized rating agency and the maximum credit exposure to any single counterparty is subject to concentration limits. In addition,
we have entered into credit support agreements with our counterparties which allow us to require our counterparties to post collateral to secure
their obligations to us under the derivative instruments. If our counterparties fail to honor their obligations under the derivative instruments, our
revenues may not be sufficient to fund the index credits on our fixed index annuities. Any such failure could harm our financial strength and
reduce our profitability.
Liquidity risk. We could have difficulty selling certain investments such as privately placed securities, below investment grade securities and
mortgage loans because they are less liquid than our publicly traded securities. If we require significant amounts of cash on short notice, we
may have difficulty selling these securities and loans at attractive prices or in a timely manner, or both.
Fluctuations in interest rates and investment spread could adversely affect our business, financial condition, results of operations and
cash flows.
A key component of our net income is the investment spread. A narrowing of investment spreads may adversely affect operating results. Although
we have the right to adjust interest crediting rates (caps, participation or asset fee rates for fixed index annuities) on most products, changes to
crediting rates may not be sufficient to maintain targeted investment spreads in all economic and market environments. In general, our ability
to lower crediting rates is subject to minimum crediting rates filed with and approved by state regulators. In addition, competition and other
factors, including the potential for increases in surrenders and withdrawals, may limit our ability to adjust or maintain crediting rates at levels
necessary to avoid the narrowing of spreads under certain market conditions. Our policy structure generally provides for resetting of policy
crediting rates at least annually and imposes withdrawal penalties for withdrawals during the first 5 to 17 years a policy is in force.
We manage the index-based risk component of our fixed index annuities by purchasing call options on the applicable indices to fund the annual
index credits on these annuities and by adjusting the caps, participation rates and asset fees on policy anniversary dates to reflect changes in the
cost of such options which varies based on market conditions. The price of such options generally increases with increases in the volatility in
both the options and interest rates, which may either narrow the spread or cause us to lower caps or participation rates. Thus, the volatility of
the cost of the options adds an additional degree of uncertainty to the profitability of the index products. We attempt to mitigate this risk by
resetting caps, participation rates and asset fees annually on the policy anniversaries.
Persistent environment of low interest rates may adversely affect our business, financial condition, results of operations and cash flows.
Prolonged periods of low interest rates may have a negative impact on our ability to sell our fixed index annuities as consumers look for other
financial instruments with potentially higher returns to fund retirement. In times of low interest rates, such as we have been experiencing since
2010 and which we may continue to experience in 2019, it is difficult to offer attractive rates and benefits to customers while maintaining
profitability, which may limit sales growth of interest sensitive products.
Sustained declines in interest rates may subject us to lower returns on our invested assets, and we have had to and may have to continue to invest
the cash we receive from premiums and interest or return of principal on our investments in instruments with yields less than those we currently
own. This may reduce our future net investment income and compress the spread on our annuity products. Further, borrowers may prepay fixed
maturity securities and commercial mortgage loans in order to borrow at lower market rates. Any related prepayment fees are recorded in net
investment income and may create income statement volatility.
An environment of rising interest rates may adversely affect our business, financial condition, results of operations and cash flows.
Periods of rising interest rates may cause increased policy surrenders and withdrawals as policyholders seek financial instruments with higher
returns, commonly referred to as disintermediation. This may lead to net cash outflows and the resulting liquidity demands may require us to
sell investment assets when the prices of those assets are adversely affected by the increase in interest rates, which may result in realized investment
losses. Further, a portion of our investment portfolio consists of privately placed securities, below investment grade securities and commercial
mortgage loans, which are relatively illiquid, thus increasing our liquidity risk in the event of disintermediation. We may also be required to
accelerate the amortization of deferred policy acquisition costs and deferred sales inducements related to surrendered contracts, which would
adversely affect our results of operations.
During such times, we may offer higher crediting rates on new sales of annuity products and increase crediting rates on existing annuity products
to maintain or enhance product competitiveness. We may not be able to purchase enough higher yielding assets necessary to fund higher crediting
rates and maintain our desired spread, which could result in lower profitability on our business. Alternatively, if we seek to maintain profitability
of our products in rising interest rate environments it may be difficult to position our products to offer attractive rates and benefits to customers
which may limit sales growth of interest sensitive products.
8
9
Our valuation of fixed maturity securities may include methodologies, estimates and assumptions which are subject to differing
interpretations and could result in changes to investment valuations that may adversely affect our financial condition and results of
operations.
Fixed maturity securities are reported at fair value in our consolidated balance sheets. During periods of market disruption including periods of
significantly rising or high interest rates, rapidly widening credit spreads or illiquidity, it may be difficult to value certain of our securities if
trading becomes less frequent and/or market data becomes less observable. Prices provided by independent pricing services or independent
broker quotes that are used in the determination of fair value can vary significantly for a particular security. There may be certain asset classes
that were in active markets with significant observable data that become illiquid due to changes in the financial environment. As such, valuations
may include inputs and assumptions that are less observable or require greater judgment as well as valuation methods that require greater
judgment. Further, rapidly changing and unprecedented credit conditions could negatively impact the valuation of securities as reported in our
consolidated financial statements and the period-to-period changes in value could vary significantly. Decreases in value may have an adverse
effect on our results of operations or financial condition.
Defaults on commercial mortgage loans and volatility in performance may adversely affect our business, financial condition, results of
operations and cash flows.
Commercial mortgage loans have the potential to face heightened delinquency and default risk depending on economic conditions which could
have a negative impact on the performance of the underlying collateral, resulting in declining values and an adverse impact on the obligors of
such instruments. An increase in the default rate of our commercial mortgage loan investments could have an adverse effect on our business,
financial condition, results of operations and cash flows.
In addition, the carrying value of commercial mortgage loans is negatively impacted by such factors. The carrying value of commercial mortgage
loans is stated as outstanding principal less any loan loss allowances recognized. Considerations in determining allowances include, but are not
limited to, the following: (i) declining debt service coverage ratios and increasing loan to value ratios; (ii) bankruptcy filings of major tenants
or affiliates of the borrower on the property; (iii) catastrophic events at the property; and (iv) other subjective events or factors, including whether
the terms of the debt will be restructured. There can be no assurance that management's assessment of loan loss allowances on commercial
mortgage loans will not change in future periods, which could lead to investment losses.
Equity market volatility could adversely impact our business, financial condition and results of operations.
to meet the obligations assumed by them.
Equity market volatility could adversely affect our profitability in various ways, particularly as a result of the lifetime income benefit riders in
most of our policies. The liability for lifetime income benefit riders incorporates assumptions about the overall performance of equity markets
over the estimated lives of the policies. Periods of equity market performance that are lower than our expectations could result in an increase in
the portion of the liability for lifetime income benefit riders associated with such policies that is not funded by growth in the policy account
value which could result in a reduction in our net income. In addition, periods of equity market performance that are lower than our expectations
could result in accelerating the amortization of expenses we deferred in connection with the acquisition of the policies.
Conditions in the U.S. and global capital markets and economies could deteriorate in the near future and adversely affect our business,
financial condition, results of operations and cash flows.
Our business is affected by conditions in the U.S. and global capital markets and economies. Future economic downturn or market disruption
could negatively impact our ability to invest funds. Specifically, if market conditions deteriorate in 2019 or beyond:
•
•
•
our investment portfolio could incur additional other than temporary impairments;
our commercial mortgage loans could experience a greater amount of loss;
due to potential downgrades in our investment portfolio, we could be required to raise additional capital to sustain our current business
in force and new sales of our annuity products, which may be difficult in a distressed market. If capital would be available, it may be
at terms that are not favorable to us;
• we may be required to limit growth in sales of our annuity products; and/or
•
our liquidity could be negatively affected and we could be forced to limit our operations and our business could suffer, as we need
liquidity to pay our policyholder benefits, operating expenses, dividends on our capital stock, and to service our debt obligations.
The principal sources of our liquidity are annuity deposits, investment income and proceeds from the sale, maturity and call of investments.
Sources of additional capital in normal markets include the issuance of short and long-term instruments, including equity, debt or other types of
securities.
We face competition from companies that have greater financial resources, broader arrays of products and higher ratings, which may
limit our ability to retain existing customers, attract new customers and maintain our profitability and financial strength.
We operate in a highly competitive industry. Many of our competitors are substantially larger and enjoy substantially greater financial resources,
higher ratings by rating agencies, broader and more diversified product lines and more widespread agency relationships. Our annuity products
compete with fixed index, fixed rate and variable annuities sold by other insurance companies and also with mutual fund products, traditional
bank products and other retirement funding alternatives offered by asset managers, banks and broker/dealers. Our insurance products compete
with those of other insurance companies, financial intermediaries and other institutions based on a number of factors, including caps, participation
rates and crediting rates, policy terms and conditions, service provided to distributors and policyholders, ratings by rating agencies, reputation
and distributor compensation.
Our ability to compete depends in part on returns and other benefits we make available to our policyholders through our annuity contracts. We
will not be able to accumulate and retain assets under management for our products if our investment results underperform the market or the
competition, since such underperformance likely would result in lower rates to policyholders which could lead to withdrawals and reduced sales.
Our ability to compete also depends on financial strength ratings we receive from rating agencies. A ratings downgrade, or the potential for a
ratings downgrade, could have a number of adverse effects on our business. For example, distributors and sales agents for annuity products use
the ratings as one factor in determining which insurer's annuities to market. A ratings downgrade could cause those distributors and agents to
seek alternative carriers.
We compete for distribution sources for our products. We believe that our success in competing for distributors depends on our financial strength,
the services we provide to and the relationships we develop with these distributors, as well as offering competitive commission structures. Our
distributors are generally free to sell products from whichever providers they wish, which makes it important for us to continually offer distributors
products and services they find attractive. If our products or services fall short of distributors' needs, we may not be able to establish and maintain
satisfactory relationships with distributors of our products. Our ability to compete in the past has also depended in part on our ability to develop
innovative new products. In order for us to compete in the future, we will need to continue to bring innovative products to market in a timely
fashion. Otherwise, our revenues and profitability could suffer.
Our reinsurance program involves risks because we remain liable with respect to the liabilities ceded to reinsurers if the reinsurers fail
Our life insurance subsidiaries cede certain policies to other insurance companies through reinsurance agreements. American Equity Life has
three coinsurance agreements with Athene covering $4.4 billion of policy benefit reserves at December 31, 2018 and two coinsurance agreements
with EquiTrust covering $0.6 billion of policy benefit reserves at December 31, 2018. Since Athene is an unauthorized reinsurer, the annuity
deposits ceded to Athene are held in trusts and American Equity Life is named as the sole beneficiary of the trusts. The assets in the trusts are
required to remain at a value that is sufficient to support the current balance of policy benefit liabilities of the ceded business on a statutory basis.
If the value of the assets in the trusts would ever be less than the amount of the ceded policy benefit liabilities on a statutory basis, Athene is
required to either establish a letter of credit or deposit securities in the trusts for the amount of any shortfall. We remain liable with respect to
the policy liabilities ceded to EquiTrust and Athene should either fail to meet the obligations assumed by them.
In addition, we have entered into other types of reinsurance contracts including financing arrangements. Should any of these reinsurers fail to
meet the obligations assumed under such contracts, we remain liable with respect to the statutory liabilities ceded.
Any disruption in our ability to maintain our reinsurance program may hinder our ability to manage our regulatory capital.
No assurances can be made that reinsurance will remain continuously available to us to the same extent and on the same terms as are currently
available. If we were unable to maintain our current level of reinsurance or purchase new reinsurance protection in amounts that we consider
sufficient and at prices that we consider acceptable, we would have to accept an increase in our net liability exposure or a decrease in our statutory
surplus, reduce the amount of business we write or develop other alternatives to reinsurance.
10
11
Our valuation of fixed maturity securities may include methodologies, estimates and assumptions which are subject to differing
interpretations and could result in changes to investment valuations that may adversely affect our financial condition and results of
We face competition from companies that have greater financial resources, broader arrays of products and higher ratings, which may
limit our ability to retain existing customers, attract new customers and maintain our profitability and financial strength.
operations.
Fixed maturity securities are reported at fair value in our consolidated balance sheets. During periods of market disruption including periods of
significantly rising or high interest rates, rapidly widening credit spreads or illiquidity, it may be difficult to value certain of our securities if
trading becomes less frequent and/or market data becomes less observable. Prices provided by independent pricing services or independent
broker quotes that are used in the determination of fair value can vary significantly for a particular security. There may be certain asset classes
that were in active markets with significant observable data that become illiquid due to changes in the financial environment. As such, valuations
may include inputs and assumptions that are less observable or require greater judgment as well as valuation methods that require greater
judgment. Further, rapidly changing and unprecedented credit conditions could negatively impact the valuation of securities as reported in our
consolidated financial statements and the period-to-period changes in value could vary significantly. Decreases in value may have an adverse
effect on our results of operations or financial condition.
Defaults on commercial mortgage loans and volatility in performance may adversely affect our business, financial condition, results of
operations and cash flows.
Commercial mortgage loans have the potential to face heightened delinquency and default risk depending on economic conditions which could
have a negative impact on the performance of the underlying collateral, resulting in declining values and an adverse impact on the obligors of
such instruments. An increase in the default rate of our commercial mortgage loan investments could have an adverse effect on our business,
financial condition, results of operations and cash flows.
In addition, the carrying value of commercial mortgage loans is negatively impacted by such factors. The carrying value of commercial mortgage
loans is stated as outstanding principal less any loan loss allowances recognized. Considerations in determining allowances include, but are not
limited to, the following: (i) declining debt service coverage ratios and increasing loan to value ratios; (ii) bankruptcy filings of major tenants
or affiliates of the borrower on the property; (iii) catastrophic events at the property; and (iv) other subjective events or factors, including whether
the terms of the debt will be restructured. There can be no assurance that management's assessment of loan loss allowances on commercial
mortgage loans will not change in future periods, which could lead to investment losses.
Equity market volatility could adversely impact our business, financial condition and results of operations.
Equity market volatility could adversely affect our profitability in various ways, particularly as a result of the lifetime income benefit riders in
most of our policies. The liability for lifetime income benefit riders incorporates assumptions about the overall performance of equity markets
over the estimated lives of the policies. Periods of equity market performance that are lower than our expectations could result in an increase in
the portion of the liability for lifetime income benefit riders associated with such policies that is not funded by growth in the policy account
value which could result in a reduction in our net income. In addition, periods of equity market performance that are lower than our expectations
could result in accelerating the amortization of expenses we deferred in connection with the acquisition of the policies.
Conditions in the U.S. and global capital markets and economies could deteriorate in the near future and adversely affect our business,
financial condition, results of operations and cash flows.
Our business is affected by conditions in the U.S. and global capital markets and economies. Future economic downturn or market disruption
could negatively impact our ability to invest funds. Specifically, if market conditions deteriorate in 2019 or beyond:
our investment portfolio could incur additional other than temporary impairments;
our commercial mortgage loans could experience a greater amount of loss;
due to potential downgrades in our investment portfolio, we could be required to raise additional capital to sustain our current business
in force and new sales of our annuity products, which may be difficult in a distressed market. If capital would be available, it may be
at terms that are not favorable to us;
• we may be required to limit growth in sales of our annuity products; and/or
our liquidity could be negatively affected and we could be forced to limit our operations and our business could suffer, as we need
liquidity to pay our policyholder benefits, operating expenses, dividends on our capital stock, and to service our debt obligations.
The principal sources of our liquidity are annuity deposits, investment income and proceeds from the sale, maturity and call of investments.
Sources of additional capital in normal markets include the issuance of short and long-term instruments, including equity, debt or other types of
•
•
•
•
securities.
We operate in a highly competitive industry. Many of our competitors are substantially larger and enjoy substantially greater financial resources,
higher ratings by rating agencies, broader and more diversified product lines and more widespread agency relationships. Our annuity products
compete with fixed index, fixed rate and variable annuities sold by other insurance companies and also with mutual fund products, traditional
bank products and other retirement funding alternatives offered by asset managers, banks and broker/dealers. Our insurance products compete
with those of other insurance companies, financial intermediaries and other institutions based on a number of factors, including caps, participation
rates and crediting rates, policy terms and conditions, service provided to distributors and policyholders, ratings by rating agencies, reputation
and distributor compensation.
Our ability to compete depends in part on returns and other benefits we make available to our policyholders through our annuity contracts. We
will not be able to accumulate and retain assets under management for our products if our investment results underperform the market or the
competition, since such underperformance likely would result in lower rates to policyholders which could lead to withdrawals and reduced sales.
Our ability to compete also depends on financial strength ratings we receive from rating agencies. A ratings downgrade, or the potential for a
ratings downgrade, could have a number of adverse effects on our business. For example, distributors and sales agents for annuity products use
the ratings as one factor in determining which insurer's annuities to market. A ratings downgrade could cause those distributors and agents to
seek alternative carriers.
We compete for distribution sources for our products. We believe that our success in competing for distributors depends on our financial strength,
the services we provide to and the relationships we develop with these distributors, as well as offering competitive commission structures. Our
distributors are generally free to sell products from whichever providers they wish, which makes it important for us to continually offer distributors
products and services they find attractive. If our products or services fall short of distributors' needs, we may not be able to establish and maintain
satisfactory relationships with distributors of our products. Our ability to compete in the past has also depended in part on our ability to develop
innovative new products. In order for us to compete in the future, we will need to continue to bring innovative products to market in a timely
fashion. Otherwise, our revenues and profitability could suffer.
Our reinsurance program involves risks because we remain liable with respect to the liabilities ceded to reinsurers if the reinsurers fail
to meet the obligations assumed by them.
Our life insurance subsidiaries cede certain policies to other insurance companies through reinsurance agreements. American Equity Life has
three coinsurance agreements with Athene covering $4.4 billion of policy benefit reserves at December 31, 2018 and two coinsurance agreements
with EquiTrust covering $0.6 billion of policy benefit reserves at December 31, 2018. Since Athene is an unauthorized reinsurer, the annuity
deposits ceded to Athene are held in trusts and American Equity Life is named as the sole beneficiary of the trusts. The assets in the trusts are
required to remain at a value that is sufficient to support the current balance of policy benefit liabilities of the ceded business on a statutory basis.
If the value of the assets in the trusts would ever be less than the amount of the ceded policy benefit liabilities on a statutory basis, Athene is
required to either establish a letter of credit or deposit securities in the trusts for the amount of any shortfall. We remain liable with respect to
the policy liabilities ceded to EquiTrust and Athene should either fail to meet the obligations assumed by them.
In addition, we have entered into other types of reinsurance contracts including financing arrangements. Should any of these reinsurers fail to
meet the obligations assumed under such contracts, we remain liable with respect to the statutory liabilities ceded.
Any disruption in our ability to maintain our reinsurance program may hinder our ability to manage our regulatory capital.
No assurances can be made that reinsurance will remain continuously available to us to the same extent and on the same terms as are currently
available. If we were unable to maintain our current level of reinsurance or purchase new reinsurance protection in amounts that we consider
sufficient and at prices that we consider acceptable, we would have to accept an increase in our net liability exposure or a decrease in our statutory
surplus, reduce the amount of business we write or develop other alternatives to reinsurance.
10
11
We may experience volatility in net income due to the application of fair value accounting to our derivatives.
If we do not manage our growth effectively, our business, financial condition and results of operations could be adversely affected; our
All of our derivative instruments and derivatives embedded in other contracts are recognized in the balance sheet at their fair values and changes
in fair value are recognized immediately in earnings. This impacts certain revenues and expenses we report for our fixed index annuity business
as follows:
• We must present the call options purchased to fund the index credits on our fixed index annuity products at fair value. 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. We record the change in fair value of these options as a component of our
revenues. The change in fair value of derivatives includes the gains or losses recognized at expiration of the option term and changes
in fair value for open positions.
The contractual obligations for future index credits are treated as a "series of embedded derivatives" over the expected life of the
applicable contracts. Increases or decreases in the fair value of embedded derivatives generally correspond to increases or decreases
in equity market performance and changes in the interest rates used to discount the excess of the projected policy contract values over
the projected minimum guaranteed contract values. We record the change in fair value of these embedded derivatives as a component
of our benefits and expenses in our consolidated statements of operations.
•
The application of fair value accounting for derivatives and embedded derivatives in future periods to our fixed index annuity business may
cause substantial volatility in our reported net income.
Our financial condition and results of operations depend on the accuracy of management assumptions and estimates.
Assumptions and estimates are made regarding expenses and interest rates, tax liability, contingent liabilities, investment performance and other
factors related to our business and anticipated results. We rely on these assumptions and estimates when determining period end accruals, future
earnings and various components of our consolidated balance sheet. All assumptions and estimates utilized incorporate many factors, none of
which can be predicted with certainty. Our actual experiences, as well as changes in estimates, are used to prepare our consolidated statement
of operations. To the extent our actual experience and changes in estimates differ from original estimates, our results of operations and financial
condition could be adversely affected.
The calculations we use to estimate various components of our consolidated balance sheet and consolidated statement of operations are necessarily
complex and involve analyzing and interpreting large quantities of data. The assumptions and estimates required for these calculations involve
judgment and by their nature are imprecise and subject to changes and revisions over time. Accordingly, our results may be adversely affected
from time to time by actual results differing from assumptions, by changes in estimates and by changes resulting from implementing more
sophisticated administrative systems and procedures that facilitate the calculation of more precise estimates.
We may face unanticipated losses if there are significant deviations from our assumptions regarding the probabilities that our annuity
contracts will remain in force from one period to the next and our assumptions regarding policyholders' utilization of lifetime income
benefit riders.
The expected profitability of our annuity products is based in part upon expected patterns of premiums, expenses and benefits using a number
of assumptions, including those related to the probability that a policy will remain in force, or persistency, and mortality. Since no insurer can
precisely determine persistency or mortality, actual results could differ significantly from assumptions, and deviations from estimates and
assumptions could have an adverse effect on our business, financial condition or results of operations. For example, actual persistency that is
lower than our assumptions could have an adverse impact on future profitability, especially in the early years of a policy primarily because we
would be required to accelerate the amortization of expenses we deferred in connection with the acquisition of the policy.
In addition, we set initial crediting rates for our annuity products based upon expected benefit payments using assumptions for, among other
factors, mortality rates of our policyholders. The long-term profitability of these products depends upon how our actual experience compares
with our pricing assumptions. For example, if mortality rates are lower than our pricing assumptions, we could be required to make more payments
under certain annuity contracts than what we had projected.
In determining the liability from period to period of our lifetime income benefit riders, we must make significant assumptions such as expected
index credits, the age when a policyholder may begin to utilize the rider and the number of policyholders that may not utilize the rider at all.
Changes in these assumptions can be significant. Our experience regarding policyholder activity is limited as we began issuing policies with
this rider in 2007. Accordingly, our results of operations could be adversely affected from time to time by actual index credits being different
than expected, actual policyholder behavior varying from what we have assumed in determining the liability associated with these riders and by
changes in estimates based on this policyholder behavior.
If our estimated gross profits decrease significantly from initial expectations we may be required to expense our deferred policy acquisition
costs and deferred sales inducements in an accelerated manner, which would reduce our profitability.
Deferred policy acquisition costs are costs that vary with and primarily relate to the successful acquisition of new business. Deferred sales
inducements are contract enhancements such as first-year premium and interest bonuses that are credited to policyholder account balances. These
costs are capitalized when incurred and are amortized over the expected life of the contracts. Current amortization of these costs is generally in
proportion to expected gross profits from interest margins and, to a lesser extent, from surrender charges and rider fees. Unfavorable experience
with regard to expected expenses, investment returns, mortality or withdrawals may cause acceleration of the amortization of these costs resulting
in an increase of expenses and lower profitability.
historical growth rates may not be indicative of our future growth.
We have experienced rapid growth since our formation in December 1995. We intend to continue to grow and further growth will impose
significant added responsibilities on our management, including the need to identify, recruit, maintain and integrate additional employees,
including management. There can be no assurance that we will be successful in expanding our business or that our systems, procedures and
controls will be adequate to support our operations as they expand. In addition, due to our rapid growth and resulting increased size, it may be
necessary to expand the scope of our investing activities to asset classes in which we historically have not invested or have not had significant
exposure. If we are unable to adequately manage our investments in these classes, our financial condition or operating results in the future could
be less favorable than in the past. Further, we have utilized reinsurance in the past to support our growth. The future availability and cost of
reinsurance is uncertain. Our failure to manage growth effectively, or our inability to recruit, maintain and integrate additional qualified employees
could have an adverse effect on our business, financial condition or results of operations. In addition, our historical growth rates are not likely
to accurately reflect our future growth rates or our growth potential. There is no assurance that our future revenues will increase or that we will
continue to be profitable.
Our operations support complex transactions and are highly dependent on the proper functioning of information technology and
communication systems. Any failure of our information technology or communications systems could adversely affect our reputation,
business, financial condition, results of operations and cash flows.
While systems and processes are designed to support complex transactions and avoid systems failure, fraud, information security failures,
processing errors and breaches of regulation, any failure could have an adverse effect on our business, financial condition, results of operations
and cash flows. In addition, we must commit significant resources to maintain and enhance our existing systems in order to keep pace with
industry standards and customer preferences. If we fail to keep up-to-date information systems, we may not be able to rely on information for
product pricing, risk management and underwriting decisions. In addition, even though backup and recovery systems and contingency plans are
in place, we cannot assure investors that interruptions, failures or breaches in security of these processes and systems will not occur, or if they
do occur, that they can be remediated promptly. The occurrence of any of these events could have an adverse effect on our business, results of
operations and financial condition.
operations and cash flows.
An information technology failure or security breach could adversely affect our reputation, business, financial condition, results of
We use information technology ("IT") to store, retrieve, evaluate and utilize customer and company data and information. Our business is highly
dependent on our ability to access IT systems to perform necessary business functions such as providing customer support, making changes to
existing policies, filing and paying claims, managing our investment portfolios and producing financial statements. While we maintain
comprehensive policies, procedures, automation and backup plans, and a broad range of information security technical and human controls
designed to prevent or limit the effect of a failure, all IT systems are vulnerable to disruptions or data breaches as the result of natural or man-
made disasters, criminal activity, pandemics or other events beyond an organization's control. The failure of our IT for any of these reasons could
disrupt our operations, cause reputational harm resulting in the loss of customers, or otherwise negatively impact our business, financial condition,
results of operations and cash flows.
We retain confidential information within our IT, and we rely on sophisticated commercial control technologies to maintain the security of those
systems. Anyone who is able to circumvent our security measures and penetrate our IT could access, view, misappropriate, alter, or delete any
information contained with the accessed systems, including personally identifiable policyholder information and proprietary business information.
The NAIC has adopted the Insurance Data Security Model Law which established the standards for data security and investigation and notification
of a breach of data security for insurance companies, and an increasing number of states require that affected persons be notified if a security
breach results in the disclosure of their personally identifiable information. Any compromise of the security of our computer systems that results
in the inappropriate disclosure of personally identifiable customer information could damage our reputation in the marketplace, deter people
from purchasing our products, subject us to significant civil and criminal liability and require us to incur significant technical, legal and other
expenses. While there have been attempts to penetrate our IT security defenses, there is no evidence that any the attacks have been successful
or that an IT breach has occurred.
If we are unable to attract and retain national marketing organizations, independent agents, broker/dealers, banks and registered
investment advisors, sales of our products may be reduced.
We must attract and retain marketing organizations and distributors, including agents to sell our products. Insurance companies compete vigorously
for productive agents. We compete with other life insurance companies for marketers and agents primarily on the basis of our financial position,
support services, compensation and product features. Such marketers and agents may promote products offered by other life insurance companies
that may offer a larger variety of products than we do. Our competitiveness for such marketers and agents also depends upon the long-term
relationships we develop with them. We are developing a network of broker/dealers, banks and registered investment advisors to distribute our
products. If we are unable to attract and retain sufficient marketers, agents, broker/dealers, banks and registered investment advisors to sell our
products, our ability to compete and our sales would suffer.
12
13
We may experience volatility in net income due to the application of fair value accounting to our derivatives.
All of our derivative instruments and derivatives embedded in other contracts are recognized in the balance sheet at their fair values and changes
in fair value are recognized immediately in earnings. This impacts certain revenues and expenses we report for our fixed index annuity business
as follows:
• We must present the call options purchased to fund the index credits on our fixed index annuity products at fair value. 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. We record the change in fair value of these options as a component of our
revenues. The change in fair value of derivatives includes the gains or losses recognized at expiration of the option term and changes
in fair value for open positions.
•
The contractual obligations for future index credits are treated as a "series of embedded derivatives" over the expected life of the
applicable contracts. Increases or decreases in the fair value of embedded derivatives generally correspond to increases or decreases
in equity market performance and changes in the interest rates used to discount the excess of the projected policy contract values over
the projected minimum guaranteed contract values. We record the change in fair value of these embedded derivatives as a component
of our benefits and expenses in our consolidated statements of operations.
The application of fair value accounting for derivatives and embedded derivatives in future periods to our fixed index annuity business may
cause substantial volatility in our reported net income.
Our financial condition and results of operations depend on the accuracy of management assumptions and estimates.
Assumptions and estimates are made regarding expenses and interest rates, tax liability, contingent liabilities, investment performance and other
factors related to our business and anticipated results. We rely on these assumptions and estimates when determining period end accruals, future
earnings and various components of our consolidated balance sheet. All assumptions and estimates utilized incorporate many factors, none of
which can be predicted with certainty. Our actual experiences, as well as changes in estimates, are used to prepare our consolidated statement
of operations. To the extent our actual experience and changes in estimates differ from original estimates, our results of operations and financial
condition could be adversely affected.
The calculations we use to estimate various components of our consolidated balance sheet and consolidated statement of operations are necessarily
complex and involve analyzing and interpreting large quantities of data. The assumptions and estimates required for these calculations involve
judgment and by their nature are imprecise and subject to changes and revisions over time. Accordingly, our results may be adversely affected
from time to time by actual results differing from assumptions, by changes in estimates and by changes resulting from implementing more
sophisticated administrative systems and procedures that facilitate the calculation of more precise estimates.
We may face unanticipated losses if there are significant deviations from our assumptions regarding the probabilities that our annuity
contracts will remain in force from one period to the next and our assumptions regarding policyholders' utilization of lifetime income
benefit riders.
The expected profitability of our annuity products is based in part upon expected patterns of premiums, expenses and benefits using a number
of assumptions, including those related to the probability that a policy will remain in force, or persistency, and mortality. Since no insurer can
precisely determine persistency or mortality, actual results could differ significantly from assumptions, and deviations from estimates and
assumptions could have an adverse effect on our business, financial condition or results of operations. For example, actual persistency that is
lower than our assumptions could have an adverse impact on future profitability, especially in the early years of a policy primarily because we
would be required to accelerate the amortization of expenses we deferred in connection with the acquisition of the policy.
In addition, we set initial crediting rates for our annuity products based upon expected benefit payments using assumptions for, among other
factors, mortality rates of our policyholders. The long-term profitability of these products depends upon how our actual experience compares
with our pricing assumptions. For example, if mortality rates are lower than our pricing assumptions, we could be required to make more payments
under certain annuity contracts than what we had projected.
In determining the liability from period to period of our lifetime income benefit riders, we must make significant assumptions such as expected
index credits, the age when a policyholder may begin to utilize the rider and the number of policyholders that may not utilize the rider at all.
Changes in these assumptions can be significant. Our experience regarding policyholder activity is limited as we began issuing policies with
this rider in 2007. Accordingly, our results of operations could be adversely affected from time to time by actual index credits being different
than expected, actual policyholder behavior varying from what we have assumed in determining the liability associated with these riders and by
changes in estimates based on this policyholder behavior.
If our estimated gross profits decrease significantly from initial expectations we may be required to expense our deferred policy acquisition
costs and deferred sales inducements in an accelerated manner, which would reduce our profitability.
Deferred policy acquisition costs are costs that vary with and primarily relate to the successful acquisition of new business. Deferred sales
inducements are contract enhancements such as first-year premium and interest bonuses that are credited to policyholder account balances. These
costs are capitalized when incurred and are amortized over the expected life of the contracts. Current amortization of these costs is generally in
proportion to expected gross profits from interest margins and, to a lesser extent, from surrender charges and rider fees. Unfavorable experience
with regard to expected expenses, investment returns, mortality or withdrawals may cause acceleration of the amortization of these costs resulting
in an increase of expenses and lower profitability.
If we do not manage our growth effectively, our business, financial condition and results of operations could be adversely affected; our
historical growth rates may not be indicative of our future growth.
We have experienced rapid growth since our formation in December 1995. We intend to continue to grow and further growth will impose
significant added responsibilities on our management, including the need to identify, recruit, maintain and integrate additional employees,
including management. There can be no assurance that we will be successful in expanding our business or that our systems, procedures and
controls will be adequate to support our operations as they expand. In addition, due to our rapid growth and resulting increased size, it may be
necessary to expand the scope of our investing activities to asset classes in which we historically have not invested or have not had significant
exposure. If we are unable to adequately manage our investments in these classes, our financial condition or operating results in the future could
be less favorable than in the past. Further, we have utilized reinsurance in the past to support our growth. The future availability and cost of
reinsurance is uncertain. Our failure to manage growth effectively, or our inability to recruit, maintain and integrate additional qualified employees
could have an adverse effect on our business, financial condition or results of operations. In addition, our historical growth rates are not likely
to accurately reflect our future growth rates or our growth potential. There is no assurance that our future revenues will increase or that we will
continue to be profitable.
Our operations support complex transactions and are highly dependent on the proper functioning of information technology and
communication systems. Any failure of our information technology or communications systems could adversely affect our reputation,
business, financial condition, results of operations and cash flows.
While systems and processes are designed to support complex transactions and avoid systems failure, fraud, information security failures,
processing errors and breaches of regulation, any failure could have an adverse effect on our business, financial condition, results of operations
and cash flows. In addition, we must commit significant resources to maintain and enhance our existing systems in order to keep pace with
industry standards and customer preferences. If we fail to keep up-to-date information systems, we may not be able to rely on information for
product pricing, risk management and underwriting decisions. In addition, even though backup and recovery systems and contingency plans are
in place, we cannot assure investors that interruptions, failures or breaches in security of these processes and systems will not occur, or if they
do occur, that they can be remediated promptly. The occurrence of any of these events could have an adverse effect on our business, results of
operations and financial condition.
An information technology failure or security breach could adversely affect our reputation, business, financial condition, results of
operations and cash flows.
We use information technology ("IT") to store, retrieve, evaluate and utilize customer and company data and information. Our business is highly
dependent on our ability to access IT systems to perform necessary business functions such as providing customer support, making changes to
existing policies, filing and paying claims, managing our investment portfolios and producing financial statements. While we maintain
comprehensive policies, procedures, automation and backup plans, and a broad range of information security technical and human controls
designed to prevent or limit the effect of a failure, all IT systems are vulnerable to disruptions or data breaches as the result of natural or man-
made disasters, criminal activity, pandemics or other events beyond an organization's control. The failure of our IT for any of these reasons could
disrupt our operations, cause reputational harm resulting in the loss of customers, or otherwise negatively impact our business, financial condition,
results of operations and cash flows.
We retain confidential information within our IT, and we rely on sophisticated commercial control technologies to maintain the security of those
systems. Anyone who is able to circumvent our security measures and penetrate our IT could access, view, misappropriate, alter, or delete any
information contained with the accessed systems, including personally identifiable policyholder information and proprietary business information.
The NAIC has adopted the Insurance Data Security Model Law which established the standards for data security and investigation and notification
of a breach of data security for insurance companies, and an increasing number of states require that affected persons be notified if a security
breach results in the disclosure of their personally identifiable information. Any compromise of the security of our computer systems that results
in the inappropriate disclosure of personally identifiable customer information could damage our reputation in the marketplace, deter people
from purchasing our products, subject us to significant civil and criminal liability and require us to incur significant technical, legal and other
expenses. While there have been attempts to penetrate our IT security defenses, there is no evidence that any the attacks have been successful
or that an IT breach has occurred.
If we are unable to attract and retain national marketing organizations, independent agents, broker/dealers, banks and registered
investment advisors, sales of our products may be reduced.
We must attract and retain marketing organizations and distributors, including agents to sell our products. Insurance companies compete vigorously
for productive agents. We compete with other life insurance companies for marketers and agents primarily on the basis of our financial position,
support services, compensation and product features. Such marketers and agents may promote products offered by other life insurance companies
that may offer a larger variety of products than we do. Our competitiveness for such marketers and agents also depends upon the long-term
relationships we develop with them. We are developing a network of broker/dealers, banks and registered investment advisors to distribute our
products. If we are unable to attract and retain sufficient marketers, agents, broker/dealers, banks and registered investment advisors to sell our
products, our ability to compete and our sales would suffer.
12
13
We may require additional capital to support our business and sustain future growth which may not be available when needed or may
be available only on unfavorable terms.
Our long-term strategic capital requirements will depend on many factors including the accumulated statutory earnings of our life insurance
subsidiaries and the relationship between the statutory capital and surplus of our life insurance subsidiaries and various elements of required
capital. For the purpose of supporting long-term capital requirements, we may need to increase or maintain the statutory capital and surplus of
our life insurance subsidiaries through additional financings, which could include debt, equity, financing arrangements and/or other surplus relief
transactions. Adverse market conditions have affected and continue to affect the availability and cost of capital. Such financings, if available at
all, may be available only on terms that are not favorable to us. If we cannot maintain adequate capital, we may be required to limit growth in
sales of new annuity products, and such action could adversely affect our business, financial condition or results of operations.
Changes in state and federal laws and regulation may adversely affect our business, financial condition, results of operations and cash
flows.
We are subject to regulation under applicable insurance statutes, including insurance holding company statutes, in the various states in which
our life insurance subsidiaries transact business. Our life insurance subsidiaries are domiciled in Iowa and New York. We are currently licensed
to sell our products in 50 states and the District of Columbia. Insurance regulation is intended to provide safeguards for policyholders rather
than to protect shareholders of insurance companies or their holding companies. As increased scrutiny has been placed upon the insurance
regulatory framework, a number of state legislatures have considered or enacted legislative proposals that alter, and in many cases increase, state
authority to regulate insurance companies and holding company systems.
Regulators oversee matters relating to trade practices, policy forms, claims practices, guaranty funds, types and amounts of investments, reserve
adequacy, insurer solvency, minimum amounts of capital and surplus, transactions with related parties, changes in control and payment of
dividends.
The NAIC and state insurance regulators continually reexamine existing laws and regulations. The NAIC may develop and recommend adoption
of new or modify existing Model Laws and Regulations. State insurance regulators may impose those recommended changes, or others, in the
future.
Our life insurance subsidiaries are subject to state insurance regulations based on the NAIC's risk-based capital requirements which are intended
to be used by insurance regulators as an early warning tool to identify deteriorating or weakly capitalized insurance companies for the purpose
of initiating regulatory action. Our life insurance subsidiaries also may be required, under solvency or guaranty laws of most states in which
they do business, to pay assessments up to certain prescribed limits to fund policyholder losses or liabilities for insolvent insurance companies.
Although the federal government does not directly regulate the insurance business, federal legislation and administrative policies in several
areas, including financial services regulation, securities regulation, federal taxation and employment matters, can significantly affect the insurance
business. Heightened standards of conduct as a result of a fiduciary or best interest standard or other similar rules or regulations could also
increase the compliance and regulatory burdens on our representatives. In addition, legislation has been enacted which could result in the federal
government assuming some role in the regulation of the insurance industry.
In July 2010, the Dodd-Frank Act was enacted and signed into law. The Dodd-Frank Act made extensive changes to the laws regulating the
financial services industry and requires various federal agencies to adopt a broad range of new rules and regulations. Among other things, the
Dodd-Frank Act imposes a comprehensive new regulatory regime on the over-the-counter ("OTC") derivatives marketplace. It also requires
central clearing for certain derivatives transactions that the U.S. Commodities Futures Trading Commission ("CFTC") determines must be cleared
and are accepted for clearing by a "derivatives clearing organization" (subject to certain exceptions) and provides the CFTC with authority to
impose position limits across markets. The Dodd-Frank Act and any such regulations may subject us to additional restrictions on our hedging
positions which may have an adverse effect on our ability to hedge risks associated with our business, including our fixed index annuity business,
or on the cost of our hedging activity.
The Dodd-Frank Act also created the FSOC. The FSOC may designate whether certain insurance companies and insurance holding companies
pose a grave threat to the financial stability of the United States, in which case such companies would become subject to prudential regulation
by the Board of Governors of the Federal Reserve. The Dodd-Frank Act also established a Federal Insurance Office under the U.S. Treasury
Department to monitor all aspects of the insurance industry other than certain health insurance, certain long-term care insurance and crop
insurance. It is not possible at this time to assess the impact on our business of the establishment of the Federal Insurance Office and the FSOC.
However, the regulatory framework at the state and federal level applicable to our insurance products is evolving. The changing regulatory
framework could affect the design of such products and our ability to sell certain products. Any changes in these laws and regulations could
adversely affect our business, financial condition or results of operations.
Changes in federal income taxation laws, including any reduction in individual income tax rates, may adversely affect our business,
financial condition, results of operations and cash flows.
The annuity and life insurance products that we market generally provide the policyholder with certain federal income tax advantages. For
example, federal income taxation on any increases in non-qualified annuity contract values (i.e., the "inside build-up") is deferred until it is
received by the policyholder. With other savings instruments, such as certificates of deposit and taxable bonds, the increase in value is generally
taxed each year as it is realized. Decreases in individual income tax rates would decrease the advantage of deferring the inside build-up.
From time to time, various tax law changes have been proposed that could have an adverse effect on our business, including the elimination of
all or a portion of the income tax advantages described above for annuities and life insurance. If legislation were enacted to eliminate all or a
portion of the tax deferral for annuities, such a change would have an adverse effect on our ability to sell non-qualified annuities. Non-qualified
annuities are annuities that are not sold to a qualified retirement plan.
We face risks relating to litigation and regulatory examination, including the costs of such litigation or examination, management
distraction and the potential for damage awards, fines, penalties or other required remediation, which may adversely affect our business,
financial condition, results of operations and cash flows.
We are occasionally involved in litigation, both as a defendant and as a plaintiff. In addition, state regulatory bodies, such as state insurance
departments, the SEC, the Financial Industry Regulatory Authority, Inc. ("FINRA"), the Department of Labor ("DOL") and other regulatory
bodies regularly make inquiries and conduct examinations or investigations concerning our compliance with, among other things, insurance
laws, securities laws, the Employee Retirement Income Security Act of 1974, as amended, and laws governing the activities of broker/dealers.
Companies in the life insurance and annuity business have faced litigation, including class action lawsuits, alleging improper product design,
improper sales practices and similar claims.
A downgrade in our credit or financial strength ratings may increase our cost of capital, reduce new sales, adversely affect relationships
with distributors and increase policy surrenders and withdrawals.
Currently, our senior unsecured indebtedness carries a "BBB-" rating with a stable outlook from S&P, a "BB+" rating with a positive outlook
from Fitch, and a "bbb-" rating with a stable outlook from A.M. Best. Our ability to maintain such ratings is dependent upon the results of
operations of our subsidiaries and our financial strength. If we fail to preserve the strength of our balance sheet and to maintain a capital structure
that rating agencies deem suitable, it could result in a downgrade of the ratings applicable to our senior unsecured indebtedness. A downgrade
would likely reduce the fair value of the common stock and may increase our cost of capital.
Financial strength ratings are important factors in establishing the competitive position of life insurance and annuity companies. In recent years,
the market for annuities has been dominated by those insurers with the highest ratings. A ratings downgrade, or the potential for a ratings
downgrade, could have a number of adverse effects on our business. For example, distributors and sales agents for life insurance and annuity
products use the ratings as one factor in determining which insurer's annuities to market. A ratings downgrade could cause those distributors and
agents to seek alternative carriers. In addition, a ratings downgrade could increase the number of policy or contract surrenders we experience,
as well as our ability to obtain reinsurance or obtain reasonable pricing on reinsurance.
Financial strength ratings are measures of an insurance company's ability to meet policyholder obligations and generally involve quantitative
and qualitative evaluations by rating agencies of a company's financial condition and operating performance. Generally, rating agencies base
their ratings upon information furnished to them by the insurer and upon their own investigations, studies and assumptions. Ratings are based
upon factors of concern to agents, policyholders and intermediaries and are not directed toward the protection of investors and are not
We lease commercial office space in two buildings in West Des Moines, Iowa, one for our principal offices under an operating lease that expires
on November 30, 2026 and one for our investment operations under a lease that expires on March 15, 2023. We believe these facilities are
recommendations to buy, sell or hold securities.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
suitable and adequate for our current business operations.
Item 3. Legal Proceedings
See Note 13 to our audited consolidated financial statements.
Item 4. Mine Safety Disclosures
None
14
15
flows.
dividends.
future.
We may require additional capital to support our business and sustain future growth which may not be available when needed or may
be available only on unfavorable terms.
Our long-term strategic capital requirements will depend on many factors including the accumulated statutory earnings of our life insurance
subsidiaries and the relationship between the statutory capital and surplus of our life insurance subsidiaries and various elements of required
capital. For the purpose of supporting long-term capital requirements, we may need to increase or maintain the statutory capital and surplus of
our life insurance subsidiaries through additional financings, which could include debt, equity, financing arrangements and/or other surplus relief
transactions. Adverse market conditions have affected and continue to affect the availability and cost of capital. Such financings, if available at
all, may be available only on terms that are not favorable to us. If we cannot maintain adequate capital, we may be required to limit growth in
sales of new annuity products, and such action could adversely affect our business, financial condition or results of operations.
Changes in state and federal laws and regulation may adversely affect our business, financial condition, results of operations and cash
We are subject to regulation under applicable insurance statutes, including insurance holding company statutes, in the various states in which
our life insurance subsidiaries transact business. Our life insurance subsidiaries are domiciled in Iowa and New York. We are currently licensed
to sell our products in 50 states and the District of Columbia. Insurance regulation is intended to provide safeguards for policyholders rather
than to protect shareholders of insurance companies or their holding companies. As increased scrutiny has been placed upon the insurance
regulatory framework, a number of state legislatures have considered or enacted legislative proposals that alter, and in many cases increase, state
authority to regulate insurance companies and holding company systems.
Regulators oversee matters relating to trade practices, policy forms, claims practices, guaranty funds, types and amounts of investments, reserve
adequacy, insurer solvency, minimum amounts of capital and surplus, transactions with related parties, changes in control and payment of
The NAIC and state insurance regulators continually reexamine existing laws and regulations. The NAIC may develop and recommend adoption
of new or modify existing Model Laws and Regulations. State insurance regulators may impose those recommended changes, or others, in the
Our life insurance subsidiaries are subject to state insurance regulations based on the NAIC's risk-based capital requirements which are intended
to be used by insurance regulators as an early warning tool to identify deteriorating or weakly capitalized insurance companies for the purpose
of initiating regulatory action. Our life insurance subsidiaries also may be required, under solvency or guaranty laws of most states in which
they do business, to pay assessments up to certain prescribed limits to fund policyholder losses or liabilities for insolvent insurance companies.
Although the federal government does not directly regulate the insurance business, federal legislation and administrative policies in several
areas, including financial services regulation, securities regulation, federal taxation and employment matters, can significantly affect the insurance
business. Heightened standards of conduct as a result of a fiduciary or best interest standard or other similar rules or regulations could also
increase the compliance and regulatory burdens on our representatives. In addition, legislation has been enacted which could result in the federal
government assuming some role in the regulation of the insurance industry.
In July 2010, the Dodd-Frank Act was enacted and signed into law. The Dodd-Frank Act made extensive changes to the laws regulating the
financial services industry and requires various federal agencies to adopt a broad range of new rules and regulations. Among other things, the
Dodd-Frank Act imposes a comprehensive new regulatory regime on the over-the-counter ("OTC") derivatives marketplace. It also requires
central clearing for certain derivatives transactions that the U.S. Commodities Futures Trading Commission ("CFTC") determines must be cleared
and are accepted for clearing by a "derivatives clearing organization" (subject to certain exceptions) and provides the CFTC with authority to
impose position limits across markets. The Dodd-Frank Act and any such regulations may subject us to additional restrictions on our hedging
positions which may have an adverse effect on our ability to hedge risks associated with our business, including our fixed index annuity business,
or on the cost of our hedging activity.
The Dodd-Frank Act also created the FSOC. The FSOC may designate whether certain insurance companies and insurance holding companies
pose a grave threat to the financial stability of the United States, in which case such companies would become subject to prudential regulation
by the Board of Governors of the Federal Reserve. The Dodd-Frank Act also established a Federal Insurance Office under the U.S. Treasury
Department to monitor all aspects of the insurance industry other than certain health insurance, certain long-term care insurance and crop
insurance. It is not possible at this time to assess the impact on our business of the establishment of the Federal Insurance Office and the FSOC.
However, the regulatory framework at the state and federal level applicable to our insurance products is evolving. The changing regulatory
framework could affect the design of such products and our ability to sell certain products. Any changes in these laws and regulations could
adversely affect our business, financial condition or results of operations.
Changes in federal income taxation laws, including any reduction in individual income tax rates, may adversely affect our business,
financial condition, results of operations and cash flows.
The annuity and life insurance products that we market generally provide the policyholder with certain federal income tax advantages. For
example, federal income taxation on any increases in non-qualified annuity contract values (i.e., the "inside build-up") is deferred until it is
received by the policyholder. With other savings instruments, such as certificates of deposit and taxable bonds, the increase in value is generally
taxed each year as it is realized. Decreases in individual income tax rates would decrease the advantage of deferring the inside build-up.
From time to time, various tax law changes have been proposed that could have an adverse effect on our business, including the elimination of
all or a portion of the income tax advantages described above for annuities and life insurance. If legislation were enacted to eliminate all or a
portion of the tax deferral for annuities, such a change would have an adverse effect on our ability to sell non-qualified annuities. Non-qualified
annuities are annuities that are not sold to a qualified retirement plan.
We face risks relating to litigation and regulatory examination, including the costs of such litigation or examination, management
distraction and the potential for damage awards, fines, penalties or other required remediation, which may adversely affect our business,
financial condition, results of operations and cash flows.
We are occasionally involved in litigation, both as a defendant and as a plaintiff. In addition, state regulatory bodies, such as state insurance
departments, the SEC, the Financial Industry Regulatory Authority, Inc. ("FINRA"), the Department of Labor ("DOL") and other regulatory
bodies regularly make inquiries and conduct examinations or investigations concerning our compliance with, among other things, insurance
laws, securities laws, the Employee Retirement Income Security Act of 1974, as amended, and laws governing the activities of broker/dealers.
Companies in the life insurance and annuity business have faced litigation, including class action lawsuits, alleging improper product design,
improper sales practices and similar claims.
A downgrade in our credit or financial strength ratings may increase our cost of capital, reduce new sales, adversely affect relationships
with distributors and increase policy surrenders and withdrawals.
Currently, our senior unsecured indebtedness carries a "BBB-" rating with a stable outlook from S&P, a "BB+" rating with a positive outlook
from Fitch, and a "bbb-" rating with a stable outlook from A.M. Best. Our ability to maintain such ratings is dependent upon the results of
operations of our subsidiaries and our financial strength. If we fail to preserve the strength of our balance sheet and to maintain a capital structure
that rating agencies deem suitable, it could result in a downgrade of the ratings applicable to our senior unsecured indebtedness. A downgrade
would likely reduce the fair value of the common stock and may increase our cost of capital.
Financial strength ratings are important factors in establishing the competitive position of life insurance and annuity companies. In recent years,
the market for annuities has been dominated by those insurers with the highest ratings. A ratings downgrade, or the potential for a ratings
downgrade, could have a number of adverse effects on our business. For example, distributors and sales agents for life insurance and annuity
products use the ratings as one factor in determining which insurer's annuities to market. A ratings downgrade could cause those distributors and
agents to seek alternative carriers. In addition, a ratings downgrade could increase the number of policy or contract surrenders we experience,
as well as our ability to obtain reinsurance or obtain reasonable pricing on reinsurance.
Financial strength ratings are measures of an insurance company's ability to meet policyholder obligations and generally involve quantitative
and qualitative evaluations by rating agencies of a company's financial condition and operating performance. Generally, rating agencies base
their ratings upon information furnished to them by the insurer and upon their own investigations, studies and assumptions. Ratings are based
upon factors of concern to agents, policyholders and intermediaries and are not directed toward the protection of investors and are not
recommendations to buy, sell or hold securities.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease commercial office space in two buildings in West Des Moines, Iowa, one for our principal offices under an operating lease that expires
on November 30, 2026 and one for our investment operations under a lease that expires on March 15, 2023. We believe these facilities are
suitable and adequate for our current business operations.
Item 3. Legal Proceedings
See Note 13 to our audited consolidated financial statements.
Item 4. Mine Safety Disclosures
None
14
15
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange ("NYSE") under the symbol AEL. The following table sets forth the high and
low sales prices of our common stock for each quarterly period within the two most recent fiscal years as quoted on the NYSE.
The summary consolidated financial and other data should be read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and our audited consolidated financial statements and related notes appearing elsewhere in this report. The
results for past periods are not necessarily indicative of results that may be expected for future periods.
PART II
Item 6. Selected Consolidated Financial Data
2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$35.79
$37.16
$38.57
$36.39
$28.00
$26.65
$29.43
$32.54
$28.90
$27.06
$34.51
$25.27
$21.66
$22.23
$25.43
$28.06
As of February 11, 2019, there were approximately 28,800 holders of our common stock. In 2018 and 2017, we paid an annual cash dividend
of $0.28 and $0.26, respectively, per share on our common stock. We intend to continue to pay an annual cash dividend on such shares so long
as we have sufficient capital and/or future earnings to do so. However, we anticipate retaining most of our future earnings, if any, for use in our
operations and the expansion of our business. Any further determination as to dividend policy will be made by our board of directors and will
depend on a number of factors, including our future earnings, capital requirements, financial condition and future prospects and such other factors
as our board of directors may deem relevant.
Since we are a holding company, our ability to pay cash dividends depends in large measure on our subsidiaries' ability to make distributions of
cash or property to us. Iowa insurance laws restrict the amount of distributions American Equity Life and Eagle Life can pay to us without the
approval of the Iowa Insurance Commissioner. See Management's Discussion and Analysis of Financial Condition and Results of Operations
and Note 12 to our audited consolidated financial statements, which are incorporated by reference in this Item 5.
Issuer Purchases of Equity Securities
The following table presents the amount of our share purchase activity for the periods indicated:
Period
January 1, 2018 - January 31, 2018
February 1, 2018 - February 28, 2018
March 1, 2018 - March 31, 2018
April 1, 2018 - April 30, 2018
May 1, 2018 - May 31, 2018
June 1, 2018 - June 30, 2018
July 1, 2018 - July 31, 2018
August 1, 2018 - August 31, 2018
September 1, 2018 - September 30, 2018
October 1, 2018 - October 31, 2018
November 1, 2018 - November 30, 2018
December 1, 2018 - December 31, 2018
Total
Total Number of
Shares Purchased (a)
Average Price
Paid Per Share
— $
913
8,759
$
$
— $
— $
2,018
$
— $
— $
— $
— $
— $
— $
11,690
—
31.92
31.82
—
—
35.70
—
—
—
—
—
—
(a) Includes the number of shares of common stock utilized to execute certain stock incentive awards.
Year ended December 31,
2018
2017
2016
2015
2014
(Dollars in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenues
Premiums and other considerations
$
26,480
$
34,228
$
43,767
$
36,048
$
32,623
Annuity product charges
Net investment income
Change in fair value of derivatives
Net realized gains (losses) on investments, excluding other than
temporary impairment ("OTTI") losses
Net OTTI losses recognized in operations
224,488
2,147,812
(777,848)
(37,178)
(36,656)
200,494
1,991,997
1,677,871
173,579
136,168
118,990
1,849,872
1,692,192
1,531,667
164,219
(336,146)
504,825
10,509
(4,630)
11,524
(22,679)
10,211
(19,536)
(4,003)
(2,627)
1,547,098
3,891,652
2,220,282
1,518,937
2,168,973
Total revenues
Benefits and expenses
Insurance policy benefits and change in future policy
benefits
Interest sensitive and index product benefits
Change in fair value of embedded derivatives
Amortization of deferred sales inducements and policy acquisition
Interest expense on notes and loan payable and subordinated
costs
debentures
Other operating costs and expenses
Total benefits and expenses
Income before income taxes
Income tax expense
Net income
Per Share Data:
Earnings per common share
Earnings per common share - assuming dilution
Dividends declared per common share
39,530
43,219
1,610,835
2,023,668
(1,389,491)
919,735
45,458
968,053
(464,698)
41,815
1,473,700
32,321
550,192
432,576
625,178
495,504
294,997
40,989
129,301
981,356
565,742
107,726
44,492
111,691
316,271
141,626
41,088
96,218
337,314
117,484
48,492
81,584
196,064
70,041
3,575,381
2,090,035
1,181,623
1,972,909
458,016
$
174,645
$
83,243
$
219,830
$
126,023
52,483
725,472
543,465
41,206
102,231
130,247
47,004
5.07
5.01
0.28
$
$
$
$
1.96
1.93
0.26
0.98
0.97
0.24
2.78
2.72
0.22
1.69
1.58
0.20
Non-GAAP Financial Measures (a):
Reconciliation from net income to non-GAAP operating income:
Net income
$
458,016
$
174,645
$
83,243
$
219,830
$
126,023
Net realized investment (gains) losses, including OTTI
45,450
(5,093)
7,188
5,737
4,429
Change in fair value of derivatives and embedded derivatives -
fixed index annuities
Change in fair value of derivatives - debt
Extinguishment of debt
Litigation reserve
Income taxes
Non-GAAP operating income
Non-GAAP operating income per common share
Non-GAAP operating income per common share - assuming dilution
(72,181)
(1,892)
—
—
(3,653)
425,740
4.71
4.66
$
$
121,846
(1,224)
—
—
(5,124)
285,050
3.20
3.16
$
$
56,634
(1,265)
—
(1,957)
(21,499)
122,344
1.44
1.43
$
$
(44,055)
1,296
—
—
13,012
195,820
2.48
2.42
$
$
79,053
104
12,503
(1,418)
(30,048)
190,646
2.56
2.39
$
$
$
$
16
17
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange ("NYSE") under the symbol AEL. The following table sets forth the high and
low sales prices of our common stock for each quarterly period within the two most recent fiscal years as quoted on the NYSE.
The summary consolidated financial and other data should be read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and our audited consolidated financial statements and related notes appearing elsewhere in this report. The
results for past periods are not necessarily indicative of results that may be expected for future periods.
PART II
Item 6. Selected Consolidated Financial Data
2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$35.79
$37.16
$38.57
$36.39
$28.00
$26.65
$29.43
$32.54
$28.90
$27.06
$34.51
$25.27
$21.66
$22.23
$25.43
$28.06
As of February 11, 2019, there were approximately 28,800 holders of our common stock. In 2018 and 2017, we paid an annual cash dividend
of $0.28 and $0.26, respectively, per share on our common stock. We intend to continue to pay an annual cash dividend on such shares so long
as we have sufficient capital and/or future earnings to do so. However, we anticipate retaining most of our future earnings, if any, for use in our
operations and the expansion of our business. Any further determination as to dividend policy will be made by our board of directors and will
depend on a number of factors, including our future earnings, capital requirements, financial condition and future prospects and such other factors
as our board of directors may deem relevant.
Since we are a holding company, our ability to pay cash dividends depends in large measure on our subsidiaries' ability to make distributions of
cash or property to us. Iowa insurance laws restrict the amount of distributions American Equity Life and Eagle Life can pay to us without the
approval of the Iowa Insurance Commissioner. See Management's Discussion and Analysis of Financial Condition and Results of Operations
and Note 12 to our audited consolidated financial statements, which are incorporated by reference in this Item 5.
Issuer Purchases of Equity Securities
The following table presents the amount of our share purchase activity for the periods indicated:
Period
January 1, 2018 - January 31, 2018
February 1, 2018 - February 28, 2018
March 1, 2018 - March 31, 2018
April 1, 2018 - April 30, 2018
May 1, 2018 - May 31, 2018
June 1, 2018 - June 30, 2018
July 1, 2018 - July 31, 2018
August 1, 2018 - August 31, 2018
September 1, 2018 - September 30, 2018
October 1, 2018 - October 31, 2018
November 1, 2018 - November 30, 2018
December 1, 2018 - December 31, 2018
Total
Total Number of
Shares Purchased (a)
Average Price
Paid Per Share
— $
913
8,759
$
$
— $
— $
2,018
$
— $
— $
— $
— $
— $
— $
11,690
—
31.92
31.82
35.70
—
—
—
—
—
—
—
—
(a) Includes the number of shares of common stock utilized to execute certain stock incentive awards.
Year ended December 31,
2018
2017
2016
2015
2014
(Dollars in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenues
Premiums and other considerations
$
26,480
$
34,228
$
43,767
$
36,048
$
32,623
Annuity product charges
Net investment income
Change in fair value of derivatives
Net realized gains (losses) on investments, excluding other than
temporary impairment ("OTTI") losses
Net OTTI losses recognized in operations
Total revenues
Benefits and expenses
Insurance policy benefits and change in future policy
benefits
Interest sensitive and index product benefits
Change in fair value of embedded derivatives
Amortization of deferred sales inducements and policy acquisition
costs
Interest expense on notes and loan payable and subordinated
debentures
Other operating costs and expenses
Total benefits and expenses
Income before income taxes
Income tax expense
Net income
Per Share Data:
Earnings per common share
Earnings per common share - assuming dilution
Dividends declared per common share
224,488
2,147,812
(777,848)
(37,178)
(36,656)
200,494
1,991,997
1,677,871
173,579
136,168
118,990
1,849,872
1,692,192
1,531,667
164,219
(336,146)
504,825
10,509
(4,630)
11,524
(22,679)
10,211
(19,536)
(4,003)
(2,627)
1,547,098
3,891,652
2,220,282
1,518,937
2,168,973
39,530
43,219
1,610,835
2,023,668
(1,389,491)
919,735
52,483
725,472
543,465
45,458
968,053
(464,698)
41,815
1,473,700
32,321
550,192
432,576
625,178
495,504
294,997
40,989
129,301
981,356
565,742
107,726
44,492
111,691
41,206
102,231
41,088
96,218
48,492
81,584
3,575,381
2,090,035
1,181,623
1,972,909
316,271
141,626
130,247
47,004
337,314
117,484
196,064
70,041
458,016
$
174,645
$
83,243
$
219,830
$
126,023
$
5.07
5.01
0.28
$
1.96
1.93
0.26
$
0.98
0.97
0.24
$
2.78
2.72
0.22
1.69
1.58
0.20
$
$
Non-GAAP Financial Measures (a):
Reconciliation from net income to non-GAAP operating income:
Net income
$
458,016
$
174,645
$
83,243
$
219,830
$
126,023
Net realized investment (gains) losses, including OTTI
45,450
(5,093)
7,188
5,737
4,429
Change in fair value of derivatives and embedded derivatives -
fixed index annuities
Change in fair value of derivatives - debt
Extinguishment of debt
Litigation reserve
Income taxes
Non-GAAP operating income
Non-GAAP operating income per common share
Non-GAAP operating income per common share - assuming dilution
(72,181)
(1,892)
—
—
(3,653)
425,740
4.71
4.66
$
$
121,846
(1,224)
—
—
(5,124)
285,050
3.20
3.16
$
$
56,634
(1,265)
—
(1,957)
(21,499)
122,344
1.44
1.43
$
$
(44,055)
1,296
—
—
13,012
195,820
2.48
2.42
$
$
79,053
104
12,503
(1,418)
(30,048)
190,646
2.56
2.39
$
$
16
17
Consolidated Balance Sheet Data:
Total investments
Total assets
Policy benefit reserves
Notes and loan payable
Subordinated debentures
Accumulated other comprehensive income (loss) ("AOCI")
As of and for the Year Ended December 31,
2018
2017
2016
2015
2014
(Dollars in thousands, except per share data)
$ 49,427,498
$ 50,300,705
$ 44,757,568
$ 39,570,332
$ 35,981,858
61,625,564
62,030,736
56,053,472
49,029,392
43,976,689
57,606,009
56,142,673
51,637,026
45,495,431
39,802,861
494,591
242,982
(52,432)
494,093
242,565
724,599
493,755
241,853
339,966
393,227
241,452
201,663
413,805
241,072
721,401
Total stockholders' equity
2,399,101
2,850,157
2,291,595
1,944,535
2,139,876
Other Data:
Life subsidiaries' statutory capital and surplus and asset valuation
reserve
Life subsidiaries' statutory net gain from operations before income
taxes and realized capital gains (losses)
Life subsidiaries' statutory net income
Book value per share (b)
Book value per share, excluding AOCI (b)
3,542,339
3,260,328
2,933,193
2,593,472
2,327,335
372,830
222,734
26.55
27.13
565,295
386,274
31.91
23.79
144,159
80,699
26.04
22.17
227,865
132,723
23.83
21.36
467,923
344,666
27.93
18.52
(a) In addition to net income, we have consistently utilized non-GAAP operating income and non-GAAP operating income per common share
—assuming dilution, non-GAAP financial measures commonly used in the life insurance industry, as economic measures to evaluate our
financial performance. Non-GAAP operating income equals net income adjusted to eliminate the impact of items that fluctuate from year
to year 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 eliminate the impact of fair value accounting for our fixed index
annuity business. These adjustments are not economic in nature but rather impact the timing of reported results. In addition, 2017 includes
a $35.9 million adjustment to arrive at non-GAAP operating income resulting from the Tax Cuts and Jobs Act of 2017, which was enacted
on December 22, 2017 and required a revaluation of our net deferred tax assets from 35% to 21%. We believe the combined presentation
and evaluation of non-GAAP operating income together with net income provides information that may enhance an investor's understanding
of our underlying results and profitability. The amounts included in the reconciliation of net income to non-GAAP operating income are
presented net of related adjustments to amortization of deferred sales inducements and deferred policy acquisition costs.
(b) Book value per share and book value per share excluding AOCI, non-GAAP financial measures, are calculated as total stockholders' equity
and total stockholders' equity excluding AOCI divided by the total number of shares of common stock outstanding. Since AOCI fluctuates
from year to year due to unrealized changes in the fair value of available for sale investments, we believe these non-GAAP financial measures
provide useful supplemental information.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's discussion and analysis reviews our consolidated financial position at December 31, 2018 and 2017, and our consolidated results
of operations for the three years in the period ended December 31, 2018, and where appropriate, factors that may affect future financial
performance. This analysis should be read in conjunction with our audited consolidated financial statements, notes thereto and selected
consolidated financial data appearing elsewhere in this report.
Cautionary Statement Regarding Forward-Looking Information
All statements, trend analyses and other information contained in this report and elsewhere (such as in filings by us with the SEC, press releases,
presentations by us or our management or oral statements) relative to markets for our products and trends in our operations or financial results,
as well as other statements including words such as "anticipate", "believe", "plan", "estimate", "expect", "intend" and other similar expressions,
constitute forward-looking statements. We caution that these statements may and often do vary from actual results and the differences between
these statements and actual results can be material. Accordingly, we cannot assure you that actual results will not differ materially from those
expressed or implied by the forward-looking statements. Factors that could contribute to these differences include, among other things:
•
general economic conditions and other factors, including prevailing interest rate levels and stock and credit market performance which
may affect (among other things) our ability to sell our products, our ability to access capital resources and the costs associated therewith,
the fair value of our investments, which could result in impairments and other than temporary impairments, and certain liabilities, and
the lapse rate and profitability of policies;
customer response to new products and marketing initiatives;
changes in Federal income tax laws and regulations which may affect the relative income tax advantages of our products;
increasing competition in the sale of fixed annuities;
regulatory changes or actions, including those relating to regulation of financial services affecting (among other things) bank sales
and underwriting of insurance products and regulation of the sale, underwriting and pricing of products; and
the risk factors or uncertainties listed from time to time in our filings with the SEC.
•
•
•
•
•
For a detailed discussion of these and other factors that might affect our performance, see Item 1A of this report.
Executive Summary
Excellent customer service teamed with our ability to offer innovative insurance products that provide principal protection and lifetime income
continued to result in significant sales of our annuity products. In 2018, our sales were $4.4 billion which has resulted in cash and investments
in excess of $49 billion at December 31, 2018. Our sales for the last five years have ranged from $4.2 billion to $7.1 billion. We have applied
a conservative investment strategy to the annuity deposits we continue to manage which has provided reliable returns on our invested assets.
Our profitability has also been driven by maintaining an efficient operation.
The economic and personal investing environments continued to be conducive for high sales levels as retirees and others look to put their money
in instruments that will protect their principal and provide them with consistent cash flow sources in their retirement years. Our sales increased
in 2018 as compared to 2017 due to the launch of new products during 2018 to improve our competitive position in the guaranteed lifetime
income benefit market, the continued competitiveness of our accumulation products and higher yields which supported increases in payout
factors on our guaranteed income products. In addition, we benefited from an increase in industry sales of fixed index annuities during 2018 in
part due to the DOL conflict of interest fiduciary rule being vacated. These factors were partially mitigated by continued competitive pressures
within each of our distribution channels. We continue to face a challenging environment for sales of fixed index annuities due to a highly
competitive market.
We continue to be in the midst of an unprecedented period of low interest rates and low yields for investments with the credit quality we prefer
which presents a strong headwind to achieving our target rate for investment spread. In response, we have been reducing policyholder crediting
rates for new annuities and existing annuities since the fourth quarter of 2011. In addition, options costs for certain index strategies have been
increasing in the last several quarters which has caused an increase in our aggregate cost of money. We continue to have flexibility to reduce
our crediting rates if necessary and could decrease our cost of money by approximately 63 basis points if we reduce current rates to guaranteed
minimums. In addition, starting in 2017 we began to invest in asset classes that were not traditionally in our portfolio, focusing on investments
with less liquidity that provide higher yields and have a track record of positive credit performance. Investment yields available to us in 2018
increased compared to 2017 due to an increase in interest rates on the asset classes we targeted for purchase and investment in new asset classes
as noted above. We are looking to improve our investment yield through the opportunistic replacement of lower yielding securities with higher
yielding securities. During 2018 we sold $2.1 billion in book value of lower yielding securities for a yield pick-up of approximately 170 basis
points on these investments. As book yields on the securities sold were less than market yields, we recognized losses of approximately $50
million with $38 million recognized in net realized gains (losses), and $12 million recognized as OTTI. These losses should be recovered from
the higher yields on the securities acquired with the proceeds from the sales in less than two years. While we anticipate pursuing additional
portfolio realignment opportunities in 2019, we would not expect the size to be as large as in 2018.
18
19
Consolidated Balance Sheet Data:
Total investments
Total assets
Policy benefit reserves
Notes and loan payable
Subordinated debentures
As of and for the Year Ended December 31,
2018
2017
2016
2015
2014
(Dollars in thousands, except per share data)
$ 49,427,498
$ 50,300,705
$ 44,757,568
$ 39,570,332
$ 35,981,858
61,625,564
62,030,736
56,053,472
49,029,392
43,976,689
57,606,009
56,142,673
51,637,026
45,495,431
39,802,861
494,591
242,982
(52,432)
494,093
242,565
724,599
493,755
241,853
339,966
393,227
241,452
201,663
413,805
241,072
721,401
Accumulated other comprehensive income (loss) ("AOCI")
Total stockholders' equity
2,399,101
2,850,157
2,291,595
1,944,535
2,139,876
Other Data:
reserve
Life subsidiaries' statutory capital and surplus and asset valuation
Life subsidiaries' statutory net gain from operations before income
taxes and realized capital gains (losses)
Life subsidiaries' statutory net income
Book value per share (b)
Book value per share, excluding AOCI (b)
3,542,339
3,260,328
2,933,193
2,593,472
2,327,335
372,830
222,734
26.55
27.13
565,295
386,274
31.91
23.79
144,159
80,699
26.04
22.17
227,865
132,723
23.83
21.36
467,923
344,666
27.93
18.52
(a) In addition to net income, we have consistently utilized non-GAAP operating income and non-GAAP operating income per common share
—assuming dilution, non-GAAP financial measures commonly used in the life insurance industry, as economic measures to evaluate our
financial performance. Non-GAAP operating income equals net income adjusted to eliminate the impact of items that fluctuate from year
to year 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 eliminate the impact of fair value accounting for our fixed index
annuity business. These adjustments are not economic in nature but rather impact the timing of reported results. In addition, 2017 includes
a $35.9 million adjustment to arrive at non-GAAP operating income resulting from the Tax Cuts and Jobs Act of 2017, which was enacted
on December 22, 2017 and required a revaluation of our net deferred tax assets from 35% to 21%. We believe the combined presentation
and evaluation of non-GAAP operating income together with net income provides information that may enhance an investor's understanding
of our underlying results and profitability. The amounts included in the reconciliation of net income to non-GAAP operating income are
presented net of related adjustments to amortization of deferred sales inducements and deferred policy acquisition costs.
(b) Book value per share and book value per share excluding AOCI, non-GAAP financial measures, are calculated as total stockholders' equity
and total stockholders' equity excluding AOCI divided by the total number of shares of common stock outstanding. Since AOCI fluctuates
from year to year due to unrealized changes in the fair value of available for sale investments, we believe these non-GAAP financial measures
provide useful supplemental information.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's discussion and analysis reviews our consolidated financial position at December 31, 2018 and 2017, and our consolidated results
of operations for the three years in the period ended December 31, 2018, and where appropriate, factors that may affect future financial
performance. This analysis should be read in conjunction with our audited consolidated financial statements, notes thereto and selected
consolidated financial data appearing elsewhere in this report.
Cautionary Statement Regarding Forward-Looking Information
All statements, trend analyses and other information contained in this report and elsewhere (such as in filings by us with the SEC, press releases,
presentations by us or our management or oral statements) relative to markets for our products and trends in our operations or financial results,
as well as other statements including words such as "anticipate", "believe", "plan", "estimate", "expect", "intend" and other similar expressions,
constitute forward-looking statements. We caution that these statements may and often do vary from actual results and the differences between
these statements and actual results can be material. Accordingly, we cannot assure you that actual results will not differ materially from those
expressed or implied by the forward-looking statements. Factors that could contribute to these differences include, among other things:
•
•
•
•
•
•
general economic conditions and other factors, including prevailing interest rate levels and stock and credit market performance which
may affect (among other things) our ability to sell our products, our ability to access capital resources and the costs associated therewith,
the fair value of our investments, which could result in impairments and other than temporary impairments, and certain liabilities, and
the lapse rate and profitability of policies;
customer response to new products and marketing initiatives;
changes in Federal income tax laws and regulations which may affect the relative income tax advantages of our products;
increasing competition in the sale of fixed annuities;
regulatory changes or actions, including those relating to regulation of financial services affecting (among other things) bank sales
and underwriting of insurance products and regulation of the sale, underwriting and pricing of products; and
the risk factors or uncertainties listed from time to time in our filings with the SEC.
For a detailed discussion of these and other factors that might affect our performance, see Item 1A of this report.
Executive Summary
Excellent customer service teamed with our ability to offer innovative insurance products that provide principal protection and lifetime income
continued to result in significant sales of our annuity products. In 2018, our sales were $4.4 billion which has resulted in cash and investments
in excess of $49 billion at December 31, 2018. Our sales for the last five years have ranged from $4.2 billion to $7.1 billion. We have applied
a conservative investment strategy to the annuity deposits we continue to manage which has provided reliable returns on our invested assets.
Our profitability has also been driven by maintaining an efficient operation.
The economic and personal investing environments continued to be conducive for high sales levels as retirees and others look to put their money
in instruments that will protect their principal and provide them with consistent cash flow sources in their retirement years. Our sales increased
in 2018 as compared to 2017 due to the launch of new products during 2018 to improve our competitive position in the guaranteed lifetime
income benefit market, the continued competitiveness of our accumulation products and higher yields which supported increases in payout
factors on our guaranteed income products. In addition, we benefited from an increase in industry sales of fixed index annuities during 2018 in
part due to the DOL conflict of interest fiduciary rule being vacated. These factors were partially mitigated by continued competitive pressures
within each of our distribution channels. We continue to face a challenging environment for sales of fixed index annuities due to a highly
competitive market.
We continue to be in the midst of an unprecedented period of low interest rates and low yields for investments with the credit quality we prefer
which presents a strong headwind to achieving our target rate for investment spread. In response, we have been reducing policyholder crediting
rates for new annuities and existing annuities since the fourth quarter of 2011. In addition, options costs for certain index strategies have been
increasing in the last several quarters which has caused an increase in our aggregate cost of money. We continue to have flexibility to reduce
our crediting rates if necessary and could decrease our cost of money by approximately 63 basis points if we reduce current rates to guaranteed
minimums. In addition, starting in 2017 we began to invest in asset classes that were not traditionally in our portfolio, focusing on investments
with less liquidity that provide higher yields and have a track record of positive credit performance. Investment yields available to us in 2018
increased compared to 2017 due to an increase in interest rates on the asset classes we targeted for purchase and investment in new asset classes
as noted above. We are looking to improve our investment yield through the opportunistic replacement of lower yielding securities with higher
yielding securities. During 2018 we sold $2.1 billion in book value of lower yielding securities for a yield pick-up of approximately 170 basis
points on these investments. As book yields on the securities sold were less than market yields, we recognized losses of approximately $50
million with $38 million recognized in net realized gains (losses), and $12 million recognized as OTTI. These losses should be recovered from
the higher yields on the securities acquired with the proceeds from the sales in less than two years. While we anticipate pursuing additional
portfolio realignment opportunities in 2019, we would not expect the size to be as large as in 2018.
18
19
Our Business and Profitability
We specialize in the sale of individual annuities (primarily fixed index deferred annuities). Under U.S. generally accepted accounting principles
("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 business model contemplates continued growth in invested assets and non-GAAP operating income while maintaining a high quality
investment portfolio that will not experience significant losses from impairments of invested assets. We are committed to maintaining a high
quality investment portfolio with limited exposure to below investment grade securities and other riskier assets. Growth in invested assets is
predicated on a continuation of our high sales achievements of the last five years while at the same time maintaining a high level of retention
of the funds received.
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 impairment
of investments,
• 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.
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:
Average yield on invested assets
Aggregate cost of money
Aggregate investment spread
Impact of:
Investment yield - additional prepayment income
Cost of money benefit from over hedging
2018
4.47%
1.87%
2.60%
0.08%
0.05%
Year Ended December 31,
2017
4.46%
1.74%
2.72%
0.08%
0.06%
2016
4.51%
1.90%
2.61%
0.06%
0.01%
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. 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.
Aggregate investment spread decreased during 2018 as compared to 2017 primarily due to an increase in the cost of money resulting from an
increase in option costs for certain index strategies over the last several quarters. See the Executive Summary for a discussion of our actions
in response to the increase in option costs and the low interest rate environment.
Results of Operations for the Three Years Ended December 31, 2018
Annuity deposits by product type collected during 2018, 2017 and 2016, were as follows:
Product Type
American Equity:
Fixed index annuities
Annual reset fixed rate annuities
Multi-year fixed rate annuities
Single premium immediate annuities
Eagle Life:
Fixed index annuities
Annual reset fixed rate annuities
Multi-year fixed rate annuities
Consolidated:
Fixed index annuities
Annual reset fixed rate annuities
Multi-year fixed rate annuities
Single premium immediate annuities
Total before coinsurance ceded
Coinsurance ceded
Net after coinsurance ceded
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
$
3,560,881
$
3,390,144
$
5,114,178
3,633,911
3,513,343
45,636
3,581
23,813
660,401
1,555
109,096
771,052
4,221,282
47,191
112,677
23,813
4,404,963
413,222
74,829
23,424
24,946
576,695
—
87,172
663,867
3,966,839
74,829
110,596
24,946
4,177,210
387,280
64,317
450,474
35,851
5,664,820
610,580
—
852,799
1,463,379
5,724,758
64,317
1,303,273
35,851
7,128,199
1,736,054
5,392,145
$
3,991,741
$
3,789,930
$
Over these years competition has increased significantly within the fixed index annuity market. While we continue to be in the top three companies
for sales of fixed index annuities within the independent agent channel, the new entrants into the market have expanded the overall market
through other distribution channels and our overall market share has declined from second in 2016 to sixth based on information available
through the nine-months ended September 30, 2018 according to Wink's Sales and Market Report published by Wink, Inc. We attribute our
leading position to our attractive product offerings, our consistent presence in the fixed index annuity market, our continued strong relationships
with and excellent service provided to our distribution partners, the increased attractiveness of safe money products in volatile markets and lower
interest rates on competing products such as bank certificates of deposit.
Annuity deposits before coinsurance ceded increased 5% during 2018 compared to 2017 and decreased 41% during 2017 compared to 2016.
Annuity deposits after coinsurance ceded increased 5% during 2018 as compared to 2017 and decreased 30% in 2017 as compared to 2016. The
increase in sales in 2018 was due to the launch of new products during 2018 to improve our competitive position in the guaranteed lifetime
income benefit market, the continued competitiveness of our accumulation products and higher yields which supported increases in payout
factors on our guaranteed income products. In addition, we benefited from an increase in industry sales of fixed index annuities during 2018 in
part due to the DOL conflict of interest fiduciary rule being vacated. These factors were partially mitigated by continued competitive pressures
within each of our distribution channels. We continue to face a challenging environment for sales of fixed index annuities due to a highly
competitive market.
2017 sales levels were negatively impacted by competitive pressures within each of our distribution channels. In addition, low interest rates,
strong equity markets and uncertainty surrounding the DOL conflict of interest fiduciary rule were headwinds for sales of guaranteed income
products. 2016 sales levels were supported by sales of multi-year rate guaranteed ("MYGA") fixed annuity products. These products are often
emphasized by banks which are an expanding source of distribution for Eagle Life. Our rates on these products were more competitive during
the first half of 2016 and together with the larger number of bank distribution relationships, translated into significant sales of those products.
We coinsure 80% of the annuity deposits received from MYGA fixed annuity products and 50% of the fixed index annuities sold by Eagle Life
through broker/dealers and banks. Prior to January 1, 2017, the coinsurance percentage for fixed index annuities sold by Eagle Life was 80%.
The changes in coinsurance ceded premiums are attributable to changes in premiums from these sources.
Net income increased 162% to $458.0 million in 2018 and 110% to $174.6 million in 2017 from $83.2 million in 2016. Net income, in general,
has been positively impacted by the growth in 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) increased 6% to $49.9 billion
for the year ended December 31, 2018 compared to $46.8 billion in 2017 and 8% for the year ended December 31, 2017 compared to $43.5
billion in 2016. Our investment spread measured in dollars was $1.2 billion, $1.2 billion, and $1.0 billion for the years ended December 31,
2018, 2017 and 2016, respectively. As previously mentioned, our investment spread has been negatively impacted by the extended low interest
rate environment (see Net investment income) and the increase in our aggregate cost of money due to an increase in option costs for certain
index strategies we have been experiencing for the last several quarters.
20
21
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 business model contemplates continued growth in invested assets and non-GAAP operating income while maintaining a high quality
investment portfolio that will not experience significant losses from impairments of invested assets. We are committed to maintaining a high
quality investment portfolio with limited exposure to below investment grade securities and other riskier assets. Growth in invested assets is
predicated on a continuation of our high sales achievements of the last five years while at the same time maintaining a high level of retention
of the funds received.
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 impairment
• our ability to manage interest rates credited to policyholders and costs of the options purchased to fund the annual index credits on our
• our ability to manage the costs of acquiring new business (principally commissions paid to agents and distribution partners and bonuses
of investments,
fixed index annuities,
credited to policyholders),
• our ability to manage our operating expenses, and
• income taxes.
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:
Average yield on invested assets
Aggregate cost of money
Aggregate investment spread
Impact of:
Investment yield - additional prepayment income
Cost of money benefit from over hedging
Year Ended December 31,
2018
4.47%
1.87%
2.60%
0.08%
0.05%
2017
4.46%
1.74%
2.72%
0.08%
0.06%
2016
4.51%
1.90%
2.61%
0.06%
0.01%
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. 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.
Aggregate investment spread decreased during 2018 as compared to 2017 primarily due to an increase in the cost of money resulting from an
increase in option costs for certain index strategies over the last several quarters. See the Executive Summary for a discussion of our actions
in response to the increase in option costs and the low interest rate environment.
Our Business and Profitability
Results of Operations for the Three Years Ended December 31, 2018
We specialize in the sale of individual annuities (primarily fixed index deferred annuities). Under U.S. generally accepted accounting principles
Annuity deposits by product type collected during 2018, 2017 and 2016, were as follows:
("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
Product Type
American Equity:
Fixed index annuities
Annual reset fixed rate annuities
Multi-year fixed rate annuities
Single premium immediate annuities
Eagle Life:
Fixed index annuities
Annual reset fixed rate annuities
Multi-year fixed rate annuities
Consolidated:
Fixed index annuities
Annual reset fixed rate annuities
Multi-year fixed rate annuities
Single premium immediate annuities
Total before coinsurance ceded
Coinsurance ceded
Net after coinsurance ceded
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
$
3,560,881
$
3,390,144
$
5,114,178
45,636
3,581
23,813
74,829
23,424
24,946
3,633,911
3,513,343
660,401
1,555
109,096
771,052
4,221,282
47,191
112,677
23,813
4,404,963
413,222
576,695
—
87,172
663,867
3,966,839
74,829
110,596
24,946
4,177,210
387,280
$
3,991,741
$
3,789,930
$
64,317
450,474
35,851
5,664,820
610,580
—
852,799
1,463,379
5,724,758
64,317
1,303,273
35,851
7,128,199
1,736,054
5,392,145
Over these years competition has increased significantly within the fixed index annuity market. While we continue to be in the top three companies
for sales of fixed index annuities within the independent agent channel, the new entrants into the market have expanded the overall market
through other distribution channels and our overall market share has declined from second in 2016 to sixth based on information available
through the nine-months ended September 30, 2018 according to Wink's Sales and Market Report published by Wink, Inc. We attribute our
leading position to our attractive product offerings, our consistent presence in the fixed index annuity market, our continued strong relationships
with and excellent service provided to our distribution partners, the increased attractiveness of safe money products in volatile markets and lower
interest rates on competing products such as bank certificates of deposit.
Annuity deposits before coinsurance ceded increased 5% during 2018 compared to 2017 and decreased 41% during 2017 compared to 2016.
Annuity deposits after coinsurance ceded increased 5% during 2018 as compared to 2017 and decreased 30% in 2017 as compared to 2016. The
increase in sales in 2018 was due to the launch of new products during 2018 to improve our competitive position in the guaranteed lifetime
income benefit market, the continued competitiveness of our accumulation products and higher yields which supported increases in payout
factors on our guaranteed income products. In addition, we benefited from an increase in industry sales of fixed index annuities during 2018 in
part due to the DOL conflict of interest fiduciary rule being vacated. These factors were partially mitigated by continued competitive pressures
within each of our distribution channels. We continue to face a challenging environment for sales of fixed index annuities due to a highly
competitive market.
2017 sales levels were negatively impacted by competitive pressures within each of our distribution channels. In addition, low interest rates,
strong equity markets and uncertainty surrounding the DOL conflict of interest fiduciary rule were headwinds for sales of guaranteed income
products. 2016 sales levels were supported by sales of multi-year rate guaranteed ("MYGA") fixed annuity products. These products are often
emphasized by banks which are an expanding source of distribution for Eagle Life. Our rates on these products were more competitive during
the first half of 2016 and together with the larger number of bank distribution relationships, translated into significant sales of those products.
We coinsure 80% of the annuity deposits received from MYGA fixed annuity products and 50% of the fixed index annuities sold by Eagle Life
through broker/dealers and banks. Prior to January 1, 2017, the coinsurance percentage for fixed index annuities sold by Eagle Life was 80%.
The changes in coinsurance ceded premiums are attributable to changes in premiums from these sources.
Net income increased 162% to $458.0 million in 2018 and 110% to $174.6 million in 2017 from $83.2 million in 2016. Net income, in general,
has been positively impacted by the growth in 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) increased 6% to $49.9 billion
for the year ended December 31, 2018 compared to $46.8 billion in 2017 and 8% for the year ended December 31, 2017 compared to $43.5
billion in 2016. Our investment spread measured in dollars was $1.2 billion, $1.2 billion, and $1.0 billion for the years ended December 31,
2018, 2017 and 2016, respectively. As previously mentioned, our investment spread has been negatively impacted by the extended low interest
rate environment (see Net investment income) and the increase in our aggregate cost of money due to an increase in option costs for certain
index strategies we have been experiencing for the last several quarters.
20
21
Net income for the year ended December 31, 2018 was also positively impacted by a decrease in the statutory federal income tax rate as a result
of Tax Reform (see Income tax expense). In addition, net income for the year ended December 31, 2018 benefited from a discrete tax item for
a worthless stock deduction related to a wholly-owned subsidiary which reduced income tax expense by approximately $7.4 million.
Net income for the year ended December 31, 2018 was negatively impacted by realized investment losses of $73.8 million, of which $37.1
million was recognized as net realized losses and $36.7 million was recognized as OTTI. See Net realized gains (losses) on investments,
excluding OTTI losses and Net OTTI losses recognized in operations and Note 3 to our audited consolidated financial statements for discussion
of net realized gains (losses) on investments and net OTTI losses recognized in operations.
Net income for the year ended December 31, 2017 was negatively impacted by $35.9 million related to the revaluation of our net deferred tax
assets using the newly enacted federal tax rate as a result of Tax Reform. Net income for the year ended December 31, 2017 was also negatively
impacted by an $18.4 million pretax loss on the extinguishment of our $400 million notes due 2021 (the “2021 Notes”), which reduced net
income by $10.8 million. See Note 9 to our audited consolidated financial statements.
Net income is also impacted by the change in fair value of derivatives and embedded derivatives which fluctuates from year to year based upon
changes in fair values of call options purchased to fund the annual index credits for fixed index annuities and changes in the interest rate used
to discount the embedded derivative liability. Net income for the year ended December 31, 2018 was positively impacted by an increase in the
discount rate used to estimate our embedded derivative liabilities while net income for the years ended December 31, 2017 and 2016 was
negatively impacted by a decrease in the discount rate used to estimate our embedded derivative liabilities.
We periodically revise the key assumptions used in the calculation of amortization of deferred policy acquisition costs and deferred sales
inducements retrospectively through an unlocking process when estimates of current or future gross profits/margins (including the impact of
realized investment gains and losses) to be realized from a group of products are revised. In addition, we periodically revise the assumptions
used in determining the liability for lifetime income benefit riders as experience develops that is different from our assumptions.
Net income for 2018, 2017 and 2016 includes effects from revisions to assumptions as follows:
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
Increase (decrease) in amortization of deferred sales inducements
$
(21,465) $
(34,274) $
Increase (decrease) in amortization of deferred policy acquisition costs
Increase (decrease) in interest sensitive and index product benefits
Increase (decrease) in net income
(30,572)
(53,607)
82,825
(48,198)
21,608
39,196
35,760
48,164
42,002
(81,224)
We review these assumptions quarterly and as a result of these reviews, we made adjustments to assumptions used in the calculation of amortization
of deferred policy acquisition costs and deferred sales inducements during 2018. The most significant revisions to such assumptions were account
balance true-ups which were favorable to us due to stronger index credits than we assumed due to strong equity market performance and
adjustments to generally decrease lapse rate assumptions to reflect better persistency experienced than assumed. The favorable impact of the
account balance true-ups and lapse rate assumption changes was partially offset by revisions to lower our future investment spread assumptions
primarily due to an increase in the cost of money we have been experiencing.
The most significant revisions made during 2017 as a result of our quarterly reviews were account balance true-ups which were favorable to us
due to stronger index credits than we assumed due to strong equity market performance and adjustments to generally decrease lapse rate
assumptions to reflect better persistency experienced than assumed. The favorable impact of the account balance true-ups and lapse rate
assumption changes was partially offset by reductions in estimated future gross profits attributable to revisions to assumptions used in determining
the liability for lifetime income benefit riders as well as an increase in estimated expenses associated with a reinsurance agreement with an
unaffiliated reinsurer.
The most significant revisions during 2016 as a result of our quarterly reviews were adjustments to lower future spread assumptions as actual
investment spreads being earned showed investment spread and gross profits being less than what we were assuming in our models due to
decreases in the average yield on invested assets resulting from the continued low interest rate environment. We also made adjustments to extend
the period of time in which we assume investment spread will grade up to our long-term spread targets by an additional two years as yields
obtained on investment purchases were much lower than we had anticipated as a result of the overall decline in investment yields that followed
the Brexit vote. In addition, revisions to assumptions used in determining the liability for lifetime income benefit riders during 2016 resulted
in a decrease in estimated future gross profits.
The 2018, 2017 and 2016 revisions to the liability for lifetime income benefit riders were consistent with the revisions used in the calculation
of amortization of deferred policy acquisition costs and deferred sales inducements described above. The 2018 revisions were primarily
attributable to account balance true-ups and future investment spread assumptions. The impact of the account balance true-ups and future
investment spread changes was partially offset by the lapse rate assumptions changes described above. The 2017 revisions were primarily due
to the lapse rate assumption changes described above and changes to our account value growth projections. The 2016 revisions were primarily
due to actual index credits on policies being lower than projected over the past four quarters.
Non-GAAP operating income, a non-GAAP financial measure (see reconciliation to net income in Item 6. Selected Consolidated Financial
Data) increased 49% to $425.7 million in 2018 and 133% to $285.1 million in 2017 from $122.3 million in 2016.
In addition to net income, we have consistently utilized non-GAAP operating income, 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 equals net income adjusted
to eliminate the impact of items that fluctuate from year to year 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 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. In addition, 2017 includes a $35.9 million adjustment to arrive at non-GAAP operating income resulting from the Tax Cuts and Jobs
Act of 2017, which was enacted on December 22, 2017 and required a revaluation of our net deferred tax assets from 35% to 21%. We believe
the combined presentation and evaluation of non-GAAP operating income together with net income provides information that may enhance an
investor's understanding of our underlying results and profitability.
Non-GAAP operating income is not a substitute for net income determined in accordance with GAAP. The adjustments made to derive non-
GAAP operating income are important to understand our overall results from operations and, if evaluated without proper context, non-GAAP
operating income possesses material limitations. As an example, we could produce a low level of net income 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 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, it does not include the decrease in cash flows
expected to be collected as a result of credit loss OTTI. Therefore, our management reviews net realized investment gains (losses) and analyses
of our net investment income, including impacts related to OTTI write-downs, in connection with their review of our investment portfolio. In
addition, our management examines net income as part of their review of our overall financial results.
Non-GAAP operating income for 2018, 2017 and 2016 includes effects from revisions to assumptions as follows:
Increase (decrease) in amortization of deferred sales inducements
$
(20,466) $
(31,317) $
Increase (decrease) in amortization of deferred policy acquisition costs
Increase (decrease) in interest sensitive and index product benefits
Increase (decrease) in non-GAAP operating income
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
(28,702)
(53,607)
80,576
(43,716)
21,608
34,405
36,127
47,765
42,002
(81,202)
Annuity product charges (surrender charges assessed against policy withdrawals and fees deducted from policyholder account balances for
lifetime income benefit riders) increased 12% to $224.5 million in 2018 and 16% to $200.5 million in 2017 from $173.6 million in 2016. The
components of annuity product charges are set forth in the table that follows:
Surrender charges
Lifetime income benefit riders (LIBR) fees
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
65,644
158,844
224,488
$
$
$
54,624
145,870
200,494
$
$
$
51,577
122,002
173,579
$
$
$
$
Withdrawals from annuity policies subject to surrender charges
Average surrender charge collected on withdrawals subject to surrender charges
572,802
11.5%
456,084
12.0%
429,090
12.0%
Fund values on policies subject to LIBR fees
Weighted average per policy LIBR fee
21,773,577
$
20,440,431
$
17,809,659
0.73%
0.71%
0.69%
The increases in annuity product charges were primarily attributable to increases in fees assessed for lifetime income benefit riders due to a
larger volume of business in force subject to the fee and increases in the average fees being charged due to higher fees on new products as
compared to prior periods. See Interest sensitive and index product benefits below for corresponding expense recognized on lifetime income
benefit riders. In addition, surrender charges increased in 2018 and 2017 due to an increase in withdrawals from annuity policies subject to
surrender charges as compared to prior years, which is due to a larger volume of business in force and policyholder behavior.
Net investment income increased 8% to $2.1 billion in 2018 and 8% to $2.0 billion in 2017 from $1.8 billion in 2016. The increases were
principally attributable to the growth in our annuity business and corresponding increases in our invested assets. Average invested assets excluding
derivative instruments (on an amortized cost basis) increased 7% to $48.1 billion in 2018 and 9% to $44.8 billion in 2017 compared to $41.1
billion in 2016.
22
23
Net income for the year ended December 31, 2018 was also positively impacted by a decrease in the statutory federal income tax rate as a result
of Tax Reform (see Income tax expense). In addition, net income for the year ended December 31, 2018 benefited from a discrete tax item for
a worthless stock deduction related to a wholly-owned subsidiary which reduced income tax expense by approximately $7.4 million.
Net income for the year ended December 31, 2018 was negatively impacted by realized investment losses of $73.8 million, of which $37.1
million was recognized as net realized losses and $36.7 million was recognized as OTTI. See Net realized gains (losses) on investments,
excluding OTTI losses and Net OTTI losses recognized in operations and Note 3 to our audited consolidated financial statements for discussion
of net realized gains (losses) on investments and net OTTI losses recognized in operations.
Net income for the year ended December 31, 2017 was negatively impacted by $35.9 million related to the revaluation of our net deferred tax
assets using the newly enacted federal tax rate as a result of Tax Reform. Net income for the year ended December 31, 2017 was also negatively
impacted by an $18.4 million pretax loss on the extinguishment of our $400 million notes due 2021 (the “2021 Notes”), which reduced net
income by $10.8 million. See Note 9 to our audited consolidated financial statements.
Net income is also impacted by the change in fair value of derivatives and embedded derivatives which fluctuates from year to year based upon
changes in fair values of call options purchased to fund the annual index credits for fixed index annuities and changes in the interest rate used
to discount the embedded derivative liability. Net income for the year ended December 31, 2018 was positively impacted by an increase in the
discount rate used to estimate our embedded derivative liabilities while net income for the years ended December 31, 2017 and 2016 was
negatively impacted by a decrease in the discount rate used to estimate our embedded derivative liabilities.
We periodically revise the key assumptions used in the calculation of amortization of deferred policy acquisition costs and deferred sales
inducements retrospectively through an unlocking process when estimates of current or future gross profits/margins (including the impact of
realized investment gains and losses) to be realized from a group of products are revised. In addition, we periodically revise the assumptions
used in determining the liability for lifetime income benefit riders as experience develops that is different from our assumptions.
Net income for 2018, 2017 and 2016 includes effects from revisions to assumptions as follows:
Increase (decrease) in amortization of deferred sales inducements
$
(21,465) $
(34,274) $
Increase (decrease) in amortization of deferred policy acquisition costs
Increase (decrease) in interest sensitive and index product benefits
Increase (decrease) in net income
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
(30,572)
(53,607)
82,825
(48,198)
21,608
39,196
35,760
48,164
42,002
(81,224)
We review these assumptions quarterly and as a result of these reviews, we made adjustments to assumptions used in the calculation of amortization
of deferred policy acquisition costs and deferred sales inducements during 2018. The most significant revisions to such assumptions were account
balance true-ups which were favorable to us due to stronger index credits than we assumed due to strong equity market performance and
adjustments to generally decrease lapse rate assumptions to reflect better persistency experienced than assumed. The favorable impact of the
account balance true-ups and lapse rate assumption changes was partially offset by revisions to lower our future investment spread assumptions
primarily due to an increase in the cost of money we have been experiencing.
The most significant revisions made during 2017 as a result of our quarterly reviews were account balance true-ups which were favorable to us
due to stronger index credits than we assumed due to strong equity market performance and adjustments to generally decrease lapse rate
assumptions to reflect better persistency experienced than assumed. The favorable impact of the account balance true-ups and lapse rate
assumption changes was partially offset by reductions in estimated future gross profits attributable to revisions to assumptions used in determining
the liability for lifetime income benefit riders as well as an increase in estimated expenses associated with a reinsurance agreement with an
unaffiliated reinsurer.
The most significant revisions during 2016 as a result of our quarterly reviews were adjustments to lower future spread assumptions as actual
investment spreads being earned showed investment spread and gross profits being less than what we were assuming in our models due to
decreases in the average yield on invested assets resulting from the continued low interest rate environment. We also made adjustments to extend
the period of time in which we assume investment spread will grade up to our long-term spread targets by an additional two years as yields
obtained on investment purchases were much lower than we had anticipated as a result of the overall decline in investment yields that followed
the Brexit vote. In addition, revisions to assumptions used in determining the liability for lifetime income benefit riders during 2016 resulted
in a decrease in estimated future gross profits.
The 2018, 2017 and 2016 revisions to the liability for lifetime income benefit riders were consistent with the revisions used in the calculation
of amortization of deferred policy acquisition costs and deferred sales inducements described above. The 2018 revisions were primarily
attributable to account balance true-ups and future investment spread assumptions. The impact of the account balance true-ups and future
investment spread changes was partially offset by the lapse rate assumptions changes described above. The 2017 revisions were primarily due
to the lapse rate assumption changes described above and changes to our account value growth projections. The 2016 revisions were primarily
due to actual index credits on policies being lower than projected over the past four quarters.
Non-GAAP operating income, a non-GAAP financial measure (see reconciliation to net income in Item 6. Selected Consolidated Financial
Data) increased 49% to $425.7 million in 2018 and 133% to $285.1 million in 2017 from $122.3 million in 2016.
In addition to net income, we have consistently utilized non-GAAP operating income, 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 equals net income adjusted
to eliminate the impact of items that fluctuate from year to year 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 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. In addition, 2017 includes a $35.9 million adjustment to arrive at non-GAAP operating income resulting from the Tax Cuts and Jobs
Act of 2017, which was enacted on December 22, 2017 and required a revaluation of our net deferred tax assets from 35% to 21%. We believe
the combined presentation and evaluation of non-GAAP operating income together with net income provides information that may enhance an
investor's understanding of our underlying results and profitability.
Non-GAAP operating income is not a substitute for net income determined in accordance with GAAP. The adjustments made to derive non-
GAAP operating income are important to understand our overall results from operations and, if evaluated without proper context, non-GAAP
operating income possesses material limitations. As an example, we could produce a low level of net income 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 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, it does not include the decrease in cash flows
expected to be collected as a result of credit loss OTTI. Therefore, our management reviews net realized investment gains (losses) and analyses
of our net investment income, including impacts related to OTTI write-downs, in connection with their review of our investment portfolio. In
addition, our management examines net income as part of their review of our overall financial results.
Non-GAAP operating income for 2018, 2017 and 2016 includes effects from revisions to assumptions as follows:
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
Increase (decrease) in amortization of deferred sales inducements
$
(20,466) $
(31,317) $
Increase (decrease) in amortization of deferred policy acquisition costs
Increase (decrease) in interest sensitive and index product benefits
Increase (decrease) in non-GAAP operating income
(28,702)
(53,607)
80,576
(43,716)
21,608
34,405
36,127
47,765
42,002
(81,202)
Annuity product charges (surrender charges assessed against policy withdrawals and fees deducted from policyholder account balances for
lifetime income benefit riders) increased 12% to $224.5 million in 2018 and 16% to $200.5 million in 2017 from $173.6 million in 2016. The
components of annuity product charges are set forth in the table that follows:
Surrender charges
Lifetime income benefit riders (LIBR) fees
Withdrawals from annuity policies subject to surrender charges
Average surrender charge collected on withdrawals subject to surrender charges
Fund values on policies subject to LIBR fees
Weighted average per policy LIBR fee
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
65,644
158,844
224,488
572,802
11.5%
$
$
$
54,624
145,870
200,494
456,084
12.0%
$
$
$
51,577
122,002
173,579
429,090
12.0%
21,773,577
$
20,440,431
$
17,809,659
0.73%
0.71%
0.69%
$
$
$
$
The increases in annuity product charges were primarily attributable to increases in fees assessed for lifetime income benefit riders due to a
larger volume of business in force subject to the fee and increases in the average fees being charged due to higher fees on new products as
compared to prior periods. See Interest sensitive and index product benefits below for corresponding expense recognized on lifetime income
benefit riders. In addition, surrender charges increased in 2018 and 2017 due to an increase in withdrawals from annuity policies subject to
surrender charges as compared to prior years, which is due to a larger volume of business in force and policyholder behavior.
Net investment income increased 8% to $2.1 billion in 2018 and 8% to $2.0 billion in 2017 from $1.8 billion in 2016. The increases were
principally attributable to the growth in our annuity business and corresponding increases in our invested assets. Average invested assets excluding
derivative instruments (on an amortized cost basis) increased 7% to $48.1 billion in 2018 and 9% to $44.8 billion in 2017 compared to $41.1
billion in 2016.
22
23
The average yield earned on average invested assets was 4.47%, 4.46% and 4.51% for 2018, 2017 and 2016, respectively. The increase in yield
earned on average invested assets in 2018 was attributable to the investment of new premiums and portfolio cash flows at rates above the overall
portfolio yield and higher yields being earned on our floating rate investments. The decrease in yield earned on average invested assets in 2017
was attributable to investment of new premiums and portfolio cash flows during those periods at rates below the overall portfolio yield. The
average yield on fixed income securities purchased and commercial mortgage loans funded was 4.79%, 4.16% and 3.66% for the years ended
December 31, 2018, 2017 and 2016, respectively. The impact from these items was also impacted by non-trendable investment income items
which added eight basis points to the average yield on invested assets in 2018 and 2017 and six basis points to the average yield on invested
assets in 2016, respectively.
Change in fair value of derivatives consists of call options purchased to fund annual index credits on fixed index annuities, and an interest rate
swap and interest rate caps that hedge our floating rate subordinated debentures. The components of change in fair value of derivatives are as
follows:
Call options:
Gain (loss) on option expiration
Change in unrealized gains/losses
Interest rate swap
Interest rate caps
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
$
$
656,953
$
1,062,328
$
(1,435,852)
615,955
869
182
255
(667)
(282,574)
447,603
(482)
(328)
(777,848) $
1,677,871
$
164,219
The differences between the change in fair value of derivatives between years for call options are primarily due to the performance of the indices
upon which our call options are based which impacts the fair values and changes in the fair values of those call options between years. 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 these years is as follows:
S&P 500 Index
Point-to-point strategy
Monthly average strategy
Monthly point-to-point strategy
Fixed income (bond index) strategies
Year Ended December 31,
2018
2017
2016
0.0 - 13.9%
0.0 - 8.1%
0.0 - 17.5%
0.0 - 5.1%
1.0 - 13.3%
0.1 - 10.6%
0.0 - 17.0%
0.0 - 5.9%
0.0 - 8.2%
0.0 - 8.3%
0.0 - 5.0%
0.0 - 10.0%
The change in fair value of derivatives is also influenced by the aggregate costs of options purchased. The aggregate cost of options has increased
primarily due to an increased amount of fixed index annuities in force as well as an increase in the cost of options for certain index strategies
which began during the second half of 2017. 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.
Net realized gains (losses) on investments, excluding OTTI losses include gains and losses on the sale of securities and impairment losses on
mortgage loans on real estate which fluctuate from year to year due to changes in the interest rate and economic environment and the timing of
the sale of investments, as well as gains (losses) recognized on real estate owned due to any sales and impairments on long-lived assets. See
Note 3 to our audited consolidated financial statements for a detailed presentation of the types of investments that generated the gains (losses).
Losses on available for sale fixed maturity securities were realized primarily due to strategies to reposition the fixed maturity security portfolio
that resulted in improved net investment income, risk or duration profiles as they pertain to our asset liability management. During 2018 we
sold $2.1 billion in book value of lower yielding securities for a yield pick-up of approximately 170 basis points on these investments. As book
yields on these securities sold were less than market yields, we recognized losses of approximately $38 million on these sales. In addition,
securities were sold at losses in 2018, 2017 and 2016 due to our long-term fundamental concern with the issuers' ability to meet their future
financial obligations. See Note 4 to our audited consolidated financial statements for additional discussion of allowance for credit losses
recognized on mortgage loans on real estate.
Net OTTI losses recognized in operations increased to $36.7 million in 2018 and decreased to $4.6 million in 2017 from $22.7 million in
2016. The increase in impairments recognized in 2018 compared to 2017 is partially related to our strategy to reposition the fixed maturity
security portfolio. We sold $384 million in book value of securities in early October and recognized OTTI of $12 million based on our intent to
sell such securities as of September 30, 2018. In addition, during 2018 we recognized impairments on certain securities with exposure to various
sectors, including the energy and utilities sectors, due to specific credit concerns and/or our intent to sell such securities. The impairments
recognized in 2017 were primarily on a corporate security with exposure to the industrial sector in Latin America and additional impairments
on previously impaired residential mortgage backed securities. The impairments recognized in 2016 were primarily on three corporate securities
with exposure to the telecommunications, materials and energy sectors and two asset-backed securities with exposure to the energy sector. See
Financial Condition - Other Than Temporary Impairments and Note 3 to our audited consolidated financial statements for additional discussion
of write downs of securities for other than temporary impairments.
Interest sensitive and index product benefits decreased 20% to $1.6 billion in 2018 and increased 179% to $2.0 billion in 2017 from $0.7
billion in 2016. The components of interest sensitive and index product benefits are summarized as follows:
Index credits on index policies
Lifetime income benefit riders
Interest credited (including changes in minimum guaranteed interest for fixed index annuities)
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
1,285,555
$
1,594,722
$
221,554
103,726
257,896
171,050
1,610,835
$
2,023,668
$
267,995
276,032
181,445
725,472
The changes in index credits were attributable 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 $1.3 billion, $1.6 billion and $0.3 billion for the years ended
December 31, 2018, 2017 and 2016, respectively. The decrease in interest credited in 2018 and 2017 was primarily due to a decrease in the
average rate credited to the annuity liabilities outstanding receiving a fixed rate of interest. The average amount of annuity liabilities outstanding
(net of annuity liabilities ceded under coinsurance agreements) increased 6% to $49.9 billion in 2018 and 8% to $46.8 billion in 2017 from $43.5
billion in 2016. The decrease in benefits recognized for lifetime income benefit riders in 2018 was primarily due to the impact of revisions of
assumptions used in determining the liability for lifetime income benefit riders which caused a decrease of $53.6 million in the liability in 2018
as compared to an increase of $21.6 million in the liability in 2017. The decrease in the liability in 2018 due to assumption revisions was partially
offset by an increase in the number of policies with lifetime income benefit riders which correlates to the increase in fees discussed in Annuity
product charges. The decrease in benefits recognized for lifetime income benefit riders in 2017 was due to the impact of revisions of assumptions
used in determining the liability for lifetime income benefit riders being less in 2017 than it was in 2016 which was partially offset by an increase
in the number of policies with lifetime income benefit riders which correlates to the increase in fees discussed in Annuity product charges.
See Net income above for discussion of the changes in the assumptions used in determining reserves for lifetime income benefit riders for the
years ended December 31, 2018, 2017 and 2016.
Amortization of deferred sales inducements, in general, has been increasing each year due to growth in our annuity business and the deferral
of sales inducements incurred with respect to sales of premium bonus annuity products. Bonus products represented 81%, 87% and 88% of our
net annuity account values at December 31, 2018, 2017 and 2016, respectively. The increases in amortization from these factors have been
affected by amortization associated with (1) fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity
business, (2) net realized gains (losses) on investments and net OTTI losses recognized in operations and (3) changes in litigation reserves. 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:
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
Amortization of deferred sales inducements before gross profit adjustments
249,627
$
240,562
$
274,309
Gross profit adjustments:
Fair value accounting for derivatives and embedded derivatives
(15,283)
(64,219)
(21,678)
Net realized gains (losses) on investments, net OTTI losses recognized in operations
and changes in litigation reserves
Amortization of deferred sales inducements after gross profit adjustments
(12,143)
269
222,201
$
176,612
$
(1,465)
251,166
See Net income and Non-GAAP operating income, a non-GAAP financial measure above and Critical Accounting Policies—Deferred Policy
Acquisition Costs and Deferred Sales Inducements for discussion of the impact of unlocking on amortization of deferred sales inducements for
the years ended December 31, 2018, 2017 and 2016.
$
$
$
$
24
25
The average yield earned on average invested assets was 4.47%, 4.46% and 4.51% for 2018, 2017 and 2016, respectively. The increase in yield
earned on average invested assets in 2018 was attributable to the investment of new premiums and portfolio cash flows at rates above the overall
portfolio yield and higher yields being earned on our floating rate investments. The decrease in yield earned on average invested assets in 2017
was attributable to investment of new premiums and portfolio cash flows during those periods at rates below the overall portfolio yield. The
average yield on fixed income securities purchased and commercial mortgage loans funded was 4.79%, 4.16% and 3.66% for the years ended
December 31, 2018, 2017 and 2016, respectively. The impact from these items was also impacted by non-trendable investment income items
which added eight basis points to the average yield on invested assets in 2018 and 2017 and six basis points to the average yield on invested
Change in fair value of derivatives consists of call options purchased to fund annual index credits on fixed index annuities, and an interest rate
swap and interest rate caps that hedge our floating rate subordinated debentures. The components of change in fair value of derivatives are as
assets in 2016, respectively.
follows:
Call options:
Gain (loss) on option expiration
Change in unrealized gains/losses
Interest rate swap
Interest rate caps
S&P 500 Index
Point-to-point strategy
Monthly average strategy
Monthly point-to-point strategy
Fixed income (bond index) strategies
The differences between the change in fair value of derivatives between years for call options are primarily due to the performance of the indices
upon which our call options are based which impacts the fair values and changes in the fair values of those call options between years. 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 these years is as follows:
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
$
$
656,953
$
1,062,328
$
(1,435,852)
615,955
869
182
255
(667)
(282,574)
447,603
(482)
(328)
(777,848) $
1,677,871
$
164,219
Year Ended December 31,
2018
2017
2016
0.0 - 13.9%
0.0 - 8.1%
0.0 - 17.5%
0.0 - 5.1%
1.0 - 13.3%
0.1 - 10.6%
0.0 - 17.0%
0.0 - 5.9%
0.0 - 8.2%
0.0 - 8.3%
0.0 - 5.0%
0.0 - 10.0%
The change in fair value of derivatives is also influenced by the aggregate costs of options purchased. The aggregate cost of options has increased
primarily due to an increased amount of fixed index annuities in force as well as an increase in the cost of options for certain index strategies
which began during the second half of 2017. 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.
Net realized gains (losses) on investments, excluding OTTI losses include gains and losses on the sale of securities and impairment losses on
mortgage loans on real estate which fluctuate from year to year due to changes in the interest rate and economic environment and the timing of
the sale of investments, as well as gains (losses) recognized on real estate owned due to any sales and impairments on long-lived assets. See
Note 3 to our audited consolidated financial statements for a detailed presentation of the types of investments that generated the gains (losses).
Losses on available for sale fixed maturity securities were realized primarily due to strategies to reposition the fixed maturity security portfolio
that resulted in improved net investment income, risk or duration profiles as they pertain to our asset liability management. During 2018 we
sold $2.1 billion in book value of lower yielding securities for a yield pick-up of approximately 170 basis points on these investments. As book
yields on these securities sold were less than market yields, we recognized losses of approximately $38 million on these sales. In addition,
securities were sold at losses in 2018, 2017 and 2016 due to our long-term fundamental concern with the issuers' ability to meet their future
financial obligations. See Note 4 to our audited consolidated financial statements for additional discussion of allowance for credit losses
recognized on mortgage loans on real estate.
Net OTTI losses recognized in operations increased to $36.7 million in 2018 and decreased to $4.6 million in 2017 from $22.7 million in
2016. The increase in impairments recognized in 2018 compared to 2017 is partially related to our strategy to reposition the fixed maturity
security portfolio. We sold $384 million in book value of securities in early October and recognized OTTI of $12 million based on our intent to
sell such securities as of September 30, 2018. In addition, during 2018 we recognized impairments on certain securities with exposure to various
sectors, including the energy and utilities sectors, due to specific credit concerns and/or our intent to sell such securities. The impairments
recognized in 2017 were primarily on a corporate security with exposure to the industrial sector in Latin America and additional impairments
on previously impaired residential mortgage backed securities. The impairments recognized in 2016 were primarily on three corporate securities
with exposure to the telecommunications, materials and energy sectors and two asset-backed securities with exposure to the energy sector. See
Financial Condition - Other Than Temporary Impairments and Note 3 to our audited consolidated financial statements for additional discussion
of write downs of securities for other than temporary impairments.
Interest sensitive and index product benefits decreased 20% to $1.6 billion in 2018 and increased 179% to $2.0 billion in 2017 from $0.7
billion in 2016. The components of interest sensitive and index product benefits are summarized as follows:
Index credits on index policies
Interest credited (including changes in minimum guaranteed interest for fixed index annuities)
Lifetime income benefit riders
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
1,285,555
$
1,594,722
$
221,554
103,726
257,896
171,050
1,610,835
$
2,023,668
$
$
$
267,995
276,032
181,445
725,472
The changes in index credits were attributable 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 $1.3 billion, $1.6 billion and $0.3 billion for the years ended
December 31, 2018, 2017 and 2016, respectively. The decrease in interest credited in 2018 and 2017 was primarily due to a decrease in the
average rate credited to the annuity liabilities outstanding receiving a fixed rate of interest. The average amount of annuity liabilities outstanding
(net of annuity liabilities ceded under coinsurance agreements) increased 6% to $49.9 billion in 2018 and 8% to $46.8 billion in 2017 from $43.5
billion in 2016. The decrease in benefits recognized for lifetime income benefit riders in 2018 was primarily due to the impact of revisions of
assumptions used in determining the liability for lifetime income benefit riders which caused a decrease of $53.6 million in the liability in 2018
as compared to an increase of $21.6 million in the liability in 2017. The decrease in the liability in 2018 due to assumption revisions was partially
offset by an increase in the number of policies with lifetime income benefit riders which correlates to the increase in fees discussed in Annuity
product charges. The decrease in benefits recognized for lifetime income benefit riders in 2017 was due to the impact of revisions of assumptions
used in determining the liability for lifetime income benefit riders being less in 2017 than it was in 2016 which was partially offset by an increase
in the number of policies with lifetime income benefit riders which correlates to the increase in fees discussed in Annuity product charges.
See Net income above for discussion of the changes in the assumptions used in determining reserves for lifetime income benefit riders for the
years ended December 31, 2018, 2017 and 2016.
Amortization of deferred sales inducements, in general, has been increasing each year due to growth in our annuity business and the deferral
of sales inducements incurred with respect to sales of premium bonus annuity products. Bonus products represented 81%, 87% and 88% of our
net annuity account values at December 31, 2018, 2017 and 2016, respectively. The increases in amortization from these factors have been
affected by amortization associated with (1) fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity
business, (2) net realized gains (losses) on investments and net OTTI losses recognized in operations and (3) changes in litigation reserves. 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:
Amortization of deferred sales inducements before gross profit adjustments
Gross profit adjustments:
Fair value accounting for derivatives and embedded derivatives
Net realized gains (losses) on investments, net OTTI losses recognized in operations
and changes in litigation reserves
Amortization of deferred sales inducements after gross profit adjustments
$
$
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
249,627
$
240,562
$
274,309
(15,283)
(64,219)
(21,678)
(12,143)
269
222,201
$
176,612
$
(1,465)
251,166
See Net income and Non-GAAP operating income, a non-GAAP financial measure above and Critical Accounting Policies—Deferred Policy
Acquisition Costs and Deferred Sales Inducements for discussion of the impact of unlocking on amortization of deferred sales inducements for
the years ended December 31, 2018, 2017 and 2016.
24
25
Change in fair value of embedded derivatives includes changes in the fair value of our fixed index annuity embedded derivatives (see Notes
5 to our audited consolidated financial statements). The components of change in fair value of embedded derivatives are as follows:
Fixed index annuities - embedded derivatives
Other changes in difference between policy benefit reserves computed using derivative
accounting vs. long-duration contracts accounting
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
(2,167,628) $
174,154
$
145,045
778,137
745,581
(1,389,491) $
919,735
$
398,420
543,465
$
$
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 discount rate used in estimating our embedded derivative liabilities; and (iii) 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" represents 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.
The primary reasons for the decrease in the change in fair value of the fixed index annuity embedded derivatives for 2018 were decreases in the
expected index credits on the next policy anniversary dates resulting from a decrease in the fair value of the call options acquired to fund these
index credits during 2018 as compared to increases in the expected index credits resulting from an increase in the fair value of the call options
during 2017 and an increase in the discount rate for 2018 as compared to a decrease in the discount rate for 2017. The primary reasons for the
increase in the change in fair value of the fixed index annuity embedded derivatives for 2017 were a higher level of index credits during 2017
as compared to 2016 and a larger decrease in the discount rate used in estimating the fair value of the liability during 2017 as compared to 2016.
The discount rate used in estimating our embedded derivative liabilities fluctuates from year to year based on changes in the general level of
interest rates and credit spreads.
Interest expense on notes and loan payable decreased 16% to $25.5 million in 2018 and increased 8% to $30.4 million in 2017 from $28.2
million in 2016. Interest expense by debt instrument is as follows:
2027 Notes
2021 Notes
Term loan due 2019
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
25,498
$
13,801
$
—
—
15,024
1,543
25,498
$
30,368
$
$
$
—
27,540
708
28,248
The decrease in interest expense in 2018 was due to the repayment of our outstanding $100 million term loan and the redemption of our $400
million 6.625% notes due 2021 with the proceeds from the issuance of $500 million aggregate principal amount of senior unsecured notes due
2027 which bear interest at 5.0% per year and will mature on June 15, 2027 (the "2027 Notes"). This lowered our senior notes costs to 5% from
6.625%. The increase in interest expense in 2017 was attributable to interest expense on the $100 million variable rate term loan originated on
September 30, 2016 and prepaid on June 16, 2017 and interest expense on the 2027 Notes issued on June 16, 2017 which were partially offset
by a decrease in interest expense as a result of the redemption of the 2021 Notes on July 17, 2017. See Note 9 to our audited consolidated
financial statements.
$
$
$
$
Amortization of deferred policy acquisition costs, in general, has been increasing each year due to the growth in our annuity business and the
deferral of policy acquisition costs incurred with respect to sales of annuity products. The increases in amortization from these factors have
been affected by amortization associated with (1) fair value accounting for derivatives and embedded derivatives utilized in our fixed index
annuity business, (2) net realized gains (losses) on investments and net OTTI losses recognized in operations, and (3) changes in litigation
reserves. 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:
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
Amortization of deferred policy acquisition costs before gross profit adjustments
358,736
$
340,191
$
387,089
Gross profit adjustments:
Fair value accounting for derivatives and embedded derivatives
(14,504)
(84,744)
(11,447)
Net realized gains (losses) on investments, net OTTI losses recognized in operations
and changes in litigation reserves
Amortization of deferred policy acquisition costs after gross profit adjustments
(16,241)
517
327,991
$
255,964
$
(1,630)
374,012
See Net income and non-GAAP operating income, a non-GAAP financial measure, above for discussion of the impact of unlocking on
amortization of deferred policy acquisition costs for the years ended December 31, 2018, 2017 and 2016. See Critical Accounting Policies—
Deferred Policy Acquisition Costs and Deferred Sales Inducements.
Other operating costs and expenses increased 16% to $129.3 million in 2018 and increased 9% to $111.7 million in 2017 from $102.2 million
in 2016 and are summarized as follows:
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
71,914
$
58,043
$
31,297
26,090
29,104
24,544
53,479
28,276
20,476
Salary and benefits
Risk charges
Other
Total other operating costs and expenses
129,301
$
111,691
$
102,231
Salary and benefits expense increased in 2018 as compared to 2017 as a result of an increase in salary and benefits of $5.4 million due to an
increased number of employees related to our growth and an increase of $6.8 million related to expense recognized under our equity and cash
incentive compensation programs ("incentive compensation programs"). The increases in expense for our incentive compensation programs
were primarily due to increases in the actual and expected payouts due to a larger number of employees participating in the programs, higher
potential payouts for certain employees participating in the programs and an increase in the percentage of restricted stock units that were earned
or expected to be earned. In addition, salary and benefits for 2017 reflected a benefit of $1.3 million related to a retirement agreement with our
former executive chairman.
Salary and benefits expense increased in 2017 as compared to 2016 as a result of an increase in salary and benefits of $3.3 million due to an
increased number of employees related to our growth, an increase of $3.7 million related to expense recognized under our incentive compensation
programs as a result of the short-term incentive compensation program being paid out at a higher percentage of target than in 2016 and an increase
of $0.8 million related to a deferred compensation liability that is based on the value of our common stock. These increases were partially offset
by a decrease of $3.2 million in expenses related to a retirement agreement with our former executive chairman.
The increases in reinsurance risk charges expense during 2018 and 2017 were due to the growth in our policyholder liabilities subject to a
reinsurance agreement pursuant to which we cede excess regulatory reserves to an unaffiliated reinsurer. The increase in risk charge expense
in 2017 due to growth in the policyholder liabilities subject to the reinsurance was partially offset by a lower risk charge percentage which was
included in an October 1, 2016 amendment to the reinsurance agreement. The regulatory reserves ceded at December 31, 2018, 2017 and 2016
were $780.0 million, $737.3 million and $638.1 million, respectively.
Other expenses increased in 2018 primarily as a result of increases in professional and consulting fees, increases in depreciation and maintenance
expenses primarily related to software and hardware assets and increases in licensing fees which are based on the level of policyholder funds
under management allocated to index strategies. These increases were offset by decreases in commission expense related to the exit of the group
life business effective January 1, 2018.
Other expenses increased in 2017 as compared to 2016 due primarily to 2016 benefiting from the release of a litigation liability of $2.8 million
and the release of a guaranty fund assessment liability of $2.3 million. Other expenses adjusted for these nonrecurring items from 2016 decreased
in 2017 as compared to 2016 due to decreases in general expenses that vary from period to period based on the level of annuity deposits collected
that are not eligible for deferral.
26
27
Change in fair value of embedded derivatives includes changes in the fair value of our fixed index annuity embedded derivatives (see Notes
5 to our audited consolidated financial statements). The components of change in fair value of embedded derivatives are as follows:
Fixed index annuities - embedded derivatives
(2,167,628) $
174,154
$
145,045
Other changes in difference between policy benefit reserves computed using derivative
accounting vs. long-duration contracts accounting
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
778,137
745,581
(1,389,491) $
919,735
$
398,420
543,465
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 discount rate used in estimating our embedded derivative liabilities; and (iii) 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" represents 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.
The primary reasons for the decrease in the change in fair value of the fixed index annuity embedded derivatives for 2018 were decreases in the
expected index credits on the next policy anniversary dates resulting from a decrease in the fair value of the call options acquired to fund these
index credits during 2018 as compared to increases in the expected index credits resulting from an increase in the fair value of the call options
during 2017 and an increase in the discount rate for 2018 as compared to a decrease in the discount rate for 2017. The primary reasons for the
increase in the change in fair value of the fixed index annuity embedded derivatives for 2017 were a higher level of index credits during 2017
as compared to 2016 and a larger decrease in the discount rate used in estimating the fair value of the liability during 2017 as compared to 2016.
The discount rate used in estimating our embedded derivative liabilities fluctuates from year to year based on changes in the general level of
interest rates and credit spreads.
Interest expense on notes and loan payable decreased 16% to $25.5 million in 2018 and increased 8% to $30.4 million in 2017 from $28.2
million in 2016. Interest expense by debt instrument is as follows:
2027 Notes
2021 Notes
Term loan due 2019
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
25,498
$
13,801
$
—
—
15,024
1,543
25,498
$
30,368
$
—
27,540
708
28,248
$
$
$
$
The decrease in interest expense in 2018 was due to the repayment of our outstanding $100 million term loan and the redemption of our $400
million 6.625% notes due 2021 with the proceeds from the issuance of $500 million aggregate principal amount of senior unsecured notes due
2027 which bear interest at 5.0% per year and will mature on June 15, 2027 (the "2027 Notes"). This lowered our senior notes costs to 5% from
6.625%. The increase in interest expense in 2017 was attributable to interest expense on the $100 million variable rate term loan originated on
September 30, 2016 and prepaid on June 16, 2017 and interest expense on the 2027 Notes issued on June 16, 2017 which were partially offset
by a decrease in interest expense as a result of the redemption of the 2021 Notes on July 17, 2017. See Note 9 to our audited consolidated
financial statements.
Amortization of deferred policy acquisition costs, in general, has been increasing each year due to the growth in our annuity business and the
deferral of policy acquisition costs incurred with respect to sales of annuity products. The increases in amortization from these factors have
been affected by amortization associated with (1) fair value accounting for derivatives and embedded derivatives utilized in our fixed index
annuity business, (2) net realized gains (losses) on investments and net OTTI losses recognized in operations, and (3) changes in litigation
reserves. 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:
Amortization of deferred policy acquisition costs before gross profit adjustments
Gross profit adjustments:
Fair value accounting for derivatives and embedded derivatives
Net realized gains (losses) on investments, net OTTI losses recognized in operations
and changes in litigation reserves
Amortization of deferred policy acquisition costs after gross profit adjustments
$
$
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
358,736
$
340,191
$
387,089
(14,504)
(84,744)
(11,447)
(16,241)
517
327,991
$
255,964
$
(1,630)
374,012
See Net income and non-GAAP operating income, a non-GAAP financial measure, above for discussion of the impact of unlocking on
amortization of deferred policy acquisition costs for the years ended December 31, 2018, 2017 and 2016. See Critical Accounting Policies—
Deferred Policy Acquisition Costs and Deferred Sales Inducements.
Other operating costs and expenses increased 16% to $129.3 million in 2018 and increased 9% to $111.7 million in 2017 from $102.2 million
in 2016 and are summarized as follows:
Salary and benefits
Risk charges
Other
Total other operating costs and expenses
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
71,914
$
58,043
$
31,297
26,090
29,104
24,544
53,479
28,276
20,476
129,301
$
111,691
$
102,231
$
$
Salary and benefits expense increased in 2018 as compared to 2017 as a result of an increase in salary and benefits of $5.4 million due to an
increased number of employees related to our growth and an increase of $6.8 million related to expense recognized under our equity and cash
incentive compensation programs ("incentive compensation programs"). The increases in expense for our incentive compensation programs
were primarily due to increases in the actual and expected payouts due to a larger number of employees participating in the programs, higher
potential payouts for certain employees participating in the programs and an increase in the percentage of restricted stock units that were earned
or expected to be earned. In addition, salary and benefits for 2017 reflected a benefit of $1.3 million related to a retirement agreement with our
former executive chairman.
Salary and benefits expense increased in 2017 as compared to 2016 as a result of an increase in salary and benefits of $3.3 million due to an
increased number of employees related to our growth, an increase of $3.7 million related to expense recognized under our incentive compensation
programs as a result of the short-term incentive compensation program being paid out at a higher percentage of target than in 2016 and an increase
of $0.8 million related to a deferred compensation liability that is based on the value of our common stock. These increases were partially offset
by a decrease of $3.2 million in expenses related to a retirement agreement with our former executive chairman.
The increases in reinsurance risk charges expense during 2018 and 2017 were due to the growth in our policyholder liabilities subject to a
reinsurance agreement pursuant to which we cede excess regulatory reserves to an unaffiliated reinsurer. The increase in risk charge expense
in 2017 due to growth in the policyholder liabilities subject to the reinsurance was partially offset by a lower risk charge percentage which was
included in an October 1, 2016 amendment to the reinsurance agreement. The regulatory reserves ceded at December 31, 2018, 2017 and 2016
were $780.0 million, $737.3 million and $638.1 million, respectively.
Other expenses increased in 2018 primarily as a result of increases in professional and consulting fees, increases in depreciation and maintenance
expenses primarily related to software and hardware assets and increases in licensing fees which are based on the level of policyholder funds
under management allocated to index strategies. These increases were offset by decreases in commission expense related to the exit of the group
life business effective January 1, 2018.
Other expenses increased in 2017 as compared to 2016 due primarily to 2016 benefiting from the release of a litigation liability of $2.8 million
and the release of a guaranty fund assessment liability of $2.3 million. Other expenses adjusted for these nonrecurring items from 2016 decreased
in 2017 as compared to 2016 due to decreases in general expenses that vary from period to period based on the level of annuity deposits collected
that are not eligible for deferral.
26
27
Income tax expense decreased in 2018 as Tax Reform reduced the statutory federal income tax rate from 35% to 21% effective January 1, 2018.
The lower tax rate offset the expected increase in income tax expense from the increase in income before income taxes. Income tax expense
increased in 2017 due to an increase in income before income taxes and the impact of Tax Reform discussed below. The effective income tax
rates were 19.0%, 44.8% and 36.1% for 2018, 2017 and 2016, respectively.
Income tax expense and the resulting effective tax rate are based upon two components of income before income taxes ("pretax income") that
are taxed at different tax rates. Life insurance income is generally taxed at an effective rate of approximately 21.6% reflecting the absence of
state income taxes for substantially all of the states that the life insurance subsidiaries do business in. The income for the parent company and
other non-life insurance subsidiaries (the "non-life insurance group") is generally taxed at an effective tax rate of 29.5% reflecting the combined
federal / state income tax rates. Prior to Tax Reform, life insurance income was generally taxed at an effective rate of approximately 35.6%
while income for the non-life insurance group was generally taxed at an effective tax rate of 41.5% reflecting the combined federal / state income
tax rates. The effective income tax rates resulting from the combination of the income tax provisions for the life / non-life sources of income
vary from year to year based primarily on the relative size of pretax income from the two sources.
The effective income tax rate for 2018 was impacted by capital losses being carried back to periods in which a 35% statutory tax rate was in
effect. The impact of the higher capital loss carry back rate reduced income tax expense by approximately $2.5 million for the year ended
December 31, 2018. In addition, the effective tax rate for the year ended December 31, 2018 benefited from a discrete tax item for a worthless
stock deduction related to a wholly-owned subsidiary which reduced income tax expense by approximately $7.4 million.
The effective income tax rate for 2018 and 2017 was impacted by a discrete tax item related to share-based compensation that reduced income
tax expense for 2018 and 2017 by approximately $2.7 million and $2.8 million, respectively.
Income tax expense for the year ended December 31, 2017 was increased by $35.9 million related to the revaluation of our net deferred tax
assets using the newly enacted federal tax rate as a result of Tax Reform. The effective tax rate for 2017 adjusted to exclude the impact of Tax
Reform was 32.3%. The effective tax rate adjusted to exclude the impact of Tax Reform decreased in 2017 as compared to 2016 as the portion
of taxable income from the non-life insurance group decreased significantly and the level of permanent tax adjustments, including tax exempt
investment income, compared to pretax income increased as compared to 2016.
Financial Condition
Investments
Our investment strategy is to maintain a predominantly investment grade fixed income portfolio, provide adequate liquidity to meet our cash
obligations to policyholders and others and maximize current income and total investment return through active investment management.
Consistent with this strategy, our investments principally consist of fixed maturity securities and mortgage loans on real estate.
Insurance statutes regulate the type of investments that our life subsidiaries are permitted to make and limit the amount of funds that may be
used for any one type of investment. In light of these statutes and regulations and our business and investment strategy, we generally seek to
invest in United States government and government-sponsored agency securities, corporate securities, residential and commercial mortgage
backed securities, other asset backed securities and United States municipalities, states and territories securities rated investment grade by
established nationally recognized statistical rating organizations ("NRSRO's") or in securities of comparable investment quality, if not rated and
commercial mortgage loans on real estate.
28
The composition of our investment portfolio is summarized as follows:
Fixed maturity securities:
United States Government full faith and credit
$
—% $
December 31,
2018
2017
Carrying
Amount
Percent
Carrying
Amount
Percent
(Dollars in thousands)
11,652
1,138,529
4,126,267
230,274
28,371,514
1,202,159
5,379,003
5,464,329
45,923,727
2,943,091
205,149
355,531
2.3%
8.3%
0.5%
57.4%
2.4%
10.9%
11.1%
92.9%
6.0%
0.4%
0.7%
11,876
1,305,017
4,166,812
239,360
29,956,012
1,105,567
5,544,850
3,120,536
45,450,030
2,665,531
1,568,380
616,764
$
49,427,498
100.0% $
50,300,705
100.0%
United States Government sponsored agencies
United States municipalities, states and territories
Foreign government obligations
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Total fixed maturity securities
Mortgage loans on real estate
Derivative instruments
Other investments
Fixed Maturity Securities
Our fixed maturity security portfolio is managed to minimize risks such as interest rate changes and defaults or impairments while earning a
sufficient and stable return on our investments. The largest portion of our fixed maturity securities are in investment grade (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:
Rating Agency Rating
Total investment grade
Aaa/Aa/A
Baa
Ba
B
Caa
Ca and lower
Total below investment grade
December 31,
2018
2017
Carrying
Amount
Percent of Fixed
Maturity Securities
Carrying
Amount
Percent of Fixed
Maturity Securities
$
$
27,052,481
17,265,590
44,318,071
1,191,772
139,313
122,717
151,854
1,605,656
45,923,727
(Dollars in thousands)
58.9% $
37.6%
96.5%
2.6%
0.3%
0.3%
0.3%
3.5%
100.0% $
27,909,879
16,048,610
43,958,489
1,035,676
130,857
134,586
190,422
1,491,541
45,450,030
The NAIC's Securities Valuation Office ("SVO") is responsible for the day-to-day credit quality assessment and the valuation of fixed maturity
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 an NAIC designation and/or unit price. Typically, if a security
has been rated by a NRSRO, the SVO utilizes that rating and assigns a NAIC designation based upon the following system:
—%
2.6%
8.3%
0.5%
59.6%
2.2%
11.0%
6.2%
90.4%
5.3%
3.1%
1.2%
61.4%
35.3%
96.7%
2.3%
0.3%
0.3%
0.4%
3.3%
100.0%
NAIC Designation
NRSRO Equivalent Rating
1
2
3
4
5
6
Aaa/Aa/A
Baa
Ba
B
Caa
Ca and lower
29
Income tax expense decreased in 2018 as Tax Reform reduced the statutory federal income tax rate from 35% to 21% effective January 1, 2018.
The composition of our investment portfolio is summarized as follows:
Fixed maturity securities:
United States Government full faith and credit
$
United States Government sponsored agencies
United States municipalities, states and territories
Foreign government obligations
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
December 31,
2018
2017
Carrying
Amount
Percent
Carrying
Amount
Percent
(Dollars in thousands)
11,652
1,138,529
4,126,267
230,274
28,371,514
1,202,159
5,379,003
5,464,329
45,923,727
2,943,091
205,149
355,531
—% $
2.3%
8.3%
0.5%
57.4%
2.4%
10.9%
11.1%
92.9%
6.0%
0.4%
0.7%
11,876
1,305,017
4,166,812
239,360
29,956,012
1,105,567
5,544,850
3,120,536
45,450,030
2,665,531
1,568,380
616,764
—%
2.6%
8.3%
0.5%
59.6%
2.2%
11.0%
6.2%
90.4%
5.3%
3.1%
1.2%
$
49,427,498
100.0% $
50,300,705
100.0%
Other asset backed securities
Total fixed maturity securities
Mortgage loans on real estate
Derivative instruments
Other investments
Fixed Maturity Securities
Our fixed maturity security portfolio is managed to minimize risks such as interest rate changes and defaults or impairments while earning a
sufficient and stable return on our investments. The largest portion of our fixed maturity securities are in investment grade (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:
Rating Agency Rating
Aaa/Aa/A
Baa
Total investment grade
Ba
B
Caa
Ca and lower
Total below investment grade
December 31,
2018
2017
Carrying
Amount
Percent of Fixed
Maturity Securities
Carrying
Amount
Percent of Fixed
Maturity Securities
(Dollars in thousands)
$
$
27,052,481
17,265,590
44,318,071
1,191,772
139,313
122,717
151,854
1,605,656
45,923,727
58.9% $
37.6%
96.5%
2.6%
0.3%
0.3%
0.3%
3.5%
100.0% $
27,909,879
16,048,610
43,958,489
1,035,676
130,857
134,586
190,422
1,491,541
45,450,030
61.4%
35.3%
96.7%
2.3%
0.3%
0.3%
0.4%
3.3%
100.0%
The NAIC's Securities Valuation Office ("SVO") is responsible for the day-to-day credit quality assessment and the valuation of fixed maturity
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 an NAIC designation and/or unit price. Typically, if a security
has been rated by a NRSRO, the SVO utilizes that rating and assigns a NAIC designation based upon the following system:
NAIC Designation
NRSRO Equivalent Rating
1
2
3
4
5
6
Aaa/Aa/A
Baa
Ba
B
Caa
Ca and lower
29
The lower tax rate offset the expected increase in income tax expense from the increase in income before income taxes. Income tax expense
increased in 2017 due to an increase in income before income taxes and the impact of Tax Reform discussed below. The effective income tax
rates were 19.0%, 44.8% and 36.1% for 2018, 2017 and 2016, respectively.
Income tax expense and the resulting effective tax rate are based upon two components of income before income taxes ("pretax income") that
are taxed at different tax rates. Life insurance income is generally taxed at an effective rate of approximately 21.6% reflecting the absence of
state income taxes for substantially all of the states that the life insurance subsidiaries do business in. The income for the parent company and
other non-life insurance subsidiaries (the "non-life insurance group") is generally taxed at an effective tax rate of 29.5% reflecting the combined
federal / state income tax rates. Prior to Tax Reform, life insurance income was generally taxed at an effective rate of approximately 35.6%
while income for the non-life insurance group was generally taxed at an effective tax rate of 41.5% reflecting the combined federal / state income
tax rates. The effective income tax rates resulting from the combination of the income tax provisions for the life / non-life sources of income
vary from year to year based primarily on the relative size of pretax income from the two sources.
The effective income tax rate for 2018 was impacted by capital losses being carried back to periods in which a 35% statutory tax rate was in
effect. The impact of the higher capital loss carry back rate reduced income tax expense by approximately $2.5 million for the year ended
December 31, 2018. In addition, the effective tax rate for the year ended December 31, 2018 benefited from a discrete tax item for a worthless
stock deduction related to a wholly-owned subsidiary which reduced income tax expense by approximately $7.4 million.
The effective income tax rate for 2018 and 2017 was impacted by a discrete tax item related to share-based compensation that reduced income
tax expense for 2018 and 2017 by approximately $2.7 million and $2.8 million, respectively.
Income tax expense for the year ended December 31, 2017 was increased by $35.9 million related to the revaluation of our net deferred tax
assets using the newly enacted federal tax rate as a result of Tax Reform. The effective tax rate for 2017 adjusted to exclude the impact of Tax
Reform was 32.3%. The effective tax rate adjusted to exclude the impact of Tax Reform decreased in 2017 as compared to 2016 as the portion
of taxable income from the non-life insurance group decreased significantly and the level of permanent tax adjustments, including tax exempt
investment income, compared to pretax income increased as compared to 2016.
Financial Condition
Investments
Our investment strategy is to maintain a predominantly investment grade fixed income portfolio, provide adequate liquidity to meet our cash
obligations to policyholders and others and maximize current income and total investment return through active investment management.
Consistent with this strategy, our investments principally consist of fixed maturity securities and mortgage loans on real estate.
Insurance statutes regulate the type of investments that our life subsidiaries are permitted to make and limit the amount of funds that may be
used for any one type of investment. In light of these statutes and regulations and our business and investment strategy, we generally seek to
invest in United States government and government-sponsored agency securities, corporate securities, residential and commercial mortgage
backed securities, other asset backed securities and United States municipalities, states and territories securities rated investment grade by
established nationally recognized statistical rating organizations ("NRSRO's") or in securities of comparable investment quality, if not rated and
commercial mortgage loans on real estate.
28
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 higher 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.
As stated previously, 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 has been to invest primarily in investment grade fixed maturity securities. Investment grade
is NAIC 1 and 2 securities and Baa3/BBB- and better securities on the NRSRO scale. This strategy meets 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:
December 31, 2018
December 31, 2017
NAIC
Designation
Amortized
Cost
Fair Value
Carrying
Amount
Percentage
of Total
Carrying
Amount
Amortized
Cost
Fair Value
Carrying
Amount
1
2
3
4
5
6
(Dollars in thousands)
(Dollars in thousands)
$ 26,588,352
$ 26,921,843
$ 26,921,843
58.6% $ 26,669,427
$ 28,274,379
$ 28,274,379
17,901,161
17,528,072
17,528,072
38.2%
15,198,551
15,869,219
15,869,219
1,396,650
1,269,242
1,269,242
173,987
23,836
47,204
137,991
19,453
47,126
137,991
19,453
47,126
2.8%
0.3%
—%
0.1%
1,161,737
1,157,420
1,158,001
134,838
17,015
12,232
117,542
20,927
9,962
117,542
20,927
9,962
Percentage
of Total
Carrying
Amount
62.2%
34.9%
2.5%
0.3%
0.1%
—%
$ 46,131,190
$ 45,923,727
$ 45,923,727
100.0% $ 43,193,800
$ 45,449,449
$ 45,450,030
100.0%
The amortized cost and fair value of fixed maturity securities at December 31, 2018, by contractual maturity are presented in Note 3 to our
audited consolidated financial statements in this Form 10-K, which is incorporated by reference in this Item 7.
Unrealized Losses
The amortized cost and fair value of fixed maturity securities that were in an unrealized loss position were as follows:
December 31, 2018
Fixed maturity securities, available for sale:
United States Government full faith and credit
United States Government sponsored agencies
United States municipalities, states and territories
Foreign government obligations
Corporate securities:
Finance, insurance and real estate
Manufacturing, construction and mining
Utilities and related sectors
Wholesale/retail trade
Services, media and other
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
December 31, 2017
Fixed maturity securities, available for sale:
United States Government full faith and credit
United States Government sponsored agencies
United States municipalities, states and territories
Foreign government obligations
Corporate securities:
Finance, insurance and real estate
Manufacturing, construction and mining
Utilities and related sectors
Wholesale/retail trade
Services, media and other
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Fixed maturity securities, held for investment:
Corporate security:
Insurance
Number of
Securities
Amortized
Cost
Unrealized
Losses
Fair Value
(Dollars in thousands)
$
8,650
$
(322) $
2,715
$
27,311,802
$
(1,351,087) $
25,960,715
$
8,443
$
(147) $
8,296
4
23
136
6
286
231
273
103
529
33
487
604
4
18
48
2
92
55
63
31
165
20
310
146
954
1,066,544
518,758
114,529
3,551,237
2,515,204
3,032,710
1,308,962
6,040,083
172,427
4,367,221
4,615,477
1,035,489
176,831
64,313
1,090,077
468,505
657,599
344,196
1,693,343
75,159
2,473,034
996,531
(83,034)
(15,658)
(4,159)
(164,727)
(119,607)
(127,957)
(77,554)
(348,884)
(4,125)
(134,826)
(270,234)
(31,730)
(3,596)
(2,025)
(33,178)
(14,324)
(13,000)
(12,620)
(72,565)
(2,471)
(69,840)
(13,405)
8,328
983,510
503,100
110,370
3,386,510
2,395,597
2,904,753
1,231,408
5,691,199
168,302
4,232,395
4,345,243
1,003,759
173,235
62,288
1,056,899
454,181
644,599
331,576
1,620,778
72,688
2,403,194
983,126
$
9,083,520
$
(268,901) $
8,814,619
1
$
77,041
$
(581) $
76,460
The increase in unrealized losses from December 31, 2017 to 2018 was primarily due to an increase in interest rates in addition to price deterioration
due to wider credit spreads during the year ended December 31, 2018. The 10-year U.S. Treasury yield rates at December 31, 2018 and 2017
were 2.69% and 2.40%, respectively. The 30-year U.S. Treasury yields at December 31, 2018 and 2017 were 3.02% and 2.74%, respectively.
30
31
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 higher 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.
As stated previously, 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 has been to invest primarily in investment grade fixed maturity securities. Investment grade
is NAIC 1 and 2 securities and Baa3/BBB- and better securities on the NRSRO scale. This strategy meets 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:
December 31, 2018
December 31, 2017
Percentage
of Total
Carrying
Amount
NAIC
Designation
Amortized
Cost
Fair Value
Carrying
Amount
Amortized
Cost
Fair Value
Carrying
Amount
1
2
3
4
5
6
(Dollars in thousands)
(Dollars in thousands)
$ 26,588,352
$ 26,921,843
$ 26,921,843
58.6% $ 26,669,427
$ 28,274,379
$ 28,274,379
17,901,161
17,528,072
17,528,072
38.2%
15,198,551
15,869,219
15,869,219
1,396,650
1,269,242
1,269,242
1,161,737
1,157,420
1,158,001
173,987
23,836
47,204
137,991
19,453
47,126
137,991
19,453
47,126
134,838
17,015
12,232
117,542
20,927
9,962
117,542
20,927
9,962
2.8%
0.3%
—%
0.1%
Percentage
of Total
Carrying
Amount
62.2%
34.9%
2.5%
0.3%
0.1%
—%
$ 46,131,190
$ 45,923,727
$ 45,923,727
100.0% $ 43,193,800
$ 45,449,449
$ 45,450,030
100.0%
The amortized cost and fair value of fixed maturity securities at December 31, 2018, by contractual maturity are presented in Note 3 to our
audited consolidated financial statements in this Form 10-K, which is incorporated by reference in this Item 7.
For most of the bonds held in our portfolio the NAIC designation matches the NRSRO equivalent rating. However, for certain loan-backed and
Unrealized Losses
The amortized cost and fair value of fixed maturity securities that were in an unrealized loss position were as follows:
Number of
Securities
Amortized
Cost
Unrealized
Losses
Fair Value
(Dollars in thousands)
December 31, 2018
Fixed maturity securities, available for sale:
United States Government full faith and credit
United States Government sponsored agencies
United States municipalities, states and territories
Foreign government obligations
Corporate securities:
Finance, insurance and real estate
Manufacturing, construction and mining
Utilities and related sectors
Wholesale/retail trade
Services, media and other
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
December 31, 2017
Fixed maturity securities, available for sale:
United States Government full faith and credit
United States Government sponsored agencies
United States municipalities, states and territories
Foreign government obligations
Corporate securities:
Finance, insurance and real estate
Manufacturing, construction and mining
Utilities and related sectors
Wholesale/retail trade
Services, media and other
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Fixed maturity securities, held for investment:
Corporate security:
Insurance
4
23
136
6
286
231
273
103
529
33
487
604
$
8,650
$
(322) $
1,066,544
518,758
114,529
3,551,237
2,515,204
3,032,710
1,308,962
6,040,083
172,427
4,367,221
4,615,477
(83,034)
(15,658)
(4,159)
(164,727)
(119,607)
(127,957)
(77,554)
(348,884)
(4,125)
(134,826)
(270,234)
8,328
983,510
503,100
110,370
3,386,510
2,395,597
2,904,753
1,231,408
5,691,199
168,302
4,232,395
4,345,243
2,715
$
27,311,802
$
(1,351,087) $
25,960,715
4
18
48
2
92
55
63
31
165
20
310
146
954
$
8,443
$
(147) $
8,296
1,035,489
176,831
64,313
1,090,077
468,505
657,599
344,196
1,693,343
75,159
2,473,034
996,531
(31,730)
(3,596)
(2,025)
(33,178)
(14,324)
(13,000)
(12,620)
(72,565)
(2,471)
(69,840)
(13,405)
1,003,759
173,235
62,288
1,056,899
454,181
644,599
331,576
1,620,778
72,688
2,403,194
983,126
$
9,083,520
$
(268,901) $
8,814,619
1
$
77,041
$
(581) $
76,460
The increase in unrealized losses from December 31, 2017 to 2018 was primarily due to an increase in interest rates in addition to price deterioration
due to wider credit spreads during the year ended December 31, 2018. The 10-year U.S. Treasury yield rates at December 31, 2018 and 2017
were 2.69% and 2.40%, respectively. The 30-year U.S. Treasury yields at December 31, 2018 and 2017 were 3.02% and 2.74%, respectively.
30
31
The following table sets forth the composition by credit quality (NAIC designation) of fixed maturity securities with gross unrealized losses:
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:
NAIC Designation
December 31, 2018
1
2
3
4
5
6
December 31, 2017
1
2
3
4
5
6
Carrying Value of
Securities with
Gross Unrealized
Losses
Percent of
Total
Gross
Unrealized
Losses
Percent of
Total
(Dollars in thousands)
$
$
$
$
13,302,253
11,301,715
1,170,941
127,222
19,453
39,131
25,960,715
5,433,608
2,809,981
540,320
94,004
11,130
2,617
51.2% $
43.5%
4.5%
0.5%
0.1%
0.2%
(552,455)
(622,053)
(129,441)
(40,927)
(4,383)
(1,828)
100.0% $
(1,351,087)
61.1% $
31.6%
6.1%
1.1%
0.1%
—%
(158,991)
(64,369)
(23,166)
(17,972)
(1,460)
(3,524)
8,891,660
100.0% $
(269,482)
40.9%
46.0%
9.6%
3.0%
0.3%
0.2%
100.0%
59.0%
23.9%
8.6%
6.7%
0.5%
1.3%
100.0%
Our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities (consisting
of 2,715 and 955 securities, respectively) have been in a continuous unrealized loss position at December 31, 2018 and 2017, along with a
description of the factors causing the unrealized losses is presented in Note 3 to our audited consolidated financial statements in this Form 10-
K, which is incorporated by reference in this Item 7.
Six months or more and less than twelve months
Six months or more and less than twelve months
Twelve months or greater
Total below investment grade
December 31, 2018
Fixed maturity securities:
Investment grade:
Less than six months
Twelve months or greater
Total investment grade
Below investment grade:
Less than six months
December 31, 2017
Fixed maturity securities
Investment grade:
Less than six 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
Number of
Securities
Amortized
Cost
Fair Value
(Dollars in thousands)
Gross
Unrealized
Losses
770
$
6,986,778
$
6,777,338
$
12,208,435
6,639,807
25,835,020
578,858
371,075
526,849
11,692,145
6,186,550
24,656,033
533,979
338,056
432,647
1,476,782
1,304,682
2,715
$
27,311,802
$
25,960,715
$
(1,351,087)
257,924
4,668,838
8,477,536
201,885
36,595
444,545
683,025
249,690
4,486,239
8,256,093
194,821
34,619
405,546
634,986
955
$
9,160,561
$
8,891,079
$
(269,482)
(209,440)
(516,290)
(453,257)
(1,178,987)
(44,879)
(33,019)
(94,202)
(172,100)
(30,610)
(8,234)
(182,599)
(221,443)
(7,064)
(1,976)
(38,999)
(48,039)
1,184
606
2,560
59
44
52
155
27
430
866
32
12
45
89
Six months or more and less than twelve months
409
$
3,550,774
$
3,520,164
$
32
33
The following table sets forth the composition by credit quality (NAIC designation) of fixed maturity securities with gross unrealized losses:
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:
NAIC Designation
December 31, 2018
December 31, 2017
1
2
3
4
5
6
1
2
3
4
5
6
Carrying Value of
Securities with
Gross Unrealized
Losses
Percent of
Total
Gross
Unrealized
Losses
Percent of
Total
(Dollars in thousands)
13,302,253
11,301,715
1,170,941
127,222
19,453
39,131
25,960,715
5,433,608
2,809,981
540,320
94,004
11,130
2,617
$
$
$
$
100.0% $
(1,351,087)
51.2% $
43.5%
4.5%
0.5%
0.1%
0.2%
61.1% $
31.6%
6.1%
1.1%
0.1%
—%
(552,455)
(622,053)
(129,441)
(40,927)
(4,383)
(1,828)
(158,991)
(64,369)
(23,166)
(17,972)
(1,460)
(3,524)
40.9%
46.0%
9.6%
3.0%
0.3%
0.2%
100.0%
59.0%
23.9%
8.6%
6.7%
0.5%
1.3%
100.0%
8,891,660
100.0% $
(269,482)
Our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities (consisting
of 2,715 and 955 securities, respectively) have been in a continuous unrealized loss position at December 31, 2018 and 2017, along with a
description of the factors causing the unrealized losses is presented in Note 3 to our audited consolidated financial statements in this Form 10-
K, which is incorporated by reference in this Item 7.
December 31, 2018
Fixed maturity securities:
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
December 31, 2017
Fixed maturity securities
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
Number of
Securities
Amortized
Cost
Fair Value
(Dollars in thousands)
Gross
Unrealized
Losses
770
$
6,986,778
$
6,777,338
$
1,184
606
2,560
59
44
52
155
12,208,435
6,639,807
25,835,020
578,858
371,075
526,849
11,692,145
6,186,550
24,656,033
533,979
338,056
432,647
1,476,782
1,304,682
(209,440)
(516,290)
(453,257)
(1,178,987)
(44,879)
(33,019)
(94,202)
(172,100)
2,715
$
27,311,802
$
25,960,715
$
(1,351,087)
409
$
3,550,774
$
3,520,164
$
27
430
866
32
12
45
89
257,924
4,668,838
8,477,536
201,885
36,595
444,545
683,025
249,690
4,486,239
8,256,093
194,821
34,619
405,546
634,986
(30,610)
(8,234)
(182,599)
(221,443)
(7,064)
(1,976)
(38,999)
(48,039)
955
$
9,160,561
$
8,891,079
$
(269,482)
32
33
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:
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
Number of
Securities
Amortized
Cost
Fair
Value
Gross
Unrealized
Losses
(Dollars in thousands)
December 31, 2018
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
December 31, 2017
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
5
1
—
6
13
—
3
16
22
3
—
—
3
1
1
4
6
9
$
$
$
103,637
$
78,378
$
20,189
—
123,826
146,474
—
45,594
192,068
15,225
—
93,603
108,465
—
26,665
135,130
315,894
$
228,733
$
(25,259)
(4,964)
—
(30,223)
(38,009)
—
(18,929)
(56,938)
(87,161)
8,597
$
6,931
$
(1,666)
—
—
8,597
11,021
3,523
55,647
70,191
—
—
6,931
8,275
2,674
37,591
48,540
$
78,788
$
55,471
$
—
—
(1,666)
(2,746)
(849)
(18,056)
(21,651)
(23,317)
shown below as a separate line.
December 31, 2018
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years through twenty years
Due after twenty years
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
December 31, 2017
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years through twenty years
Due after twenty years
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
International Exposure
GIIPS (1)
Asia/Pacific
Non-GIIPS Europe
Latin America
Non-U.S. North America
Australia & New Zealand
Other
Available for sale
Held for investment
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
(Dollars in thousands)
$
31,590
$
30,780
$
— $
$
$
27,311,802
$
25,960,715
$
— $
— $
— $
— $
18,156,677
17,214,775
2,596,616
7,196,565
3,247,923
5,083,983
172,427
4,367,221
4,615,477
463,667
1,996,166
1,937,009
1,141,954
5,538,796
75,159
2,473,034
996,531
2,534,891
6,907,961
3,056,474
4,684,669
168,302
4,232,395
4,345,243
454,062
1,945,474
1,881,162
1,074,913
5,355,611
72,688
2,403,194
983,126
—
—
—
—
—
—
—
—
—
—
—
—
—
—
77,041
77,041
76,460
76,460
$
9,083,520
$
8,814,619
$
77,041
$
76,460
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
December 31, 2018
Amortized
Cost
Carrying Amount/
Fair Value
(Dollars in thousands)
$
249,818
$
Percent
of Total
Carrying
Amount
460,239
3,030,213
285,509
1,351,033
946,658
5,195,192
246,303
464,240
3,007,307
287,639
1,349,443
919,847
4,935,145
$
11,518,662
$
11,209,924
0.5%
1.0%
6.6%
0.6%
2.9%
2.0%
10.8%
24.4%
We hold fixed maturity securities with international exposure. As of December 31, 2018, 24% 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.
All of our fixed maturity securities with international exposure are 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:
34
35
(1) Greece, Ireland, Italy, Portugal and Spain ("GIIPS"). All of our exposure in GIIPS are corporate securities with issuers domiciled in these
countries. None of our foreign government obligations were held in any of these countries.
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:
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.
Six months or more and less than twelve months
$
103,637
$
78,378
$
December 31, 2018
Investment grade:
Less than six months
Twelve months or greater
Total investment grade
Below investment grade:
Less than six months
December 31, 2017
Investment grade:
Less than six 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
Six months or more and less than twelve months
Six months or more and less than twelve months
Twelve months or greater
Total below investment grade
Number of
Securities
Amortized
Cost
Fair
Value
Gross
Unrealized
Losses
(Dollars in thousands)
5
1
—
6
13
—
3
16
22
3
—
—
3
1
1
4
6
9
$
$
20,189
—
123,826
146,474
—
45,594
192,068
—
—
8,597
11,021
3,523
55,647
70,191
15,225
—
93,603
108,465
—
26,665
135,130
—
—
6,931
8,275
2,674
37,591
48,540
$
78,788
$
55,471
$
315,894
$
228,733
$
8,597
$
6,931
$
(1,666)
(25,259)
(4,964)
—
(30,223)
(38,009)
—
(18,929)
(56,938)
(87,161)
—
—
(1,666)
(2,746)
(849)
(18,056)
(21,651)
(23,317)
December 31, 2018
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years through twenty years
Due after twenty years
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
December 31, 2017
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years through twenty years
Due after twenty years
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
International Exposure
Available for sale
Held for investment
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
(Dollars in thousands)
$
31,590
$
30,780
$
— $
2,596,616
7,196,565
3,247,923
5,083,983
2,534,891
6,907,961
3,056,474
4,684,669
18,156,677
17,214,775
172,427
4,367,221
4,615,477
168,302
4,232,395
4,345,243
—
—
—
—
—
—
—
—
$
$
27,311,802
$
25,960,715
$
— $
— $
— $
— $
463,667
1,996,166
1,937,009
1,141,954
5,538,796
75,159
2,473,034
996,531
454,062
1,945,474
1,881,162
1,074,913
5,355,611
72,688
2,403,194
983,126
—
—
—
77,041
77,041
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
76,460
76,460
—
—
—
$
9,083,520
$
8,814,619
$
77,041
$
76,460
We hold fixed maturity securities with international exposure. As of December 31, 2018, 24% 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.
All of our fixed maturity securities with international exposure are 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:
GIIPS (1)
Asia/Pacific
Non-GIIPS Europe
Latin America
Non-U.S. North America
Australia & New Zealand
Other
December 31, 2018
Amortized
Cost
Carrying Amount/
Fair Value
(Dollars in thousands)
Percent
of Total
Carrying
Amount
$
249,818
$
460,239
3,030,213
285,509
1,351,033
946,658
5,195,192
246,303
464,240
3,007,307
287,639
1,349,443
919,847
4,935,145
$
11,518,662
$
11,209,924
0.5%
1.0%
6.6%
0.6%
2.9%
2.0%
10.8%
24.4%
(1) Greece, Ireland, Italy, Portugal and Spain ("GIIPS"). All of our exposure in GIIPS are corporate securities with issuers domiciled in these
countries. None of our foreign government obligations were held in any of these countries.
34
35
All of the securities presented in the table above are investment grade (NAIC designation of either 1 or 2), except for the following:
We have determined that the unrealized losses of the securities on the watch list are temporary as we do not intend to sell these securities and it
is more likely than not we will not have to sell these securities before recovery of their amortized cost. Our analysis of these securities and their
GIIPS
Asia/Pacific
Non-GIIPS Europe
Latin America
Non-U.S. North America
Other
Watch List
December 31, 2018
Amortized Cost
Carrying Amount/
Fair Value
$
$
(Dollars in thousands)
19,524
$
11,000
140,289
67,944
50,941
419,602
709,300
$
18,101
9,814
132,826
66,011
46,880
373,533
647,165
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 an other than temporary impairment. 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. Specifically for corporate issues we evaluate the financial stability and quality of asset
coverage for the securities relative to the term to maturity for the issues we own. A security which has a 20% or greater change in market price
relative to its amortized cost and/or a possibility of a loss of principal will be included on a list which is referred to as our watch list. We exclude
from this list securities with unrealized losses which are related to market movements in interest rates and which have no factors indicating that
such unrealized losses may be other than temporary as we do not intend to sell these securities and it is more likely than not we will not have to
sell these securities before a recovery is realized. In addition, we exclude our residential and commercial mortgage backed securities as we
monitor all of our residential and commercial mortgage backed securities on a quarterly basis for changes in default rates, loss severities and
expected cash flows for the purpose of assessing potential other than temporary impairments and related credit losses to be recognized in
operations. At December 31, 2018, the amortized cost and fair value of securities on the watch list (all fixed maturity securities) are as follows:
General Description
Below investment grade
Corporate securities:
Consumer discretionary
Energy
Industrials
Materials
Utilities
Other asset backed securities:
Financials
Number of
Securities
Amortized
Cost
Unrealized
Gains
(Losses)
Fair Value
(Dollars in thousands)
Months in
Continuous
Unrealized
Loss Position
Months
Unrealized
Losses
Greater
Than 20%
5
8
1
1
5
2
22
$
52,470
$
(10,457) $
76,005
562
3,990
59,753
(18,321)
—
1,417
(6,008)
42,013
57,684
562
5,407
53,745
5 - 47
2 - 52
—
—
3 - 15
0 - 10
0 - 43
—
—
0 - 2
1,693
326
2,019
—
—
$
194,473
$
(33,043) $
161,430
credit performance at December 31, 2018 is as follows:
Corporate securities:
Consumer discretionary: The decline in the value of certain of these securities is primarily due to weak operating performance and sales trends.
The decrease in sales for certain of these securities related to a domestic based toy manufacturer is attributable to the liquidation of a major toy
retailer during the fourth quarter of 2017. While the issuer has seen a decrease in operating performance, it has implemented a plan to reduce
costs and stabilize its revenue and is in the early phase of executing on that plan. We have determined that these securities were not other than
temporarily impaired due to our evaluation of the operating performance and the creditworthiness of the issuer and the fact that all required
payments have been made. The decline in operating performance and sales trends of another of these securities related to a domestic company
operating retail chain stores is a result of market deterioration being experienced in many companies within the retail market. We recognized an
other than temporary impairment on this issuer during 2018 due to our evaluation of the operating performance and the credit worthiness of the
issuer. In addition, we included a Brazilian food company whose operating trends have come under pressure due to export challenges, domestic
poultry price weakness and a domestic trucking strike. As one of the world's largest food companies, we believe the company remains a viable
entity even though operating metrics have declined. We have determined that these securities were not other than temporarily impaired due to
our evaluation of their operating performance, asset base and creditworthiness of the borrower.
Energy, Industrials and Materials: The decline in the value of these securities relates to continued operational pressure due to past declines in
certain commodity prices specific to their businesses. The decline in these commodity prices creates financial challenges as the companies had
to realign operations to accommodate the new environment. These issuers will be stressed greater than the average company due to their price
sensitivity and the specific position they hold in the supply chain. While values have declined, improving commodity prices should continue
to provide better financial performance for these companies. We recognized an other than temporary impairment on two of these issuers during
2018 due to our evaluation of the operating performance and the credit worthiness of each issuer. While the remaining issuers have seen their
financial and profitability profile weakened, we have determined that the remaining securities were not other than temporarily impaired due to
our evaluation of the operating performance and the credit worthiness of the issuer.
Utilities: The decline in the value of these securities relates to pending litigation and bankruptcy concerns of the issuer. We have impaired one
of these securities, which was issued at a premium, to reflect the risk that the issuer may call the bonds as a result of pending litigation and
bankruptcy and limit payback to stated par values. The remaining securities were issued at discounts and we have determined that the issuer
remains solvent and appears to have sufficient capital levels to address litigation concerns.
Other asset backed securities:
Financials: The decline in value of one of the asset backed securities is due to poor performance in the underlying pool of student loans. The
investment is backed by a guarantee from the for-profit education services provider. This service provider filed for bankruptcy creating concerns
around the security. We recognized an other than temporary impairment on this issuer during 2018 due to concerns over pending litigation and
our evaluation of the operating performance and the credit worthiness. The decline in value of the other asset backed security is related directly
to the decline in oil prices and the financial stability of its operator. The issuer has direct exposure to the oil market as its primary business is
deep water drilling. As oil prices have remained low, the operator of the deep water vessel has experienced financial pressure on its balance
sheet and similar vessel sales have been at softer valuations. We recognized other than temporary impairments on this security during 2018 and
2017.
Other Than Temporary Impairments
We have a policy and process to identify securities in our investment portfolio for which we should recognize impairments. See Critical
Accounting Policies—Evaluation of Other Than Temporary Impairments. During the years ended December 31, 2018, 2017 and 2016, we
recognized other than temporary impairment on corporate securities, residential mortgage backed securities, commercial mortgage backed
securities and other asset backed securities, all of which are available for sale fixed maturity securities. In addition, in all periods presented we
recognized credit losses on residential mortgage backed securities, and on one other asset backed security in 2018 and 2016 that resulted in a
reclassification of OTTI loss from accumulated other comprehensive income to net income.
In 2018, we recognized $12 million OTTI loss in operations due to our intent to sell certain securities as part of our opportunistic replacement
of lower yielding securities with higher yielding securities which is further discussed in Management's Discussion and Analysis - Executive
Summary. We recognized a $5.5 million OTTI loss in operations on a corporate security in the utilities sector due to concerns over pending
litigation. We recognized a $3.6 million OTTI loss in operations on an other asset backed security as potential sales activity related to the asset
backing our security led us to conclude the asset is worth less than our previous estimate. We recognized a $2.7 million OTTI loss in operations
on a corporate security related to an issuer operating retail chain stores due to deteriorating operating performance and sales trends. We recognized
a $3.6 million OTTI loss in operations on an issuer in the commodities sector due to deteriorating operating performance resulting in part of
from operational pressure related to past declines in certain commodity prices specific to its businesses.
36
37
All of the securities presented in the table above are investment grade (NAIC designation of either 1 or 2), except for the following:
GIIPS
Asia/Pacific
Non-GIIPS Europe
Latin America
Non-U.S. North America
Other
Watch List
December 31, 2018
Amortized Cost
Carrying Amount/
Fair Value
(Dollars in thousands)
19,524
$
$
$
11,000
140,289
67,944
50,941
419,602
709,300
$
18,101
9,814
132,826
66,011
46,880
373,533
647,165
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 an other than temporary impairment. 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. Specifically for corporate issues we evaluate the financial stability and quality of asset
coverage for the securities relative to the term to maturity for the issues we own. A security which has a 20% or greater change in market price
relative to its amortized cost and/or a possibility of a loss of principal will be included on a list which is referred to as our watch list. We exclude
from this list securities with unrealized losses which are related to market movements in interest rates and which have no factors indicating that
such unrealized losses may be other than temporary as we do not intend to sell these securities and it is more likely than not we will not have to
sell these securities before a recovery is realized. In addition, we exclude our residential and commercial mortgage backed securities as we
monitor all of our residential and commercial mortgage backed securities on a quarterly basis for changes in default rates, loss severities and
expected cash flows for the purpose of assessing potential other than temporary impairments and related credit losses to be recognized in
operations. At December 31, 2018, the amortized cost and fair value of securities on the watch list (all fixed maturity securities) are as follows:
General Description
Below investment grade
Corporate securities:
Consumer discretionary
Energy
Industrials
Materials
Utilities
Financials
Other asset backed securities:
Number of
Securities
Amortized
Cost
Unrealized
Gains
(Losses)
Fair Value
(Dollars in thousands)
Months in
Continuous
Unrealized
Loss Position
Months
Unrealized
Losses
Greater
Than 20%
5
8
1
1
5
2
22
$
52,470
$
(10,457) $
76,005
562
3,990
59,753
(18,321)
—
1,417
(6,008)
42,013
57,684
562
5,407
53,745
5 - 47
2 - 52
—
—
3 - 15
0 - 10
0 - 43
—
—
0 - 2
1,693
326
2,019
—
—
$
194,473
$
(33,043) $
161,430
We have determined that the unrealized losses of the securities on the watch list are temporary as we do not intend to sell these securities and it
is more likely than not we will not have to sell these securities before recovery of their amortized cost. Our analysis of these securities and their
credit performance at December 31, 2018 is as follows:
Corporate securities:
Consumer discretionary: The decline in the value of certain of these securities is primarily due to weak operating performance and sales trends.
The decrease in sales for certain of these securities related to a domestic based toy manufacturer is attributable to the liquidation of a major toy
retailer during the fourth quarter of 2017. While the issuer has seen a decrease in operating performance, it has implemented a plan to reduce
costs and stabilize its revenue and is in the early phase of executing on that plan. We have determined that these securities were not other than
temporarily impaired due to our evaluation of the operating performance and the creditworthiness of the issuer and the fact that all required
payments have been made. The decline in operating performance and sales trends of another of these securities related to a domestic company
operating retail chain stores is a result of market deterioration being experienced in many companies within the retail market. We recognized an
other than temporary impairment on this issuer during 2018 due to our evaluation of the operating performance and the credit worthiness of the
issuer. In addition, we included a Brazilian food company whose operating trends have come under pressure due to export challenges, domestic
poultry price weakness and a domestic trucking strike. As one of the world's largest food companies, we believe the company remains a viable
entity even though operating metrics have declined. We have determined that these securities were not other than temporarily impaired due to
our evaluation of their operating performance, asset base and creditworthiness of the borrower.
Energy, Industrials and Materials: The decline in the value of these securities relates to continued operational pressure due to past declines in
certain commodity prices specific to their businesses. The decline in these commodity prices creates financial challenges as the companies had
to realign operations to accommodate the new environment. These issuers will be stressed greater than the average company due to their price
sensitivity and the specific position they hold in the supply chain. While values have declined, improving commodity prices should continue
to provide better financial performance for these companies. We recognized an other than temporary impairment on two of these issuers during
2018 due to our evaluation of the operating performance and the credit worthiness of each issuer. While the remaining issuers have seen their
financial and profitability profile weakened, we have determined that the remaining securities were not other than temporarily impaired due to
our evaluation of the operating performance and the credit worthiness of the issuer.
Utilities: The decline in the value of these securities relates to pending litigation and bankruptcy concerns of the issuer. We have impaired one
of these securities, which was issued at a premium, to reflect the risk that the issuer may call the bonds as a result of pending litigation and
bankruptcy and limit payback to stated par values. The remaining securities were issued at discounts and we have determined that the issuer
remains solvent and appears to have sufficient capital levels to address litigation concerns.
Other asset backed securities:
Financials: The decline in value of one of the asset backed securities is due to poor performance in the underlying pool of student loans. The
investment is backed by a guarantee from the for-profit education services provider. This service provider filed for bankruptcy creating concerns
around the security. We recognized an other than temporary impairment on this issuer during 2018 due to concerns over pending litigation and
our evaluation of the operating performance and the credit worthiness. The decline in value of the other asset backed security is related directly
to the decline in oil prices and the financial stability of its operator. The issuer has direct exposure to the oil market as its primary business is
deep water drilling. As oil prices have remained low, the operator of the deep water vessel has experienced financial pressure on its balance
sheet and similar vessel sales have been at softer valuations. We recognized other than temporary impairments on this security during 2018 and
2017.
Other Than Temporary Impairments
We have a policy and process to identify securities in our investment portfolio for which we should recognize impairments. See Critical
Accounting Policies—Evaluation of Other Than Temporary Impairments. During the years ended December 31, 2018, 2017 and 2016, we
recognized other than temporary impairment on corporate securities, residential mortgage backed securities, commercial mortgage backed
securities and other asset backed securities, all of which are available for sale fixed maturity securities. In addition, in all periods presented we
recognized credit losses on residential mortgage backed securities, and on one other asset backed security in 2018 and 2016 that resulted in a
reclassification of OTTI loss from accumulated other comprehensive income to net income.
In 2018, we recognized $12 million OTTI loss in operations due to our intent to sell certain securities as part of our opportunistic replacement
of lower yielding securities with higher yielding securities which is further discussed in Management's Discussion and Analysis - Executive
Summary. We recognized a $5.5 million OTTI loss in operations on a corporate security in the utilities sector due to concerns over pending
litigation. We recognized a $3.6 million OTTI loss in operations on an other asset backed security as potential sales activity related to the asset
backing our security led us to conclude the asset is worth less than our previous estimate. We recognized a $2.7 million OTTI loss in operations
on a corporate security related to an issuer operating retail chain stores due to deteriorating operating performance and sales trends. We recognized
a $3.6 million OTTI loss in operations on an issuer in the commodities sector due to deteriorating operating performance resulting in part of
from operational pressure related to past declines in certain commodity prices specific to its businesses.
36
37
In 2017, we recognized a $2.5 million OTTI loss in operations due to our concern regarding a corporate security issued by a Latin America
engineering and construction company as developments in 2017 led us to the conclusion that we will not be able to recover our amortized cost
basis. We recognized an OTTI of $0.3 million on a residential mortgage backed security that had not been previously impaired and we recognized
additional credit losses on previously impaired residential mortgage backed securities during 2017 as several factors led us to believe the full
recovery of amortized cost is not expected on the residential mortgage backed securities. Also in 2017, we recognized an additional impairment
of $0.3 million on an asset backed security as sales of similar assets during 2017 led us to conclude that the asset backing our security was worth
less than our previous estimates.
In 2016, we recognized a $3.9 million OTTI loss in operations due to our concern regarding a corporate security issued by a Brazilian
telecommunications company as developments in 2016 led us to the conclusion that we will not be able to fully recover our amortized cost basis
due to liquidity concerns. A $3.0 million OTTI loss was recognized in operations due to our concern regarding a corporate security issued by
a Brazilian metals and mining company as developments during 2016 led us to the conclusion that we will not be able to fully recover our
amortized cost basis. We recognized a $9.2 million OTTI loss in operations on a corporate security and an other asset backed security as a result
of the parent of both entities announcement that it is committed to exiting the power generation business and could potentially enter the facilities
into bankruptcy. In 2016, we recognized an additional impairment of $3.5 million on an other asset backed security due to the asset supporting
the cash flows being taken out of production which was first impaired during 2015. The OTTI that we recognized in 2016 on commercial
mortgage backed securities were due to our intent to sell the securities, which were in an unrealized loss position at the reporting date of the
period in which the decision to sell these securities was made.
Several factors led us to believe that full recovery of amortized cost is not expected on the securities for which we recognized credit losses and
reclassified OTTI from accumulated other comprehensive income (loss) to net income. A discussion of these factors, our policy and process to
identify securities that could potentially have impairment that is other than temporary and a summary of OTTI is presented in Note 3 to our
audited consolidated financial statements in this Form 10-K, which is incorporated by reference in this Item 7.
Mortgage Loans on Real Estate
Our commercial mortgage loan 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 commercial mortgage loans on real estate are reported at cost, net of loan loss allowances and deferred
prepayment fees. At December 31, 2018 and 2017, the largest principal amount outstanding for any single mortgage loan was $23.8 million
and $21.2 million, respectively, and the average loan size was $3.8 million and $3.5 million, respectively. In addition, the average loan to value
ratio for the overall portfolio was 53.6% at both December 31, 2018 and 2017, respectively, based upon the underwriting and appraisal at the
time the loan was made. This loan to value is indicative of our conservative underwriting policies and practices for making commercial 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 of our audited consolidated financial
statements of this Form 10-K, which is incorporated by reference in this Item 7.
In the normal course of business, we commit to fund commercial mortgage loans up to 90 days in advance. At December 31, 2018, we had
commitments to fund commercial mortgage loans totaling $148.0 million, with interest rates ranging from 4.50% to 7.40%. During 2018 and
2017, 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 year ended December 31, 2018, we received $178.2 million in cash for loans
being paid in full compared to $230.4 million for the year ended December 31, 2017. 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.
See Note 4 to our audited consolidated financial statements, incorporated by reference, for a presentation of our specific and general loan loss
allowances, impaired loans, foreclosure activity and troubled debt restructure analysis.
We have a process by which we evaluate the credit quality of each of our commercial mortgage loans. This process utilizes each loan's debt
service coverage ratio as a primary metric. A summary of our portfolio by debt service coverage ratio (based on most recent information collected)
follows:
Debt Service Coverage Ratio:
Greater than or equal to 1.5
Greater than or equal to 1.2 and less than 1.5
Greater than or equal to 1.0 and less than 1.2
Less than 1.0
December 31, 2018
December 31, 2017
Percent of Total
Principal
Outstanding
Principal
Outstanding
(Dollars in
thousands)
Percent of Total
Principal
Outstanding
71.9% $
1,826,596
21.8%
4.3%
2.0%
638,299
148,881
60,539
100.0% $
2,674,315
68.3%
23.9%
5.6%
2.2%
100.0%
Principal
Outstanding
(Dollars in
thousands)
$
$
2,121,785
645,470
127,083
58,126
2,952,464
38
All of our mortgage loans (based on principal outstanding) that have a debt service coverage ratio of less than 1.0 are performing under the
original contractual loan terms at December 31, 2018.
Mortgage loans summarized in the following table represent all loans that we are either not currently collecting or those we feel it is probable
we will not collect all amounts due according to the contractual terms of the loan agreements (all loans that we have worked with the borrower
to alleviate short-term cash flow issues, loans delinquent for 60 days or more at the reporting date, loans we have determined to be collateral
dependent and loans that we have recorded specific impairments on that we feel may continue to have performance issues).
December 31,
2018
2017
(Dollars in thousands)
$
$
1,253
$
—
(229)
1,024
$
5,445
1,436
(1,418)
5,463
Impaired mortgage loans with an allowance
Impaired mortgage loans with no related allowance
Allowance for probable loan losses
Net carrying value of impaired mortgage loans
principal and interest payments.
Derivative Instruments
At December 31, 2018, we had no commercial mortgage loans that were delinquent (60 days or more past due at the reporting date) in their
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 5 to our audited consolidated financial statements in this Form 10-K, which is incorporated by reference
in this Item 7.
Liabilities
Our liability for policy benefit reserves increased to $57.6 billion at December 31, 2018 compared to $56.1 billion at December 31, 2017,
primarily due to net cash flows from annuity deposits and funds returned to policyholders and interest and index credits credited to policyholders
during 2018. The increase in policy benefit reserves resulting from these items was partially mitigated by a decrease in the fair value of our fixed
index annuity embedded derivatives during 2018. Substantially all of our annuity products have a surrender charge feature designed to reduce
the risk of early withdrawal or surrender of the policies and to compensate us for our costs if policies are withdrawn early. Our lifetime income
benefit rider also reduces the risk of early withdrawal or surrender of the policies as it provides an additional liquidity option to policyholders
as the policyholder can elect to receive guaranteed payments for life from their contract without requiring them to annuitize their contract value
and the rider is not transferable to other contracts. Notwithstanding these policy features, the withdrawal rates of policyholder funds may be
affected by changes in interest rates and other factors.
See Note 9 to our audited consolidated financial statements in this Form 10-K, which is incorporated by reference in this Item 7 for discussion
of our notes and loan payable and borrowings under repurchase agreements.
See Note 10 to our audited consolidated financial statements for additional information concerning our subordinated debentures payable to, and
the preferred securities issued by, our subsidiary trusts.
Liquidity and Capital Resources
Liquidity for Insurance Operations
Our insurance subsidiaries' primary sources of cash flow are annuity deposits, investment income, and proceeds from the sale, maturity and calls
of investments. The primary uses of funds are investment purchases, payments to policyholders in connection with surrenders and withdrawals,
policy acquisition costs and other operating expenses.
Liquidity requirements are met primarily by funds provided from operations. Our life subsidiaries generally receive adequate cash flow from
annuity deposits and investment income to meet their obligations. Annuity liabilities are generally long-term in nature. However, a primary
liquidity concern is the risk of an extraordinary level of early policyholder withdrawals. We include provisions within our annuity policies, such
as surrender charges and bonus vesting, which help limit and discourage early withdrawals. Our lifetime income benefit rider also limits the
risk of early withdrawals as it provides an additional liquidity option to policyholders as the policyholder can elect to receive guaranteed payments
for life from their contract without requiring them to annuitize their contract value and the rider is not transferable to other contracts. At
December 31, 2018, approximately 93% of our annuity liabilities were subject to penalty upon surrender, with a weighted average remaining
surrender charge period of 7.5 years and a weighted average surrender charge percentage of 12.1%.
39
In 2017, we recognized a $2.5 million OTTI loss in operations due to our concern regarding a corporate security issued by a Latin America
engineering and construction company as developments in 2017 led us to the conclusion that we will not be able to recover our amortized cost
basis. We recognized an OTTI of $0.3 million on a residential mortgage backed security that had not been previously impaired and we recognized
additional credit losses on previously impaired residential mortgage backed securities during 2017 as several factors led us to believe the full
recovery of amortized cost is not expected on the residential mortgage backed securities. Also in 2017, we recognized an additional impairment
of $0.3 million on an asset backed security as sales of similar assets during 2017 led us to conclude that the asset backing our security was worth
less than our previous estimates.
In 2016, we recognized a $3.9 million OTTI loss in operations due to our concern regarding a corporate security issued by a Brazilian
telecommunications company as developments in 2016 led us to the conclusion that we will not be able to fully recover our amortized cost basis
due to liquidity concerns. A $3.0 million OTTI loss was recognized in operations due to our concern regarding a corporate security issued by
a Brazilian metals and mining company as developments during 2016 led us to the conclusion that we will not be able to fully recover our
amortized cost basis. We recognized a $9.2 million OTTI loss in operations on a corporate security and an other asset backed security as a result
of the parent of both entities announcement that it is committed to exiting the power generation business and could potentially enter the facilities
into bankruptcy. In 2016, we recognized an additional impairment of $3.5 million on an other asset backed security due to the asset supporting
the cash flows being taken out of production which was first impaired during 2015. The OTTI that we recognized in 2016 on commercial
mortgage backed securities were due to our intent to sell the securities, which were in an unrealized loss position at the reporting date of the
period in which the decision to sell these securities was made.
Several factors led us to believe that full recovery of amortized cost is not expected on the securities for which we recognized credit losses and
reclassified OTTI from accumulated other comprehensive income (loss) to net income. A discussion of these factors, our policy and process to
identify securities that could potentially have impairment that is other than temporary and a summary of OTTI is presented in Note 3 to our
audited consolidated financial statements in this Form 10-K, which is incorporated by reference in this Item 7.
Mortgage Loans on Real Estate
Our commercial mortgage loan 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 commercial mortgage loans on real estate are reported at cost, net of loan loss allowances and deferred
prepayment fees. At December 31, 2018 and 2017, the largest principal amount outstanding for any single mortgage loan was $23.8 million
and $21.2 million, respectively, and the average loan size was $3.8 million and $3.5 million, respectively. In addition, the average loan to value
ratio for the overall portfolio was 53.6% at both December 31, 2018 and 2017, respectively, based upon the underwriting and appraisal at the
time the loan was made. This loan to value is indicative of our conservative underwriting policies and practices for making commercial 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 of our audited consolidated financial
statements of this Form 10-K, which is incorporated by reference in this Item 7.
In the normal course of business, we commit to fund commercial mortgage loans up to 90 days in advance. At December 31, 2018, we had
commitments to fund commercial mortgage loans totaling $148.0 million, with interest rates ranging from 4.50% to 7.40%. During 2018 and
2017, 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 year ended December 31, 2018, we received $178.2 million in cash for loans
being paid in full compared to $230.4 million for the year ended December 31, 2017. 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.
See Note 4 to our audited consolidated financial statements, incorporated by reference, for a presentation of our specific and general loan loss
allowances, impaired loans, foreclosure activity and troubled debt restructure analysis.
We have a process by which we evaluate the credit quality of each of our commercial mortgage loans. This process utilizes each loan's debt
service coverage ratio as a primary metric. A summary of our portfolio by debt service coverage ratio (based on most recent information collected)
follows:
Debt Service Coverage Ratio:
Greater than or equal to 1.5
Greater than or equal to 1.2 and less than 1.5
Greater than or equal to 1.0 and less than 1.2
Less than 1.0
December 31, 2018
December 31, 2017
Percent of Total
Principal
Outstanding
Percent of Total
Principal
Outstanding
Principal
Outstanding
(Dollars in
thousands)
71.9% $
1,826,596
21.8%
4.3%
2.0%
638,299
148,881
60,539
100.0% $
2,674,315
68.3%
23.9%
5.6%
2.2%
100.0%
Principal
Outstanding
(Dollars in
thousands)
$
$
2,121,785
645,470
127,083
58,126
2,952,464
38
All of our mortgage loans (based on principal outstanding) that have a debt service coverage ratio of less than 1.0 are performing under the
original contractual loan terms at December 31, 2018.
Mortgage loans summarized in the following table represent all loans that we are either not currently collecting or those we feel it is probable
we will not collect all amounts due according to the contractual terms of the loan agreements (all loans that we have worked with the borrower
to alleviate short-term cash flow issues, loans delinquent for 60 days or more at the reporting date, loans we have determined to be collateral
dependent and loans that we have recorded specific impairments on that we feel may continue to have performance issues).
Impaired mortgage loans with an allowance
Impaired mortgage loans with no related allowance
Allowance for probable loan losses
Net carrying value of impaired mortgage loans
December 31,
2018
2017
(Dollars in thousands)
$
$
1,253
$
—
(229)
1,024
$
5,445
1,436
(1,418)
5,463
At December 31, 2018, we had no commercial mortgage loans that were delinquent (60 days or more past due at the reporting date) in their
principal and interest payments.
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 5 to our audited consolidated financial statements in this Form 10-K, which is incorporated by reference
in this Item 7.
Liabilities
Our liability for policy benefit reserves increased to $57.6 billion at December 31, 2018 compared to $56.1 billion at December 31, 2017,
primarily due to net cash flows from annuity deposits and funds returned to policyholders and interest and index credits credited to policyholders
during 2018. The increase in policy benefit reserves resulting from these items was partially mitigated by a decrease in the fair value of our fixed
index annuity embedded derivatives during 2018. Substantially all of our annuity products have a surrender charge feature designed to reduce
the risk of early withdrawal or surrender of the policies and to compensate us for our costs if policies are withdrawn early. Our lifetime income
benefit rider also reduces the risk of early withdrawal or surrender of the policies as it provides an additional liquidity option to policyholders
as the policyholder can elect to receive guaranteed payments for life from their contract without requiring them to annuitize their contract value
and the rider is not transferable to other contracts. Notwithstanding these policy features, the withdrawal rates of policyholder funds may be
affected by changes in interest rates and other factors.
See Note 9 to our audited consolidated financial statements in this Form 10-K, which is incorporated by reference in this Item 7 for discussion
of our notes and loan payable and borrowings under repurchase agreements.
See Note 10 to our audited consolidated financial statements for additional information concerning our subordinated debentures payable to, and
the preferred securities issued by, our subsidiary trusts.
Liquidity and Capital Resources
Liquidity for Insurance Operations
Our insurance subsidiaries' primary sources of cash flow are annuity deposits, investment income, and proceeds from the sale, maturity and calls
of investments. The primary uses of funds are investment purchases, payments to policyholders in connection with surrenders and withdrawals,
policy acquisition costs and other operating expenses.
Liquidity requirements are met primarily by funds provided from operations. Our life subsidiaries generally receive adequate cash flow from
annuity deposits and investment income to meet their obligations. Annuity liabilities are generally long-term in nature. However, a primary
liquidity concern is the risk of an extraordinary level of early policyholder withdrawals. We include provisions within our annuity policies, such
as surrender charges and bonus vesting, which help limit and discourage early withdrawals. Our lifetime income benefit rider also limits the
risk of early withdrawals as it provides an additional liquidity option to policyholders as the policyholder can elect to receive guaranteed payments
for life from their contract without requiring them to annuitize their contract value and the rider is not transferable to other contracts. At
December 31, 2018, approximately 93% of our annuity liabilities were subject to penalty upon surrender, with a weighted average remaining
surrender charge period of 7.5 years and a weighted average surrender charge percentage of 12.1%.
39
Our insurance subsidiaries continue to 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
$1.2 billion for the year ended December 31, 2018 compared to $1.3 billion for the year ended December 31, 2017 with the decrease attributable
to a $341.4 million (after coinsurance) increase in funds returned to policyholders, which was partially offset by a $202.9 million increase in
net annuity deposits after coinsurance. We continue to invest the net proceeds from policyholder transactions and investment activities in high
quality fixed maturity securities and fixed rate commercial mortgage loans.
Liquidity of Parent Company
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 subsidiary trusts), pay operating expenses and pay dividends
to 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. These sources provide adequate cash
flow for us to meet our current and reasonably foreseeable future obligations and we expect they will be adequate to fund our parent company
cash flow requirements in 2019.
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% of American Equity Life's statutory capital and surplus at the preceding
December 31. For 2019, up to $325.2 million can be distributed as dividends by American 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 $1.9
billion of statutory earned surplus at December 31, 2018.
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 of December 31, 2018, we estimate American Equity Life has sufficient statutory capital and surplus, combined with capital available to the
holding company, to maintain this rating objective. 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.
The transfer of funds by American Equity Life is also restricted by a covenant in our line of credit agreement which requires American Equity
Life to maintain a minimum risk-based capital ratio of 275% and a minimum level of statutory surplus equal to the sum of 1) 80% of statutory
surplus at June 30, 2016, 2) 50% of the statutory net income for each fiscal quarter ending after June 30, 2016, and 3) 50% of all capital contributed
to American Equity Life after June 30, 2016. American Equity Life's risk-based capital ratio was 360% at December 31, 2018. Under this
agreement, we are also required to maintain a maximum ratio of adjusted debt to total adjusted capital of 0.35.
Cash and cash equivalents of the parent holding company at December 31, 2018, were $68.9 million. In addition, as discussed in Note 9 to our
audited consolidated financial statements, we have a $150 million revolving line of credit agreement, with no borrowings outstanding at
December 31, 2018. This revolving line of credit terminates on September 30, 2021, and borrowings are available for general corporate purposes
of the parent company and its subsidiaries. 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.
Statutory accounting practices prescribed or permitted for our life subsidiaries differ in many respects from those governing the preparation of
financial statements under GAAP. Accordingly, statutory operating results and statutory capital and surplus may differ substantially from amounts
reported in the GAAP basis financial statements for comparable items. Information as to statutory capital and surplus and statutory net income
for our life subsidiaries as of December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016 is included in Note 12
to our audited consolidated financial statements.
In the normal course of business, we enter into financing transactions, lease agreements, or other commitments. These commitments may obligate
us to certain cash flows during future periods. The following table summarizes such obligations as of December 31, 2018.
Total
Less Than
1 year
Payments Due by Period
1–3 Years
4–5 Years
(Dollars in thousands)
After
5 Years
Annuity and single premium universal life products (1)
$
51,269,156
$
3,427,764
$
10,105,250
$
6,159,800
$
31,576,342
Notes and loan payable, including interest payments (2)
Subordinated debentures, including interest payments (3)
Amounts due under repurchase agreements
Operating leases
Total
Mortgage loan funding and other investments
713,734
574,235
109,298
13,389
203,980
25,462
15,535
109,298
1,986
176,234
50,772
31,071
—
3,878
27,746
50,000
31,071
3,161
—
—
587,500
496,558
4,364
—
—
$
52,883,792
$
3,756,279
$
10,218,717
$
6,244,032
$
32,664,764
(1) Amounts shown in this table are projected payments through the year 2038 which we are contractually obligated to pay to our annuity policyholders. The
payments are derived from actuarial models which assume a level interest rate scenario and incorporate assumptions regarding mortality and persistency,
when applicable. These assumptions are based on our historical experience.
(2) Period that principal amounts are due is determined by the earliest of the call/put date or the maturity date of each note payable.
(3) Amount shown is net of equity investments in the capital trusts due to the contractual right of offset upon repayment of the notes.
Inflation
Critical Accounting Policies
Inflation does not have a significant effect on our consolidated balance sheet. We have minimal investments in property, equipment or inventories.
To the extent that interest rates may change to reflect inflation or inflation expectations, there would be an effect on our balance sheet and
operations. It is not possible to calculate the effect such changes in interest rates, if any, have had on our operating results.
The increasing complexity of the business environment and applicable authoritative accounting guidance require us to closely monitor our
accounting policies. We have identified six critical accounting policies that are complex and require significant judgment. The following
summary of our critical accounting policies is intended to enhance your ability to assess our financial condition and results of operations and
the potential volatility due to changes in estimates.
Valuation of Investments
Our fixed maturity securities classified as available for sale are reported at fair value. Unrealized gains and losses, if any, on these securities
are included directly in stockholders' equity as a component of accumulated other comprehensive income (loss), net of income taxes and certain
adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements. Unrealized gains and
losses represent the difference between the amortized cost or cost basis and the fair value of these investments. We use significant judgment
within the process used to determine fair value of these investments.
GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction
between market participants at the measurement date. We categorize our investments into three levels of fair value hierarchy based on the priority
of inputs used in determining fair value. The hierarchy defines the highest priority inputs (Level 1) as quoted prices in active markets for identical
assets or liabilities. The lowest priority inputs (Level 3) are our own assumptions about what a market participant would use in determining fair
value such as estimated future cash flows. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value
hierarchy. In such cases, a financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to
the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment
and considers factors specific to the financial instrument.
40
41
Our insurance subsidiaries continue to 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
$1.2 billion for the year ended December 31, 2018 compared to $1.3 billion for the year ended December 31, 2017 with the decrease attributable
to a $341.4 million (after coinsurance) increase in funds returned to policyholders, which was partially offset by a $202.9 million increase in
net annuity deposits after coinsurance. We continue to invest the net proceeds from policyholder transactions and investment activities in high
quality fixed maturity securities and fixed rate commercial mortgage loans.
Liquidity of Parent Company
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 subsidiary trusts), pay operating expenses and pay dividends
to 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. These sources provide adequate cash
flow for us to meet our current and reasonably foreseeable future obligations and we expect they will be adequate to fund our parent company
cash flow requirements in 2019.
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% of American Equity Life's statutory capital and surplus at the preceding
December 31. For 2019, up to $325.2 million can be distributed as dividends by American 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 $1.9
billion of statutory earned surplus at December 31, 2018.
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 of December 31, 2018, we estimate American Equity Life has sufficient statutory capital and surplus, combined with capital available to the
holding company, to maintain this rating objective. 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.
The transfer of funds by American Equity Life is also restricted by a covenant in our line of credit agreement which requires American Equity
Life to maintain a minimum risk-based capital ratio of 275% and a minimum level of statutory surplus equal to the sum of 1) 80% of statutory
surplus at June 30, 2016, 2) 50% of the statutory net income for each fiscal quarter ending after June 30, 2016, and 3) 50% of all capital contributed
to American Equity Life after June 30, 2016. American Equity Life's risk-based capital ratio was 360% at December 31, 2018. Under this
agreement, we are also required to maintain a maximum ratio of adjusted debt to total adjusted capital of 0.35.
Cash and cash equivalents of the parent holding company at December 31, 2018, were $68.9 million. In addition, as discussed in Note 9 to our
audited consolidated financial statements, we have a $150 million revolving line of credit agreement, with no borrowings outstanding at
December 31, 2018. This revolving line of credit terminates on September 30, 2021, and borrowings are available for general corporate purposes
of the parent company and its subsidiaries. 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.
Statutory accounting practices prescribed or permitted for our life subsidiaries differ in many respects from those governing the preparation of
financial statements under GAAP. Accordingly, statutory operating results and statutory capital and surplus may differ substantially from amounts
reported in the GAAP basis financial statements for comparable items. Information as to statutory capital and surplus and statutory net income
for our life subsidiaries as of December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016 is included in Note 12
to our audited consolidated financial statements.
In the normal course of business, we enter into financing transactions, lease agreements, or other commitments. These commitments may obligate
us to certain cash flows during future periods. The following table summarizes such obligations as of December 31, 2018.
Total
Less Than
1 year
Payments Due by Period
1–3 Years
4–5 Years
(Dollars in thousands)
After
5 Years
Annuity and single premium universal life products (1)
$
51,269,156
$
3,427,764
$
10,105,250
$
6,159,800
$
31,576,342
Notes and loan payable, including interest payments (2)
Subordinated debentures, including interest payments (3)
Amounts due under repurchase agreements
Operating leases
Mortgage loan funding and other investments
713,734
574,235
109,298
13,389
203,980
25,462
15,535
109,298
1,986
176,234
50,772
31,071
—
3,878
27,746
50,000
31,071
—
3,161
—
587,500
496,558
—
4,364
—
Total
$
52,883,792
$
3,756,279
$
10,218,717
$
6,244,032
$
32,664,764
(1) Amounts shown in this table are projected payments through the year 2038 which we are contractually obligated to pay to our annuity policyholders. The
payments are derived from actuarial models which assume a level interest rate scenario and incorporate assumptions regarding mortality and persistency,
when applicable. These assumptions are based on our historical experience.
(2) Period that principal amounts are due is determined by the earliest of the call/put date or the maturity date of each note payable.
(3) Amount shown is net of equity investments in the capital trusts due to the contractual right of offset upon repayment of the notes.
Inflation
Inflation does not have a significant effect on our consolidated balance sheet. We have minimal investments in property, equipment or inventories.
To the extent that interest rates may change to reflect inflation or inflation expectations, there would be an effect on our balance sheet and
operations. It is not possible to calculate the effect such changes in interest rates, if any, have had on our operating results.
Critical Accounting Policies
The increasing complexity of the business environment and applicable authoritative accounting guidance require us to closely monitor our
accounting policies. We have identified six critical accounting policies that are complex and require significant judgment. The following
summary of our critical accounting policies is intended to enhance your ability to assess our financial condition and results of operations and
the potential volatility due to changes in estimates.
Valuation of Investments
Our fixed maturity securities classified as available for sale are reported at fair value. Unrealized gains and losses, if any, on these securities
are included directly in stockholders' equity as a component of accumulated other comprehensive income (loss), net of income taxes and certain
adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements. Unrealized gains and
losses represent the difference between the amortized cost or cost basis and the fair value of these investments. We use significant judgment
within the process used to determine fair value of these investments.
GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction
between market participants at the measurement date. We categorize our investments into three levels of fair value hierarchy based on the priority
of inputs used in determining fair value. The hierarchy defines the highest priority inputs (Level 1) as quoted prices in active markets for identical
assets or liabilities. The lowest priority inputs (Level 3) are our own assumptions about what a market participant would use in determining fair
value such as estimated future cash flows. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value
hierarchy. In such cases, a financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to
the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment
and considers factors specific to the financial instrument.
40
41
We categorize investments recorded at fair value in the consolidated balance sheets as follows:
Level 1 —
Level 2 —
Quoted prices are available in active markets for identical financial instruments as of the reporting date. We do not
adjust the quoted price for these financial instruments, even in situations where we hold a large position and a sale
could reasonably impact the quoted price.
Quoted prices in active markets for similar financial instruments, quoted prices for identical or similar financial
instruments in markets that are not active; and models and other valuation methodologies using inputs other than quoted
prices that are observable.
Level 3 — Models and other valuation methodologies using significant inputs that are unobservable for financial instruments and
include situations where there is little, if any, market activity for the financial instrument. The inputs into the
determination of fair value require significant management judgment or estimation. Financial instruments that are
included in Level 3 are securities for which no market activity or data exists and for which we used discounted expected
future cash flows with our own assumptions about what a market participant would use in determining fair value.
The following table presents the fair value of fixed maturity and equity securities, available for sale, by pricing source and hierarchy level as of
December 31, 2018 and 2017, respectively:
Evaluation of Other Than Temporary Impairments and Allowance for Loan Loss
December 31, 2018
Priced via third party pricing services
Priced via independent broker quotations
Priced via other methods
% of Total
December 31, 2017
Priced via third party pricing services
Priced via independent broker quotations
Priced via other methods
% of Total
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(Dollars in thousands)
Total
$
$
$
$
5,907
$
45,268,935
$
— $
45,274,842
—
—
20,367
635,955
—
—
20,367
635,955
5,907
$
45,925,257
$
— $
45,931,164
—%
100.0%
—%
100.0%
290,645
$
45,150,229
$
— $
45,440,874
—
—
34,750
189,794
—
—
34,750
189,794
290,645
$
45,374,773
$
— $
45,665,418
0.6%
99.4%
—%
100.0%
Management's assessment of all available data when determining fair value of our investments is necessary to appropriately apply fair value
accounting.
We utilize independent pricing services in estimating the fair values of investment securities. The independent pricing services incorporate a
variety of observable market data in their valuation techniques, including:
•
•
•
•
•
•
•
•
reported trading prices,
benchmark yields,
broker-dealer quotes,
benchmark securities,
bids and offers,
credit ratings,
relative credit information, and
other reference data.
The independent pricing services also take into account perceived market movements and sector news, as well as a security's terms and conditions,
including any features specific to that issue that may influence risk and marketability. Depending on the security, the priority of the use of
observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary.
The independent pricing services provide quoted market prices when available. Quoted prices are not always available due to market inactivity.
When quoted market prices are not available, the third parties use yield data and other factors relating to instruments or securities with similar
characteristics to determine fair value for securities that are not actively traded. We generally obtain one value from our primary external pricing
service. In situations where a price is not available from this service, we may obtain quotes or prices from additional parties as needed. In
addition, for our callable United States Government sponsored agencies we obtain multiple broker quotes and take the average of the broker
prices received. Market indices of similar rated asset class spreads are considered for valuations and broker indications of similar securities are
compared. Inputs used by the broker include market information, such as yield data and other factors relating to instruments or securities with
similar characteristics. Valuations and quotes obtained from third party commercial pricing services are non-binding and do not represent quotes
on which one may execute the disposition of the assets.
We validate external valuations at least quarterly through a combination of procedures that include the evaluation of methodologies used by the
pricing services, comparison of the prices to a secondary pricing source, analytical reviews and performance analysis of the prices against trends,
and maintenance of a securities watch list. Additionally, as needed we utilize discounted cash flow models or perform independent valuations
on a case-by-case basis using inputs and assumptions similar to those used by the pricing services. Although we do identify differences from
time to time as a result of these validation procedures, we did not make any significant adjustments as of December 31, 2018 and 2017.
The evaluation of investments for other than temporary impairments involves significant judgment and estimates by management. We review
and analyze all investments on an ongoing basis for changes in market interest rates and credit deterioration. This review process includes
analyzing our ability to recover the amortized cost or cost basis of each investment that has a fair value that is materially lower than its amortized
cost and requires a high degree of management judgment and involves uncertainty. The evaluation of securities for other than temporary
impairments is a quantitative and qualitative process, which is subject to risks and uncertainties.
We have a policy and process to identify securities that could potentially have an impairment that is other than temporary. This process involves
monitoring market events and other items that could impact issuers. The evaluation includes but is not limited to such factors as:
•
•
•
•
•
•
•
•
the length of time and the extent to which the fair value has been less than amortized cost or cost;
• whether the issuer is current on all payments and all contractual payments have been made as agreed;
the remaining payment terms and the financial condition and near-term prospects of the issuer;
the lack of ability to refinance due to liquidity problems in the credit market;
the fair value of any underlying collateral;
the existence of any credit protection available;
our intent to sell and whether it is more likely than not we would be required to sell prior to recovery for debt securities;
consideration of rating agency actions; and
changes in estimated cash flows of mortgage and asset backed securities.
We determine whether other than temporary impairment losses should be recognized for debt securities by assessing all facts and circumstances
surrounding each security. Where the decline in fair value of debt securities is attributable to changes in market interest rates or to factors such
as market volatility, liquidity and spread widening, and we anticipate recovery of all contractual or expected cash flows, we do not consider
these investments to be other than temporarily impaired because we do not intend to sell these investments and it is not more likely than not we
will be required to sell these investments before a recovery of amortized cost, which may be maturity.
If we intend to sell a debt security or if it is more likely than not that we will be required to sell a debt security before recovery of its amortized
cost basis, other than temporary impairment has occurred and the difference between amortized cost and fair value will be recognized as a loss
in operations.
If we do not intend to sell and it is not more likely than not we will be required to sell the debt security but also do not expect to recover the
entire amortized cost basis of the security, an impairment loss would be recognized in operations in the amount of the expected credit loss. We
determine the amount of expected credit loss by calculating the present value of the cash flows expected to be collected discounted at each
security's acquisition yield based on our consideration of whether the security was of high credit quality at the time of acquisition. The difference
between the present value of expected future cash flows and the amortized cost basis of the security is the amount of credit loss recognized in
operations. The remaining amount of the other than temporary impairment is recognized in other comprehensive income (loss).
The determination of the credit loss component of a mortgage backed security is based on a number of factors. The primary consideration in
this evaluation process is the issuer's ability to meet current and future interest and principal payments as contractually stated at time of purchase.
Our review of these securities includes an analysis of the cash flow modeling under various default scenarios considering independent third
party benchmarks, the seniority of the specific tranche within the structure of the security, the composition of the collateral and the actual default,
loss severity and prepayment experience exhibited. With the input of third party assumptions for default projections, loss severity and prepayment
expectations, we evaluate the cash flow projections to determine whether the security is performing in accordance with its contractual obligation.
42
43
We categorize investments recorded at fair value in the consolidated balance sheets as follows:
Level 1 —
Quoted prices are available in active markets for identical financial instruments as of the reporting date. We do not
adjust the quoted price for these financial instruments, even in situations where we hold a large position and a sale
could reasonably impact the quoted price.
Level 2 —
Quoted prices in active markets for similar financial instruments, quoted prices for identical or similar financial
instruments in markets that are not active; and models and other valuation methodologies using inputs other than quoted
prices that are observable.
Level 3 — Models and other valuation methodologies using significant inputs that are unobservable for financial instruments and
include situations where there is little, if any, market activity for the financial instrument. The inputs into the
determination of fair value require significant management judgment or estimation. Financial instruments that are
included in Level 3 are securities for which no market activity or data exists and for which we used discounted expected
future cash flows with our own assumptions about what a market participant would use in determining fair value.
The independent pricing services provide quoted market prices when available. Quoted prices are not always available due to market inactivity.
When quoted market prices are not available, the third parties use yield data and other factors relating to instruments or securities with similar
characteristics to determine fair value for securities that are not actively traded. We generally obtain one value from our primary external pricing
service. In situations where a price is not available from this service, we may obtain quotes or prices from additional parties as needed. In
addition, for our callable United States Government sponsored agencies we obtain multiple broker quotes and take the average of the broker
prices received. Market indices of similar rated asset class spreads are considered for valuations and broker indications of similar securities are
compared. Inputs used by the broker include market information, such as yield data and other factors relating to instruments or securities with
similar characteristics. Valuations and quotes obtained from third party commercial pricing services are non-binding and do not represent quotes
on which one may execute the disposition of the assets.
We validate external valuations at least quarterly through a combination of procedures that include the evaluation of methodologies used by the
pricing services, comparison of the prices to a secondary pricing source, analytical reviews and performance analysis of the prices against trends,
and maintenance of a securities watch list. Additionally, as needed we utilize discounted cash flow models or perform independent valuations
on a case-by-case basis using inputs and assumptions similar to those used by the pricing services. Although we do identify differences from
time to time as a result of these validation procedures, we did not make any significant adjustments as of December 31, 2018 and 2017.
The following table presents the fair value of fixed maturity and equity securities, available for sale, by pricing source and hierarchy level as of
December 31, 2018 and 2017, respectively:
Evaluation of Other Than Temporary Impairments and Allowance for Loan Loss
5,907
$
45,268,935
$
— $
45,274,842
We have a policy and process to identify securities that could potentially have an impairment that is other than temporary. This process involves
monitoring market events and other items that could impact issuers. The evaluation includes but is not limited to such factors as:
The evaluation of investments for other than temporary impairments involves significant judgment and estimates by management. We review
and analyze all investments on an ongoing basis for changes in market interest rates and credit deterioration. This review process includes
analyzing our ability to recover the amortized cost or cost basis of each investment that has a fair value that is materially lower than its amortized
cost and requires a high degree of management judgment and involves uncertainty. The evaluation of securities for other than temporary
impairments is a quantitative and qualitative process, which is subject to risks and uncertainties.
•
the length of time and the extent to which the fair value has been less than amortized cost or cost;
• whether the issuer is current on all payments and all contractual payments have been made as agreed;
•
the remaining payment terms and the financial condition and near-term prospects of the issuer;
•
the lack of ability to refinance due to liquidity problems in the credit market;
•
the fair value of any underlying collateral;
•
the existence of any credit protection available;
•
our intent to sell and whether it is more likely than not we would be required to sell prior to recovery for debt securities;
•
consideration of rating agency actions; and
•
changes in estimated cash flows of mortgage and asset backed securities.
We determine whether other than temporary impairment losses should be recognized for debt securities by assessing all facts and circumstances
surrounding each security. Where the decline in fair value of debt securities is attributable to changes in market interest rates or to factors such
as market volatility, liquidity and spread widening, and we anticipate recovery of all contractual or expected cash flows, we do not consider
these investments to be other than temporarily impaired because we do not intend to sell these investments and it is not more likely than not we
will be required to sell these investments before a recovery of amortized cost, which may be maturity.
If we intend to sell a debt security or if it is more likely than not that we will be required to sell a debt security before recovery of its amortized
cost basis, other than temporary impairment has occurred and the difference between amortized cost and fair value will be recognized as a loss
in operations.
If we do not intend to sell and it is not more likely than not we will be required to sell the debt security but also do not expect to recover the
entire amortized cost basis of the security, an impairment loss would be recognized in operations in the amount of the expected credit loss. We
determine the amount of expected credit loss by calculating the present value of the cash flows expected to be collected discounted at each
security's acquisition yield based on our consideration of whether the security was of high credit quality at the time of acquisition. The difference
between the present value of expected future cash flows and the amortized cost basis of the security is the amount of credit loss recognized in
operations. The remaining amount of the other than temporary impairment is recognized in other comprehensive income (loss).
The determination of the credit loss component of a mortgage backed security is based on a number of factors. The primary consideration in
this evaluation process is the issuer's ability to meet current and future interest and principal payments as contractually stated at time of purchase.
Our review of these securities includes an analysis of the cash flow modeling under various default scenarios considering independent third
party benchmarks, the seniority of the specific tranche within the structure of the security, the composition of the collateral and the actual default,
loss severity and prepayment experience exhibited. With the input of third party assumptions for default projections, loss severity and prepayment
expectations, we evaluate the cash flow projections to determine whether the security is performing in accordance with its contractual obligation.
42
43
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(Dollars in thousands)
Total
$
$
$
$
5,907
$
45,925,257
$
— $
45,931,164
—%
100.0%
—%
100.0%
—
—
—
—
20,367
635,955
34,750
189,794
—
—
—
—
20,367
635,955
34,750
189,794
290,645
$
45,150,229
$
— $
45,440,874
290,645
$
45,374,773
$
— $
45,665,418
0.6%
99.4%
—%
100.0%
Management's assessment of all available data when determining fair value of our investments is necessary to appropriately apply fair value
We utilize independent pricing services in estimating the fair values of investment securities. The independent pricing services incorporate a
variety of observable market data in their valuation techniques, including:
December 31, 2018
Priced via third party pricing services
Priced via independent broker quotations
Priced via other methods
% of Total
December 31, 2017
Priced via third party pricing services
Priced via independent broker quotations
Priced via other methods
% of Total
accounting.
•
•
•
•
•
•
•
•
reported trading prices,
benchmark yields,
broker-dealer quotes,
benchmark securities,
bids and offers,
credit ratings,
relative credit information, and
other reference data.
The independent pricing services also take into account perceived market movements and sector news, as well as a security's terms and conditions,
including any features specific to that issue that may influence risk and marketability. Depending on the security, the priority of the use of
observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary.
We utilize the models from a leading structured product software specialist serving institutional investors. These models incorporate each
security's seniority and cash flow structure. In circumstances where the analysis implies a potential for principal loss at some point in the future,
we use our "best estimate" cash flow projection discounted at the security's effective yield at acquisition to determine the amount of our potential
credit loss associated with this security. The discounted expected future cash flows equates to our expected recovery value. Any shortfall of
the expected recovery when compared to the amortized cost of the security will be recorded as the credit loss component of an other than
temporary impairment.
The cash flow modeling is performed on a security-by-security basis and incorporates actual cash flows on the residential mortgage backed
securities through the current period, as well as the projection of remaining cash flows using a number of assumptions including default rates,
prepayment rates and loss severity rates. The default curves we use are tailored to the Prime or Alt-A residential mortgage backed securities
that we own, which assume lower default rates and loss severity for Prime securities versus Alt-A securities. These default curves are scaled
higher or lower depending on factors such as current underlying mortgage loan performance, rating agency loss projections, loan to value ratios,
geographic diversity, as well as other appropriate considerations.
The determination of the credit loss component of a corporate bond (including redeemable preferred stocks) is based on the underlying financial
performance of the issuer and their ability to meet their contractual obligations. Considerations in our evaluation include, but are not limited
to, credit rating changes, financial statement and ratio analysis, changes in management, significant changes in credit spreads, breaches of
financial covenants and a review of the economic outlook for the industry and markets in which they trade. In circumstances where an issuer
appears unlikely to meet its future obligation, or the security's price decline is deemed other than temporary, an estimate of credit loss is determined.
Credit loss is calculated using default probabilities as derived from the credit default swaps markets in conjunction with recovery rates derived
from independent third party analysis or a best estimate of credit loss. This credit loss rate is then incorporated into a present value calculation
based on an expected principal loss in the future discounted at the yield at the date of purchase and compared to amortized cost to determine the
amount of credit loss associated with the security.
In addition, for debt securities which we do not intend to sell and it is not more likely than not we will be required to sell, but our intent changes
due to changes or events that could not have been reasonably anticipated, an other than temporary impairment charge is recognized. Once an
impairment charge has been recorded, we then continue to review the other than temporarily impaired securities for appropriate valuation on an
ongoing basis. Unrealized losses may be recognized in future periods through a charge to earnings should we later conclude that the decline in
fair value below amortized cost is other than temporary pursuant to our accounting policy described above. The use of different methodologies
and assumptions to determine the fair value of investments and the timing and amount of impairments may have a material effect on the amounts
presented in our consolidated financial statements.
We evaluate our mortgage loan portfolio for the establishment of a loan loss allowance by specific identification of impaired loans and the
measurement of an estimated loss for each individual loan identified. A mortgage loan is impaired when it is probable that we will be unable
to collect all amounts due according to the contractual terms of the loan agreement. If we determine that the value of any specific mortgage
loan is impaired, the carrying amount of the mortgage loan will be reduced to its fair value, based upon the present value of expected future cash
flows from the loan discounted at the loan's effective interest rate, or the fair value of the underlying collateral less estimated costs to sell.
In addition, we analyze the mortgage loan portfolio for the need of a general loan allowance for probable losses on all other loans on a quantitative
and qualitative basis. The amount of the general loan allowance is based upon management's evaluation of the collectability of the loan portfolio,
historical loss experience, delinquencies, credit concentrations, underwriting standards and national and local economic conditions.
We rate each of the mortgage loans in our portfolio based on factors such as historical operating performance, loan to value ratio and economic
outlook, among others. We calculate a loss factor to apply to each rating based on historical losses we have recognized in our mortgage loan
portfolio. We apply the loss factors to the total principal outstanding within each rating category to determine an appropriate estimate of the
general loan loss allowance. We also assess the portfolio quantitatively and apply a loss rate to all loans without a specific allowance based on
management's assessment of economic conditions, and we apply an additional amount of loss allowance to a group of loans that we have identified
as having higher risk of loss.
Policy Liabilities for Fixed Index Annuities
We offer a variety of fixed index annuities with crediting strategies linked to the S&P 500 Index and other equity and bond market indices. We
purchase call options on the applicable indices as an investment to provide the income needed to fund the annual index credits on the index
products. See Financial Condition—Derivative Instruments. Certain derivative instruments embedded in the fixed index annuity contracts are
recognized in the consolidated balance sheet at their fair values and changes in fair value are recognized immediately in our consolidated
statements of operations in accordance with accounting standards for derivative instruments and hedging activities.
Accounting for derivatives prescribes that the contractual obligations for future annual index credits are treated as a "series of embedded
derivatives" over the expected life of the applicable contracts. Policy liabilities for fixed index annuities are equal to the sum of the "host" (or
guaranteed) component and the embedded derivative component for each fixed index annuity policy. The host value is established at inception
of the contract and accreted over the policy's life at a constant rate of interest. We estimate the fair value of the embedded derivative component
at each valuation date by (i) projecting policy contract values and minimum guaranteed contract values over the expected lives of the contracts
and (ii) discounting the excess of the projected contract value amounts at the applicable risk free interest rates adjusted for our nonperformance
risk related to those liabilities. The projections of policy contract values are based on our best estimate assumptions for future policy growth
and future policy decrements. Our best estimate assumptions for future policy growth include assumptions for the expected index credits on
the next policy anniversary date which are derived from the fair values of the underlying call options purchased to fund such index credits and
the expected costs of annual call options we will purchase in the future to fund index credits beyond the next policy anniversary. The projections
of minimum guaranteed contract values include the same best estimate assumptions for policy decrements as were used to project policy contract
values. The amounts reported in the consolidated statements of operations as "Interest sensitive and index product benefits" represent amounts
credited to policy liabilities pursuant to accounting by insurance companies for certain long-duration contracts which include index credits
through the most recent policy anniversary. The amounts reported in the consolidated statements of operations as "Changes in fair value of
embedded derivatives" equal the 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.
In general, the change in the fair value of the embedded derivatives will not correspond to the change in fair value of the purchased call options
because the purchased call options are generally one year options while the options valued in the embedded derivatives represent the rights of
the contract holder to receive index credits over the entire period the fixed index annuities are expected to be in force, which typically exceeds
10 years.
The most sensitive assumption in determining policy liabilities for fixed index annuities is the rates used to discount the excess projected contract
values. As indicated above, the discount rate reflects our nonperformance risk. If the discount rates used to discount the excess projected contract
values at December 31, 2018 were to increase by 100 basis points, our reserves for fixed index annuities would decrease by $504.5 million
recorded through operations as a decrease in the change in fair value of embedded derivatives and there would be a corresponding decrease of
$423.5 million to our combined balance for deferred policy acquisition costs and deferred sales inducements recorded through operations as an
increase in amortization of deferred policy acquisition costs and deferred sales inducements. A decrease by 100 basis points in the discount rate
used to discount the excess projected contract values would increase the fair value of the embedded derivatives by $559.9 million recorded
through operations as an increase in the change in fair value of embedded derivatives and there would be a corresponding increase of $291.8
million to our combined balance for deferred policy acquisition costs and deferred sales inducements recorded through operations as a decrease
in amortization of deferred policy acquisition costs and deferred sales inducements.
Liability for Lifetime Income Benefit Riders
The liability for lifetime income benefit riders is based on estimates of the present value of benefit payments expected to be paid in excess of
projected policy values recognizing the excess over the expected lives of the underlying policies based on the actual and present value of expected
assessments including spreads and product charges and fees. The inputs used in the calculation of the liability for lifetime income benefit riders
include actual policy values, actual income account values, actual payout factors, actual roll-up rates and our best estimate assumptions for future
policy growth, future policy decrements, the ages at which policyholders are expected to elect to begin to receive lifetime income benefit
payments, the percentage of policyholders who elect to receive lifetime income benefit payments and the type of income benefit payments
selected upon election. The assumptions are reviewed quarterly and revisions to the assumptions are made based on historical results and our
best estimates of future experience. The liability for lifetime income benefit riders is included in policy benefit reserves in the consolidated
balance sheets and the change in the liability is included in interest sensitive and index product benefits in the consolidated statements of
operations. See Results of Operations for the Three Years Ended December 31, 2018 in this Item 7 for a discussion and presentation of the
actual effects of assumption revisions.
A key assumption in the calculation of the liability for lifetime income benefit riders is the percentage of policyholders who elect to receive
lifetime income benefit payments. If the percentage of policyholders who elect to receive lifetime income benefit payments under our fee based
rider was increased by 10% at December 31, 2018, our liability for lifetime income benefit riders would increase by $102 million recorded
through operations as an increase in interest sensitive and index product benefits. A decrease by 10% in the percentage of policyholders who
elect to receive lifetime income benefit payments under our fee based rider would decrease our liability for lifetime income benefit riders by
$101 million recorded through operations as a decrease in interest sensitive and index product benefits.
Deferred Policy Acquisition Costs and Deferred Sales Inducements
Costs relating to the successful production of new business are not expensed when incurred but instead are capitalized as deferred policy
acquisition costs or deferred sales inducements. Only costs which are expected to be recovered from future policy revenues and gross profits
may be deferred.
Deferred policy acquisition costs and deferred sales inducements are subject to loss recognition testing on a quarterly basis or when an event
occurs that may warrant loss recognition. Deferred policy acquisition costs consist principally of commissions and certain costs of policy
issuance. Deferred sales inducements consist of premium and interest bonuses credited to policyholder account balances.
44
45
We utilize the models from a leading structured product software specialist serving institutional investors. These models incorporate each
security's seniority and cash flow structure. In circumstances where the analysis implies a potential for principal loss at some point in the future,
we use our "best estimate" cash flow projection discounted at the security's effective yield at acquisition to determine the amount of our potential
credit loss associated with this security. The discounted expected future cash flows equates to our expected recovery value. Any shortfall of
the expected recovery when compared to the amortized cost of the security will be recorded as the credit loss component of an other than
temporary impairment.
The cash flow modeling is performed on a security-by-security basis and incorporates actual cash flows on the residential mortgage backed
securities through the current period, as well as the projection of remaining cash flows using a number of assumptions including default rates,
prepayment rates and loss severity rates. The default curves we use are tailored to the Prime or Alt-A residential mortgage backed securities
that we own, which assume lower default rates and loss severity for Prime securities versus Alt-A securities. These default curves are scaled
higher or lower depending on factors such as current underlying mortgage loan performance, rating agency loss projections, loan to value ratios,
geographic diversity, as well as other appropriate considerations.
The determination of the credit loss component of a corporate bond (including redeemable preferred stocks) is based on the underlying financial
performance of the issuer and their ability to meet their contractual obligations. Considerations in our evaluation include, but are not limited
to, credit rating changes, financial statement and ratio analysis, changes in management, significant changes in credit spreads, breaches of
financial covenants and a review of the economic outlook for the industry and markets in which they trade. In circumstances where an issuer
appears unlikely to meet its future obligation, or the security's price decline is deemed other than temporary, an estimate of credit loss is determined.
Credit loss is calculated using default probabilities as derived from the credit default swaps markets in conjunction with recovery rates derived
from independent third party analysis or a best estimate of credit loss. This credit loss rate is then incorporated into a present value calculation
based on an expected principal loss in the future discounted at the yield at the date of purchase and compared to amortized cost to determine the
amount of credit loss associated with the security.
In addition, for debt securities which we do not intend to sell and it is not more likely than not we will be required to sell, but our intent changes
due to changes or events that could not have been reasonably anticipated, an other than temporary impairment charge is recognized. Once an
impairment charge has been recorded, we then continue to review the other than temporarily impaired securities for appropriate valuation on an
ongoing basis. Unrealized losses may be recognized in future periods through a charge to earnings should we later conclude that the decline in
fair value below amortized cost is other than temporary pursuant to our accounting policy described above. The use of different methodologies
and assumptions to determine the fair value of investments and the timing and amount of impairments may have a material effect on the amounts
presented in our consolidated financial statements.
We evaluate our mortgage loan portfolio for the establishment of a loan loss allowance by specific identification of impaired loans and the
measurement of an estimated loss for each individual loan identified. A mortgage loan is impaired when it is probable that we will be unable
to collect all amounts due according to the contractual terms of the loan agreement. If we determine that the value of any specific mortgage
loan is impaired, the carrying amount of the mortgage loan will be reduced to its fair value, based upon the present value of expected future cash
flows from the loan discounted at the loan's effective interest rate, or the fair value of the underlying collateral less estimated costs to sell.
In addition, we analyze the mortgage loan portfolio for the need of a general loan allowance for probable losses on all other loans on a quantitative
and qualitative basis. The amount of the general loan allowance is based upon management's evaluation of the collectability of the loan portfolio,
historical loss experience, delinquencies, credit concentrations, underwriting standards and national and local economic conditions.
We rate each of the mortgage loans in our portfolio based on factors such as historical operating performance, loan to value ratio and economic
outlook, among others. We calculate a loss factor to apply to each rating based on historical losses we have recognized in our mortgage loan
portfolio. We apply the loss factors to the total principal outstanding within each rating category to determine an appropriate estimate of the
general loan loss allowance. We also assess the portfolio quantitatively and apply a loss rate to all loans without a specific allowance based on
management's assessment of economic conditions, and we apply an additional amount of loss allowance to a group of loans that we have identified
as having higher risk of loss.
Policy Liabilities for Fixed Index Annuities
We offer a variety of fixed index annuities with crediting strategies linked to the S&P 500 Index and other equity and bond market indices. We
purchase call options on the applicable indices as an investment to provide the income needed to fund the annual index credits on the index
products. See Financial Condition—Derivative Instruments. Certain derivative instruments embedded in the fixed index annuity contracts are
recognized in the consolidated balance sheet at their fair values and changes in fair value are recognized immediately in our consolidated
statements of operations in accordance with accounting standards for derivative instruments and hedging activities.
Accounting for derivatives prescribes that the contractual obligations for future annual index credits are treated as a "series of embedded
derivatives" over the expected life of the applicable contracts. Policy liabilities for fixed index annuities are equal to the sum of the "host" (or
guaranteed) component and the embedded derivative component for each fixed index annuity policy. The host value is established at inception
of the contract and accreted over the policy's life at a constant rate of interest. We estimate the fair value of the embedded derivative component
at each valuation date by (i) projecting policy contract values and minimum guaranteed contract values over the expected lives of the contracts
and (ii) discounting the excess of the projected contract value amounts at the applicable risk free interest rates adjusted for our nonperformance
risk related to those liabilities. The projections of policy contract values are based on our best estimate assumptions for future policy growth
and future policy decrements. Our best estimate assumptions for future policy growth include assumptions for the expected index credits on
the next policy anniversary date which are derived from the fair values of the underlying call options purchased to fund such index credits and
the expected costs of annual call options we will purchase in the future to fund index credits beyond the next policy anniversary. The projections
of minimum guaranteed contract values include the same best estimate assumptions for policy decrements as were used to project policy contract
values. The amounts reported in the consolidated statements of operations as "Interest sensitive and index product benefits" represent amounts
credited to policy liabilities pursuant to accounting by insurance companies for certain long-duration contracts which include index credits
through the most recent policy anniversary. The amounts reported in the consolidated statements of operations as "Changes in fair value of
embedded derivatives" equal the 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.
In general, the change in the fair value of the embedded derivatives will not correspond to the change in fair value of the purchased call options
because the purchased call options are generally one year options while the options valued in the embedded derivatives represent the rights of
the contract holder to receive index credits over the entire period the fixed index annuities are expected to be in force, which typically exceeds
10 years.
The most sensitive assumption in determining policy liabilities for fixed index annuities is the rates used to discount the excess projected contract
values. As indicated above, the discount rate reflects our nonperformance risk. If the discount rates used to discount the excess projected contract
values at December 31, 2018 were to increase by 100 basis points, our reserves for fixed index annuities would decrease by $504.5 million
recorded through operations as a decrease in the change in fair value of embedded derivatives and there would be a corresponding decrease of
$423.5 million to our combined balance for deferred policy acquisition costs and deferred sales inducements recorded through operations as an
increase in amortization of deferred policy acquisition costs and deferred sales inducements. A decrease by 100 basis points in the discount rate
used to discount the excess projected contract values would increase the fair value of the embedded derivatives by $559.9 million recorded
through operations as an increase in the change in fair value of embedded derivatives and there would be a corresponding increase of $291.8
million to our combined balance for deferred policy acquisition costs and deferred sales inducements recorded through operations as a decrease
in amortization of deferred policy acquisition costs and deferred sales inducements.
Liability for Lifetime Income Benefit Riders
The liability for lifetime income benefit riders is based on estimates of the present value of benefit payments expected to be paid in excess of
projected policy values recognizing the excess over the expected lives of the underlying policies based on the actual and present value of expected
assessments including spreads and product charges and fees. The inputs used in the calculation of the liability for lifetime income benefit riders
include actual policy values, actual income account values, actual payout factors, actual roll-up rates and our best estimate assumptions for future
policy growth, future policy decrements, the ages at which policyholders are expected to elect to begin to receive lifetime income benefit
payments, the percentage of policyholders who elect to receive lifetime income benefit payments and the type of income benefit payments
selected upon election. The assumptions are reviewed quarterly and revisions to the assumptions are made based on historical results and our
best estimates of future experience. The liability for lifetime income benefit riders is included in policy benefit reserves in the consolidated
balance sheets and the change in the liability is included in interest sensitive and index product benefits in the consolidated statements of
operations. See Results of Operations for the Three Years Ended December 31, 2018 in this Item 7 for a discussion and presentation of the
actual effects of assumption revisions.
A key assumption in the calculation of the liability for lifetime income benefit riders is the percentage of policyholders who elect to receive
lifetime income benefit payments. If the percentage of policyholders who elect to receive lifetime income benefit payments under our fee based
rider was increased by 10% at December 31, 2018, our liability for lifetime income benefit riders would increase by $102 million recorded
through operations as an increase in interest sensitive and index product benefits. A decrease by 10% in the percentage of policyholders who
elect to receive lifetime income benefit payments under our fee based rider would decrease our liability for lifetime income benefit riders by
$101 million recorded through operations as a decrease in interest sensitive and index product benefits.
Deferred Policy Acquisition Costs and Deferred Sales Inducements
Costs relating to the successful production of new business are not expensed when incurred but instead are capitalized as deferred policy
acquisition costs or deferred sales inducements. Only costs which are expected to be recovered from future policy revenues and gross profits
may be deferred.
Deferred policy acquisition costs and deferred sales inducements are subject to loss recognition testing on a quarterly basis or when an event
occurs that may warrant loss recognition. Deferred policy acquisition costs consist principally of commissions and certain costs of policy
issuance. Deferred sales inducements consist of premium and interest bonuses credited to policyholder account balances.
44
45
For annuity products, these costs are being amortized generally in proportion to expected gross profits from investment spreads, including the
cost of hedging the fixed indexed annuity obligations, and, to a lesser extent, from product charges net of expected excess payments for lifetime
income benefit riders, and mortality and expense margins. Current and future period gross profits/margins for fixed index annuities also include
the impact of amounts recorded for the change in fair value of derivatives and the change in fair value of embedded derivatives. Current period
amortization is adjusted retrospectively through an unlocking process when estimates of current or future gross profits/margins (including the
impact of realized investment gains and losses) to be realized from a group of products are revised. Our estimates of future gross profits/margins
are based on actuarial assumptions related to the underlying policies terms, lives of the policies, yield on investments supporting the liabilities
and level of expenses necessary to maintain the polices over their entire lives. Revisions are made based on historical results and our best
estimates of future experience. See Results of Operations for the Three Years Ended December 31, 2018 in this Item 7 for a discussion and
presentation of the actual effects of unlocking.
Estimated future gross profits vary based on a number of sources including investment spread margins, lifetime income benefit rider fees and
benefits, surrender charge income, policy persistency, policy administrative expenses and realized gains and losses on investments including
credit related other than temporary impairment losses. Estimated future gross profits are most sensitive to changes in investment spread margins
which are the most significant component of gross profits. If estimated gross profits for all future years on business in force at December 31,
2018 were to increase by 10%, our combined balance for deferred policy acquisition costs and deferred sales inducements at December 31, 2018
would increase by $239.2 million recorded through operations as a decrease to amortization of deferred policy acquisition costs and deferred
sales inducements. Correspondingly, a 10% decrease in estimated gross profits for all future years would result in a $265.0 million decrease in
the combined December 31, 2018 balances recorded through operations as an increase to amortization of deferred policy acquisition costs and
deferred sales inducements.
Deferred Income Taxes
We account for income taxes using the liability method. This method provides for the tax effects of transactions reported in the audited consolidated
financial statements for both taxes currently due and deferred. Deferred income taxes reflect the impact of temporary differences between the
amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. A temporary difference
is a transaction, or amount of a transaction, that is recognized currently for financial reporting purposes but will not be recognized for tax purposes
until a future tax period, or is recognized currently for tax purposes but will not be recognized for financial reporting purposes until a future
reporting period. Deferred income taxes are measured by applying enacted tax rates for the years in which the temporary differences are expected
to be recovered or settled to the amount of each temporary difference.
The realization of deferred income tax assets is primarily based upon management's estimates of future taxable income. Valuation allowances
are established when management estimates, based on available information, that it is more likely than not that deferred income tax assets will
not be realized. Significant judgment is required in determining whether valuation allowances should be established, as well as the amount of
such allowances. When making such determination, consideration is given to, among other things, the following:
•
•
•
•
future taxable income of the necessary character exclusive of reversing temporary differences and carryforwards;
future reversals of existing taxable temporary differences;
taxable capital income in prior carryback years; and
tax planning strategies.
Actual realization of deferred income tax assets and liabilities may materially differ from these estimates as a result of changes in tax laws as
well as unanticipated future transactions impacting related income tax balances.
The realization of deferred income tax assets related to unrealized losses on our available for sale fixed maturity securities is also based upon
our intent to hold these securities for a period of time sufficient to allow for a recovery in fair value and not realize the unrealized loss.
New Accounting Pronouncements
See Note 1 to our audited consolidated financial statements in this Form 10-K beginning on page F-9, which is incorporated by reference in this
Item 7, for new accounting pronouncement disclosures.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We seek to invest our available funds in a manner that will maximize shareholder value and fund future obligations to policyholders and debtors,
subject to appropriate risk considerations. We seek to meet this objective through investments that: (i) consist substantially of investment grade
fixed maturity securities, (ii) have projected returns which satisfy our spread targets, and (iii) have characteristics which support the underlying
liabilities. Many of our products incorporate surrender charges, market interest rate adjustments or other features to encourage persistency.
We seek to maximize the total return on our available for sale investments through active investment management. Accordingly, we have
determined that our available for sale portfolio of fixed maturity securities is available to be sold in response to: (i) changes in market interest
rates, (ii) changes in relative values of individual securities and asset sectors, (iii) changes in prepayment risks, (iv) changes in credit quality
outlook for certain securities, (v) liquidity needs, and (vi) other factors.
Interest rate risk is our primary market risk exposure. Substantial and sustained increases and decreases in market interest rates can affect the
profitability of our products, the fair value of our investments and the amount of interest we pay on our floating rate subordinated debentures.
Our floating rate trust preferred securities bear interest at the three month LIBOR plus 3.50% - 4.00%. Our outstanding balance of floating rate
trust preferred securities was $164.5 million at December 31, 2018, of which $85.5 million has been swapped to a fixed rate for seven years
which began in March 2014 and $79.0 million has been capped for seven years which began in July 2014 (see Note 5 to our audited consolidated
financial statements in this Form 10-K). The profitability of most of our products depends on the spreads between interest yield on investments
and rates credited on insurance liabilities. We have the ability to adjust crediting rates (caps, participation rates or asset fee rates for fixed index
annuities) on substantially all of our annuity liabilities at least annually (subject to minimum guaranteed values). In addition, substantially all
of our annuity products have surrender and withdrawal penalty provisions designed to encourage persistency and to help ensure targeted spreads
are earned. However, competitive factors, including the impact of the level of surrenders and withdrawals, may limit our ability to adjust or
maintain crediting rates at levels necessary to avoid narrowing of spreads under certain market conditions.
A major component of our interest rate risk management program is structuring the investment portfolio with cash flow characteristics consistent
with the cash flow characteristics of our insurance liabilities. We use models to simulate cash flows expected from our existing business under
various interest rate scenarios. These simulations enable us to measure the potential gain or loss in fair value of our interest rate-sensitive financial
instruments, to evaluate the adequacy of expected cash flows from our assets to meet the expected cash requirements of our liabilities and to
determine if it is necessary to lengthen or shorten the average life and duration of our investment portfolio. The "duration" of a security is the
time weighted present value of the security's expected cash flows and is used to measure a security's sensitivity to changes in interest rates.
When the durations of assets and liabilities are similar, exposure to interest rate risk is minimized because a change in value of assets should be
largely offset by a change in the value of liabilities.
If interest rates were to increase 10% (30 basis points) from levels at December 31, 2018, we estimate that the fair value of our fixed maturity
securities would decrease by approximately $1.0 billion. The impact on stockholders' equity of such decrease (net of income taxes and certain
adjustments for changes in amortization of deferred policy acquisition costs and deferred sales inducements) would be a decrease of $342.0
million in accumulated other comprehensive income (loss) and a decrease in stockholders' equity. The models used to estimate the impact of a
10% change in market interest rates incorporate numerous assumptions, require significant estimates and assume an immediate and parallel
change in interest rates without any management of the investment portfolio in reaction to such change. Consequently, potential changes in
value of our financial instruments indicated by the simulations will likely be different from the actual changes experienced under given interest
rate scenarios, and the differences may be material. Because we actively manage our investments and liabilities, our net exposure to interest
rates can vary over time. However, any such decreases in the fair value of our fixed maturity securities (unless related to credit concerns of the
issuer requiring recognition of an other than temporary impairment) would generally be realized only if we were required to sell such securities
at losses prior to their maturity to meet our liquidity needs, which we manage using the surrender and withdrawal provisions of our annuity
contracts and through other means. See Financial Condition—Liquidity for Insurance Operations for a further discussion of the liquidity risk.
The amortized cost of fixed maturity securities that will be callable at the option of the issuer, excluding securities with a make-whole provision,
was $8.7 billion as of December 31, 2018. During the years ended December 31, 2018 and 2017, we received $0.9 billion and $0.6 billion,
respectively, in net redemption proceeds related to the exercise of such call options. We have reinvestment risk related to these redemptions to
the extent we cannot reinvest the net proceeds in assets with credit quality and yield characteristics similar to the redeemed bonds. Such
reinvestment risk typically occurs in a declining rate environment. Should rates decline to levels which tighten the spread between our average
portfolio yield and average cost of interest credited on annuity liabilities, we have the ability to reduce crediting rates (caps, participation rates
or asset fees for fixed index annuities) on most of our annuity liabilities to maintain the spread at our targeted level. At December 31, 2018,
approximately 99% of our annuity liabilities were subject to annual adjustment of the applicable crediting rates at our discretion, limited by
minimum guaranteed crediting rates specified in the policies. At December 31, 2018, approximately 15% of our annuity liabilities were at
minimum guaranteed crediting rates.
We purchase call options on the applicable indices to fund the annual index credits on our fixed index annuities. These options are primarily
one-year instruments purchased to match the funding requirements of the underlying policies. Fair value changes associated with those investments
are substantially offset by an increase or decrease in the amounts added to policyholder account balances for fixed index products. The difference
between proceeds received at expiration of these options and index credits, as shown in the following table, is primarily due to over-hedging as
a result of policyholder behavior being different than our expectations.
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
Annual index credits to policyholders on their anniversaries
$
1,285,555
$
1,594,722
$
Proceeds received at expiration of options related to such credits
1,307,755
1,623,346
267,995
272,277
On the anniversary dates of the index policies, we purchase new call options to fund the next annual index credits. The risk associated with
these prospective purchases is the uncertainty of the cost, which will determine whether we are able to earn our spread on our index business.
We manage this risk through the terms of our fixed index annuities, which permit us to change caps, participation rates and asset fees, subject
to contractual features. By modifying caps, participation rates or asset fees, we can limit option costs to budgeted amounts, except in cases
where the contractual features would prevent further modifications. Based upon actuarial testing which we conduct as a part of the design of
our index products and on an ongoing basis, we believe the risk that contractual features would prevent us from controlling option costs is not
material.
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47
For annuity products, these costs are being amortized generally in proportion to expected gross profits from investment spreads, including the
cost of hedging the fixed indexed annuity obligations, and, to a lesser extent, from product charges net of expected excess payments for lifetime
income benefit riders, and mortality and expense margins. Current and future period gross profits/margins for fixed index annuities also include
the impact of amounts recorded for the change in fair value of derivatives and the change in fair value of embedded derivatives. Current period
amortization is adjusted retrospectively through an unlocking process when estimates of current or future gross profits/margins (including the
impact of realized investment gains and losses) to be realized from a group of products are revised. Our estimates of future gross profits/margins
are based on actuarial assumptions related to the underlying policies terms, lives of the policies, yield on investments supporting the liabilities
and level of expenses necessary to maintain the polices over their entire lives. Revisions are made based on historical results and our best
estimates of future experience. See Results of Operations for the Three Years Ended December 31, 2018 in this Item 7 for a discussion and
presentation of the actual effects of unlocking.
Estimated future gross profits vary based on a number of sources including investment spread margins, lifetime income benefit rider fees and
benefits, surrender charge income, policy persistency, policy administrative expenses and realized gains and losses on investments including
credit related other than temporary impairment losses. Estimated future gross profits are most sensitive to changes in investment spread margins
which are the most significant component of gross profits. If estimated gross profits for all future years on business in force at December 31,
2018 were to increase by 10%, our combined balance for deferred policy acquisition costs and deferred sales inducements at December 31, 2018
would increase by $239.2 million recorded through operations as a decrease to amortization of deferred policy acquisition costs and deferred
sales inducements. Correspondingly, a 10% decrease in estimated gross profits for all future years would result in a $265.0 million decrease in
the combined December 31, 2018 balances recorded through operations as an increase to amortization of deferred policy acquisition costs and
deferred sales inducements.
Deferred Income Taxes
We account for income taxes using the liability method. This method provides for the tax effects of transactions reported in the audited consolidated
financial statements for both taxes currently due and deferred. Deferred income taxes reflect the impact of temporary differences between the
amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. A temporary difference
is a transaction, or amount of a transaction, that is recognized currently for financial reporting purposes but will not be recognized for tax purposes
until a future tax period, or is recognized currently for tax purposes but will not be recognized for financial reporting purposes until a future
reporting period. Deferred income taxes are measured by applying enacted tax rates for the years in which the temporary differences are expected
to be recovered or settled to the amount of each temporary difference.
The realization of deferred income tax assets is primarily based upon management's estimates of future taxable income. Valuation allowances
are established when management estimates, based on available information, that it is more likely than not that deferred income tax assets will
not be realized. Significant judgment is required in determining whether valuation allowances should be established, as well as the amount of
such allowances. When making such determination, consideration is given to, among other things, the following:
future taxable income of the necessary character exclusive of reversing temporary differences and carryforwards;
•
•
•
•
future reversals of existing taxable temporary differences;
taxable capital income in prior carryback years; and
tax planning strategies.
Actual realization of deferred income tax assets and liabilities may materially differ from these estimates as a result of changes in tax laws as
well as unanticipated future transactions impacting related income tax balances.
The realization of deferred income tax assets related to unrealized losses on our available for sale fixed maturity securities is also based upon
our intent to hold these securities for a period of time sufficient to allow for a recovery in fair value and not realize the unrealized loss.
See Note 1 to our audited consolidated financial statements in this Form 10-K beginning on page F-9, which is incorporated by reference in this
New Accounting Pronouncements
Item 7, for new accounting pronouncement disclosures.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We seek to invest our available funds in a manner that will maximize shareholder value and fund future obligations to policyholders and debtors,
subject to appropriate risk considerations. We seek to meet this objective through investments that: (i) consist substantially of investment grade
fixed maturity securities, (ii) have projected returns which satisfy our spread targets, and (iii) have characteristics which support the underlying
liabilities. Many of our products incorporate surrender charges, market interest rate adjustments or other features to encourage persistency.
We seek to maximize the total return on our available for sale investments through active investment management. Accordingly, we have
determined that our available for sale portfolio of fixed maturity securities is available to be sold in response to: (i) changes in market interest
rates, (ii) changes in relative values of individual securities and asset sectors, (iii) changes in prepayment risks, (iv) changes in credit quality
outlook for certain securities, (v) liquidity needs, and (vi) other factors.
Interest rate risk is our primary market risk exposure. Substantial and sustained increases and decreases in market interest rates can affect the
profitability of our products, the fair value of our investments and the amount of interest we pay on our floating rate subordinated debentures.
Our floating rate trust preferred securities bear interest at the three month LIBOR plus 3.50% - 4.00%. Our outstanding balance of floating rate
trust preferred securities was $164.5 million at December 31, 2018, of which $85.5 million has been swapped to a fixed rate for seven years
which began in March 2014 and $79.0 million has been capped for seven years which began in July 2014 (see Note 5 to our audited consolidated
financial statements in this Form 10-K). The profitability of most of our products depends on the spreads between interest yield on investments
and rates credited on insurance liabilities. We have the ability to adjust crediting rates (caps, participation rates or asset fee rates for fixed index
annuities) on substantially all of our annuity liabilities at least annually (subject to minimum guaranteed values). In addition, substantially all
of our annuity products have surrender and withdrawal penalty provisions designed to encourage persistency and to help ensure targeted spreads
are earned. However, competitive factors, including the impact of the level of surrenders and withdrawals, may limit our ability to adjust or
maintain crediting rates at levels necessary to avoid narrowing of spreads under certain market conditions.
A major component of our interest rate risk management program is structuring the investment portfolio with cash flow characteristics consistent
with the cash flow characteristics of our insurance liabilities. We use models to simulate cash flows expected from our existing business under
various interest rate scenarios. These simulations enable us to measure the potential gain or loss in fair value of our interest rate-sensitive financial
instruments, to evaluate the adequacy of expected cash flows from our assets to meet the expected cash requirements of our liabilities and to
determine if it is necessary to lengthen or shorten the average life and duration of our investment portfolio. The "duration" of a security is the
time weighted present value of the security's expected cash flows and is used to measure a security's sensitivity to changes in interest rates.
When the durations of assets and liabilities are similar, exposure to interest rate risk is minimized because a change in value of assets should be
largely offset by a change in the value of liabilities.
If interest rates were to increase 10% (30 basis points) from levels at December 31, 2018, we estimate that the fair value of our fixed maturity
securities would decrease by approximately $1.0 billion. The impact on stockholders' equity of such decrease (net of income taxes and certain
adjustments for changes in amortization of deferred policy acquisition costs and deferred sales inducements) would be a decrease of $342.0
million in accumulated other comprehensive income (loss) and a decrease in stockholders' equity. The models used to estimate the impact of a
10% change in market interest rates incorporate numerous assumptions, require significant estimates and assume an immediate and parallel
change in interest rates without any management of the investment portfolio in reaction to such change. Consequently, potential changes in
value of our financial instruments indicated by the simulations will likely be different from the actual changes experienced under given interest
rate scenarios, and the differences may be material. Because we actively manage our investments and liabilities, our net exposure to interest
rates can vary over time. However, any such decreases in the fair value of our fixed maturity securities (unless related to credit concerns of the
issuer requiring recognition of an other than temporary impairment) would generally be realized only if we were required to sell such securities
at losses prior to their maturity to meet our liquidity needs, which we manage using the surrender and withdrawal provisions of our annuity
contracts and through other means. See Financial Condition—Liquidity for Insurance Operations for a further discussion of the liquidity risk.
The amortized cost of fixed maturity securities that will be callable at the option of the issuer, excluding securities with a make-whole provision,
was $8.7 billion as of December 31, 2018. During the years ended December 31, 2018 and 2017, we received $0.9 billion and $0.6 billion,
respectively, in net redemption proceeds related to the exercise of such call options. We have reinvestment risk related to these redemptions to
the extent we cannot reinvest the net proceeds in assets with credit quality and yield characteristics similar to the redeemed bonds. Such
reinvestment risk typically occurs in a declining rate environment. Should rates decline to levels which tighten the spread between our average
portfolio yield and average cost of interest credited on annuity liabilities, we have the ability to reduce crediting rates (caps, participation rates
or asset fees for fixed index annuities) on most of our annuity liabilities to maintain the spread at our targeted level. At December 31, 2018,
approximately 99% of our annuity liabilities were subject to annual adjustment of the applicable crediting rates at our discretion, limited by
minimum guaranteed crediting rates specified in the policies. At December 31, 2018, approximately 15% of our annuity liabilities were at
minimum guaranteed crediting rates.
We purchase call options on the applicable indices to fund the annual index credits on our fixed index annuities. These options are primarily
one-year instruments purchased to match the funding requirements of the underlying policies. Fair value changes associated with those investments
are substantially offset by an increase or decrease in the amounts added to policyholder account balances for fixed index products. The difference
between proceeds received at expiration of these options and index credits, as shown in the following table, is primarily due to over-hedging as
a result of policyholder behavior being different than our expectations.
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
Annual index credits to policyholders on their anniversaries
$
1,285,555
$
1,594,722
$
Proceeds received at expiration of options related to such credits
1,307,755
1,623,346
267,995
272,277
On the anniversary dates of the index policies, we purchase new call options to fund the next annual index credits. The risk associated with
these prospective purchases is the uncertainty of the cost, which will determine whether we are able to earn our spread on our index business.
We manage this risk through the terms of our fixed index annuities, which permit us to change caps, participation rates and asset fees, subject
to contractual features. By modifying caps, participation rates or asset fees, we can limit option costs to budgeted amounts, except in cases
where the contractual features would prevent further modifications. Based upon actuarial testing which we conduct as a part of the design of
our index products and on an ongoing basis, we believe the risk that contractual features would prevent us from controlling option costs is not
material.
46
47
Item 8. Consolidated Financial Statements and Supplementary Data
PART IV
The audited consolidated financial statements are included as a part of this report on Form 10-K on pages F-1 through F-53.
Item 15. Exhibits and Financial Statement Schedules
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
list of financial statements and financial statement schedules included in this report.
Financial Statements and Financial Statement Schedules. See Index to Consolidated Financial Statements and Schedules on page F-1 for a
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
In accordance with the Securities Exchange Act Rules 13a-15(e) and 15d-15(e), our management, under the supervision of our Chief Executive
Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of our disclosure controls and procedures were effective as of December 31, 2018 in
recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or
submit under the Exchange Act.
(b) Management's Report on Internal Control over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined
in the Exchange Act Rules 13a-15(f) and 15d-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2018
based upon criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on the assessment, management has determined that we maintained effective internal control over
financial reporting as of December 31, 2018.
The Company's independent registered public accounting firm, KPMG LLP, who audited the consolidated financial statements included in this
annual report on Form 10-K, has issued an attestation report on the effectiveness of management's internal control over financial reporting as
of December 31, 2018. This report appears on page F-2 of this annual report on Form 10-K.
(c) Changes in Internal Control over Financial Reporting.
There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2018, that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
There is no information required to be disclosed on Form 8-K for the quarter ended December 31, 2018 which has not been previously reported.
The information required by Part III is incorporated by reference from our definitive proxy statement for our annual meeting of shareholders to
be held June 6, 2019 to be filed with the Commission pursuant to Regulation 14A within 120 days after December 31, 2018.
PART III
All other schedules to the audited consolidated financial statements required by Article 7 of Regulation S-X are omitted because they are not
applicable, not required, or because the information is included elsewhere in the audited consolidated financial statements or notes thereto.
Exhibits.
Exhibit No.
Description
3.1
3.2
3.3
3.4
3.5
3.6
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
Articles of Incorporation, including Articles of Amendment (Incorporated by reference to Exhibit 3.1 to Post-Effective Amendment No. 1 to
the Registration Statement on Form 10, filed on July 22, 1999, File No. 000-25985)
Articles of Amendment to Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to Form 10-Q for the period ended June 30, 2000
filed on August 14, 2000, File No. 000-25985)
Articles of Amendment to Articles of Incorporation (Incorporated by reference to Exhibit 3.2 to Pre-Effective Amendment No. 1 to the Registration
Statement on Form S-1 filed on October 20, 2003, File No. 333-108794)
Articles of Amendment to Articles of Incorporation (Incorporated by reference to Exhibit 3.3 to the Registration Statement on Form S-3 filed
on January 15, 2008, File No. 333-148681)
filed on August 5, 2011, File No. 001-31911)
Articles of Amendment to Articles of Incorporation (Incorporated by reference to Exhibit 3.5 to Form 10-Q for the period ended June 30, 2011
Third Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.1 to Form 8-K filed on September 2, 2008, File No. 001-31911)
Indenture dated October 29, 1999 between American Equity Investment Life Holding Company and Wilmington Trust Company (as successor
in interest to West Des Moines State Bank), as trustee (Incorporated by reference to Exhibit 10.19 to the Registration Statement on Form S-1,
File No. 333-108794, including all pre-effective amendments thereto)
Trust Preferred Securities Guarantee Agreement dated October 29, 1999 between American Equity Investment Life Holding Company and
Wilmington Trust Company (as successor in interest to West Des Moines State Bank), as trustee (Incorporated by reference to Exhibit 10.20 to
the Registration Statement on Form S-1, File No. 333-108794, including all pre-effective amendments thereto)
Trust Common Securities Guarantee Agreement dated October 29, 1999 between American Equity Investment Life Holding Company and West
Des Moines State Bank, as trustee (Incorporated by reference to Exhibit 10.21 to the Registration Statement on Form S-1, File No. 333-108794,
including all pre-effective amendments thereto)
Instruments of Resignation, Appointment and Acceptance, effective September 12, 2006, among American Equity Investment Life Holding
Company, Wilmington Trust Company, West Des Moines State Bank and Delaware Trust Company, National Association (formerly known as
First Union Trust Company, National Association) (Incorporated by reference to Exhibit 4.10A to Form 10-K for the year ended December 31,
2008 filed on March 16, 2009)
Indenture dated December 16, 2003, between American Equity Investment Life Holding Company and Wilmington Trust Company, as trustee
(Incorporated by reference to Exhibit 4.11 to Form 10-K for the year ended December 31, 2003 filed on March 4, 2004)
Guarantee Agreement dated December 16, 2003, between American Equity Investment Life Holding Company and Wilmington Trust Company,
as trustee (Incorporated by reference to Exhibit 4.12 to Form 10-K for the year ended December 31, 2003 filed on March 4, 2004)
Indenture dated April 29, 2004, between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National Association,
as trustee (Incorporated by reference to Exhibit 4.13 to Form 10-Q for the period ended September 30, 2004 filed on November 9, 2004)
Guarantee Agreement dated April 29, 2004, between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National
Association, as trustee (Incorporated by reference to Exhibit 4.14 to Form 10-Q for the period ended September 30, 2004 filed on November
9, 2004)
9, 2004)
14, 2005)
4, 2005)
Indenture dated September 14, 2004, between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National
Association, as trustee (Incorporated by reference to Exhibit 4.15 to Form 10-Q for the period ended September 30, 2004 filed on November
Guarantee Agreement dated September 14, 2004, between American Equity Investment Life Holding Company and JP Morgan Chase Bank,
National Association, as trustee (Incorporated by reference to Exhibit 4.16 to Form 10-Q for the period ended September 30, 2004 filed on
November 9, 2004)
Indenture dated December 22, 2004, between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National
Association, as trustee (Incorporated by reference to Exhibit 4.17 to Form 10-K for the year ended December 31, 2004 filed on March 14, 2005)
Guarantee Agreement dated December 22, 2004, between American Equity Investment Life Holding Company and JP Morgan Chase Bank,
National Association, as trustee (Incorporated by reference to Exhibit 4.18 to Form 10-K for the year ended December 31, 2004 filed on March
Indenture dated June 15, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National Association,
as trustee (Incorporated by reference to Exhibit 4.23 to Form 10-Q for the period ended June 30, 2005 filed on August 4, 2005)
Guarantee Agreement dated June 15, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National
Association, as trustee (Incorporated by reference to Exhibit 4.24 to Form 10-Q for the period ended June 30, 2005 filed on August 4, 2005)
Indenture dated August 4, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National Association,
as trustee (Incorporated by reference to Exhibit 4.25 to Form 10-Q for the period ended September 30, 2005 filed on November 4, 2005)
Guarantee Agreement dated August 4, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National
Association, as trustee (Incorporated by reference to Exhibit 4.26 to Form 10-Q for the period ended September 30, 2005 filed on November
Indenture dated December 15, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National
Association, as trustee (Incorporated by reference to Exhibit 4.27 to Form 10-K for the year ended December 31, 2005 filed on March 14, 2006)
48
49
Item 8. Consolidated Financial Statements and Supplementary Data
PART IV
The audited consolidated financial statements are included as a part of this report on Form 10-K on pages F-1 through F-53.
Item 15. Exhibits and Financial Statement Schedules
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
In accordance with the Securities Exchange Act Rules 13a-15(e) and 15d-15(e), our management, under the supervision of our Chief Executive
Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of our disclosure controls and procedures were effective as of December 31, 2018 in
recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or
submit under the Exchange Act.
(b) Management's Report on Internal Control over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined
in the Exchange Act Rules 13a-15(f) and 15d-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2018
based upon criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on the assessment, management has determined that we maintained effective internal control over
financial reporting as of December 31, 2018.
The Company's independent registered public accounting firm, KPMG LLP, who audited the consolidated financial statements included in this
annual report on Form 10-K, has issued an attestation report on the effectiveness of management's internal control over financial reporting as
of December 31, 2018. This report appears on page F-2 of this annual report on Form 10-K.
(c) Changes in Internal Control over Financial Reporting.
There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2018, that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
There is no information required to be disclosed on Form 8-K for the quarter ended December 31, 2018 which has not been previously reported.
The information required by Part III is incorporated by reference from our definitive proxy statement for our annual meeting of shareholders to
be held June 6, 2019 to be filed with the Commission pursuant to Regulation 14A within 120 days after December 31, 2018.
PART III
Financial Statements and Financial Statement Schedules. See Index to Consolidated Financial Statements and Schedules on page F-1 for a
list of financial statements and financial statement schedules included in this report.
All other schedules to the audited consolidated financial statements required by Article 7 of Regulation S-X are omitted because they are not
applicable, not required, or because the information is included elsewhere in the audited consolidated financial statements or notes thereto.
Exhibits.
Exhibit No.
Description
3.1
3.2
3.3
3.4
3.5
3.6
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
Articles of Incorporation, including Articles of Amendment (Incorporated by reference to Exhibit 3.1 to Post-Effective Amendment No. 1 to
the Registration Statement on Form 10, filed on July 22, 1999, File No. 000-25985)
Articles of Amendment to Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to Form 10-Q for the period ended June 30, 2000
filed on August 14, 2000, File No. 000-25985)
Articles of Amendment to Articles of Incorporation (Incorporated by reference to Exhibit 3.2 to Pre-Effective Amendment No. 1 to the Registration
Statement on Form S-1 filed on October 20, 2003, File No. 333-108794)
Articles of Amendment to Articles of Incorporation (Incorporated by reference to Exhibit 3.3 to the Registration Statement on Form S-3 filed
on January 15, 2008, File No. 333-148681)
Articles of Amendment to Articles of Incorporation (Incorporated by reference to Exhibit 3.5 to Form 10-Q for the period ended June 30, 2011
filed on August 5, 2011, File No. 001-31911)
Third Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.1 to Form 8-K filed on September 2, 2008, File No. 001-31911)
Indenture dated October 29, 1999 between American Equity Investment Life Holding Company and Wilmington Trust Company (as successor
in interest to West Des Moines State Bank), as trustee (Incorporated by reference to Exhibit 10.19 to the Registration Statement on Form S-1,
File No. 333-108794, including all pre-effective amendments thereto)
Trust Preferred Securities Guarantee Agreement dated October 29, 1999 between American Equity Investment Life Holding Company and
Wilmington Trust Company (as successor in interest to West Des Moines State Bank), as trustee (Incorporated by reference to Exhibit 10.20 to
the Registration Statement on Form S-1, File No. 333-108794, including all pre-effective amendments thereto)
Trust Common Securities Guarantee Agreement dated October 29, 1999 between American Equity Investment Life Holding Company and West
Des Moines State Bank, as trustee (Incorporated by reference to Exhibit 10.21 to the Registration Statement on Form S-1, File No. 333-108794,
including all pre-effective amendments thereto)
Instruments of Resignation, Appointment and Acceptance, effective September 12, 2006, among American Equity Investment Life Holding
Company, Wilmington Trust Company, West Des Moines State Bank and Delaware Trust Company, National Association (formerly known as
First Union Trust Company, National Association) (Incorporated by reference to Exhibit 4.10A to Form 10-K for the year ended December 31,
2008 filed on March 16, 2009)
Indenture dated December 16, 2003, between American Equity Investment Life Holding Company and Wilmington Trust Company, as trustee
(Incorporated by reference to Exhibit 4.11 to Form 10-K for the year ended December 31, 2003 filed on March 4, 2004)
Guarantee Agreement dated December 16, 2003, between American Equity Investment Life Holding Company and Wilmington Trust Company,
as trustee (Incorporated by reference to Exhibit 4.12 to Form 10-K for the year ended December 31, 2003 filed on March 4, 2004)
Indenture dated April 29, 2004, between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National Association,
as trustee (Incorporated by reference to Exhibit 4.13 to Form 10-Q for the period ended September 30, 2004 filed on November 9, 2004)
Guarantee Agreement dated April 29, 2004, between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National
Association, as trustee (Incorporated by reference to Exhibit 4.14 to Form 10-Q for the period ended September 30, 2004 filed on November
9, 2004)
Indenture dated September 14, 2004, between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National
Association, as trustee (Incorporated by reference to Exhibit 4.15 to Form 10-Q for the period ended September 30, 2004 filed on November
9, 2004)
Guarantee Agreement dated September 14, 2004, between American Equity Investment Life Holding Company and JP Morgan Chase Bank,
National Association, as trustee (Incorporated by reference to Exhibit 4.16 to Form 10-Q for the period ended September 30, 2004 filed on
November 9, 2004)
Indenture dated December 22, 2004, between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National
Association, as trustee (Incorporated by reference to Exhibit 4.17 to Form 10-K for the year ended December 31, 2004 filed on March 14, 2005)
Guarantee Agreement dated December 22, 2004, between American Equity Investment Life Holding Company and JP Morgan Chase Bank,
National Association, as trustee (Incorporated by reference to Exhibit 4.18 to Form 10-K for the year ended December 31, 2004 filed on March
14, 2005)
Indenture dated June 15, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National Association,
as trustee (Incorporated by reference to Exhibit 4.23 to Form 10-Q for the period ended June 30, 2005 filed on August 4, 2005)
Guarantee Agreement dated June 15, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National
Association, as trustee (Incorporated by reference to Exhibit 4.24 to Form 10-Q for the period ended June 30, 2005 filed on August 4, 2005)
Indenture dated August 4, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National Association,
as trustee (Incorporated by reference to Exhibit 4.25 to Form 10-Q for the period ended September 30, 2005 filed on November 4, 2005)
Guarantee Agreement dated August 4, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National
Association, as trustee (Incorporated by reference to Exhibit 4.26 to Form 10-Q for the period ended September 30, 2005 filed on November
4, 2005)
Indenture dated December 15, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank, National
Association, as trustee (Incorporated by reference to Exhibit 4.27 to Form 10-K for the year ended December 31, 2005 filed on March 14, 2006)
48
49
Exhibit No.
Description
10.25 *
10.26 *
August 9, 2016)
Form of First Amendment to Employee Stock Option Agreements between American Equity Investment Life Holding Company and each of
David J. Noble and Debra J. Richardson (Incorporated by reference to Exhibit 10.2 to Form 10-Q for the period ended June 30, 2016 filed on
American Equity Marketing Officers Deferred Compensation Agreement, dated as of January 1, 1998, between American Equity Investment
Life Insurance Company and Ronald J. Grensteiner (Incorporated by reference to Exhibit 10.27 to Form 10-K for the year ended December 31,
10.27 *
Form of Restricted Stock Unit Award Agreement (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the period ended March 31, 2018
10.28 *
Form of Director Stock Option Agreement (Incorporated by reference to Exhibit 10.2 to Form 10-Q for the period ended March 31, 2018 filed
10.29 *
Form of Employee Stock Option Agreement (Incorporated by reference to Exhibit 10.3 to Form 10-Q for the period ended March 31, 2018 filed
10.30 *
Form of Employee Stock Option Agreement (Incorporated by reference to Exhibit 10.4 to Form 10-Q for the period ended March 31, 2018 filed
2017 filed on February 23, 2018)
filed on May 8, 2018)
on May 8, 2018)
on May 8, 2018)
on May 8, 2018)
10.31 *
Form of Change in Control Agreement between American Equity Investment Life Holding Company and Jennifer L. Bryant (Incorporated by
reference to Exhibit 10.5 to Form 10-Q for the period ended March 31, 2018 filed on May 8, 2018)
10.32 *
Form of Restricted Stock Unit Award Agreement (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the period ended June 30, 2018
filed on August 8, 2018)
Subsidiaries of American Equity Investment Life Holding Company
Consent of Independent Registered Public Accounting Firm
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
21.2
23.1
31.1
31.2
32.1
32.2
2002
2002
2002
2002
*
Denotes management contract or compensatory plan.
Exhibit No.
Description
4.18
4.19
4.20
4.21
4.22
4.23
4.24
10.1 *
10.2 *
10.3 *
10.4 *
10.5 *
10.6 *
10.7
10.8 *
10.9
10.10 *
10.11
10.12 *
10.13 *
10.14 *
10.15 *
10.16 *
10.17 *
10.18
10.19
10.20
10.21 *
10.22 *
10.23 *
Guarantee Agreement dated December 15, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank,
National Association, as trustee (Incorporated by reference to Exhibit 4.28 to Form 10-K for the year ended December 31, 2005 filed on March
14, 2006)
Amended and Restated Indenture dated July 7, 2006 between American Equity Investment Life Holding Company and Wells Fargo Bank,
National Association, as trustee (Incorporated by reference to Exhibit 4.31 to Form 10-Q for the period ended September 30, 2006 filed on
November 3, 2006)
Amended and Restated Guarantee Agreement dated July 7, 2006 between American Equity Investment Life Holding Company and Wells Fargo
Delaware Trust Company, as trustee (Incorporated by reference to Exhibit 4.32 to Form 10-Q for the period ended September 30, 2006 filed
on November 3, 2006)
Senior Amended and Restated Indenture, dated as of April 22, 2004, between American Equity Investment Life Holding Company and U.S.
Bank National Association, as trustee (Incorporated by reference to Exhibit 4.1 to Amendment No.1 to Form S-3 filed on April 22, 2004).
First Supplemental Indenture, dated July 17, 2013, among American Equity Investment Life Holding Company, U.S. Bank National Association,
and Wells Fargo Bank, National Association, as trustee (Incorporated by reference to Exhibit 4.2 to Form 8-K filed on July 17, 2013)
Second Supplemental Indenture, dated as of July 17, 2013, between American Equity Investment Life Holding Company and Wells Fargo Bank,
National Association, as trustee (Incorporated by reference to Exhibit 4.3 to Form 8-K filed on July 17, 2013)
Third Supplemental Indenture, dated as of June 16, 2017, between American Equity Investment Life Holding Company and U.S. Bank National
Association, as trustee (Incorporated by reference to Exhibit 4.2 to Form 8-K filed on June 16, 2017)
Deferred Compensation Agreement between American Equity Investment Life Holding Company and David S. Mulcahy dated December 31,
1997 (Incorporated by reference to Exhibit 10.5 to the Registration Statement on Form 10 filed on May 6, 1999)
2000 Employee Stock Option Plan (Incorporated by reference to Exhibit 10.7 to Form 10-Q for the period ended June 30, 2000 filed on August
14, 2000)
2000 Director Stock Option Plan (Incorporated by reference to Exhibit 10.8 to Form 10-Q for the period ended June 30, 2000 filed on August
14, 2000)
American Equity Investment Life Holding Company 2009 Employee Incentive Plan (Incorporated by reference to Exhibit 10.2 to Form 8-K
filed on June 9, 2009)
Form of Change in Control Agreement between American Equity Investment Life Holding Company and John M. Matovina (Incorporated by
reference to the Registration Statement on Form S-1, File No. 333-108794, including all pre-effective amendments thereto)
Form of Amendment to Change in Control Agreement between American Equity Investment Life Holding Company and John M. Matovina
(Incorporated by reference to Exhibit 10.11-A to Form 10-K for the year ended December 31, 2012 filed on March 7, 2013)
American Equity Investment Life Holding Company Independent Insurance Agent Stock Option Plan (Incorporated by reference to Exhibit
10.26 to Form 10-Q for the period ended September 30, 2007 filed on November 2, 2007)
Amended and Restated Retirement Benefit Agreement by and between American Equity Investment Life Holding Company and David J. Noble
(Incorporated by reference to Exhibit 10.3 to Form 10-Q for the period ended March 31, 2016 filed on May 10, 2016)
2010 Independent Insurance Agent Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-3
filed on December 15, 2010)
American Equity Investment Life Holding Company 2011 Director Stock Option Plan (Incorporated by reference to the Appendix A to the
Company's proxy statement on Form DEF 14A filed on April 25, 2011)
2012 Independent Insurance Agent Stock Option Plan (Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-3
filed on August 23, 2012)
Form of Change in Control Agreement between American Equity Investment Life Holding Company and each of Ted M. Johnson, Ronald J.
Grensteiner, Jeffrey D. Lorenzen and Renee D. Montz (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on December 14, 2012)
American Equity Investment Life Holding Company Short-Term Performance Incentive Plan adopted April 15, 2013, as amended and restated
(Incorporated by reference to Exhibit 10.1 to Form 8-K filed on April 18, 2013)
Form of Performance Restricted Stock Unit Award Agreement (Incorporated by reference to Exhibit 10.2 to Form 10-Q for the period ended
March 31, 2013 filed on May 8, 2013)
Form of First Amendment to the Performance Restricted Stock Unit Award Agreement (Incorporated by reference to Exhibit 10.1 to Form 10-
Q for the period ended March 31, 2016 filed on May 10, 2016)
Form of Change in Control Agreement between American Equity Investment Life Holding Company and Scott A. Samuelson (Incorporated by
reference to Exhibit 10.3 to Form 10-Q for the period ended June 30, 2013 filed on August 8, 2013)
2013 Director Equity and Incentive Plan (Incorporated by reference to Exhibit 10.4 to Form 10-Q for the period ended June 30, 2013 filed on
August 8, 2013)
Credit Agreement dated September 30, 2016 among American Equity Life Investment Holding Company, JP Morgan Chase Bank, National
Association, SunTrust Bank, and Citibank, National Association and Royal Bank of Canada (Incorporated by reference to Exhibit 10.1 to Form
8-K filed on October 3, 2016)
Amended and Restated American Equity Investment Life Holding Company 2014 Independent Insurance Agent Restricted Stock and Restricted
Stock Unit Plan (Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-3 filed on December 17, 2014)
Amended and Restated American Equity Investment Life Holding Company 2014 Independent Insurance Agent Restricted Stock and Restricted
Stock Unit Plan, as amended (Incorporated by reference to the Appendix B to the Company's proxy statement on Form DEF 14A filed on April
18, 2016)
American Equity Investment Life Holding Company 2016 Employee Incentive Plan (Incorporated by reference to the Appendix A to the
Company's proxy statement on Form DEF 14A filed on April 18, 2016)
First Amendment to American Equity Investment Life Holding Company 2016 Employee Incentive Plan (Incorporated by reference to Exhibit
99.2 to Form S-8 filed on September 8, 2016)
Form of Restricted Stock Award Agreement with Respect to Common Stock of American Equity Investment Life Holding Company (Incorporated
by reference to Exhibit 10.1 to Form 8-K filed on June 8, 2016)
10.24 *
Form of Performance Restricted Stock Unit Award Agreement (Incorporated by reference to Exhibit 10.2 to Form 8-K filed on June 8, 2016)
50
51
Exhibit No.
Description
Exhibit No.
Description
10.25 *
10.26 *
10.27 *
10.28 *
10.29 *
10.30 *
10.31 *
10.32 *
21.2
23.1
31.1
31.2
32.1
32.2
Form of First Amendment to Employee Stock Option Agreements between American Equity Investment Life Holding Company and each of
David J. Noble and Debra J. Richardson (Incorporated by reference to Exhibit 10.2 to Form 10-Q for the period ended June 30, 2016 filed on
August 9, 2016)
American Equity Marketing Officers Deferred Compensation Agreement, dated as of January 1, 1998, between American Equity Investment
Life Insurance Company and Ronald J. Grensteiner (Incorporated by reference to Exhibit 10.27 to Form 10-K for the year ended December 31,
2017 filed on February 23, 2018)
Form of Restricted Stock Unit Award Agreement (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the period ended March 31, 2018
filed on May 8, 2018)
Form of Director Stock Option Agreement (Incorporated by reference to Exhibit 10.2 to Form 10-Q for the period ended March 31, 2018 filed
on May 8, 2018)
Form of Employee Stock Option Agreement (Incorporated by reference to Exhibit 10.3 to Form 10-Q for the period ended March 31, 2018 filed
on May 8, 2018)
Form of Employee Stock Option Agreement (Incorporated by reference to Exhibit 10.4 to Form 10-Q for the period ended March 31, 2018 filed
on May 8, 2018)
Form of Change in Control Agreement between American Equity Investment Life Holding Company and Jennifer L. Bryant (Incorporated by
reference to Exhibit 10.5 to Form 10-Q for the period ended March 31, 2018 filed on May 8, 2018)
Form of Restricted Stock Unit Award Agreement (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the period ended June 30, 2018
filed on August 8, 2018)
Subsidiaries of American Equity Investment Life Holding Company
Consent of Independent Registered Public Accounting Firm
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
*
Denotes management contract or compensatory plan.
4.18
4.19
4.20
4.21
4.22
4.23
4.24
10.1 *
10.2 *
10.3 *
10.4 *
10.5 *
10.6 *
10.7
10.18
10.19
10.20
Guarantee Agreement dated December 15, 2005 between American Equity Investment Life Holding Company and JP Morgan Chase Bank,
National Association, as trustee (Incorporated by reference to Exhibit 4.28 to Form 10-K for the year ended December 31, 2005 filed on March
14, 2006)
November 3, 2006)
on November 3, 2006)
Amended and Restated Indenture dated July 7, 2006 between American Equity Investment Life Holding Company and Wells Fargo Bank,
National Association, as trustee (Incorporated by reference to Exhibit 4.31 to Form 10-Q for the period ended September 30, 2006 filed on
Amended and Restated Guarantee Agreement dated July 7, 2006 between American Equity Investment Life Holding Company and Wells Fargo
Delaware Trust Company, as trustee (Incorporated by reference to Exhibit 4.32 to Form 10-Q for the period ended September 30, 2006 filed
Senior Amended and Restated Indenture, dated as of April 22, 2004, between American Equity Investment Life Holding Company and U.S.
Bank National Association, as trustee (Incorporated by reference to Exhibit 4.1 to Amendment No.1 to Form S-3 filed on April 22, 2004).
First Supplemental Indenture, dated July 17, 2013, among American Equity Investment Life Holding Company, U.S. Bank National Association,
and Wells Fargo Bank, National Association, as trustee (Incorporated by reference to Exhibit 4.2 to Form 8-K filed on July 17, 2013)
Second Supplemental Indenture, dated as of July 17, 2013, between American Equity Investment Life Holding Company and Wells Fargo Bank,
National Association, as trustee (Incorporated by reference to Exhibit 4.3 to Form 8-K filed on July 17, 2013)
Third Supplemental Indenture, dated as of June 16, 2017, between American Equity Investment Life Holding Company and U.S. Bank National
Association, as trustee (Incorporated by reference to Exhibit 4.2 to Form 8-K filed on June 16, 2017)
Deferred Compensation Agreement between American Equity Investment Life Holding Company and David S. Mulcahy dated December 31,
1997 (Incorporated by reference to Exhibit 10.5 to the Registration Statement on Form 10 filed on May 6, 1999)
2000 Employee Stock Option Plan (Incorporated by reference to Exhibit 10.7 to Form 10-Q for the period ended June 30, 2000 filed on August
2000 Director Stock Option Plan (Incorporated by reference to Exhibit 10.8 to Form 10-Q for the period ended June 30, 2000 filed on August
American Equity Investment Life Holding Company 2009 Employee Incentive Plan (Incorporated by reference to Exhibit 10.2 to Form 8-K
14, 2000)
14, 2000)
filed on June 9, 2009)
Form of Change in Control Agreement between American Equity Investment Life Holding Company and John M. Matovina (Incorporated by
reference to the Registration Statement on Form S-1, File No. 333-108794, including all pre-effective amendments thereto)
Form of Amendment to Change in Control Agreement between American Equity Investment Life Holding Company and John M. Matovina
(Incorporated by reference to Exhibit 10.11-A to Form 10-K for the year ended December 31, 2012 filed on March 7, 2013)
American Equity Investment Life Holding Company Independent Insurance Agent Stock Option Plan (Incorporated by reference to Exhibit
10.26 to Form 10-Q for the period ended September 30, 2007 filed on November 2, 2007)
10.8 *
Amended and Restated Retirement Benefit Agreement by and between American Equity Investment Life Holding Company and David J. Noble
(Incorporated by reference to Exhibit 10.3 to Form 10-Q for the period ended March 31, 2016 filed on May 10, 2016)
10.9
2010 Independent Insurance Agent Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-3
10.10 *
American Equity Investment Life Holding Company 2011 Director Stock Option Plan (Incorporated by reference to the Appendix A to the
Company's proxy statement on Form DEF 14A filed on April 25, 2011)
10.11
2012 Independent Insurance Agent Stock Option Plan (Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-3
filed on December 15, 2010)
filed on August 23, 2012)
10.12 *
Form of Change in Control Agreement between American Equity Investment Life Holding Company and each of Ted M. Johnson, Ronald J.
Grensteiner, Jeffrey D. Lorenzen and Renee D. Montz (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on December 14, 2012)
10.13 *
American Equity Investment Life Holding Company Short-Term Performance Incentive Plan adopted April 15, 2013, as amended and restated
(Incorporated by reference to Exhibit 10.1 to Form 8-K filed on April 18, 2013)
10.14 *
Form of Performance Restricted Stock Unit Award Agreement (Incorporated by reference to Exhibit 10.2 to Form 10-Q for the period ended
March 31, 2013 filed on May 8, 2013)
10.15 *
Form of First Amendment to the Performance Restricted Stock Unit Award Agreement (Incorporated by reference to Exhibit 10.1 to Form 10-
Q for the period ended March 31, 2016 filed on May 10, 2016)
10.16 *
Form of Change in Control Agreement between American Equity Investment Life Holding Company and Scott A. Samuelson (Incorporated by
reference to Exhibit 10.3 to Form 10-Q for the period ended June 30, 2013 filed on August 8, 2013)
10.17 *
2013 Director Equity and Incentive Plan (Incorporated by reference to Exhibit 10.4 to Form 10-Q for the period ended June 30, 2013 filed on
August 8, 2013)
8-K filed on October 3, 2016)
Credit Agreement dated September 30, 2016 among American Equity Life Investment Holding Company, JP Morgan Chase Bank, National
Association, SunTrust Bank, and Citibank, National Association and Royal Bank of Canada (Incorporated by reference to Exhibit 10.1 to Form
Amended and Restated American Equity Investment Life Holding Company 2014 Independent Insurance Agent Restricted Stock and Restricted
Stock Unit Plan (Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-3 filed on December 17, 2014)
Amended and Restated American Equity Investment Life Holding Company 2014 Independent Insurance Agent Restricted Stock and Restricted
Stock Unit Plan, as amended (Incorporated by reference to the Appendix B to the Company's proxy statement on Form DEF 14A filed on April
18, 2016)
10.21 *
American Equity Investment Life Holding Company 2016 Employee Incentive Plan (Incorporated by reference to the Appendix A to the
Company's proxy statement on Form DEF 14A filed on April 18, 2016)
10.22 *
First Amendment to American Equity Investment Life Holding Company 2016 Employee Incentive Plan (Incorporated by reference to Exhibit
99.2 to Form S-8 filed on September 8, 2016)
10.23 *
Form of Restricted Stock Award Agreement with Respect to Common Stock of American Equity Investment Life Holding Company (Incorporated
by reference to Exhibit 10.1 to Form 8-K filed on June 8, 2016)
10.24 *
Form of Performance Restricted Stock Unit Award Agreement (Incorporated by reference to Exhibit 10.2 to Form 8-K filed on June 8, 2016)
50
51
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, this 22nd day of February 2019.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
YEARS ENDED DECEMBER 31, 2018, 2017 and 2016
SIGNATURES
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
By:
/s/ JOHN M. MATOVINA
John M. Matovina,
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this registration statement has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated:
Signature
Title (Capacity)
Date
/s/ JOHN M. MATOVINA
John M. Matovina
/s/ TED M. JOHNSON
Ted M. Johnson
/s/ SCOTT A. SAMUELSON
Scott A. Samuelson
/s/ JOYCE A. CHAPMAN
Joyce A. Chapman
/s/ ALEXANDER M. CLARK
Alexander M. Clark
/s/ BRENDA J. CUSHING
Brenda J. Cushing
/s/ JAMES M. GERLACH
James M. Gerlach
/s/ ROBERT L. HOWE
Robert L. Howe
/s/ WILLIAM R. KUNKEL
William R. Kunkel
/s/ ALAN D. MATULA
Alan D. Matula
/s/ DAVID S. MULCAHY
David S. Mulcahy
/s/ GERARD D. NEUGENT
Gerard D. Neugent
/s/ DEBRA J. RICHARDSON
Debra J. Richardson
/s/ A.J. STRICKLAND, III
A.J. Strickland, III
Chairman of the Board, Chief Executive Officer and President
(Principal Executive Officer)
February 22, 2019
Chief Financial Officer and Treasurer
(Principal Financial Officer)
February 22, 2019
Vice President and Chief Accounting Officer
(Principal Accounting Officer)
February 22, 2019
Note 6. Deferred Policy Acquisition Costs, Deferred Sales Inducements and Liability for Lifetime Income Benefit Riders
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
February 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
52
F-1
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Note 1. Significant Accounting Policies
Note 2. Fair Value of Financial Instruments
Note 3. Investments
Note 4. Mortgage Loans on Real Estate
Note 5. Derivative Instruments
Note 7. Reinsurance and Policy Provisions
Note 8. Income Taxes
Note 9. Notes and Loan Payable and Amounts Due Under Repurchase Agreements
Note 10. Subordinated Debentures
Note 11. Retirement and Share-based Compensation Plans
Note 12. Statutory Financial Information and Dividend Restrictions
Note 13. Commitments and Contingencies
Note 14. Earnings Per Share and Stockholders' Equity
Note 15. Quarterly Financial Information (Unaudited)
Schedules:
Schedule I—Summary of Investments—Other Than Investments in Related Parties
Schedule II—Condensed Financial Information of Registrant
Schedule III—Supplementary Insurance Information
Schedule IV—Reinsurance
Schedule V—Valuation and Qualifying Accounts
F-2
F-3
F-4
F-5
F-6
F-7
F-9
F-14
F-19
F-26
F-31
F-33
F-34
F-36
F-38
F-39
F-39
F-42
F-43
F-44
F-45
F-46
F-47
F-51
F-52
F-53
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
on its behalf by the undersigned, thereunto duly authorized, this 22nd day of February 2019.
YEARS ENDED DECEMBER 31, 2018, 2017 and 2016
SIGNATURES
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
By:
/s/ JOHN M. MATOVINA
John M. Matovina,
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this registration statement has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated:
Signature
Title (Capacity)
Date
Chairman of the Board, Chief Executive Officer and President
February 22, 2019
(Principal Executive Officer)
Chief Financial Officer and Treasurer
(Principal Financial Officer)
February 22, 2019
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Note 1. Significant Accounting Policies
Note 2. Fair Value of Financial Instruments
Note 3. Investments
Note 4. Mortgage Loans on Real Estate
Note 5. Derivative Instruments
Vice President and Chief Accounting Officer
(Principal Accounting Officer)
February 22, 2019
Note 6. Deferred Policy Acquisition Costs, Deferred Sales Inducements and Liability for Lifetime Income Benefit Riders
Note 7. Reinsurance and Policy Provisions
Note 8. Income Taxes
Note 9. Notes and Loan Payable and Amounts Due Under Repurchase Agreements
Note 10. Subordinated Debentures
Note 11. Retirement and Share-based Compensation Plans
Note 12. Statutory Financial Information and Dividend Restrictions
Note 13. Commitments and Contingencies
Note 14. Earnings Per Share and Stockholders' Equity
Note 15. Quarterly Financial Information (Unaudited)
Schedules:
Schedule I—Summary of Investments—Other Than Investments in Related Parties
Schedule II—Condensed Financial Information of Registrant
Schedule III—Supplementary Insurance Information
Schedule IV—Reinsurance
Schedule V—Valuation and Qualifying Accounts
/s/ JOHN M. MATOVINA
John M. Matovina
/s/ TED M. JOHNSON
Ted M. Johnson
/s/ SCOTT A. SAMUELSON
Scott A. Samuelson
/s/ JOYCE A. CHAPMAN
Joyce A. Chapman
/s/ ALEXANDER M. CLARK
Alexander M. Clark
/s/ BRENDA J. CUSHING
Brenda J. Cushing
/s/ JAMES M. GERLACH
James M. Gerlach
/s/ ROBERT L. HOWE
Robert L. Howe
/s/ WILLIAM R. KUNKEL
William R. Kunkel
/s/ ALAN D. MATULA
Alan D. Matula
/s/ DAVID S. MULCAHY
David S. Mulcahy
/s/ GERARD D. NEUGENT
Gerard D. Neugent
/s/ DEBRA J. RICHARDSON
Debra J. Richardson
/s/ A.J. STRICKLAND, III
A.J. Strickland, III
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
February 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
F-2
F-3
F-4
F-5
F-6
F-7
F-9
F-14
F-19
F-26
F-31
F-33
F-34
F-36
F-38
F-39
F-39
F-42
F-43
F-44
F-45
F-46
F-47
F-51
F-52
F-53
52
F-1
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
American Equity Investment Life Holding Company:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of American Equity Investment Life Holding Company and subsidiaries (the
Company) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income (loss), changes in
stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes and financial
statement schedules I to V (collectively, the consolidated financial statements). We also have audited the Company’s internal control over
financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company
as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended
December 31, 2018, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2018 based on criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial
statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm
registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and
whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
We have served as the Company’s auditor since 2005.
Des Moines, Iowa
February 22, 2019
/s/ KPMG LLP
F-2
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
Available for sale, at fair value (amortized cost: 2018 - $46,131,190; 2017 - $43,116,759)
$
45,923,727
$
45,372,989
Held for investment, at amortized cost (fair value: 2017 - $76,460)
December 31,
2018
2017
49,427,498
50,300,705
—
2,943,091
205,149
355,531
344,396
4,954,068
468,729
3,535,838
2,516,721
291,169
26,537
60,608
270,858
494,591
242,982
109,298
—
502,725
59,226,463
77,041
2,665,531
1,568,380
616,764
1,434,045
4,858,289
429,008
2,714,523
2,001,892
38,147
—
254,127
282,884
494,093
242,565
—
34,285
1,984,079
59,180,579
$
$
61,625,564
$
62,030,736
57,606,009
$
56,142,673
Assets
Investments:
Fixed maturity securities:
Mortgage loans on real estate
Derivative instruments
Other investments
Total investments
Cash and cash equivalents
Coinsurance deposits
Accrued investment income
Deferred policy acquisition costs
Deferred sales inducements
Deferred income taxes
Income taxes recoverable
Other assets
Total assets
Liabilities and Stockholders' Equity
Liabilities:
Policy benefit reserves
Other policy funds and contract claims
Notes and loan payable
Subordinated debentures
Amounts due under repurchase agreements
Income taxes payable
Other liabilities
Total liabilities
Stockholders' equity:
Preferred stock, par value $1 per share, 2,000,000 shares authorized,
2018 and 2017 - no shares issued and outstanding
Common stock, par value $1 per share, 200,000,000 shares authorized; issued and outstanding:
2018 - 90,369,229 shares (excluding 1,535,960 treasury shares);
2017 - 89,331,087 shares (excluding 2,064,727 treasury shares)
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
See accompanying notes to consolidated financial statements.
—
—
90,369
811,186
(52,432)
1,549,978
2,399,101
89,331
791,446
724,599
1,244,781
2,850,157
$
61,625,564
$
62,030,736
F-3
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
American Equity Investment Life Holding Company:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of American Equity Investment Life Holding Company and subsidiaries (the
Company) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income (loss), changes in
stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes and financial
statement schedules I to V (collectively, the consolidated financial statements). We also have audited the Company’s internal control over
financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company
as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended
December 31, 2018, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2018 based on criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial
statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm
registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and
whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
We have served as the Company’s auditor since 2005.
Des Moines, Iowa
February 22, 2019
/s/ KPMG LLP
F-2
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
December 31,
2018
2017
Assets
Investments:
Fixed maturity securities:
Available for sale, at fair value (amortized cost: 2018 - $46,131,190; 2017 - $43,116,759)
$
45,923,727
$
45,372,989
Held for investment, at amortized cost (fair value: 2017 - $76,460)
Mortgage loans on real estate
Derivative instruments
Other investments
Total investments
Cash and cash equivalents
Coinsurance deposits
Accrued investment income
Deferred policy acquisition costs
Deferred sales inducements
Deferred income taxes
Income taxes recoverable
Other assets
Total assets
Liabilities and Stockholders' Equity
Liabilities:
Policy benefit reserves
Other policy funds and contract claims
Notes and loan payable
Subordinated debentures
Amounts due under repurchase agreements
Income taxes payable
Other liabilities
Total liabilities
Stockholders' equity:
Preferred stock, par value $1 per share, 2,000,000 shares authorized,
2018 and 2017 - no shares issued and outstanding
Common stock, par value $1 per share, 200,000,000 shares authorized; issued and outstanding:
2018 - 90,369,229 shares (excluding 1,535,960 treasury shares);
2017 - 89,331,087 shares (excluding 2,064,727 treasury shares)
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
See accompanying notes to consolidated financial statements.
F-3
—
2,943,091
205,149
355,531
77,041
2,665,531
1,568,380
616,764
49,427,498
50,300,705
344,396
4,954,068
468,729
3,535,838
2,516,721
291,169
26,537
60,608
1,434,045
4,858,289
429,008
2,714,523
2,001,892
38,147
—
254,127
61,625,564
$
62,030,736
57,606,009
$
56,142,673
270,858
494,591
242,982
109,298
—
502,725
59,226,463
282,884
494,093
242,565
—
34,285
1,984,079
59,180,579
$
$
—
—
90,369
811,186
(52,432)
1,549,978
2,399,101
89,331
791,446
724,599
1,244,781
2,850,157
$
61,625,564
$
62,030,736
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
Net income
Other comprehensive income (loss):
Change in net unrealized investment gains/losses (1)
Noncredit component of OTTI losses (1)
Reclassification of unrealized investment gains/losses to net income (1)
Other comprehensive income (loss) before income tax
Income tax effect related to other comprehensive income (loss)
Other comprehensive income (loss)
Comprehensive income (loss)
Year Ended December 31,
2018
2017
2016
$
458,016
$
174,645
$
83,243
(1,129,213)
775
(16,606)
(1,145,044)
240,459
(904,585)
556,384
915
4,496
561,795
(177,162)
384,633
$
(446,569) $
559,278
$
207,994
556
4,224
212,774
(74,471)
138,303
221,546
(1) Net of related adjustments to amortization of deferred sales inducements and deferred policy acquisition costs.
See accompanying notes to consolidated financial statements.
Revenues:
Premiums and other considerations
Annuity product charges
Net investment income
Change in fair value of derivatives
Net realized gains (losses) on investments, excluding other than temporary impairment ("OTTI")
losses
OTTI losses on investments:
Total OTTI losses
Portion of OTTI losses recognized in (from) other comprehensive income
Net OTTI losses recognized in operations
Loss on extinguishment of debt
Total revenues
Benefits and expenses:
Insurance policy benefits and change in future policy benefits
Interest sensitive and index product benefits
Amortization of deferred sales inducements
Change in fair value of embedded derivatives
Interest expense on notes and loan payable
Interest expense on subordinated debentures
Amortization of deferred policy acquisition costs
Other operating costs and expenses
Total benefits and expenses
Income before income taxes
Income tax expense
Net income
Earnings per common share
Earnings per common share - assuming dilution
Weighted average common shares outstanding (in thousands):
Earnings per common share
Earnings per common share - assuming dilution
See accompanying notes to consolidated financial statements.
Year Ended December 31,
2018
2017
2016
$
26,480
$
34,228
$
224,488
2,147,812
(777,848)
200,494
1,991,997
1,677,871
43,767
173,579
1,849,872
164,219
(37,178)
10,509
11,524
(35,005)
(1,651)
(36,656)
—
1,547,098
39,530
1,610,835
222,201
(1,389,491)
25,498
15,491
327,991
129,301
981,356
565,742
107,726
458,016
5.07
5.01
90,348
91,423
$
$
$
(2,758)
(1,872)
(4,630)
(18,817)
3,891,652
43,219
2,023,668
176,612
919,735
30,368
14,124
255,964
111,691
3,575,381
316,271
141,626
174,645
1.96
1.93
88,982
90,311
$
$
$
(21,349)
(1,330)
(22,679)
—
2,220,282
52,483
725,472
251,166
543,465
28,248
12,958
374,012
102,231
2,090,035
130,247
47,004
83,243
0.98
0.97
84,793
85,605
$
$
$
F-4
F-5
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
Net income
Other comprehensive income (loss):
Change in net unrealized investment gains/losses (1)
Noncredit component of OTTI losses (1)
Reclassification of unrealized investment gains/losses to net income (1)
Other comprehensive income (loss) before income tax
Income tax effect related to other comprehensive income (loss)
Other comprehensive income (loss)
Comprehensive income (loss)
Year Ended December 31,
2018
2017
2016
$
458,016
$
174,645
$
83,243
(1,129,213)
775
(16,606)
(1,145,044)
240,459
(904,585)
556,384
915
4,496
561,795
(177,162)
384,633
$
(446,569) $
559,278
$
207,994
556
4,224
212,774
(74,471)
138,303
221,546
(1) Net of related adjustments to amortization of deferred sales inducements and deferred policy acquisition costs.
See accompanying notes to consolidated financial statements.
Net realized gains (losses) on investments, excluding other than temporary impairment ("OTTI")
(37,178)
10,509
11,524
Revenues:
Premiums and other considerations
Annuity product charges
Net investment income
Change in fair value of derivatives
losses
OTTI losses on investments:
Total OTTI losses
Portion of OTTI losses recognized in (from) other comprehensive income
Net OTTI losses recognized in operations
Loss on extinguishment of debt
Total revenues
Benefits and expenses:
Insurance policy benefits and change in future policy benefits
Interest sensitive and index product benefits
Amortization of deferred sales inducements
Change in fair value of embedded derivatives
Interest expense on notes and loan payable
Interest expense on subordinated debentures
Amortization of deferred policy acquisition costs
Other operating costs and expenses
Total benefits and expenses
Income before income taxes
Income tax expense
Net income
Earnings per common share
Earnings per common share - assuming dilution
Weighted average common shares outstanding (in thousands):
Earnings per common share
Earnings per common share - assuming dilution
See accompanying notes to consolidated financial statements.
Year Ended December 31,
2018
2017
2016
$
26,480
$
34,228
$
224,488
2,147,812
(777,848)
200,494
1,991,997
1,677,871
(35,005)
(1,651)
(36,656)
—
1,547,098
39,530
1,610,835
222,201
(1,389,491)
25,498
15,491
327,991
129,301
981,356
565,742
107,726
458,016
5.07
5.01
$
$
$
(2,758)
(1,872)
(4,630)
(18,817)
3,891,652
43,219
2,023,668
176,612
919,735
30,368
14,124
255,964
111,691
3,575,381
316,271
141,626
174,645
$
$
$
1.96
1.93
90,348
91,423
88,982
90,311
$
$
$
43,767
173,579
1,849,872
164,219
(21,349)
(1,330)
(22,679)
—
2,220,282
52,483
725,472
251,166
543,465
28,248
12,958
374,012
102,231
2,090,035
130,247
47,004
83,243
0.98
0.97
84,793
85,605
F-4
F-5
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share data)
(Dollars in thousands)
Balance at December 31, 2015
Net income for the year
Other comprehensive income
Share-based compensation, including excess income tax
benefits
Issuance of common stock via settlement of forward sale
agreements
Issuance of 964,053 shares of common stock under
compensation plans, including excess income tax benefits
Issuance of 92,998 shares of common stock to settle warrants
that have reached their expiration
Dividends on common stock ($0.24 per share)
Balance at December 31, 2016
Net income for the year
Other comprehensive income
Share-based compensation
Issuance of 1,329,957 shares of common stock under
compensation plans
Dividends on common stock ($0.26 per share)
Balance at December 31, 2017
Net income for the year
Other comprehensive loss
Implementation of accounting standard related to the
reclassification of certain tax effects
Share-based compensation
Issuance of 1,038,142 shares of common stock under
compensation plans
Dividends on common stock ($0.28 per share)
Common
Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Total
Stockholders'
Equity
$
81,354
$
630,367
$
201,663
$
1,031,151
$
1,944,535
—
—
—
—
—
7,218
5,590
129,072
964
93
—
3,781
(94)
—
88,001
770,344
—
—
—
1,330
—
89,331
—
—
—
—
1,038
—
—
—
6,464
14,638
—
791,446
—
—
—
11,097
8,643
—
—
138,303
—
—
—
—
—
339,966
—
384,633
—
—
—
724,599
—
(904,585)
83,243
—
—
—
—
—
(21,110)
1,093,284
174,645
—
—
—
(23,148)
1,244,781
458,016
—
127,554
(127,554)
—
—
—
—
—
(25,265)
83,243
138,303
7,218
134,662
4,745
(1)
(21,110)
2,291,595
174,645
384,633
6,464
15,968
(23,148)
2,850,157
458,016
(904,585)
—
11,097
9,681
(25,265)
Balance at December 31, 2018
$
90,369
$
811,186
$
(52,432) $
1,549,978
$
2,399,101
See accompanying notes to consolidated financial statements.
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Interest sensitive and index product benefits
Amortization of deferred sales inducements
Annuity product charges
Change in fair value of embedded derivatives
Change in traditional life and accident and health insurance reserves
Policy acquisition costs deferred
Amortization of deferred policy acquisition costs
Provision for depreciation and other amortization
Amortization of discounts and premiums on investments
Loss on extinguishment of debt
Realized gains (losses) on investments and net OTTI losses recognized in operations
Change in fair value of derivatives
Distributions from equity method investments
Deferred income taxes
Share-based compensation
Change in accrued investment income
Change in income taxes recoverable/payable
Change in other assets
Change in other policy funds and contract claims
Change in collateral held for derivatives
Change in other liabilities
Other
Net cash provided by operating activities
Investing activities
Sales, maturities, or repayments of investments:
Fixed maturity securities - available for sale
Mortgage loans on real estate
Derivative instruments
Other investments
Acquisitions of investments:
Mortgage loans on real estate
Derivative instruments
Other investments
Purchases of property, furniture and equipment
Net cash used in investing activities
Year Ended December 31,
2018
2017
2016
$
458,016
$
174,645
$
83,243
1,610,835
2,023,668
222,201
(224,488)
(1,389,491)
(163)
(388,222)
327,991
3,474
19,204
—
73,834
777,575
1,270
(12,563)
11,097
(39,721)
(60,822)
(844)
(19,029)
(1,296,629)
(17,318)
(13,022)
43,185
3,870,415
298,100
1,446,948
358,372
(575,367)
(864,717)
(85,318)
(4,283)
(1,678,956)
176,612
(200,494)
919,735
(33)
(406,641)
255,964
3,948
15,431
18,817
(5,879)
1,454
(46,730)
6,464
(31,235)
45,759
448
(23,101)
772,181
(84,416)
(13,794)
1,911,991
351,255
1,697,948
9,117
(535,249)
(691,428)
(305,575)
(4,809)
725,472
251,166
(173,579)
543,465
12,724
(543,325)
374,012
3,879
1,070
—
11,155
(165,727)
2,064
(10,408)
6,692
(35,669)
18,125
1,812
(34,411)
414,655
(55,940)
(14,089)
2,746,510
383,763
284,470
11,981
(428,833)
(602,349)
(11,559)
(1,197)
1,923,847
1,416,386
(2,408,331)
(2,593,390)
(4,501,109)
Fixed maturity securities - available for sale
(6,852,481)
(5,026,640)
(6,883,895)
F-6
F-7
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share data)
(Dollars in thousands)
Balance at December 31, 2015
Net income for the year
Other comprehensive income
Share-based compensation, including excess income tax
Issuance of common stock via settlement of forward sale
benefits
agreements
Issuance of 964,053 shares of common stock under
compensation plans, including excess income tax benefits
Issuance of 92,998 shares of common stock to settle warrants
that have reached their expiration
Dividends on common stock ($0.24 per share)
Balance at December 31, 2016
Net income for the year
Other comprehensive income
Share-based compensation
Issuance of 1,329,957 shares of common stock under
compensation plans
Dividends on common stock ($0.26 per share)
Balance at December 31, 2017
Net income for the year
Other comprehensive loss
Implementation of accounting standard related to the
reclassification of certain tax effects
Share-based compensation
Issuance of 1,038,142 shares of common stock under
compensation plans
Dividends on common stock ($0.28 per share)
Common
Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Total
Stockholders'
Equity
$
81,354
$
630,367
$
201,663
$
1,031,151
$
1,944,535
83,243
138,303
—
—
7,218
129,072
3,781
(94)
—
—
—
6,464
—
—
—
—
11,097
8,643
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(21,110)
1,093,284
174,645
(23,148)
1,244,781
458,016
(25,265)
83,243
138,303
7,218
134,662
4,745
(1)
(21,110)
2,291,595
174,645
384,633
6,464
15,968
(23,148)
2,850,157
458,016
(904,585)
—
11,097
9,681
(25,265)
(904,585)
127,554
(127,554)
88,001
770,344
339,966
384,633
1,330
14,638
89,331
791,446
724,599
5,590
964
—
—
—
93
—
—
—
—
—
—
—
—
—
1,038
—
Balance at December 31, 2018
$
90,369
$
811,186
$
(52,432) $
1,549,978
$
2,399,101
See accompanying notes to consolidated financial statements.
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Interest sensitive and index product benefits
Amortization of deferred sales inducements
Annuity product charges
Change in fair value of embedded derivatives
Change in traditional life and accident and health insurance reserves
Policy acquisition costs deferred
Amortization of deferred policy acquisition costs
Provision for depreciation and other amortization
Amortization of discounts and premiums on investments
Loss on extinguishment of debt
Realized gains (losses) on investments and net OTTI losses recognized in operations
Change in fair value of derivatives
Distributions from equity method investments
Deferred income taxes
Share-based compensation
Change in accrued investment income
Change in income taxes recoverable/payable
Change in other assets
Change in other policy funds and contract claims
Change in collateral held for derivatives
Change in other liabilities
Other
Net cash provided by operating activities
Investing activities
Sales, maturities, or repayments of investments:
Fixed maturity securities - available for sale
Mortgage loans on real estate
Derivative instruments
Other investments
Acquisitions of investments:
Fixed maturity securities - available for sale
Mortgage loans on real estate
Derivative instruments
Other investments
Purchases of property, furniture and equipment
Net cash used in investing activities
F-6
F-7
Year Ended December 31,
2018
2017
2016
$
458,016
$
174,645
$
83,243
1,610,835
2,023,668
222,201
(224,488)
(1,389,491)
(163)
(388,222)
327,991
3,474
19,204
—
73,834
777,575
1,270
(12,563)
11,097
(39,721)
(60,822)
(844)
(19,029)
(1,296,629)
(17,318)
(13,022)
43,185
176,612
(200,494)
919,735
(33)
(406,641)
255,964
3,948
15,431
18,817
(5,879)
(1,678,956)
1,454
(46,730)
6,464
(31,235)
45,759
448
(23,101)
772,181
(84,416)
(13,794)
725,472
251,166
(173,579)
543,465
12,724
(543,325)
374,012
3,879
1,070
—
11,155
(165,727)
2,064
(10,408)
6,692
(35,669)
18,125
1,812
(34,411)
414,655
(55,940)
(14,089)
1,923,847
1,416,386
3,870,415
298,100
1,446,948
358,372
1,911,991
351,255
1,697,948
9,117
2,746,510
383,763
284,470
11,981
(6,852,481)
(5,026,640)
(6,883,895)
(575,367)
(864,717)
(85,318)
(4,283)
(535,249)
(691,428)
(305,575)
(4,809)
(428,833)
(602,349)
(11,559)
(1,197)
(2,408,331)
(2,593,390)
(4,501,109)
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Year Ended December 31,
2018
2017
2016
1. Significant Accounting Policies
Nature of Operations
Financing activities
Receipts credited to annuity policyholder account balances
$
4,381,150
$
4,152,264
$
7,092,348
Coinsurance deposits
Return of annuity policyholder account balances
Financing fees incurred and deferred
Proceeds from issuance of notes payable
Repayment of notes payable
Repayment of loan payable
Proceeds from issuance of loan payable
Net proceeds from amounts due under repurchase agreements
Excess tax benefits realized from share-based compensation plans
Proceeds from issuance of common stock
Change in checks in excess of cash balance
Dividends paid
Net cash provided by financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest expense
Income taxes
Non-cash operating activity:
Deferral of sales inducements
Non-cash financing activity:
$
$
(23,838)
(6,597)
(3,159,700)
(2,809,486)
—
—
—
—
—
109,298
—
9,681
(15,829)
(25,265)
1,275,497
(1,089,649)
1,434,045
(5,817)
499,650
(413,252)
(100,000)
—
—
—
14,028
4,680
(23,148)
642,779
791,266
344,396
$
1,434,045
$
1,312,322
3,478,240
39,575
$
55,445
$
181,202
142,627
39,647
39,066
The consolidated financial statements include our accounts and our wholly-owned subsidiaries: American Equity Life, American Equity Life
of New York, Eagle Life, AERL, L.C., American Equity Capital, Inc., American Equity Investment Properties, L.C., American Equity Advisors,
Inc. and American Equity Investment Service Company. All significant intercompany accounts and transactions have been eliminated. As of
December 31, 2018, American Equity Capital, Inc., American Equity Advisors, Inc. and American Equity Investment Service Company have
179,465
216,172
353,966
been dissolved.
393,517
397,749
791,266
(1,317,555)
(2,535,669)
(1,456)
—
—
—
100,000
—
527
139,654
21,501
(21,110)
type were as follows:
Product Type
Fixed index annuities
Annual reset fixed rate annuities
Multi-year fixed rate annuities
Single premium immediate annuities (SPIA)
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
$
$
3,898,366
$
3,668,121
$
5,035,818
46,744
22,818
23,813
74,572
22,291
24,946
63,582
256,894
35,851
3,991,741
$
3,789,930
$
5,392,145
American Equity Investment Life Holding Company ("we", "us", "our" or "parent company"), through its wholly-owned subsidiaries, American
Equity Investment Life Insurance Company ("American Equity Life"), American Equity Investment Life Insurance Company of New York
("American Equity Life of New York") and Eagle Life Insurance Company ("Eagle Life"), is licensed to sell insurance products in 50 states and
the District of Columbia at December 31, 2018. We operate solely in the insurance business.
We primarily market fixed index and fixed rate annuities. Annuity deposits (net of coinsurance) collected in 2018, 2017 and 2016, by product
Agents contracted with us through two national marketing organizations accounted for more than 10% of annuity deposits we collected during
2018 representing 20% and 14%, individually, of the annuity deposits collected. Agents contracted with us through two national marketing
organization accounted for more than 10% of annuity deposits we collected during 2017 representing 14% and 10%, individually, of the annuity
deposits collected. Agents contracted with us through one national marketing organization accounted for more than 10% of annuity deposits
we collected during 2016 representing 15% of the annuity deposits collected.
Consolidation and Basis of Presentation
Estimates and Assumptions
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
Significant estimates and assumptions are utilized in the calculation of deferred policy acquisition costs, deferred sales inducements, policy
benefit reserves, including the liability for lifetime income benefit riders and the valuation of embedded derivatives on index annuity reserves,
valuation of derivatives, valuation of investments, other than temporary impairment of investments, allowances for loan losses on mortgage
loans and valuation allowances on deferred tax assets. A description of each critical estimate is incorporated within the discussion of the related
accounting policies which follow. It is reasonably possible that actual experience could differ from the estimates and assumptions utilized.
Investments
Fixed maturity securities (bonds maturing more than one year after issuance) that may be sold prior to maturity are classified as available for
sale. Available for sale securities are reported at fair value and unrealized gains and losses, if any, on these securities are included directly in a
separate component of stockholders' equity, net of income taxes and certain adjustments for assumed changes in amortization of deferred policy
acquisition costs and deferred sales inducements. Fair values, as reported herein, of fixed maturity and equity securities are based on quoted
market prices in active markets when available, or for those fixed maturity securities not actively traded, yield data and other factors relating to
instruments or securities with similar characteristics are used. See Note 2 for more information on the determination of fair value. Premiums
and discounts are amortized/accrued using methods which result in a constant yield over the securities' expected lives. Amortization/accrual of
premiums and discounts on residential and commercial mortgage backed securities incorporate prepayment assumptions to estimate the securities'
expected lives. Interest income is recognized as earned.
Fixed maturity securities that we have the positive intent and ability to hold to maturity are classified as held for investment. Held for investment
securities are reported at cost adjusted for amortization of premiums and discounts. Changes in the fair value of these securities, except for
declines that are other than temporary, are not reflected in our consolidated financial statements.
Common stock issued to settle warrants that have expired
—
—
93
See accompanying notes to consolidated financial statements.
F-8
F-9
Receipts credited to annuity policyholder account balances
$
4,381,150
$
4,152,264
$
7,092,348
Year Ended December 31,
2018
2017
2016
(23,838)
(6,597)
(3,159,700)
(2,809,486)
—
—
—
—
—
—
109,298
9,681
(15,829)
(25,265)
1,275,497
(1,089,649)
1,434,045
(5,817)
499,650
(413,252)
(100,000)
—
—
—
14,028
4,680
(23,148)
642,779
791,266
344,396
$
1,434,045
$
(1,317,555)
(2,535,669)
(1,456)
—
—
—
—
527
100,000
139,654
21,501
(21,110)
393,517
397,749
791,266
1,312,322
3,478,240
$
$
Financing activities
Coinsurance deposits
Return of annuity policyholder account balances
Financing fees incurred and deferred
Proceeds from issuance of notes payable
Repayment of notes payable
Repayment of loan payable
Proceeds from issuance of loan payable
Net proceeds from amounts due under repurchase agreements
Excess tax benefits realized from share-based compensation plans
Proceeds from issuance of common stock
Change in checks in excess of cash balance
Dividends paid
Net cash provided by financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest expense
Income taxes
Non-cash operating activity:
Deferral of sales inducements
Non-cash financing activity:
See accompanying notes to consolidated financial statements.
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
1. Significant Accounting Policies
Nature of Operations
American Equity Investment Life Holding Company ("we", "us", "our" or "parent company"), through its wholly-owned subsidiaries, American
Equity Investment Life Insurance Company ("American Equity Life"), American Equity Investment Life Insurance Company of New York
("American Equity Life of New York") and Eagle Life Insurance Company ("Eagle Life"), is licensed to sell insurance products in 50 states and
the District of Columbia at December 31, 2018. We operate solely in the insurance business.
We primarily market fixed index and fixed rate annuities. Annuity deposits (net of coinsurance) collected in 2018, 2017 and 2016, by product
type were as follows:
Product Type
Fixed index annuities
Annual reset fixed rate annuities
Multi-year fixed rate annuities
Single premium immediate annuities (SPIA)
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
$
$
3,898,366
$
3,668,121
$
5,035,818
46,744
22,818
23,813
74,572
22,291
24,946
63,582
256,894
35,851
3,991,741
$
3,789,930
$
5,392,145
Agents contracted with us through two national marketing organizations accounted for more than 10% of annuity deposits we collected during
2018 representing 20% and 14%, individually, of the annuity deposits collected. Agents contracted with us through two national marketing
organization accounted for more than 10% of annuity deposits we collected during 2017 representing 14% and 10%, individually, of the annuity
deposits collected. Agents contracted with us through one national marketing organization accounted for more than 10% of annuity deposits
we collected during 2016 representing 15% of the annuity deposits collected.
Consolidation and Basis of Presentation
Common stock issued to settle warrants that have expired
—
—
93
Estimates and Assumptions
39,575
$
55,445
$
181,202
142,627
39,647
39,066
179,465
216,172
353,966
The consolidated financial statements include our accounts and our wholly-owned subsidiaries: American Equity Life, American Equity Life
of New York, Eagle Life, AERL, L.C., American Equity Capital, Inc., American Equity Investment Properties, L.C., American Equity Advisors,
Inc. and American Equity Investment Service Company. All significant intercompany accounts and transactions have been eliminated. As of
December 31, 2018, American Equity Capital, Inc., American Equity Advisors, Inc. and American Equity Investment Service Company have
been dissolved.
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
Significant estimates and assumptions are utilized in the calculation of deferred policy acquisition costs, deferred sales inducements, policy
benefit reserves, including the liability for lifetime income benefit riders and the valuation of embedded derivatives on index annuity reserves,
valuation of derivatives, valuation of investments, other than temporary impairment of investments, allowances for loan losses on mortgage
loans and valuation allowances on deferred tax assets. A description of each critical estimate is incorporated within the discussion of the related
accounting policies which follow. It is reasonably possible that actual experience could differ from the estimates and assumptions utilized.
Investments
Fixed maturity securities (bonds maturing more than one year after issuance) that may be sold prior to maturity are classified as available for
sale. Available for sale securities are reported at fair value and unrealized gains and losses, if any, on these securities are included directly in a
separate component of stockholders' equity, net of income taxes and certain adjustments for assumed changes in amortization of deferred policy
acquisition costs and deferred sales inducements. Fair values, as reported herein, of fixed maturity and equity securities are based on quoted
market prices in active markets when available, or for those fixed maturity securities not actively traded, yield data and other factors relating to
instruments or securities with similar characteristics are used. See Note 2 for more information on the determination of fair value. Premiums
and discounts are amortized/accrued using methods which result in a constant yield over the securities' expected lives. Amortization/accrual of
premiums and discounts on residential and commercial mortgage backed securities incorporate prepayment assumptions to estimate the securities'
expected lives. Interest income is recognized as earned.
Fixed maturity securities that we have the positive intent and ability to hold to maturity are classified as held for investment. Held for investment
securities are reported at cost adjusted for amortization of premiums and discounts. Changes in the fair value of these securities, except for
declines that are other than temporary, are not reflected in our consolidated financial statements.
F-8
F-9
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The carrying amounts of our impaired investments in fixed maturity securities are adjusted for declines in value that are other than temporary.
Other than temporary impairment losses are reported as a component of revenues in the consolidated statements of operations, which presents
the amount of noncredit impairment losses that is reported in accumulated other comprehensive income (loss). See Note 3 for further discussion
of other than temporary impairment losses.
Deterioration in credit quality of the companies or assets backing our fixed maturity securities, imbalances in liquidity recurring in the marketplace
or declines in real estate values may further affect the fair value of these fixed maturity securities and increase the potential that certain unrealized
losses will be recognized as other than temporary impairments in the future.
Mortgage loans on real estate are reported at cost, adjusted for amortization of premiums and accrual of discounts. Interest income is recorded
when earned; however, interest ceases to accrue for loans on which interest is more than 90 days past due based upon contractual terms and/or
when the collection of interest is not considered probable. We evaluate the mortgage loan portfolio for the establishment of a loan loss allowance
by specific identification of impaired loans and the measurement of an estimated loss, if any, for each impaired loan identified and an analysis
of the mortgage loan portfolio for the need of a general loan allowance for probable losses on all loans. If we determine that the value of any
specific mortgage loan is impaired, the carrying amount of the mortgage loan will be reduced to its fair value, based upon the present value of
expected future cash flows from the loan discounted at the loan's contractual interest rate, or the fair value of the underlying collateral, less costs
to sell. The amount of the general loan allowance, if any, is based upon our evaluation of the probability of collection, historical loss experience,
delinquencies, credit concentrations, underwriting standards and national and local economic conditions. The carrying value of impaired loans
is reduced by the establishment of an allowance for loan losses, changes to which are recognized as realized gains or losses on investments.
Interest income on impaired loans is recorded on a cash basis.
Other invested assets include company owned life insurance, equity securities, real estate, limited partnerships accounted for using the equity
method and policy loans. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the end
of the reporting period, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Dividends are recognized when declared. Policy loans are stated at current unpaid principal balances.
Real estate owned is reported at cost less accumulated depreciation. Cost is determined at the time ownership is acquired in satisfaction of
mortgage loans and is the lower of the carrying value of the mortgage loan or fair value of the real estate less its estimated cost to sell. Buildings
and improvements are depreciated using the straight-line method over their estimated useful lives. Impairment losses on real estate owned are
recognized when there are indicators of impairment present and the expected future undiscounted cash flows are not sufficient to recover the
real estate's carrying value. Any impairment losses are reported as realized losses and are part of net income.
Realized gains and losses on sales of investments are determined on the basis of specific identification based on the trade date.
Derivative Instruments
Our derivative instruments include call options used to fund fixed index annuity credits and interest rate swap and caps used to manage interest
rate risk associated with the floating rate component on certain of our subordinated debentures. All of our derivative instruments are recognized
in the balance sheet at fair value and changes in fair value are recognized immediately in operations. See Note 5 for more information on
derivative instruments.
Cash and Cash Equivalents
We consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
Book Overdrafts
Under our cash management system, checks issued but not yet presented to banks frequently result in overdraft balances for accounting purposes
and are classified as Other liabilities on our consolidated balance sheets. We report the changes in the amount of the overdraft balance as a
financing activity in our consolidated statement of cash flows as Change in checks in excess of cash balance.
Deferred Policy Acquisition Costs and Deferred Sales Inducements
To the extent recoverable from future policy revenues and gross profits, certain costs that are incremental or directly related to the successful
production of new business are not expensed when incurred but instead are capitalized as deferred policy acquisition costs or deferred sales
inducements. Deferred policy acquisition costs and deferred sales inducements are subject to loss recognition testing on a quarterly basis or
when an event occurs that may warrant loss recognition. Deferred policy acquisition costs consist primarily of commissions and certain costs
of policy issuance. Deferred sales inducements consist of premium and interest bonuses credited to policyholder account balances.
For annuity products, these capitalized costs are being amortized in proportion to expected gross profits from investment spreads, including the
cost of hedging the fixed indexed annuity obligations, and, to a lesser extent, from product charges net of expected excess payments for lifetime
income benefit riders, and mortality and expense margins. Current and future period gross profits/margins for fixed index annuities also include
the impact of amounts recorded for the change in fair value of derivatives and the change in fair value of embedded derivatives. That amortization
is adjusted retrospectively through an unlocking process when estimates of current or future gross profits/margins (including the impact of net
realized gains on investments and net OTTI losses recognized in operations) to be realized from a group of products are revised. Deferred policy
acquisition costs and deferred sales inducements are also adjusted for the change in amortization that would have occurred if available for sale
fixed maturity securities had been sold at their aggregate fair value at the end of the reporting period and the proceeds reinvested at current
yields. The impact of this adjustment is included in accumulated other comprehensive income (loss) within consolidated stockholders' equity,
net of applicable taxes. See Note 6 for more information on deferred policy acquisition costs and deferred sales inducements.
Policy Benefit Reserves
Policy benefit reserves for fixed index annuities with returns linked to the performance of a specified market index are equal to the sum of the
fair value of the embedded derivatives and the host (or guaranteed) component of the contracts. The host value is established at inception of
the contract and accreted over the policy's life at a constant rate of interest. Future policy benefit reserves for fixed index annuities earning a
fixed rate of interest and other deferred annuity products are computed under a retrospective deposit method and represent policy account balances
before applicable surrender charges. For the years ended December 31, 2018, 2017 and 2016, interest crediting rates for these products ranged
from 1.00% to 3.30%.
The liability for lifetime income benefit riders is based on estimates of the present value of benefit payments expected to be paid in excess of
projected policy values recognizing the excess over the expected lives of the underlying policies based on the actual and present value of expected
assessments including spreads and product charges and fees. The inputs used in the calculation of the liability for lifetime income benefit riders
include actual policy values, actual income account values, actual payout factors, actual roll-up rates and our best estimate assumptions for future
policy growth, future policy decrements, the ages at which policyholders are expected to elect to begin to receive lifetime income benefit
payments, the percentage of policyholders who elect to receive lifetime income benefit payments and the type of income benefit payments
selected upon election. See Note 6 for more information on lifetime income benefit rider reserves.
Policy benefit reserves are not reduced for amounts ceded under coinsurance agreements which are reported as coinsurance deposits on our
consolidated balance sheets. See Note 7 for more information on reinsurance.
Deferred Income Taxes
Deferred income tax assets or liabilities are computed based on the temporary differences between the financial statement and income tax bases
of assets and liabilities using the enacted marginal tax rate. The effect on deferred income tax assets and liabilities resulting from a change in
the enacted marginal tax rate is recognized in income in the period that includes the enactment date. Deferred income tax expenses or benefits
are based on the changes in the asset or liability from period to period. Deferred income tax assets are subject to ongoing evaluation of whether
such assets will more likely than not be realized. The realization of deferred income tax assets primarily depends on generating future taxable
income during the periods in which temporary differences become deductible. Deferred income tax assets are reduced by a valuation allowance
if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. In
making such a determination, all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected
future taxable income, tax planning strategies and recent financial operations, is considered. The realization of deferred income tax assets related
to unrealized losses on available for sale fixed maturity securities is also based upon our intent and ability to hold those securities for a period
of time sufficient to allow for a recovery in fair value and not realize the unrealized loss.
Recognition of Premium Revenues and Costs
Revenues for annuity products include surrender and living income benefit rider charges assessed against policyholder account balances during
the period. Interest sensitive and index product benefits related to annuity products include interest credited or index credits to policyholder
account balances pursuant to accounting by insurance companies for certain long-duration contracts. The change in fair value of the embedded
derivatives for fixed index annuities equals the 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.
Considerations from immediate annuities and supplemental contract annuities with life contingencies are recognized as revenue when the policy
is issued.
All insurance-related revenues, including the change in the fair value of derivatives for call options related to the business ceded under coinsurance
agreements (see Note 7), benefits, losses and expenses are reported net of reinsurance ceded.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) includes all changes in stockholders' equity during a period except those resulting from investments by and
distributions to stockholders. Other comprehensive income (loss) excludes net realized investment gains (losses) included in net income which
merely represents transfers from unrealized to realized gains and losses.
F-10
F-11
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The carrying amounts of our impaired investments in fixed maturity securities are adjusted for declines in value that are other than temporary.
Other than temporary impairment losses are reported as a component of revenues in the consolidated statements of operations, which presents
the amount of noncredit impairment losses that is reported in accumulated other comprehensive income (loss). See Note 3 for further discussion
of other than temporary impairment losses.
Deterioration in credit quality of the companies or assets backing our fixed maturity securities, imbalances in liquidity recurring in the marketplace
or declines in real estate values may further affect the fair value of these fixed maturity securities and increase the potential that certain unrealized
losses will be recognized as other than temporary impairments in the future.
Mortgage loans on real estate are reported at cost, adjusted for amortization of premiums and accrual of discounts. Interest income is recorded
when earned; however, interest ceases to accrue for loans on which interest is more than 90 days past due based upon contractual terms and/or
when the collection of interest is not considered probable. We evaluate the mortgage loan portfolio for the establishment of a loan loss allowance
by specific identification of impaired loans and the measurement of an estimated loss, if any, for each impaired loan identified and an analysis
of the mortgage loan portfolio for the need of a general loan allowance for probable losses on all loans. If we determine that the value of any
specific mortgage loan is impaired, the carrying amount of the mortgage loan will be reduced to its fair value, based upon the present value of
expected future cash flows from the loan discounted at the loan's contractual interest rate, or the fair value of the underlying collateral, less costs
to sell. The amount of the general loan allowance, if any, is based upon our evaluation of the probability of collection, historical loss experience,
delinquencies, credit concentrations, underwriting standards and national and local economic conditions. The carrying value of impaired loans
is reduced by the establishment of an allowance for loan losses, changes to which are recognized as realized gains or losses on investments.
Interest income on impaired loans is recorded on a cash basis.
Other invested assets include company owned life insurance, equity securities, real estate, limited partnerships accounted for using the equity
method and policy loans. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the end
of the reporting period, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Dividends are recognized when declared. Policy loans are stated at current unpaid principal balances.
Real estate owned is reported at cost less accumulated depreciation. Cost is determined at the time ownership is acquired in satisfaction of
mortgage loans and is the lower of the carrying value of the mortgage loan or fair value of the real estate less its estimated cost to sell. Buildings
and improvements are depreciated using the straight-line method over their estimated useful lives. Impairment losses on real estate owned are
recognized when there are indicators of impairment present and the expected future undiscounted cash flows are not sufficient to recover the
real estate's carrying value. Any impairment losses are reported as realized losses and are part of net income.
Realized gains and losses on sales of investments are determined on the basis of specific identification based on the trade date.
Our derivative instruments include call options used to fund fixed index annuity credits and interest rate swap and caps used to manage interest
rate risk associated with the floating rate component on certain of our subordinated debentures. All of our derivative instruments are recognized
in the balance sheet at fair value and changes in fair value are recognized immediately in operations. See Note 5 for more information on
We consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
Under our cash management system, checks issued but not yet presented to banks frequently result in overdraft balances for accounting purposes
and are classified as Other liabilities on our consolidated balance sheets. We report the changes in the amount of the overdraft balance as a
financing activity in our consolidated statement of cash flows as Change in checks in excess of cash balance.
Deferred Policy Acquisition Costs and Deferred Sales Inducements
To the extent recoverable from future policy revenues and gross profits, certain costs that are incremental or directly related to the successful
production of new business are not expensed when incurred but instead are capitalized as deferred policy acquisition costs or deferred sales
inducements. Deferred policy acquisition costs and deferred sales inducements are subject to loss recognition testing on a quarterly basis or
when an event occurs that may warrant loss recognition. Deferred policy acquisition costs consist primarily of commissions and certain costs
of policy issuance. Deferred sales inducements consist of premium and interest bonuses credited to policyholder account balances.
Derivative Instruments
derivative instruments.
Cash and Cash Equivalents
Book Overdrafts
For annuity products, these capitalized costs are being amortized in proportion to expected gross profits from investment spreads, including the
cost of hedging the fixed indexed annuity obligations, and, to a lesser extent, from product charges net of expected excess payments for lifetime
income benefit riders, and mortality and expense margins. Current and future period gross profits/margins for fixed index annuities also include
the impact of amounts recorded for the change in fair value of derivatives and the change in fair value of embedded derivatives. That amortization
is adjusted retrospectively through an unlocking process when estimates of current or future gross profits/margins (including the impact of net
realized gains on investments and net OTTI losses recognized in operations) to be realized from a group of products are revised. Deferred policy
acquisition costs and deferred sales inducements are also adjusted for the change in amortization that would have occurred if available for sale
fixed maturity securities had been sold at their aggregate fair value at the end of the reporting period and the proceeds reinvested at current
yields. The impact of this adjustment is included in accumulated other comprehensive income (loss) within consolidated stockholders' equity,
net of applicable taxes. See Note 6 for more information on deferred policy acquisition costs and deferred sales inducements.
Policy Benefit Reserves
Policy benefit reserves for fixed index annuities with returns linked to the performance of a specified market index are equal to the sum of the
fair value of the embedded derivatives and the host (or guaranteed) component of the contracts. The host value is established at inception of
the contract and accreted over the policy's life at a constant rate of interest. Future policy benefit reserves for fixed index annuities earning a
fixed rate of interest and other deferred annuity products are computed under a retrospective deposit method and represent policy account balances
before applicable surrender charges. For the years ended December 31, 2018, 2017 and 2016, interest crediting rates for these products ranged
from 1.00% to 3.30%.
The liability for lifetime income benefit riders is based on estimates of the present value of benefit payments expected to be paid in excess of
projected policy values recognizing the excess over the expected lives of the underlying policies based on the actual and present value of expected
assessments including spreads and product charges and fees. The inputs used in the calculation of the liability for lifetime income benefit riders
include actual policy values, actual income account values, actual payout factors, actual roll-up rates and our best estimate assumptions for future
policy growth, future policy decrements, the ages at which policyholders are expected to elect to begin to receive lifetime income benefit
payments, the percentage of policyholders who elect to receive lifetime income benefit payments and the type of income benefit payments
selected upon election. See Note 6 for more information on lifetime income benefit rider reserves.
Policy benefit reserves are not reduced for amounts ceded under coinsurance agreements which are reported as coinsurance deposits on our
consolidated balance sheets. See Note 7 for more information on reinsurance.
Deferred Income Taxes
Deferred income tax assets or liabilities are computed based on the temporary differences between the financial statement and income tax bases
of assets and liabilities using the enacted marginal tax rate. The effect on deferred income tax assets and liabilities resulting from a change in
the enacted marginal tax rate is recognized in income in the period that includes the enactment date. Deferred income tax expenses or benefits
are based on the changes in the asset or liability from period to period. Deferred income tax assets are subject to ongoing evaluation of whether
such assets will more likely than not be realized. The realization of deferred income tax assets primarily depends on generating future taxable
income during the periods in which temporary differences become deductible. Deferred income tax assets are reduced by a valuation allowance
if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. In
making such a determination, all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected
future taxable income, tax planning strategies and recent financial operations, is considered. The realization of deferred income tax assets related
to unrealized losses on available for sale fixed maturity securities is also based upon our intent and ability to hold those securities for a period
of time sufficient to allow for a recovery in fair value and not realize the unrealized loss.
Recognition of Premium Revenues and Costs
Revenues for annuity products include surrender and living income benefit rider charges assessed against policyholder account balances during
the period. Interest sensitive and index product benefits related to annuity products include interest credited or index credits to policyholder
account balances pursuant to accounting by insurance companies for certain long-duration contracts. The change in fair value of the embedded
derivatives for fixed index annuities equals the 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.
Considerations from immediate annuities and supplemental contract annuities with life contingencies are recognized as revenue when the policy
is issued.
All insurance-related revenues, including the change in the fair value of derivatives for call options related to the business ceded under coinsurance
agreements (see Note 7), benefits, losses and expenses are reported net of reinsurance ceded.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) includes all changes in stockholders' equity during a period except those resulting from investments by and
distributions to stockholders. Other comprehensive income (loss) excludes net realized investment gains (losses) included in net income which
merely represents transfers from unrealized to realized gains and losses.
F-10
F-11
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In August 2018, the FASB issued an ASU that revises certain aspects of the measurement models and disclosure requirements for long duration
insurance and investment contracts. The FASB’s objective in issuing this ASU is to improve, simplify, and enhance the accounting for long-
duration contracts. The revisions include updating cash flow assumptions in the calculation of the liability for traditional life products, introducing
the term ‘market risk benefit’ ("MRB") and requiring all contract features meeting the definition of an MRB to be measured at fair value,
simplifying the method used to amortize deferred policy acquisition costs and deferred sales inducements to a constant basis over the expected
term of the related contracts rather than based on gross profits and enhancing disclosure requirements. While this ASU is effective for us on
January 1, 2021, the transition date (the remeasurement date) is January 1, 2019. Early adoption of this ASU is permitted. We are in process
of evaluating the impact this guidance will have on our consolidated financial statements.
Income Tax Reform
As a result of Tax Reform, the statutory federal corporate tax rate was reduced from 35% to 21% effective January 1, 2018.
Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued an accounting standards update ("ASU") related to revenue arising
from contracts with customers. This ASU, which replaces most current revenue recognition guidance, including industry specific guidance,
prescribes that an entity should recognize revenue to reflect the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted this ASU on January 1, 2018.
The adoption of this ASU had no impact on our consolidated financial statements as revenues related to insurance contracts and investment
contracts are excluded from its scope.
In January 2016, the FASB issued an ASU that, among other aspects of recognition, measurement, presentation and disclosure of financial
instruments, primarily requires equity investments (except those accounted for under the equity method of accounting or those that result in
consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose
to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting
from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Additionally, it changed the
accounting for financial liabilities measured at fair value under the fair value option and eliminates some disclosures regarding fair value of
financial assets and liabilities measured at amortized cost. We adopted this ASU on January 1, 2018. The adoption of this ASU had no impact
on our consolidated financial statements.
In March 2016, the FASB issued an ASU related to the accounting for share-based payment transactions. The aspects of accounting guidance
affected by this ASU are income taxes, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
We adopted this ASU on January 1, 2017. The adoption of this ASU resulted in an income tax benefit of $2.8 million and $2.7 million being
recognized in operations during the years ended December 31, 2018 and 2017, respectively, due to the requirement under this standard to
recognize excess tax benefits related to share-based payment awards in income tax expense.
In August 2016, the FASB issued an ASU that clarifies how certain cash receipts and cash payments are to be presented and classified in the
statement of cash flows. We adopted this ASU on January 1, 2018. The adoption of this ASU, which resulted in a reclassification of certain
cash flows related to equity method investment distributions from investing activities to operating activities within our consolidated statements
of cash flows, did not have a material impact on our consolidated financial statements.
In February 2018, the FASB issued an ASU that allows a reclassification from accumulated other comprehensive income (loss) to retained
earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 ("Tax Reform"). We adopted this ASU on January 1, 2018.
The adoption of this ASU resulted in a reclassification of $128 million between accumulated other comprehensive income (loss) and retained
earnings within our consolidated balance sheet.
New Accounting Pronouncements
In February 2016, the FASB issued an ASU that will require recognizing lease assets and lease liabilities on the balance sheet and disclosing
key information about leasing arrangements. This ASU affects accounting and disclosure more dramatically for lessees as accounting for lessors
is mainly unchanged. This ASU will be effective for us on January 1, 2019, with early adoption permitted. The primary impact this guidance
will have on our consolidated financial statements is recognition of a lease asset and lease liability within our consolidated balance sheet. Based
on our lease agreements at December 31, 2018, we would recognize a lease asset and lease liability of approximately $3.7 million.
In June 2016, the FASB issued an ASU that significantly changes the impairment model for most financial assets that are measured at amortized
cost and certain other instruments from an incurred loss model to an expected loss model that requires these assets be presented at the net amount
expected to be collected. In addition, credit losses on available for sale debt securities will be recorded through an allowance account. This
ASU will be effective for us on January 1, 2020, with early adoption permitted. While we are still in the process of evaluating the full impact
this guidance will have on our consolidated financial statements, we believe the new impairment model will lead to earlier recognition of credit
losses for our commercial mortgage loans.
In March 2017, the FASB issued an ASU that applies to certain callable debt securities where the amortized cost basis is at a premium to the
price repayable by the issuer at the earliest call date. Under this guidance, the premium will be amortized to the first call date. This ASU will
be effective for us on January 1, 2019. This guidance is to be adopted on a modified retrospective basis through a cumulative-effective adjustment
to retained earnings as of the beginning of the period of adoption. The adoption of this guidance will not have a material impact on our consolidated
financial statements.
In June 2018, the FASB issued an ASU that expands the scope of Accounting Standards Codification 718, Compensation-Stock Compensation,
to include share-based payment transactions for acquiring goods and services to nonemployees and eliminates the existing accounting model
for nonemployee share-based payment awards. This ASU will be effective for us on January 1, 2019, with early adoption permitted. While this
guidance will lead to an earlier measurement date for our nonemployee restricted stock units that have not vested as of January 1, 2019, it will
not impact our consolidated financial statements upon adoption.
F-12
F-13
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In August 2018, the FASB issued an ASU that revises certain aspects of the measurement models and disclosure requirements for long duration
insurance and investment contracts. The FASB’s objective in issuing this ASU is to improve, simplify, and enhance the accounting for long-
duration contracts. The revisions include updating cash flow assumptions in the calculation of the liability for traditional life products, introducing
the term ‘market risk benefit’ ("MRB") and requiring all contract features meeting the definition of an MRB to be measured at fair value,
simplifying the method used to amortize deferred policy acquisition costs and deferred sales inducements to a constant basis over the expected
term of the related contracts rather than based on gross profits and enhancing disclosure requirements. While this ASU is effective for us on
January 1, 2021, the transition date (the remeasurement date) is January 1, 2019. Early adoption of this ASU is permitted. We are in process
of evaluating the impact this guidance will have on our consolidated financial statements.
Income Tax Reform
As a result of Tax Reform, the statutory federal corporate tax rate was reduced from 35% to 21% effective January 1, 2018.
Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued an accounting standards update ("ASU") related to revenue arising
from contracts with customers. This ASU, which replaces most current revenue recognition guidance, including industry specific guidance,
prescribes that an entity should recognize revenue to reflect the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted this ASU on January 1, 2018.
The adoption of this ASU had no impact on our consolidated financial statements as revenues related to insurance contracts and investment
contracts are excluded from its scope.
In January 2016, the FASB issued an ASU that, among other aspects of recognition, measurement, presentation and disclosure of financial
instruments, primarily requires equity investments (except those accounted for under the equity method of accounting or those that result in
consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose
to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting
from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Additionally, it changed the
accounting for financial liabilities measured at fair value under the fair value option and eliminates some disclosures regarding fair value of
financial assets and liabilities measured at amortized cost. We adopted this ASU on January 1, 2018. The adoption of this ASU had no impact
on our consolidated financial statements.
In March 2016, the FASB issued an ASU related to the accounting for share-based payment transactions. The aspects of accounting guidance
affected by this ASU are income taxes, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
We adopted this ASU on January 1, 2017. The adoption of this ASU resulted in an income tax benefit of $2.8 million and $2.7 million being
recognized in operations during the years ended December 31, 2018 and 2017, respectively, due to the requirement under this standard to
recognize excess tax benefits related to share-based payment awards in income tax expense.
In August 2016, the FASB issued an ASU that clarifies how certain cash receipts and cash payments are to be presented and classified in the
statement of cash flows. We adopted this ASU on January 1, 2018. The adoption of this ASU, which resulted in a reclassification of certain
cash flows related to equity method investment distributions from investing activities to operating activities within our consolidated statements
of cash flows, did not have a material impact on our consolidated financial statements.
In February 2018, the FASB issued an ASU that allows a reclassification from accumulated other comprehensive income (loss) to retained
earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 ("Tax Reform"). We adopted this ASU on January 1, 2018.
The adoption of this ASU resulted in a reclassification of $128 million between accumulated other comprehensive income (loss) and retained
earnings within our consolidated balance sheet.
New Accounting Pronouncements
In February 2016, the FASB issued an ASU that will require recognizing lease assets and lease liabilities on the balance sheet and disclosing
key information about leasing arrangements. This ASU affects accounting and disclosure more dramatically for lessees as accounting for lessors
is mainly unchanged. This ASU will be effective for us on January 1, 2019, with early adoption permitted. The primary impact this guidance
will have on our consolidated financial statements is recognition of a lease asset and lease liability within our consolidated balance sheet. Based
on our lease agreements at December 31, 2018, we would recognize a lease asset and lease liability of approximately $3.7 million.
In June 2016, the FASB issued an ASU that significantly changes the impairment model for most financial assets that are measured at amortized
cost and certain other instruments from an incurred loss model to an expected loss model that requires these assets be presented at the net amount
expected to be collected. In addition, credit losses on available for sale debt securities will be recorded through an allowance account. This
ASU will be effective for us on January 1, 2020, with early adoption permitted. While we are still in the process of evaluating the full impact
this guidance will have on our consolidated financial statements, we believe the new impairment model will lead to earlier recognition of credit
losses for our commercial mortgage loans.
In March 2017, the FASB issued an ASU that applies to certain callable debt securities where the amortized cost basis is at a premium to the
price repayable by the issuer at the earliest call date. Under this guidance, the premium will be amortized to the first call date. This ASU will
be effective for us on January 1, 2019. This guidance is to be adopted on a modified retrospective basis through a cumulative-effective adjustment
to retained earnings as of the beginning of the period of adoption. The adoption of this guidance will not have a material impact on our consolidated
financial statements.
In June 2018, the FASB issued an ASU that expands the scope of Accounting Standards Codification 718, Compensation-Stock Compensation,
to include share-based payment transactions for acquiring goods and services to nonemployees and eliminates the existing accounting model
for nonemployee share-based payment awards. This ASU will be effective for us on January 1, 2019, with early adoption permitted. While this
guidance will lead to an earlier measurement date for our nonemployee restricted stock units that have not vested as of January 1, 2019, it will
not impact our consolidated financial statements upon adoption.
F-12
F-13
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Fair Values of Financial Instruments
Our assets and liabilities which are measured at fair value on a recurring basis as of December 31, 2018 and 2017 are presented below based on
The following sets forth a comparison of the carrying amounts and fair values of our financial instruments:
the fair value hierarchy levels:
Assets
Fixed maturity securities:
Available for sale
Held for investment
Mortgage loans on real estate
Derivative instruments
Other investments
Cash and cash equivalents
Coinsurance deposits
Interest rate caps
Interest rate swap
Counterparty collateral
Liabilities
Policy benefit reserves
Single premium immediate annuity (SPIA) benefit reserves
Notes payable
Subordinated debentures
Amounts due under repurchase agreements
Interest rate swap
December 31,
2018
2017
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
(Dollars in thousands)
$
45,923,727
$
45,923,727
$
45,372,989
$
45,372,989
—
2,943,091
205,149
355,531
344,396
4,954,068
597
354
33,101
—
2,920,612
205,149
348,970
344,396
4,553,790
597
354
33,101
77,041
2,665,531
1,568,380
616,764
1,434,045
4,858,289
415
—
186,108
76,460
2,670,037
1,568,380
605,894
1,434,045
4,347,990
415
—
186,108
57,249,510
49,180,143
55,786,011
46,344,931
270,406
494,591
242,982
109,298
—
279,077
489,985
215,514
109,298
—
282,563
494,093
242,565
—
789
292,153
521,800
244,117
—
789
Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market
participants at the measurement date. The objective of a fair value measurement is to determine that price for each financial instrument at each
measurement date. We meet this objective using various methods of valuation that include market, income and cost approaches.
We categorize our financial instruments into three levels of fair value hierarchy based on the priority of inputs used in determining fair value.
The hierarchy defines the highest priority inputs (Level 1) as quoted prices in active markets for identical assets or liabilities. The lowest priority
inputs (Level 3) are our own assumptions about what a market participant would use in determining fair value such as estimated future cash
flows. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, a financial
instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our
assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific
to the financial instrument. We categorize financial assets and liabilities recorded at fair value in the consolidated balance sheets as follows:
Level 1—
Level 2—
Quoted prices are available in active markets for identical financial instruments as of the reporting date. We do not adjust
the quoted price for these financial instruments, even in situations where we hold a large position and a sale could reasonably
impact the quoted price.
Quoted prices in active markets for similar financial instruments, quoted prices for identical or similar financial instruments
in markets that are not active; and models and other valuation methodologies using inputs other than quoted prices that are
observable.
Level 3— Models and other valuation methodologies using significant inputs that are unobservable for financial instruments and include
situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair
value require significant management judgment or estimation. Financial instruments that are included in Level 3 are securities
for which no market activity or data exists and for which we used discounted expected future cash flows with our own
assumptions about what a market participant would use in determining fair value.
Transfers of securities among the levels occur at times and depend on the type of inputs used to determine fair value of each security. There
were no transfers between levels during any period presented.
F-14
Fixed index annuities - embedded derivatives
8,165,405
— $
— $
8,165,405
December 31, 2018
Assets
Fixed maturity securities:
Available for sale:
United States Government full faith and credit
United States Government sponsored agencies
United States municipalities, states and territories
Foreign government obligations
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Other investments: equity securities, available for sale
Derivative instruments
Cash and cash equivalents
Interest rate caps
Interest rate swap
Counterparty collateral
Liabilities
December 31, 2017
Assets
Fixed maturity securities:
Available for sale:
United States Government full faith and credit
United States Government sponsored agencies
United States municipalities, states and territories
Foreign government obligations
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Other investments: equity securities, available for sale
Derivative instruments
Cash and cash equivalents
Interest rate caps
Counterparty collateral
Liabilities
Interest rate swap
Fixed index annuities - embedded derivatives
Total
Fair Value
Quoted
Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
(Dollars in thousands)
Significant
Unobservable
Inputs
(Level 3)
$
11,652
$
5,900
$
5,752
$
344,396
350,303
$
46,164,458
$
1,138,529
4,126,267
230,274
28,371,507
1,202,159
5,379,003
5,464,329
7,437
205,149
—
597
354
33,101
1,305,017
4,166,812
239,360
29,878,966
1,105,567
5,544,850
3,120,536
7,429
1,568,380
—
415
186,108
—
—
—
7
—
—
—
—
—
—
—
—
—
—
—
5
—
—
—
—
—
—
285,000
1,434,045
1,138,529
4,126,267
230,274
28,371,514
1,202,159
5,379,003
5,464,329
7,437
205,149
344,396
597
354
33,101
46,514,761
1,305,017
4,166,812
239,360
29,878,971
1,105,567
5,544,850
3,120,536
292,429
1,568,380
1,434,045
415
186,108
789
8,790,427
8,791,216
$
$
$
$
$
$
11,876
$
5,640
$
6,236
$
48,854,366
1,724,690
$
47,129,676
$
$
$
789
—
789
8,790,427
8,790,427
— $
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
$
$
$
F-15
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Fair Values of Financial Instruments
The following sets forth a comparison of the carrying amounts and fair values of our financial instruments:
Our assets and liabilities which are measured at fair value on a recurring basis as of December 31, 2018 and 2017 are presented below based on
the fair value hierarchy levels:
Total
Fair Value
Quoted
Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
(Dollars in thousands)
Significant
Unobservable
Inputs
(Level 3)
December 31, 2018
Assets
Fixed maturity securities:
Available for sale:
United States Government full faith and credit
United States Government sponsored agencies
United States municipalities, states and territories
Foreign government obligations
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Other investments: equity securities, available for sale
Derivative instruments
Cash and cash equivalents
Interest rate caps
Interest rate swap
Counterparty collateral
Liabilities
Fixed index annuities - embedded derivatives
December 31, 2017
Assets
Fixed maturity securities:
Available for sale:
United States Government full faith and credit
United States Government sponsored agencies
United States municipalities, states and territories
Foreign government obligations
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Other investments: equity securities, available for sale
Derivative instruments
Cash and cash equivalents
Interest rate caps
Counterparty collateral
Liabilities
Interest rate swap
Fixed index annuities - embedded derivatives
$
11,652
$
5,900
$
5,752
$
—
—
—
7
—
—
—
—
—
344,396
—
—
—
1,138,529
4,126,267
230,274
28,371,507
1,202,159
5,379,003
5,464,329
7,437
205,149
—
597
354
33,101
350,303
$
46,164,458
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
— $
8,165,405
$
5,640
—
—
—
5
—
—
—
285,000
—
1,434,045
—
—
6,236
1,305,017
4,166,812
239,360
29,878,966
1,105,567
5,544,850
3,120,536
7,429
1,568,380
—
415
186,108
1,724,690
$
47,129,676
— $
—
— $
789
—
789
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
8,790,427
8,790,427
1,138,529
4,126,267
230,274
28,371,514
1,202,159
5,379,003
5,464,329
7,437
205,149
344,396
597
354
33,101
46,514,761
8,165,405
11,876
1,305,017
4,166,812
239,360
29,878,971
1,105,567
5,544,850
3,120,536
292,429
1,568,380
1,434,045
415
186,108
48,854,366
789
8,790,427
8,791,216
$
$
$
$
$
$
$
$
$
$
$
$
F-15
Assets
Fixed maturity securities:
Available for sale
Held for investment
Mortgage loans on real estate
Derivative instruments
Other investments
Cash and cash equivalents
Coinsurance deposits
Interest rate caps
Interest rate swap
Counterparty collateral
Liabilities
Policy benefit reserves
Notes payable
Subordinated debentures
Single premium immediate annuity (SPIA) benefit reserves
Amounts due under repurchase agreements
Interest rate swap
December 31,
2018
2017
Carrying
Amount
Fair Value
Fair Value
Carrying
Amount
(Dollars in thousands)
$
45,923,727
$
45,923,727
$
45,372,989
$
45,372,989
—
—
2,943,091
2,920,612
4,954,068
4,553,790
205,149
355,531
344,396
597
354
33,101
270,406
494,591
242,982
109,298
—
205,149
348,970
344,396
597
354
33,101
279,077
489,985
215,514
109,298
—
77,041
2,665,531
1,568,380
616,764
1,434,045
4,858,289
415
—
282,563
494,093
242,565
—
789
76,460
2,670,037
1,568,380
605,894
1,434,045
4,347,990
415
—
292,153
521,800
244,117
—
789
186,108
186,108
57,249,510
49,180,143
55,786,011
46,344,931
Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market
participants at the measurement date. The objective of a fair value measurement is to determine that price for each financial instrument at each
measurement date. We meet this objective using various methods of valuation that include market, income and cost approaches.
We categorize our financial instruments into three levels of fair value hierarchy based on the priority of inputs used in determining fair value.
The hierarchy defines the highest priority inputs (Level 1) as quoted prices in active markets for identical assets or liabilities. The lowest priority
inputs (Level 3) are our own assumptions about what a market participant would use in determining fair value such as estimated future cash
flows. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, a financial
instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our
assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific
to the financial instrument. We categorize financial assets and liabilities recorded at fair value in the consolidated balance sheets as follows:
Level 1—
Quoted prices are available in active markets for identical financial instruments as of the reporting date. We do not adjust
the quoted price for these financial instruments, even in situations where we hold a large position and a sale could reasonably
Level 2—
Quoted prices in active markets for similar financial instruments, quoted prices for identical or similar financial instruments
in markets that are not active; and models and other valuation methodologies using inputs other than quoted prices that are
impact the quoted price.
observable.
Level 3— Models and other valuation methodologies using significant inputs that are unobservable for financial instruments and include
situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair
value require significant management judgment or estimation. Financial instruments that are included in Level 3 are securities
for which no market activity or data exists and for which we used discounted expected future cash flows with our own
assumptions about what a market participant would use in determining fair value.
Transfers of securities among the levels occur at times and depend on the type of inputs used to determine fair value of each security. There
were no transfers between levels during any period presented.
F-14
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following methods and assumptions were used in estimating the fair values of financial instruments during the periods presented in these
consolidated financial statements.
Cash and cash equivalents
Fixed maturity securities and equity securities
The fair values of fixed maturity securities and equity securities in an active and orderly market are determined by utilizing independent pricing
services. The independent pricing services incorporate a variety of observable market data in their valuation techniques, including:
to the nature of the assets assigned to this category.
Interest rate swap and caps
Amounts reported in the consolidated balance sheets for these instruments are reported at their historical cost which approximates fair value due
•
•
•
•
•
•
•
•
reported trading prices,
benchmark yields,
broker-dealer quotes,
benchmark securities,
bids and offers,
credit ratings,
relative credit information, and
other reference data.
The independent pricing services also take into account perceived market movements and sector news, as well as a security's terms and conditions,
including any features specific to that issue that may influence risk and marketability. Depending on the security, the priority of the use of
observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary.
The independent pricing services provide quoted market prices when available. Quoted prices are not always available due to market inactivity.
When quoted market prices are not available, the third parties use yield data and other factors relating to instruments or securities with similar
characteristics to determine fair value for securities that are not actively traded. We generally obtain one value from our primary external pricing
service. In situations where a price is not available from this service, we may obtain quotes or prices from additional parties as needed. Market
indices of similar rated asset class spreads are considered for valuations and broker indications of similar securities are compared. Inputs used
by the broker include market information, such as yield data and other factors relating to instruments or securities with similar characteristics.
Valuations and quotes obtained from third party commercial pricing services are non-binding and do not represent quotes on which one may
execute the disposition of the assets.
We validate external valuations at least quarterly through a combination of procedures that include the evaluation of methodologies used by the
pricing services, comparison of the prices to a secondary pricing source, analytical reviews and performance analysis of the prices against trends,
and maintenance of a securities watch list. Additionally, as needed we utilize discounted cash flow models or perform independent valuations
on a case-by-case basis using inputs and assumptions similar to those used by the pricing services. Although we do identify differences from
time to time as a result of these validation procedures, we did not make any significant adjustments as of December 31, 2018 and 2017.
Mortgage loans on real estate
Mortgage loans on real estate are not measured at fair value on a recurring basis. The fair values of mortgage loans on real estate are calculated
using discounted expected cash flows using competitive market interest rates currently being offered for similar loans. The fair values of impaired
mortgage loans on real estate that we have considered to be collateral dependent are based on the fair value of the real estate collateral (based
on appraised values) less estimated costs to sell. The inputs utilized to determine fair value of all mortgage loans are unobservable market data
(competitive market interest rates); therefore, fair value of mortgage loans falls into Level 3 in the fair value hierarchy.
Derivative instruments
The fair values of derivative instruments, primarily call options, are based upon the amount of cash that we will receive to settle each derivative
instrument on the reporting date. These amounts are determined by our investment team using industry accepted valuation models and are
adjusted for the nonperformance risk of each counterparty net of any collateral held. Inputs include market volatility and risk free interest rates
and are used in income valuation techniques in arriving at a fair value for each option contract. The nonperformance risk for each counterparty
is based upon its credit default swap rate. We have no performance obligations related to the call options purchased to fund our fixed index
annuity policy liabilities.
Other investments
Equity securities are the only financial instruments included in other investments that are measured at fair value on a recurring basis (see
determination of fair value above). Financial instruments included in other investments that are not measured at fair value on a recurring basis
are policy loans, equity method investments and company owned life insurance ("COLI"). We have not attempted to determine the fair values
associated with our policy loans, as we believe any differences between carrying values and the fair values afforded these instruments are
immaterial to our consolidated financial position and, accordingly, the cost to provide such disclosure does not justify the benefit to be derived.
The fair values of our equity method investments are obtained from third parties and determined by calculating the present value of future cash
flows discounted by a risk free rate, a risk spread and a liquidity discount. As the risk spread and liquidity discount are unobservable market
inputs, the fair value of our equity method investments falls within Level 3 of the fair value hierarchy. The fair value of our COLI approximates
the cash surrender value of the policies and falls within Level 2 of the fair value hierarchy.
F-16
F-17
The fair values of our pay fixed/receive variable interest rate swap and our interest rate caps are obtained from third parties and are determined
by discounting expected future cash flows using a projected London Interbank Offered Rate ("LIBOR") for the term of the swap and caps.
Amounts reported in other assets in the consolidated balance sheets for these instruments are reported at their historical cost which approximates
Counterparty collateral
fair value due to the nature of the assets assigned to this category.
Policy benefit reserves, coinsurance deposits and SPIA benefit reserves
The fair values of the liabilities under contracts not involving significant mortality or morbidity risks (principally deferred annuities), are stated
at the cost we would incur to extinguish the liability (i.e., the cash surrender value) as these contracts are generally issued without an annuitization
date. The coinsurance deposits related to the annuity benefit reserves have fair values determined in a similar fashion. For period-certain annuity
benefit contracts, the fair value is determined by discounting the benefits at the interest rates currently in effect for newly issued immediate
annuity contracts. We are not required to and have not estimated the fair value of the liabilities under contracts that involve significant mortality
or morbidity risks, as these liabilities fall within the definition of insurance contracts that are exceptions from financial instruments that require
disclosures of fair value. Policy benefit reserves, coinsurance deposits and SPIA benefit reserves are not measured at fair value on a recurring
basis. All of the fair values presented within these categories fall within Level 3 of the fair value hierarchy as most of the inputs are unobservable
The fair values of our senior unsecured notes are based upon pricing matrices developed by a third party pricing service when quoted market
prices are not available and are categorized as Level 2 within the fair value hierarchy. Notes payable are not remeasured at fair value on a
market data.
Notes payable
recurring basis.
Subordinated debentures
at fair value on a recurring basis.
Amounts due under repurchase agreements
approximate their fair values.
Fixed index annuities - embedded derivatives
Fair values for subordinated debentures are estimated using discounted cash flow calculations based principally on observable inputs including
our incremental borrowing rates, which reflect our credit rating, for similar types of borrowings with maturities consistent with those remaining
for the debt being valued. These fair values are categorized as Level 2 within the fair value hierarchy. Subordinated debentures are not measured
The amounts reported in the consolidated balance sheets for short term indebtedness under repurchase agreements with variable interest rates
We estimate the fair value of the embedded derivative component of our fixed index annuity policy benefit reserves at each valuation date by
(i) projecting policy contract values and minimum guaranteed contract values over the expected lives of the contracts and (ii) discounting the
excess of the projected contract value amounts at the applicable risk free interest rates adjusted for our nonperformance risk related to those
liabilities. The projections of policy contract values are based on our best estimate assumptions for future policy growth and future policy
decrements. Our best estimate assumptions for future policy growth include assumptions for the expected index credit on the next policy
anniversary date which are derived from the fair values of the underlying call options purchased to fund such index credits and the expected
costs of annual call options we will purchase in the future to fund index credits beyond the next policy anniversary. The projections of minimum
guaranteed contract values include the same best estimate assumptions for policy decrements as were used to project policy contract values.
Within this determination we have the following significant unobservable inputs: 1) the expected cost of annual call options we will purchase
in the future to fund index credits beyond the next policy anniversary and 2) our best estimates for future policy decrements, primarily lapse,
partial withdrawal and mortality rates. As of December 31, 2018 and 2017, we utilized an estimate of 3.10% for the expected cost of annual
call options, which are based on estimated long-term account value growth and a historical review of our actual option costs.
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following methods and assumptions were used in estimating the fair values of financial instruments during the periods presented in these
Cash and cash equivalents
The fair values of fixed maturity securities and equity securities in an active and orderly market are determined by utilizing independent pricing
Interest rate swap and caps
Amounts reported in the consolidated balance sheets for these instruments are reported at their historical cost which approximates fair value due
to the nature of the assets assigned to this category.
The fair values of our pay fixed/receive variable interest rate swap and our interest rate caps are obtained from third parties and are determined
by discounting expected future cash flows using a projected London Interbank Offered Rate ("LIBOR") for the term of the swap and caps.
Counterparty collateral
Amounts reported in other assets in the consolidated balance sheets for these instruments are reported at their historical cost which approximates
fair value due to the nature of the assets assigned to this category.
Policy benefit reserves, coinsurance deposits and SPIA benefit reserves
The fair values of the liabilities under contracts not involving significant mortality or morbidity risks (principally deferred annuities), are stated
at the cost we would incur to extinguish the liability (i.e., the cash surrender value) as these contracts are generally issued without an annuitization
date. The coinsurance deposits related to the annuity benefit reserves have fair values determined in a similar fashion. For period-certain annuity
benefit contracts, the fair value is determined by discounting the benefits at the interest rates currently in effect for newly issued immediate
annuity contracts. We are not required to and have not estimated the fair value of the liabilities under contracts that involve significant mortality
or morbidity risks, as these liabilities fall within the definition of insurance contracts that are exceptions from financial instruments that require
disclosures of fair value. Policy benefit reserves, coinsurance deposits and SPIA benefit reserves are not measured at fair value on a recurring
basis. All of the fair values presented within these categories fall within Level 3 of the fair value hierarchy as most of the inputs are unobservable
market data.
Notes payable
The fair values of our senior unsecured notes are based upon pricing matrices developed by a third party pricing service when quoted market
prices are not available and are categorized as Level 2 within the fair value hierarchy. Notes payable are not remeasured at fair value on a
recurring basis.
Subordinated debentures
Fair values for subordinated debentures are estimated using discounted cash flow calculations based principally on observable inputs including
our incremental borrowing rates, which reflect our credit rating, for similar types of borrowings with maturities consistent with those remaining
for the debt being valued. These fair values are categorized as Level 2 within the fair value hierarchy. Subordinated debentures are not measured
at fair value on a recurring basis.
Amounts due under repurchase agreements
The amounts reported in the consolidated balance sheets for short term indebtedness under repurchase agreements with variable interest rates
approximate their fair values.
Fixed index annuities - embedded derivatives
We estimate the fair value of the embedded derivative component of our fixed index annuity policy benefit reserves at each valuation date by
(i) projecting policy contract values and minimum guaranteed contract values over the expected lives of the contracts and (ii) discounting the
excess of the projected contract value amounts at the applicable risk free interest rates adjusted for our nonperformance risk related to those
liabilities. The projections of policy contract values are based on our best estimate assumptions for future policy growth and future policy
decrements. Our best estimate assumptions for future policy growth include assumptions for the expected index credit on the next policy
anniversary date which are derived from the fair values of the underlying call options purchased to fund such index credits and the expected
costs of annual call options we will purchase in the future to fund index credits beyond the next policy anniversary. The projections of minimum
guaranteed contract values include the same best estimate assumptions for policy decrements as were used to project policy contract values.
Within this determination we have the following significant unobservable inputs: 1) the expected cost of annual call options we will purchase
in the future to fund index credits beyond the next policy anniversary and 2) our best estimates for future policy decrements, primarily lapse,
partial withdrawal and mortality rates. As of December 31, 2018 and 2017, we utilized an estimate of 3.10% for the expected cost of annual
call options, which are based on estimated long-term account value growth and a historical review of our actual option costs.
F-16
F-17
services. The independent pricing services incorporate a variety of observable market data in their valuation techniques, including:
consolidated financial statements.
Fixed maturity securities and equity securities
•
•
•
•
•
•
•
•
reported trading prices,
benchmark yields,
broker-dealer quotes,
benchmark securities,
bids and offers,
credit ratings,
relative credit information, and
other reference data.
The independent pricing services also take into account perceived market movements and sector news, as well as a security's terms and conditions,
including any features specific to that issue that may influence risk and marketability. Depending on the security, the priority of the use of
observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary.
The independent pricing services provide quoted market prices when available. Quoted prices are not always available due to market inactivity.
When quoted market prices are not available, the third parties use yield data and other factors relating to instruments or securities with similar
characteristics to determine fair value for securities that are not actively traded. We generally obtain one value from our primary external pricing
service. In situations where a price is not available from this service, we may obtain quotes or prices from additional parties as needed. Market
indices of similar rated asset class spreads are considered for valuations and broker indications of similar securities are compared. Inputs used
by the broker include market information, such as yield data and other factors relating to instruments or securities with similar characteristics.
Valuations and quotes obtained from third party commercial pricing services are non-binding and do not represent quotes on which one may
execute the disposition of the assets.
We validate external valuations at least quarterly through a combination of procedures that include the evaluation of methodologies used by the
pricing services, comparison of the prices to a secondary pricing source, analytical reviews and performance analysis of the prices against trends,
and maintenance of a securities watch list. Additionally, as needed we utilize discounted cash flow models or perform independent valuations
on a case-by-case basis using inputs and assumptions similar to those used by the pricing services. Although we do identify differences from
time to time as a result of these validation procedures, we did not make any significant adjustments as of December 31, 2018 and 2017.
Mortgage loans on real estate
Mortgage loans on real estate are not measured at fair value on a recurring basis. The fair values of mortgage loans on real estate are calculated
using discounted expected cash flows using competitive market interest rates currently being offered for similar loans. The fair values of impaired
mortgage loans on real estate that we have considered to be collateral dependent are based on the fair value of the real estate collateral (based
on appraised values) less estimated costs to sell. The inputs utilized to determine fair value of all mortgage loans are unobservable market data
(competitive market interest rates); therefore, fair value of mortgage loans falls into Level 3 in the fair value hierarchy.
The fair values of derivative instruments, primarily call options, are based upon the amount of cash that we will receive to settle each derivative
instrument on the reporting date. These amounts are determined by our investment team using industry accepted valuation models and are
adjusted for the nonperformance risk of each counterparty net of any collateral held. Inputs include market volatility and risk free interest rates
and are used in income valuation techniques in arriving at a fair value for each option contract. The nonperformance risk for each counterparty
is based upon its credit default swap rate. We have no performance obligations related to the call options purchased to fund our fixed index
Derivative instruments
annuity policy liabilities.
Other investments
Equity securities are the only financial instruments included in other investments that are measured at fair value on a recurring basis (see
determination of fair value above). Financial instruments included in other investments that are not measured at fair value on a recurring basis
are policy loans, equity method investments and company owned life insurance ("COLI"). We have not attempted to determine the fair values
associated with our policy loans, as we believe any differences between carrying values and the fair values afforded these instruments are
immaterial to our consolidated financial position and, accordingly, the cost to provide such disclosure does not justify the benefit to be derived.
The fair values of our equity method investments are obtained from third parties and determined by calculating the present value of future cash
flows discounted by a risk free rate, a risk spread and a liquidity discount. As the risk spread and liquidity discount are unobservable market
inputs, the fair value of our equity method investments falls within Level 3 of the fair value hierarchy. The fair value of our COLI approximates
the cash surrender value of the policies and falls within Level 2 of the fair value hierarchy.
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our best estimate assumptions for lapse, partial withdrawal and mortality rates are based on our actual experience and our outlook as to future
expectations for such assumptions. These assumptions, which are consistent with the assumptions used in calculating deferred policy acquisition
costs and deferred sales inducements, are reviewed on a quarterly basis and are revised as our experience develops and/or as future expectations
change. Our mortality rate assumptions are based on 65% of the 1983 Basic Annuity Mortality Tables. The following table presents average
lapse rate and partial withdrawal rate assumptions, by contract duration, used in estimating the fair value of the embedded derivative component
of our fixed index annuity policy benefit reserves at each reporting date:
Contract Duration (Years)
December 31, 2018
December 31, 2017
December 31, 2018
December 31, 2017
Average Lapse Rates
Average Partial Withdrawal Rates
1 - 5
6 - 10
11 - 15
16 - 20
20+
2.05%
7.28%
11.35%
11.90%
11.57%
1.83%
7.01%
11.31%
11.96%
11.62%
3.33%
3.33%
3.35%
3.22%
3.22%
3.32%
3.32%
3.34%
3.20%
3.20%
Lapse rates are generally expected to increase as surrender charge percentages decrease. Lapse expectations reflect a significant increase in the
year in which the surrender charge period on a contract ends.
The following table provides a reconciliation of the beginning and ending balances for our Level 3 liabilities, which are measured at fair value
on a recurring basis using significant unobservable inputs for the years ended December 31, 2018 and 2017:
Fixed index annuities - embedded derivatives
Beginning balance
Premiums less benefits
Change in fair value, net
Ending balance
Year Ended December 31,
2018
2017
(Dollars in thousands)
$
$
8,790,427
$
1,542,606
(2,167,628)
6,563,288
2,052,985
174,154
8,165,405
$
8,790,427
The fair value of our fixed index annuities embedded derivatives is net of coinsurance ceded of $538.8 million and $539.7 million as of
December 31, 2018 and 2017, respectively. Change in fair value, net for each period in our embedded derivatives is included in change in fair
value of embedded derivatives in the consolidated statements of operations.
Certain derivatives embedded in our fixed index annuity contracts are our most significant financial instrument measured at fair value that are
categorized as Level 3 in the fair value hierarchy. The contractual obligations for future annual index credits within our fixed index annuity
contracts are treated as a "series of embedded derivatives" over the expected life of the applicable contracts. We estimate the fair value of these
embedded derivatives at each valuation date by the method described above under fixed index annuities - embedded derivatives. The projections
of minimum guaranteed contract values include the same best estimate assumptions for policy decrements as were used to project policy contract
values.
The most sensitive assumption in determining policy liabilities for fixed index annuities is the rates used to discount the excess projected contract
values. As indicated above, the discount rate reflects our nonperformance risk. If the discount rates used to discount the excess projected contract
values at December 31, 2018, were to increase by 100 basis points, the fair value of the embedded derivatives would decrease by $504.5 million
recorded through operations as a decrease in the change in fair value of embedded derivatives and there would be a corresponding decrease of
$423.5 million to our combined balance for deferred policy acquisition costs and deferred sales inducements recorded through operations as an
increase in amortization of deferred policy acquisition costs and deferred sales inducements. A decrease by 100 basis points in the discount rate
used to discount the excess projected contract values would increase the fair value of the embedded derivatives by $559.9 million recorded
through operations as an increase in the change in fair value of embedded derivatives and there would be a corresponding increase of $291.8
million to our combined balance for deferred policy acquisition costs and deferred sales inducements recorded through operations as a decrease
in amortization of deferred policy acquisition costs and deferred sales inducements.
At December 31, 2018 and 2017, the amortized cost and fair value of fixed maturity securities were as follows:
United States Government full faith and credit
$
11,872
$
102
$
(322) $
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(Dollars in thousands)
Fair Value
$
46,131,190
$
1,143,624
$
(1,351,087) $
45,923,727
1,208,468
3,880,703
226,860
28,483,138
1,134,623
5,492,271
5,693,255
1,308,290
3,804,360
228,214
1,028,484
5,531,922
3,075,975
13,095
261,222
7,573
727,105
71,661
21,558
41,308
28,457
366,048
13,171
79,554
82,768
57,966
(83,034)
(15,658)
(4,159)
(838,729)
(4,125)
(134,826)
(270,234)
(31,730)
(3,596)
(2,025)
(2,471)
(69,840)
(13,405)
11,652
1,138,529
4,126,267
230,274
28,371,514
1,202,159
5,379,003
5,464,329
11,876
1,305,017
4,166,812
239,360
1,105,567
5,544,850
3,120,536
28,127,653
1,897,005
(145,687)
29,878,971
3. Investments
December 31, 2018
Fixed maturity securities:
Available for sale:
United States Government sponsored agencies
United States municipalities, states and territories
Foreign government obligations
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
December 31, 2017
Fixed maturity securities:
Available for sale:
United States Government sponsored agencies
United States municipalities, states and territories
Foreign government obligations
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Held for investment:
Corporate security
Other investments: equity securities, available for sale
292,429
— $
— $
292,429
43,116,759
2,525,131
$
(268,901) $
45,372,989
77,041
— $
(581) $
76,460
$
$
$
$
$
$
United States Government full faith and credit
$
11,861
$
162
$
(147) $
F-18
F-19
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our best estimate assumptions for lapse, partial withdrawal and mortality rates are based on our actual experience and our outlook as to future
expectations for such assumptions. These assumptions, which are consistent with the assumptions used in calculating deferred policy acquisition
costs and deferred sales inducements, are reviewed on a quarterly basis and are revised as our experience develops and/or as future expectations
change. Our mortality rate assumptions are based on 65% of the 1983 Basic Annuity Mortality Tables. The following table presents average
lapse rate and partial withdrawal rate assumptions, by contract duration, used in estimating the fair value of the embedded derivative component
of our fixed index annuity policy benefit reserves at each reporting date:
Contract Duration (Years)
December 31, 2018
December 31, 2017
December 31, 2018
December 31, 2017
Average Lapse Rates
Average Partial Withdrawal Rates
1 - 5
6 - 10
11 - 15
16 - 20
20+
2.05%
7.28%
11.35%
11.90%
11.57%
1.83%
7.01%
11.31%
11.96%
11.62%
3.33%
3.33%
3.35%
3.22%
3.22%
3.32%
3.32%
3.34%
3.20%
3.20%
Lapse rates are generally expected to increase as surrender charge percentages decrease. Lapse expectations reflect a significant increase in the
year in which the surrender charge period on a contract ends.
The following table provides a reconciliation of the beginning and ending balances for our Level 3 liabilities, which are measured at fair value
on a recurring basis using significant unobservable inputs for the years ended December 31, 2018 and 2017:
3. Investments
At December 31, 2018 and 2017, the amortized cost and fair value of fixed maturity securities were as follows:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(Dollars in thousands)
Fair Value
December 31, 2018
Fixed maturity securities:
Available for sale:
United States Government full faith and credit
$
11,872
$
102
$
(322) $
United States Government sponsored agencies
United States municipalities, states and territories
Foreign government obligations
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
1,208,468
3,880,703
226,860
28,483,138
1,134,623
5,492,271
5,693,255
13,095
261,222
7,573
727,105
71,661
21,558
41,308
(83,034)
(15,658)
(4,159)
(838,729)
(4,125)
(134,826)
(270,234)
11,652
1,138,529
4,126,267
230,274
28,371,514
1,202,159
5,379,003
5,464,329
$
46,131,190
$
1,143,624
$
(1,351,087) $
45,923,727
Fixed index annuities - embedded derivatives
Beginning balance
Premiums less benefits
Change in fair value, net
Ending balance
Year Ended December 31,
2018
2017
(Dollars in thousands)
$
$
8,790,427
$
1,542,606
(2,167,628)
6,563,288
2,052,985
174,154
8,165,405
$
8,790,427
The fair value of our fixed index annuities embedded derivatives is net of coinsurance ceded of $538.8 million and $539.7 million as of
December 31, 2018 and 2017, respectively. Change in fair value, net for each period in our embedded derivatives is included in change in fair
value of embedded derivatives in the consolidated statements of operations.
Certain derivatives embedded in our fixed index annuity contracts are our most significant financial instrument measured at fair value that are
categorized as Level 3 in the fair value hierarchy. The contractual obligations for future annual index credits within our fixed index annuity
contracts are treated as a "series of embedded derivatives" over the expected life of the applicable contracts. We estimate the fair value of these
embedded derivatives at each valuation date by the method described above under fixed index annuities - embedded derivatives. The projections
of minimum guaranteed contract values include the same best estimate assumptions for policy decrements as were used to project policy contract
values.
The most sensitive assumption in determining policy liabilities for fixed index annuities is the rates used to discount the excess projected contract
values. As indicated above, the discount rate reflects our nonperformance risk. If the discount rates used to discount the excess projected contract
values at December 31, 2018, were to increase by 100 basis points, the fair value of the embedded derivatives would decrease by $504.5 million
recorded through operations as a decrease in the change in fair value of embedded derivatives and there would be a corresponding decrease of
$423.5 million to our combined balance for deferred policy acquisition costs and deferred sales inducements recorded through operations as an
increase in amortization of deferred policy acquisition costs and deferred sales inducements. A decrease by 100 basis points in the discount rate
used to discount the excess projected contract values would increase the fair value of the embedded derivatives by $559.9 million recorded
through operations as an increase in the change in fair value of embedded derivatives and there would be a corresponding increase of $291.8
million to our combined balance for deferred policy acquisition costs and deferred sales inducements recorded through operations as a decrease
in amortization of deferred policy acquisition costs and deferred sales inducements.
December 31, 2017
Fixed maturity securities:
Available for sale:
United States Government full faith and credit
$
11,861
$
162
$
(147) $
United States Government sponsored agencies
United States municipalities, states and territories
Foreign government obligations
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Held for investment:
Corporate security
Other investments: equity securities, available for sale
1,308,290
3,804,360
228,214
28,457
366,048
13,171
(31,730)
(3,596)
(2,025)
11,876
1,305,017
4,166,812
239,360
28,127,653
1,897,005
(145,687)
29,878,971
1,028,484
5,531,922
3,075,975
43,116,759
77,041
292,429
$
$
$
$
$
$
79,554
82,768
57,966
(2,471)
(69,840)
(13,405)
1,105,567
5,544,850
3,120,536
2,525,131
$
(268,901) $
45,372,989
— $
(581) $
76,460
— $
— $
292,429
F-18
F-19
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The amortized cost and fair value of fixed maturity securities at December 31, 2018, by contractual maturity 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
separate lines.
The following table shows our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that
individual securities (consisting of 2,715 and 955 securities, respectively) have been in a continuous unrealized loss position, at December 31,
2018 and 2017:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years through twenty years
Due after twenty years
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Available for sale
Amortized
Cost
Fair Value
(Dollars in thousands)
$
365,686
$
5,426,450
9,918,504
9,565,686
8,534,715
368,836
5,416,871
9,768,751
9,895,985
8,427,793
33,811,041
33,878,236
1,134,623
5,492,271
5,693,255
1,202,159
5,379,003
5,464,329
$
46,131,190
$
45,923,727
Net unrealized gains (losses) on available for sale fixed maturity securities reported as a separate component of stockholders' equity were
comprised of the following:
Net unrealized gains (losses) on available for sale fixed maturity securities
Adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales
inducements
Deferred income tax valuation allowance reversal
Deferred income tax benefit (expense) (a)
Net unrealized gains (losses) reported as accumulated other comprehensive income (loss)
December 31,
2018
2017
(Dollars in thousands)
(207,463) $
2,256,230
112,571
22,534
19,926
(52,432) $
(1,206,078)
22,534
(348,087)
724,599
$
$
(a) December 31, 2017 includes $128 million related to the impact of Tax Reform that was reclassified between accumulated other comprehensive
income (loss) and retained earnings within our consolidated balance sheet during the first quarter of 2018. For more information regarding
the reclassification, see Note 1.
The National Association of Insurance Commissioners ("NAIC") assigns designations to fixed maturity securities. These designations range
from Class 1 (highest quality) to Class 6 (lowest quality). In general, securities are assigned a designation based upon the ratings they are given
by the Nationally Recognized Statistical Rating Organizations ("NRSRO's"). The NAIC designations are utilized by insurers in preparing their
annual statutory statements. NAIC Class 1 and 2 designations are considered "investment grade" while NAIC Class 3 through 6 designations
are considered "non-investment grade." Based on the NAIC designations, we had 97% of our fixed maturity portfolio rated investment grade
at both December 31, 2018 and 2017, respectively.
The following table summarizes the credit quality, as determined by NAIC designation, of our fixed maturity portfolio as of the dates indicated:
NAIC
Designation
1
2
3
4
5
6
December 31,
2018
2017
Amortized
Cost
Fair
Value
Amortized
Cost
(Dollars in thousands)
Fair
Value
$
26,588,352
$
26,921,843
$
26,669,427
$
28,274,379
17,901,161
17,528,072
15,198,551
15,869,219
1,396,650
173,987
23,836
47,204
1,269,242
137,991
19,453
47,126
1,161,737
134,838
17,015
12,232
1,157,420
117,542
20,927
9,962
United States Government full faith and credit
$
543
$
(3) $
7,785
$
(319) $
8,328
$
(322)
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(Dollars in thousands)
$ 19,341,518
$
(803,628) $
6,619,197
$
(547,459) $ 25,960,715
$ (1,351,087)
30,089
340,103
98,511
2,501,640
2,045,859
2,313,271
1,032,603
4,618,477
145,613
2,141,560
4,073,249
44,794
44,736
49,663
456,244
222,985
395,183
152,941
729,124
39,771
1,096,757
765,531
(949)
(6,816)
(1,748)
(87,220)
(84,972)
(82,119)
(51,228)
953,421
162,997
11,859
884,870
349,738
591,482
198,805
(2,638)
22,689
(37,150)
2,090,835
(252,265)
271,994
(82,085)
(8,842)
(2,411)
(77,507)
(34,635)
(45,838)
(26,326)
(1,487)
(97,676)
(17,969)
983,510
503,100
110,370
3,386,510
2,395,597
2,904,753
1,231,408
5,691,199
168,302
4,232,395
4,345,243
(196,520)
1,072,722
(152,364)
(180)
(128)
(337)
(5,135)
(3,475)
(4,099)
(1,249)
(19,000)
(387)
958,965
128,499
12,625
600,655
231,196
249,416
178,635
891,654
32,917
(31,550)
1,003,759
(3,468)
(1,688)
173,235
62,288
(28,043)
(10,849)
(8,901)
(11,371)
(53,565)
(2,084)
1,056,899
454,181
644,599
331,576
1,620,778
72,688
(10,385)
1,306,437
(59,455)
2,403,194
(3,499)
217,595
(9,906)
983,126
(83,034)
(15,658)
(4,159)
(164,727)
(119,607)
(127,957)
(77,554)
(348,884)
(4,125)
(134,826)
(270,234)
(31,730)
(3,596)
(2,025)
(33,178)
(14,324)
(13,000)
(12,620)
(72,565)
(2,471)
(69,840)
(13,405)
$
3,999,294
$
(47,884) $
4,815,325
$
(221,017) $
8,814,619
$
(268,901)
December 31, 2018
Fixed maturity securities:
Available for sale:
United States Government sponsored agencies
United States municipalities, states and territories
Foreign government obligations
Corporate securities:
Finance, insurance and real estate
Manufacturing, construction and mining
Utilities and related sectors
Wholesale/retail trade
Services, media and other
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
December 31, 2017
Fixed maturity securities:
Available for sale:
United States Government sponsored agencies
United States municipalities, states and territories
Foreign government obligations
Corporate securities:
Finance, insurance and real estate
Manufacturing, construction and mining
Utilities and related sectors
Wholesale/retail trade
Services, media and other
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Held for investment:
Corporate security:
Insurance
United States Government full faith and credit
$
1,565
$
(10) $
6,731
$
(137) $
8,296
$
(147)
$
— $
— $
76,460
$
(581) $
76,460
$
(581)
The unrealized losses at December 31, 2018 are principally related to timing of the purchases of these securities, which carry less yield than
those available at December 31, 2018. Approximately 87% and 83% of the unrealized losses on fixed maturity securities shown in the above
table for December 31, 2018 and 2017, respectively, are on securities that are rated investment grade, defined as being the highest two NAIC
designations. All of the fixed maturity securities with unrealized losses are current with respect to the payment of principal and interest.
Because we did not have the intent to sell fixed maturity securities with unrealized losses and it was not more likely than not that we would be
required to sell these securities prior to recovery of the amortized cost, which may be maturity, we did not consider these investments to be other
$
46,131,190
$
45,923,727
$
43,193,800
$
45,449,449
than temporarily impaired as of December 31, 2018 and 2017.
F-20
F-21
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The amortized cost and fair value of fixed maturity securities at December 31, 2018, by contractual maturity 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
The following table shows our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that
individual securities (consisting of 2,715 and 955 securities, respectively) have been in a continuous unrealized loss position, at December 31,
2018 and 2017:
separate lines.
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years through twenty years
Due after twenty years
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Available for sale
Amortized
Cost
Fair Value
(Dollars in thousands)
$
365,686
$
5,426,450
9,918,504
9,565,686
8,534,715
1,134,623
5,492,271
5,693,255
368,836
5,416,871
9,768,751
9,895,985
8,427,793
1,202,159
5,379,003
5,464,329
33,811,041
33,878,236
$
46,131,190
$
45,923,727
December 31,
2018
2017
(Dollars in thousands)
$
$
112,571
22,534
19,926
(52,432) $
(1,206,078)
22,534
(348,087)
724,599
Net unrealized gains (losses) on available for sale fixed maturity securities reported as a separate component of stockholders' equity were
comprised of the following:
Net unrealized gains (losses) on available for sale fixed maturity securities
(207,463) $
2,256,230
Adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales
inducements
Deferred income tax valuation allowance reversal
Deferred income tax benefit (expense) (a)
Net unrealized gains (losses) reported as accumulated other comprehensive income (loss)
(a) December 31, 2017 includes $128 million related to the impact of Tax Reform that was reclassified between accumulated other comprehensive
income (loss) and retained earnings within our consolidated balance sheet during the first quarter of 2018. For more information regarding
the reclassification, see Note 1.
The National Association of Insurance Commissioners ("NAIC") assigns designations to fixed maturity securities. These designations range
from Class 1 (highest quality) to Class 6 (lowest quality). In general, securities are assigned a designation based upon the ratings they are given
by the Nationally Recognized Statistical Rating Organizations ("NRSRO's"). The NAIC designations are utilized by insurers in preparing their
annual statutory statements. NAIC Class 1 and 2 designations are considered "investment grade" while NAIC Class 3 through 6 designations
are considered "non-investment grade." Based on the NAIC designations, we had 97% of our fixed maturity portfolio rated investment grade
at both December 31, 2018 and 2017, respectively.
The following table summarizes the credit quality, as determined by NAIC designation, of our fixed maturity portfolio as of the dates indicated:
NAIC
Designation
1
2
3
4
5
6
December 31,
2018
2017
Amortized
Cost
Fair
Value
Amortized
Cost
(Dollars in thousands)
Fair
Value
$
26,588,352
$
26,921,843
$
26,669,427
$
28,274,379
17,901,161
17,528,072
15,198,551
15,869,219
1,396,650
173,987
23,836
47,204
1,269,242
137,991
19,453
47,126
1,161,737
134,838
17,015
12,232
1,157,420
117,542
20,927
9,962
$
46,131,190
$
45,923,727
$
43,193,800
$
45,449,449
F-20
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(Dollars in thousands)
December 31, 2018
Fixed maturity securities:
Available for sale:
United States Government full faith and credit
$
543
$
(3) $
7,785
$
(319) $
8,328
$
(322)
United States Government sponsored agencies
United States municipalities, states and territories
Foreign government obligations
Corporate securities:
Finance, insurance and real estate
Manufacturing, construction and mining
Utilities and related sectors
Wholesale/retail trade
Services, media and other
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
30,089
340,103
98,511
2,501,640
2,045,859
2,313,271
1,032,603
4,618,477
145,613
2,141,560
4,073,249
(949)
(6,816)
(1,748)
(87,220)
(84,972)
(82,119)
(51,228)
953,421
162,997
11,859
884,870
349,738
591,482
198,805
(82,085)
(8,842)
(2,411)
(77,507)
(34,635)
(45,838)
(26,326)
(196,520)
1,072,722
(152,364)
(2,638)
22,689
(37,150)
2,090,835
(252,265)
271,994
(1,487)
(97,676)
(17,969)
983,510
503,100
110,370
3,386,510
2,395,597
2,904,753
1,231,408
5,691,199
168,302
4,232,395
4,345,243
(83,034)
(15,658)
(4,159)
(164,727)
(119,607)
(127,957)
(77,554)
(348,884)
(4,125)
(134,826)
(270,234)
$ 19,341,518
$
(803,628) $
6,619,197
$
(547,459) $ 25,960,715
$ (1,351,087)
December 31, 2017
Fixed maturity securities:
Available for sale:
United States Government full faith and credit
$
1,565
$
(10) $
6,731
$
(137) $
8,296
$
(147)
United States Government sponsored agencies
United States municipalities, states and territories
Foreign government obligations
Corporate securities:
Finance, insurance and real estate
Manufacturing, construction and mining
Utilities and related sectors
Wholesale/retail trade
Services, media and other
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
44,794
44,736
49,663
456,244
222,985
395,183
152,941
729,124
39,771
1,096,757
765,531
(180)
(128)
(337)
(5,135)
(3,475)
(4,099)
(1,249)
(19,000)
(387)
958,965
128,499
12,625
600,655
231,196
249,416
178,635
891,654
32,917
(31,550)
1,003,759
(3,468)
(1,688)
173,235
62,288
(28,043)
(10,849)
(8,901)
(11,371)
(53,565)
(2,084)
1,056,899
454,181
644,599
331,576
1,620,778
72,688
(10,385)
1,306,437
(59,455)
2,403,194
(3,499)
217,595
(9,906)
983,126
(31,730)
(3,596)
(2,025)
(33,178)
(14,324)
(13,000)
(12,620)
(72,565)
(2,471)
(69,840)
(13,405)
$
3,999,294
$
(47,884) $
4,815,325
$
(221,017) $
8,814,619
$
(268,901)
Held for investment:
Corporate security:
Insurance
$
— $
— $
76,460
$
(581) $
76,460
$
(581)
The unrealized losses at December 31, 2018 are principally related to timing of the purchases of these securities, which carry less yield than
those available at December 31, 2018. Approximately 87% and 83% of the unrealized losses on fixed maturity securities shown in the above
table for December 31, 2018 and 2017, respectively, are on securities that are rated investment grade, defined as being the highest two NAIC
designations. All of the fixed maturity securities with unrealized losses are current with respect to the payment of principal and interest.
Because we did not have the intent to sell fixed maturity securities with unrealized losses and it was not more likely than not that we would be
required to sell these securities prior to recovery of the amortized cost, which may be maturity, we did not consider these investments to be other
than temporarily impaired as of December 31, 2018 and 2017.
F-21
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Changes in net unrealized gains/losses on investments for the years ended December 31, 2018, 2017 and 2016 are as follows:
Realized gains and losses on sales are determined on the basis of specific identification of investments based on the trade date. Net realized
gains (losses) on investments, excluding net OTTI losses are as follows:
Year Ended December 31,
2018
2017
2016
Fixed maturity securities held for investment carried at amortized cost
Investments carried at fair value:
Fixed maturity securities, available for sale
Equity securities, available for sale
Adjustment for effect on other balance sheet accounts:
Deferred policy acquisition costs and deferred sales inducements
Deferred income tax asset/liability
$
$
$
$
(Dollars in thousands)
581
$
7,478
(2,463,693) $
1,149,691
—
(479)
(2,463,693)
1,149,212
1,318,649
240,459
1,559,108
(587,417)
(177,162)
(764,579)
Change in net unrealized gains/losses on investments carried at fair value
$
(904,585) $
384,633
$
Components of net investment income are as follows:
3,186
508,410
166
508,576
(295,802)
(74,471)
(370,273)
138,303
Fixed maturity securities
Equity securities
Mortgage loans on real estate
Cash and cash equivalents
Other
Less investment expenses
Net investment income
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
$
2,027,599
$
1,876,542
$
1,729,176
4,735
131,259
2,320
1,548
2,167,461
(19,649)
764
122,680
2,562
4,073
2,006,621
(14,624)
531
122,985
3,201
5,499
1,861,392
(11,520)
$
2,147,812
$
1,991,997
$
1,849,872
Proceeds from sales of available for sale securities for the years ended December 31, 2018, 2017 and 2016 were $2.5 billion, $0.7 billion and
$1.0 billion, respectively. Scheduled principal repayments, calls and tenders for available for sale fixed maturity securities for the years ended
December 31, 2018, 2017 and 2016 were $1.4 billion, $1.2 billion and $1.7 billion, respectively.
Available for sale fixed maturity securities:
Gross realized gains
Gross realized losses
Available for sale equity securities:
Gross realized gains
Other investments:
Gain on sale of real estate
Loss on sale of real estate
Mortgage loans on real estate:
Decrease (increase) in allowance for credit losses
Recovery of specific allowance
Gain on sale of mortgage loans
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
$
12,245
$
18,254
$
(47,974)
(35,729)
(9,058)
9,196
14,132
(4,036)
10,096
—
884
(93)
791
(4,846)
5,483
—
637
—
—
—
—
(3,165)
1,592
124
(1,449)
348
56
—
56
278
631
—
909
Losses on available for sale fixed maturity securities in 2018, 2017 and 2016 were realized primarily due to strategies to reposition the fixed
maturity security portfolio that result in improved net investment income, credit risk or duration profiles as they pertain to our asset liability
management.
The following table summarizes the carrying value of our investments that have been non-income producing for 12 consecutive months:
$
(37,178) $
10,509
$
11,524
December 31,
2018
2017
(Dollars in thousands)
Fixed maturity securities, available for sale
$
6,717
$
8,680
We review and analyze all investments on an ongoing basis for changes in market interest rates and credit deterioration. This review process
includes analyzing our ability to recover the amortized cost basis of each investment that has a fair value that is materially lower than its amortized
cost and requires a high degree of management judgment and involves uncertainty. The evaluation of securities for other than temporary
impairments is a quantitative and qualitative process, which is subject to risks and uncertainties.
We have a policy and process to identify securities that could potentially have impairments that are other than temporary. This process involves
monitoring market events and other items that could impact issuers. The evaluation includes but is not limited to such factors as:
the length of time and the extent to which the fair value has been less than amortized cost or cost;
• whether the issuer is current on all payments and all contractual payments have been made as agreed;
the remaining payment terms and the financial condition and near-term prospects of the issuer;
the lack of ability to refinance due to liquidity problems in the credit market;
the fair value of any underlying collateral;
the existence of any credit protection available;
our intent to sell and whether it is more likely than not we would be required to sell prior to recovery for debt securities;
consideration of rating agency actions; and
changes in estimated cash flows of mortgage and asset backed securities.
•
•
•
•
•
•
•
•
We determine whether other than temporary impairment losses should be recognized for debt securities by assessing all facts and circumstances
surrounding each security. Where the decline in fair value of debt securities is attributable to changes in market interest rates or to factors such
as market volatility, liquidity and spread widening, and we anticipate recovery of all contractual or expected cash flows, we do not consider
these investments to be other than temporarily impaired because we do not intend to sell these investments and it is not more likely than not we
will be required to sell these investments before a recovery of amortized cost, which may be maturity.
F-22
F-23
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Changes in net unrealized gains/losses on investments for the years ended December 31, 2018, 2017 and 2016 are as follows:
Realized gains and losses on sales are determined on the basis of specific identification of investments based on the trade date. Net realized
gains (losses) on investments, excluding net OTTI losses are as follows:
Fixed maturity securities held for investment carried at amortized cost
581
$
7,478
3,186
Investments carried at fair value:
Fixed maturity securities, available for sale
Equity securities, available for sale
Adjustment for effect on other balance sheet accounts:
Deferred policy acquisition costs and deferred sales inducements
Deferred income tax asset/liability
Change in net unrealized gains/losses on investments carried at fair value
$
(904,585) $
384,633
$
Components of net investment income are as follows:
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
$
$
$
$
(2,463,693) $
1,149,691
—
(479)
(2,463,693)
1,149,212
1,318,649
240,459
1,559,108
(587,417)
(177,162)
(764,579)
508,410
166
508,576
(295,802)
(74,471)
(370,273)
138,303
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
$
2,027,599
$
1,876,542
$
1,729,176
4,735
131,259
2,320
1,548
2,167,461
(19,649)
764
122,680
2,562
4,073
2,006,621
(14,624)
531
122,985
3,201
5,499
1,861,392
(11,520)
$
2,147,812
$
1,991,997
$
1,849,872
Fixed maturity securities
Equity securities
Mortgage loans on real estate
Cash and cash equivalents
Other
Less investment expenses
Net investment income
Proceeds from sales of available for sale securities for the years ended December 31, 2018, 2017 and 2016 were $2.5 billion, $0.7 billion and
$1.0 billion, respectively. Scheduled principal repayments, calls and tenders for available for sale fixed maturity securities for the years ended
December 31, 2018, 2017 and 2016 were $1.4 billion, $1.2 billion and $1.7 billion, respectively.
Available for sale fixed maturity securities:
Gross realized gains
Gross realized losses
Available for sale equity securities:
Gross realized gains
Other investments:
Gain on sale of real estate
Loss on sale of real estate
Mortgage loans on real estate:
Decrease (increase) in allowance for credit losses
Recovery of specific allowance
Gain on sale of mortgage loans
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
$
12,245
$
18,254
$
(47,974)
(35,729)
(9,058)
9,196
—
—
—
—
(3,165)
1,592
124
(1,449)
348
56
—
56
278
631
—
909
14,132
(4,036)
10,096
—
884
(93)
791
(4,846)
5,483
—
637
Losses on available for sale fixed maturity securities in 2018, 2017 and 2016 were realized primarily due to strategies to reposition the fixed
maturity security portfolio that result in improved net investment income, credit risk or duration profiles as they pertain to our asset liability
management.
The following table summarizes the carrying value of our investments that have been non-income producing for 12 consecutive months:
$
(37,178) $
10,509
$
11,524
December 31,
2018
2017
(Dollars in thousands)
Fixed maturity securities, available for sale
$
6,717
$
8,680
We review and analyze all investments on an ongoing basis for changes in market interest rates and credit deterioration. This review process
includes analyzing our ability to recover the amortized cost basis of each investment that has a fair value that is materially lower than its amortized
cost and requires a high degree of management judgment and involves uncertainty. The evaluation of securities for other than temporary
impairments is a quantitative and qualitative process, which is subject to risks and uncertainties.
We have a policy and process to identify securities that could potentially have impairments that are other than temporary. This process involves
monitoring market events and other items that could impact issuers. The evaluation includes but is not limited to such factors as:
•
the length of time and the extent to which the fair value has been less than amortized cost or cost;
• whether the issuer is current on all payments and all contractual payments have been made as agreed;
the remaining payment terms and the financial condition and near-term prospects of the issuer;
•
the lack of ability to refinance due to liquidity problems in the credit market;
•
the fair value of any underlying collateral;
•
the existence of any credit protection available;
•
our intent to sell and whether it is more likely than not we would be required to sell prior to recovery for debt securities;
•
consideration of rating agency actions; and
•
changes in estimated cash flows of mortgage and asset backed securities.
•
We determine whether other than temporary impairment losses should be recognized for debt securities by assessing all facts and circumstances
surrounding each security. Where the decline in fair value of debt securities is attributable to changes in market interest rates or to factors such
as market volatility, liquidity and spread widening, and we anticipate recovery of all contractual or expected cash flows, we do not consider
these investments to be other than temporarily impaired because we do not intend to sell these investments and it is not more likely than not we
will be required to sell these investments before a recovery of amortized cost, which may be maturity.
F-22
F-23
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
If we intend to sell a debt security or if it is more likely than not that we will be required to sell a debt security before recovery of its amortized
cost basis, other than temporary impairment has occurred and the difference between amortized cost and fair value will be recognized as a loss
in operations.
If we do not intend to sell and it is not more likely than not we will be required to sell the debt security but also do not expect to recover the
entire amortized cost basis of the security, an impairment loss would be recognized in operations in the amount of the expected credit loss. We
determine the amount of expected credit loss by calculating the present value of the cash flows expected to be collected discounted at each
security's acquisition yield based on our consideration of whether the security was of high credit quality at the time of acquisition. The difference
between the present value of expected future cash flows and the amortized cost basis of the security is the amount of credit loss recognized in
operations. The remaining amount of the other than temporary impairment is recognized in other comprehensive income (loss).
The determination of the credit loss component of a mortgage backed security is based on a number of factors. The primary consideration in
this evaluation process is the issuer's ability to meet current and future interest and principal payments as contractually stated at time of purchase.
Our review of these securities includes an analysis of the cash flow modeling under various default scenarios considering independent third
party benchmarks, the seniority of the specific tranche within the structure of the security, the composition of the collateral and the actual default,
loss severity and prepayment experience exhibited. With the input of third party assumptions for default projections, loss severity and prepayment
expectations, we evaluate the cash flow projections to determine whether the security is performing in accordance with its contractual obligation.
We utilize the models from a leading structured product software specialist serving institutional investors. These models incorporate each
security's seniority and cash flow structure. In circumstances where the analysis implies a potential for principal loss at some point in the future,
we use the "best estimate" cash flow projection discounted at the security's effective yield at acquisition to determine the amount of our potential
credit loss associated with this security. The discounted expected future cash flows equates to our expected recovery value. Any shortfall of
the expected recovery when compared to the amortized cost of the security will be recorded as the credit loss component of other than temporary
impairment.
The cash flow modeling is performed on a security-by-security basis and incorporates actual cash flows on the residential mortgage backed
securities through the current period, as well as the projection of remaining cash flows using a number of assumptions including default rates,
prepayment rates and loss severity rates. The default curves we use are tailored to the Prime or Alt-A residential mortgage backed securities
that we own, which assume lower default rates and loss severity for Prime securities versus Alt-A securities. These default curves are scaled
higher or lower depending on factors such as current underlying mortgage loan performance, rating agency loss projections, loan to value ratios,
geographic diversity, as well as other appropriate considerations.
The determination of the credit loss component of a corporate bond is based on the underlying financial performance of the issuer and their
ability to meet their contractual obligations. Considerations in our evaluation include, but are not limited to, credit rating changes, financial
statement and ratio analysis, changes in management, significant changes in credit spreads, breaches of financial covenants and a review of the
economic outlook for the industry and markets in which they trade. In circumstances where an issuer appears unlikely to meet its future obligation,
or the security's price decline is deemed other than temporary, an estimate of credit loss is determined. Credit loss is calculated using default
probabilities as derived from the credit default swaps markets in conjunction with recovery rates derived from independent third party analysis
or a best estimate of credit loss. This credit loss rate is then incorporated into a present value calculation based on an expected principal loss in
the future discounted at the yield at the date of purchase and compared to amortized cost to determine the amount of credit loss associated with
the security.
In addition, for debt securities which we do not intend to sell and it is not more likely than not we will be required to sell, but our intent changes
due to changes or events that could not have been reasonably anticipated, an other than temporary impairment charge is recognized. Once an
impairment charge has been recorded, we then continue to review the other than temporarily impaired securities for appropriate valuation on an
ongoing basis. Unrealized losses may be recognized in future periods through a charge to earnings should we later conclude that the decline in
fair value below amortized cost is other than temporary pursuant to our accounting policy described above. The use of different methodologies
and assumptions to determine the fair value of investments and the timing and amount of impairments may have a material effect on the amounts
presented in our consolidated financial statements.
The following table summarizes other than temporary impairments by asset type:
Year ended December 31, 2018
Fixed maturity securities, available for sale:
Corporate securities:
Capital goods
Consumer discretionary
Energy
Financials
Information technology
Industrials
Telecommunications
Transportation
Utilities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Year ended December 31, 2017
Fixed maturity securities, available for sale:
Corporate securities:
Industrials
Residential mortgage backed securities
Other asset backed securities
Year ended December 31, 2016
Fixed maturity securities, available for sale:
Corporate securities:
Energy
Materials
Utilities
Telecommunications
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Number
of Securities
Total
OTTI Losses
Portion of OTTI
Losses
Recognized
in (from) Other
Comprehensive
Income
(Dollars in thousands)
Net OTTI
Losses
Recognized
in Operations
$
(719) $
— $
1
8
4
5
1
1
2
1
2
3
5
2
1
8
1
2
1
1
2
9
5
2
—
—
—
—
—
—
—
—
—
(295)
(1,356)
(1,651) $
1,575
562
798
(783)
—
(3,482)
(1,330) $
35
$
(35,005) $
$
(2,485) $
— $
(273)
—
(1,585)
(287)
10
$
(2,758) $
(1,872) $
$
(642) $
— $
22
$
(21,349) $
(9,533)
(4,793)
(3,495)
(550)
(2,299)
(249)
(178)
(5,518)
(63)
(4,859)
(2,749)
(4,554)
(4,462)
(6,961)
—
(1,540)
(3,190)
(719)
(9,533)
(4,793)
(3,495)
(550)
(2,299)
(249)
(178)
(5,518)
(358)
(4,859)
(4,105)
(36,656)
(2,485)
(1,858)
(287)
(4,630)
(642)
(2,979)
(3,900)
(6,163)
(783)
(1,540)
(6,672)
(22,679)
F-24
F-25
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
If we intend to sell a debt security or if it is more likely than not that we will be required to sell a debt security before recovery of its amortized
The following table summarizes other than temporary impairments by asset type:
cost basis, other than temporary impairment has occurred and the difference between amortized cost and fair value will be recognized as a loss
in operations.
If we do not intend to sell and it is not more likely than not we will be required to sell the debt security but also do not expect to recover the
entire amortized cost basis of the security, an impairment loss would be recognized in operations in the amount of the expected credit loss. We
determine the amount of expected credit loss by calculating the present value of the cash flows expected to be collected discounted at each
security's acquisition yield based on our consideration of whether the security was of high credit quality at the time of acquisition. The difference
between the present value of expected future cash flows and the amortized cost basis of the security is the amount of credit loss recognized in
operations. The remaining amount of the other than temporary impairment is recognized in other comprehensive income (loss).
The determination of the credit loss component of a mortgage backed security is based on a number of factors. The primary consideration in
this evaluation process is the issuer's ability to meet current and future interest and principal payments as contractually stated at time of purchase.
Our review of these securities includes an analysis of the cash flow modeling under various default scenarios considering independent third
party benchmarks, the seniority of the specific tranche within the structure of the security, the composition of the collateral and the actual default,
loss severity and prepayment experience exhibited. With the input of third party assumptions for default projections, loss severity and prepayment
expectations, we evaluate the cash flow projections to determine whether the security is performing in accordance with its contractual obligation.
We utilize the models from a leading structured product software specialist serving institutional investors. These models incorporate each
security's seniority and cash flow structure. In circumstances where the analysis implies a potential for principal loss at some point in the future,
we use the "best estimate" cash flow projection discounted at the security's effective yield at acquisition to determine the amount of our potential
credit loss associated with this security. The discounted expected future cash flows equates to our expected recovery value. Any shortfall of
the expected recovery when compared to the amortized cost of the security will be recorded as the credit loss component of other than temporary
impairment.
The cash flow modeling is performed on a security-by-security basis and incorporates actual cash flows on the residential mortgage backed
securities through the current period, as well as the projection of remaining cash flows using a number of assumptions including default rates,
prepayment rates and loss severity rates. The default curves we use are tailored to the Prime or Alt-A residential mortgage backed securities
that we own, which assume lower default rates and loss severity for Prime securities versus Alt-A securities. These default curves are scaled
higher or lower depending on factors such as current underlying mortgage loan performance, rating agency loss projections, loan to value ratios,
geographic diversity, as well as other appropriate considerations.
The determination of the credit loss component of a corporate bond is based on the underlying financial performance of the issuer and their
ability to meet their contractual obligations. Considerations in our evaluation include, but are not limited to, credit rating changes, financial
statement and ratio analysis, changes in management, significant changes in credit spreads, breaches of financial covenants and a review of the
economic outlook for the industry and markets in which they trade. In circumstances where an issuer appears unlikely to meet its future obligation,
or the security's price decline is deemed other than temporary, an estimate of credit loss is determined. Credit loss is calculated using default
probabilities as derived from the credit default swaps markets in conjunction with recovery rates derived from independent third party analysis
or a best estimate of credit loss. This credit loss rate is then incorporated into a present value calculation based on an expected principal loss in
the future discounted at the yield at the date of purchase and compared to amortized cost to determine the amount of credit loss associated with
the security.
In addition, for debt securities which we do not intend to sell and it is not more likely than not we will be required to sell, but our intent changes
due to changes or events that could not have been reasonably anticipated, an other than temporary impairment charge is recognized. Once an
impairment charge has been recorded, we then continue to review the other than temporarily impaired securities for appropriate valuation on an
ongoing basis. Unrealized losses may be recognized in future periods through a charge to earnings should we later conclude that the decline in
fair value below amortized cost is other than temporary pursuant to our accounting policy described above. The use of different methodologies
and assumptions to determine the fair value of investments and the timing and amount of impairments may have a material effect on the amounts
presented in our consolidated financial statements.
Year ended December 31, 2018
Fixed maturity securities, available for sale:
Corporate securities:
Capital goods
Consumer discretionary
Energy
Financials
Information technology
Industrials
Telecommunications
Transportation
Utilities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Year ended December 31, 2017
Fixed maturity securities, available for sale:
Corporate securities:
Industrials
Residential mortgage backed securities
Other asset backed securities
Year ended December 31, 2016
Fixed maturity securities, available for sale:
Corporate securities:
Energy
Materials
Telecommunications
Utilities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Number
of Securities
Total
OTTI Losses
Portion of OTTI
Losses
Recognized
in (from) Other
Comprehensive
Income
(Dollars in thousands)
Net OTTI
Losses
Recognized
in Operations
1
8
4
5
1
1
2
1
2
3
5
2
$
(719) $
— $
(9,533)
(4,793)
(3,495)
(550)
(2,299)
(249)
(178)
(5,518)
(63)
(4,859)
(2,749)
—
—
—
—
—
—
—
—
(295)
—
(1,356)
(719)
(9,533)
(4,793)
(3,495)
(550)
(2,299)
(249)
(178)
(5,518)
(358)
(4,859)
(4,105)
35
$
(35,005) $
(1,651) $
(36,656)
1
8
1
$
(2,485) $
— $
(273)
—
(1,585)
(287)
10
$
(2,758) $
(1,872) $
2
1
1
2
9
5
2
$
(642) $
— $
(4,554)
(4,462)
(6,961)
—
(1,540)
(3,190)
1,575
562
798
(783)
—
(3,482)
(1,330) $
(2,485)
(1,858)
(287)
(4,630)
(642)
(2,979)
(3,900)
(6,163)
(783)
(1,540)
(6,672)
(22,679)
22
$
(21,349) $
F-24
F-25
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The cumulative portion of other than temporary impairments determined to be credit losses which have been recognized in operations for debt
securities are summarized as follows:
The portfolio consists of commercial 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. The mortgage loan portfolio is summarized by geographic region and property type as follows:
Cumulative credit loss at beginning of year
Additions for the amount related to credit losses for which OTTI has not previously been recognized
Additional credit losses on securities for which OTTI has previously been recognized
Accumulated losses on securities that were disposed of during the period
Cumulative credit loss at end of year
Year Ended December 31,
2018
2017
(Dollars in thousands)
(157,066)
$
(166,375)
(35,005)
(1,651)
18,324
(2,758)
(1,872)
13,939
(175,398)
$
(157,066)
$
$
The following table summarizes the cumulative noncredit portion of OTTI and the change in fair value since recognition of OTTI, both of which
were recognized in other comprehensive income, by major type of security, for securities that are part of our investment portfolio at December 31,
2018 and 2017:
December 31, 2018
Fixed maturity securities, available for sale:
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
December 31, 2017
Fixed maturity securities, available for sale:
Corporate securities
Residential mortgage backed securities
Other asset backed securities
Amortized Cost
OTTI Recognized
in Other
Comprehensive
Income (Loss)
Change in
Fair Value Since
OTTI was
Recognized
(Dollars in thousands)
Fair Value
$
$
$
$
69,580
$
(3,700) $
6,195
$
245,691
35,244
1,692
(167,846)
199,191
—
—
—
326
352,207
$
(171,546) $
205,712
$
13,015
$
(4,263) $
10,739
$
297,582
4,567
(168,355)
(1,356)
201,620
(1,875)
315,164
$
(173,974) $
210,484
$
72,075
277,036
35,244
2,018
386,373
19,491
330,847
1,336
351,674
At December 31, 2018 and 2017, fixed maturity securities and short-term investments with an amortized cost of $49.2 billion and $47.5 billion,
respectively, were on deposit with state agencies to meet regulatory requirements. There are no restrictions on these assets.
At December 31, 2018 and 2017, we had no investment in any person or its affiliates (other than bonds issued by agencies of the United States
Government) that exceeded 10% of stockholders' equity.
4. Mortgage Loans on Real Estate
Our mortgage loan portfolio is summarized in the following table. There were commitments outstanding of $148.0 million at December 31,
2018.
Principal outstanding
Loan loss allowance
Deferred prepayment fees
Carrying value
December 31,
2018
2017
(Dollars in thousands)
$
$
2,952,464
$
2,674,315
(8,239)
(1,134)
(7,518)
(1,266)
2,943,091
$
2,665,531
Geographic distribution
East
Middle Atlantic
Mountain
New England
Pacific
South Atlantic
West North Central
West South Central
Property type distribution
Office
Retail
Medical Office
Industrial/Warehouse
Apartment
Agricultural
Mixed use/Other
December 31,
2018
2017
Principal
Percent
Principal
Percent
$
$
$
586,773
168,969
357,642
9,418
521,363
694,599
291,890
321,810
268,932
33,467
1,091,627
762,887
600,638
25,000
169,913
(Dollars in thousands)
19.9% $
5.7%
12.1%
0.3%
17.7%
23.5%
9.9%
10.9%
1.1%
37.0%
25.8%
20.3%
0.9%
5.8%
9.1% $
548,067
163,485
308,486
12,265
466,030
609,736
324,808
241,438
283,926
34,338
1,040,028
677,770
462,897
—
175,356
20.5%
6.1%
11.5%
0.5%
17.4%
22.8%
12.2%
9.0%
10.6%
1.3%
38.9%
25.3%
17.3%
—%
6.6%
2,952,464
100.0% $
2,674,315
100.0%
$
2,952,464
100.0% $
2,674,315
100.0%
Our financing receivables currently consist of one portfolio segment which is our commercial mortgage loan portfolio. These are mortgage
loans with collateral consisting of commercial real estate and borrowers consisting mostly of limited liability partnerships or limited liability
corporations.
We evaluate our mortgage loan portfolio for the establishment of a loan loss allowance by specific identification of impaired loans and the
measurement of an estimated loss for each individual loan identified. A mortgage loan is impaired when it is probable that we will be unable
to collect all amounts due according to the contractual terms of the loan agreement. If we determine that the value of any specific mortgage
loan is impaired, the carrying amount of the mortgage loan will be reduced to its fair value, based upon the present value of expected future cash
flows from the loan discounted at the loan's effective interest rate, or the fair value of the underlying collateral less estimated costs to sell.
In addition, we analyze the mortgage loan portfolio for the need of a general loan allowance for probable losses on all other loans on a quantitative
and qualitative basis. The amount of the general loan allowance is based upon management's evaluation of the collectability of the loan portfolio,
historical loss experience, delinquencies, credit concentrations, underwriting standards and national and local economic conditions.
We rate each of the mortgage loans in our portfolio based on factors such as historical operating performance, loan to value ratio and economic
outlook, among others. We calculate a loss factor to apply to each rating based on historical losses we have recognized in our mortgage loan
portfolio. We apply the loss factors to the total principal outstanding within each rating category to determine an appropriate estimate of the
general loan loss allowance. We also assess the portfolio qualitatively and apply a loss rate to all loans without a specific allowance based on
management's assessment of economic conditions, and we apply an additional amount of loss allowance to a group of loans that we have identified
as having higher risk of loss.
F-26
F-27
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The cumulative portion of other than temporary impairments determined to be credit losses which have been recognized in operations for debt
securities are summarized as follows:
The portfolio consists of commercial 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. The mortgage loan portfolio is summarized by geographic region and property type as follows:
Cumulative credit loss at beginning of year
Additions for the amount related to credit losses for which OTTI has not previously been recognized
Additional credit losses on securities for which OTTI has previously been recognized
Accumulated losses on securities that were disposed of during the period
Cumulative credit loss at end of year
Year Ended December 31,
2018
2017
(Dollars in thousands)
(157,066)
$
(166,375)
(35,005)
(1,651)
18,324
(2,758)
(1,872)
13,939
(175,398)
$
(157,066)
$
$
The following table summarizes the cumulative noncredit portion of OTTI and the change in fair value since recognition of OTTI, both of which
were recognized in other comprehensive income, by major type of security, for securities that are part of our investment portfolio at December 31,
2018 and 2017:
Amortized Cost
Fair Value
OTTI Recognized
in Other
Comprehensive
Income (Loss)
Change in
Fair Value Since
OTTI was
Recognized
(Dollars in thousands)
$
$
$
$
69,580
$
(3,700) $
6,195
$
245,691
35,244
1,692
(167,846)
199,191
—
—
—
326
352,207
$
(171,546) $
205,712
$
13,015
$
(4,263) $
10,739
$
297,582
4,567
(168,355)
(1,356)
201,620
(1,875)
315,164
$
(173,974) $
210,484
$
72,075
277,036
35,244
2,018
386,373
19,491
330,847
1,336
351,674
December 31, 2018
Fixed maturity securities, available for sale:
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
December 31, 2017
Fixed maturity securities, available for sale:
Corporate securities
Residential mortgage backed securities
Other asset backed securities
2018.
Principal outstanding
Loan loss allowance
Deferred prepayment fees
Carrying value
At December 31, 2018 and 2017, fixed maturity securities and short-term investments with an amortized cost of $49.2 billion and $47.5 billion,
respectively, were on deposit with state agencies to meet regulatory requirements. There are no restrictions on these assets.
At December 31, 2018 and 2017, we had no investment in any person or its affiliates (other than bonds issued by agencies of the United States
Government) that exceeded 10% of stockholders' equity.
4. Mortgage Loans on Real Estate
Our mortgage loan portfolio is summarized in the following table. There were commitments outstanding of $148.0 million at December 31,
December 31,
2018
2017
(Dollars in thousands)
$
$
2,952,464
$
2,674,315
(8,239)
(1,134)
(7,518)
(1,266)
2,943,091
$
2,665,531
Geographic distribution
East
Middle Atlantic
Mountain
New England
Pacific
South Atlantic
West North Central
West South Central
Property type distribution
Office
Medical Office
Retail
Industrial/Warehouse
Apartment
Agricultural
Mixed use/Other
December 31,
2018
2017
Principal
Percent
Principal
Percent
(Dollars in thousands)
$
$
$
586,773
168,969
357,642
9,418
521,363
694,599
291,890
321,810
19.9% $
5.7%
12.1%
0.3%
17.7%
23.5%
9.9%
10.9%
548,067
163,485
308,486
12,265
466,030
609,736
324,808
241,438
20.5%
6.1%
11.5%
0.5%
17.4%
22.8%
12.2%
9.0%
2,952,464
100.0% $
2,674,315
100.0%
268,932
33,467
1,091,627
762,887
600,638
25,000
169,913
9.1% $
1.1%
37.0%
25.8%
20.3%
0.9%
5.8%
283,926
34,338
1,040,028
677,770
462,897
—
175,356
10.6%
1.3%
38.9%
25.3%
17.3%
—%
6.6%
$
2,952,464
100.0% $
2,674,315
100.0%
Our financing receivables currently consist of one portfolio segment which is our commercial mortgage loan portfolio. These are mortgage
loans with collateral consisting of commercial real estate and borrowers consisting mostly of limited liability partnerships or limited liability
corporations.
We evaluate our mortgage loan portfolio for the establishment of a loan loss allowance by specific identification of impaired loans and the
measurement of an estimated loss for each individual loan identified. A mortgage loan is impaired when it is probable that we will be unable
to collect all amounts due according to the contractual terms of the loan agreement. If we determine that the value of any specific mortgage
loan is impaired, the carrying amount of the mortgage loan will be reduced to its fair value, based upon the present value of expected future cash
flows from the loan discounted at the loan's effective interest rate, or the fair value of the underlying collateral less estimated costs to sell.
In addition, we analyze the mortgage loan portfolio for the need of a general loan allowance for probable losses on all other loans on a quantitative
and qualitative basis. The amount of the general loan allowance is based upon management's evaluation of the collectability of the loan portfolio,
historical loss experience, delinquencies, credit concentrations, underwriting standards and national and local economic conditions.
We rate each of the mortgage loans in our portfolio based on factors such as historical operating performance, loan to value ratio and economic
outlook, among others. We calculate a loss factor to apply to each rating based on historical losses we have recognized in our mortgage loan
portfolio. We apply the loss factors to the total principal outstanding within each rating category to determine an appropriate estimate of the
general loan loss allowance. We also assess the portfolio qualitatively and apply a loss rate to all loans without a specific allowance based on
management's assessment of economic conditions, and we apply an additional amount of loss allowance to a group of loans that we have identified
as having higher risk of loss.
F-26
F-27
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents a rollforward of our specific and general valuation allowances for mortgage loans on real estate:
Year Ended December 31,
2018
2017
2016
Specific
Allowance
General
Allowance
Specific
Allowance
General
Allowance
Specific
Allowance
General
Allowance
(Dollars in thousands)
Beginning allowance balance
Charge-offs
Recoveries
Change in provision for credit losses
Ending allowance balance
$
$
(1,418)
$
(6,100)
$
(1,327) $
(7,100)
$
(7,842)
$
(6,300)
852
1,592
(1,255)
—
—
(1,910)
—
631
(722)
—
—
1,000
5,078
5,483
(4,046)
(229)
$
(8,010)
$
(1,418) $
(6,100)
$
(1,327)
$
—
—
(800)
(7,100)
The specific allowance represents the total credit loss allowances on loans which are individually evaluated for impairment. The general allowance
is for the group of loans discussed above which are collectively evaluated for impairment. The following table presents the total outstanding
principal of loans evaluated for impairment by basis of impairment method:
Individually evaluated for impairment
Collectively evaluated for impairment
Total loans evaluated for impairment
December 31,
2018
2017
2016
(Dollars in thousands)
$
$
1,253
2,951,211
2,952,464
$
$
5,445
2,668,870
2,674,315
$
$
4,640
2,485,979
2,490,619
Charge-offs include allowances that have been established on loans that were satisfied either by taking ownership of the collateral or by some
other means such as discounted pay-off or loan sale. When ownership of the property is taken it is recorded at the lower of the mortgage loan's
carrying value or the property's fair value (based on appraised values) less estimated costs to sell. The real estate owned is recorded as a component
of Other investments and the mortgage loan is recorded as fully paid, with any allowance for credit loss that has been established charged off.
Fair value of the real estate is determined by third party appraisal. Recoveries are situations where we have received a payment from the borrower
in an amount greater than the carrying value of the loan (principal outstanding less specific allowance).
We did not own any real estate during the years ended December 31, 2018 and 2017. We owned one real estate property during the year ended
December 31, 2016, which was sold prior to the end of 2016.
We analyze credit risk of our mortgage loans by analyzing all available evidence on loans that are delinquent and loans that are in a workout
period.
Credit Exposure - By Payment Activity
Performing
In workout
Collateral dependent
December 31,
2018
2017
(Dollars in thousands)
$
$
2,952,464
$
2,670,657
—
—
1,436
2,222
2,952,464
$
2,674,315
The loans that are categorized as "in workout" consist of loans that we have agreed to lower or no mortgage payments for a period of time while
the borrowers address cash flow and/or operational issues. The key features of these workouts have been determined on a loan-by-loan basis.
Most of these loans are in a period of low cash flow due to tenants vacating their space or tenants requesting rent relief during difficult economic
periods. Generally, we have allowed the borrower a six month interest only period and in some cases a twelve month period of interest only.
Interest only workout loans are expected to return to their regular debt service payments after the interest only period. Interest only loans that
are not fully amortizing will have a larger balance at their balloon date than originally contracted. Fully amortizing loans that are in interest
only periods will have larger debt service payments for their remaining term due to lost principal payments during the interest only period. In
limited circumstances we have allowed borrowers to pay the principal portion of their loan payment into an escrow account that can be used for
capital and tenant improvements for a period of not more than twelve months. In these situations new loan amortization schedules are calculated
based on the principal not collected during this twelve month workout period and larger payments are collected for the remaining term of each
loan. In all cases, the original interest rate and maturity date have not been modified, and we have not forgiven any principal amounts.
Mortgage loans are considered delinquent when they become 60 days or more past due. In general, when loans become 90 days past due, become
collateral dependent or enter a period with no debt service payments required we place them on non-accrual status and discontinue recognizing
interest income. If payments are received on a delinquent loan, interest income is recognized to the extent it would have been recognized if
normal principal and interest would have been received timely. If the payments are received to bring a delinquent loan back to current we will
resume accruing interest income on that loan. There were no loans in non-accrual status at December 31, 2018. There were $2.2 million loans
in non-accrual status at December 31, 2017.
outstanding principal of the loan.
We define collateral dependent loans as those mortgage loans for which we will depend on the value of the collateral real estate to satisfy the
All of our commercial mortgage loans depend on the cash flow of the borrower to be at a sufficient level to service the principal and interest
payments as they come due. In general, cash inflows of the borrowers are generated by collecting monthly rent from tenants occupying space
within the borrowers' properties. Our borrowers face collateral risks such as tenants going out of business, tenants struggling to make rent
payments as they become due, and tenants canceling leases and moving to other locations. We have a number of loans where the real estate is
occupied by a single tenant. Our borrowers sometimes face both a reduction in cash flow on their mortgage property as well as a reduction in
the fair value of the real estate collateral. If borrowers are unable to replace lost rent revenue and increases in the fair value of their property do
not materialize, we could potentially incur more losses than what we have allowed for in our specific and general loan loss allowances.
Aging of financing receivables is summarized in the following table, with loans in a "workout" period as of the reporting date considered current
if payments are current in accordance with agreed upon terms:
30 - 59 Days
60 - 89 Days
90 Days
and Over
Total
Past Due
Current
Collateral
Dependent
Receivables
Total
Financing
Receivables
(Dollars in thousands)
Commercial Mortgage Loans
December 31, 2018
December 31, 2017
$
$
— $
— $
— $
— $
— $
— $
— $
2,952,464
— $
2,952,464
— $
2,672,093
2,222
$
2,674,315
$
$
Financing receivables summarized in the following two tables represent all loans that we are either not currently collecting, or those we feel it
is probable we will not collect all amounts due according to the contractual terms of the loan agreements (all loans that we have worked with
the borrower to alleviate short-term cash flow issues, loans delinquent for 60 days or more at the reporting date, loans we have determined to
be collateral dependent and loans that we have recorded specific impairments on that we feel may continue to have performance issues).
December 31, 2018
Mortgage loans with an allowance
Mortgage loans with no related allowance
December 31, 2017
Mortgage loans with an allowance
Mortgage loans with no related allowance
Recorded
Investment
Unpaid Principal
Balance
Related
Allowance
(Dollars in thousands)
$
$
$
$
1,024
—
1,024
4,027
1,436
5,463
$
$
$
$
1,253
—
1,253
5,445
1,436
6,881
$
$
$
$
(229)
—
(229)
(1,418)
—
(1,418)
F-28
F-29
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Mortgage loans are considered delinquent when they become 60 days or more past due. In general, when loans become 90 days past due, become
collateral dependent or enter a period with no debt service payments required we place them on non-accrual status and discontinue recognizing
interest income. If payments are received on a delinquent loan, interest income is recognized to the extent it would have been recognized if
normal principal and interest would have been received timely. If the payments are received to bring a delinquent loan back to current we will
resume accruing interest income on that loan. There were no loans in non-accrual status at December 31, 2018. There were $2.2 million loans
in non-accrual status at December 31, 2017.
We define collateral dependent loans as those mortgage loans for which we will depend on the value of the collateral real estate to satisfy the
outstanding principal of the loan.
All of our commercial mortgage loans depend on the cash flow of the borrower to be at a sufficient level to service the principal and interest
payments as they come due. In general, cash inflows of the borrowers are generated by collecting monthly rent from tenants occupying space
within the borrowers' properties. Our borrowers face collateral risks such as tenants going out of business, tenants struggling to make rent
payments as they become due, and tenants canceling leases and moving to other locations. We have a number of loans where the real estate is
occupied by a single tenant. Our borrowers sometimes face both a reduction in cash flow on their mortgage property as well as a reduction in
the fair value of the real estate collateral. If borrowers are unable to replace lost rent revenue and increases in the fair value of their property do
not materialize, we could potentially incur more losses than what we have allowed for in our specific and general loan loss allowances.
Aging of financing receivables is summarized in the following table, with loans in a "workout" period as of the reporting date considered current
if payments are current in accordance with agreed upon terms:
30 - 59 Days
60 - 89 Days
90 Days
and Over
Total
Past Due
Current
Collateral
Dependent
Receivables
Total
Financing
Receivables
(Dollars in thousands)
Commercial Mortgage Loans
December 31, 2018
December 31, 2017
$
$
— $
— $
— $
— $
— $
— $
— $
2,952,464
— $
2,672,093
$
$
— $
2,952,464
2,222
$
2,674,315
Financing receivables summarized in the following two tables represent all loans that we are either not currently collecting, or those we feel it
is probable we will not collect all amounts due according to the contractual terms of the loan agreements (all loans that we have worked with
the borrower to alleviate short-term cash flow issues, loans delinquent for 60 days or more at the reporting date, loans we have determined to
be collateral dependent and loans that we have recorded specific impairments on that we feel may continue to have performance issues).
December 31,
2018
2017
(Dollars in thousands)
$
$
2,952,464
$
2,670,657
—
—
1,436
2,222
2,952,464
$
2,674,315
December 31, 2018
Mortgage loans with an allowance
Mortgage loans with no related allowance
December 31, 2017
Mortgage loans with an allowance
Mortgage loans with no related allowance
Recorded
Investment
Unpaid Principal
Balance
Related
Allowance
(Dollars in thousands)
$
$
$
$
1,024
—
1,024
4,027
1,436
5,463
$
$
$
$
1,253
—
1,253
5,445
1,436
6,881
$
$
$
$
(229)
—
(229)
(1,418)
—
(1,418)
The following table presents a rollforward of our specific and general valuation allowances for mortgage loans on real estate:
2018
2017
2016
Specific
Allowance
General
Allowance
Specific
Allowance
General
Allowance
Specific
Allowance
General
Allowance
Year Ended December 31,
(Dollars in thousands)
Beginning allowance balance
(1,418)
$
(6,100)
$
(1,327) $
(7,100)
$
(7,842)
$
(6,300)
Charge-offs
Recoveries
Change in provision for credit losses
852
1,592
(1,255)
—
—
(1,910)
—
631
(722)
—
—
1,000
5,078
5,483
(4,046)
Ending allowance balance
(229)
$
(8,010)
$
(1,418) $
(6,100)
$
(1,327)
$
—
—
(800)
(7,100)
$
$
The specific allowance represents the total credit loss allowances on loans which are individually evaluated for impairment. The general allowance
is for the group of loans discussed above which are collectively evaluated for impairment. The following table presents the total outstanding
principal of loans evaluated for impairment by basis of impairment method:
Individually evaluated for impairment
Collectively evaluated for impairment
Total loans evaluated for impairment
December 31,
2018
2017
2016
(Dollars in thousands)
$
$
1,253
2,951,211
2,952,464
$
$
5,445
2,668,870
2,674,315
$
$
4,640
2,485,979
2,490,619
Charge-offs include allowances that have been established on loans that were satisfied either by taking ownership of the collateral or by some
other means such as discounted pay-off or loan sale. When ownership of the property is taken it is recorded at the lower of the mortgage loan's
carrying value or the property's fair value (based on appraised values) less estimated costs to sell. The real estate owned is recorded as a component
of Other investments and the mortgage loan is recorded as fully paid, with any allowance for credit loss that has been established charged off.
Fair value of the real estate is determined by third party appraisal. Recoveries are situations where we have received a payment from the borrower
in an amount greater than the carrying value of the loan (principal outstanding less specific allowance).
We did not own any real estate during the years ended December 31, 2018 and 2017. We owned one real estate property during the year ended
December 31, 2016, which was sold prior to the end of 2016.
We analyze credit risk of our mortgage loans by analyzing all available evidence on loans that are delinquent and loans that are in a workout
period.
Credit Exposure - By Payment Activity
Performing
In workout
Collateral dependent
The loans that are categorized as "in workout" consist of loans that we have agreed to lower or no mortgage payments for a period of time while
the borrowers address cash flow and/or operational issues. The key features of these workouts have been determined on a loan-by-loan basis.
Most of these loans are in a period of low cash flow due to tenants vacating their space or tenants requesting rent relief during difficult economic
periods. Generally, we have allowed the borrower a six month interest only period and in some cases a twelve month period of interest only.
Interest only workout loans are expected to return to their regular debt service payments after the interest only period. Interest only loans that
are not fully amortizing will have a larger balance at their balloon date than originally contracted. Fully amortizing loans that are in interest
only periods will have larger debt service payments for their remaining term due to lost principal payments during the interest only period. In
limited circumstances we have allowed borrowers to pay the principal portion of their loan payment into an escrow account that can be used for
capital and tenant improvements for a period of not more than twelve months. In these situations new loan amortization schedules are calculated
based on the principal not collected during this twelve month workout period and larger payments are collected for the remaining term of each
loan. In all cases, the original interest rate and maturity date have not been modified, and we have not forgiven any principal amounts.
F-28
F-29
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018
Mortgage loans with an allowance
Mortgage loans with no related allowance
December 31, 2017
Mortgage loans with an allowance
Mortgage loans with no related allowance
December 31, 2016
Mortgage loans with an allowance
Mortgage loans with no related allowance
Average Recorded
Investment
Interest Income
Recognized
(Dollars in thousands)
5. Derivative Instruments
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. The fair value of our derivative instruments, including derivative instruments embedded in fixed index
annuity contracts, presented in the consolidated balance sheets are as follows:
$
$
$
$
$
$
1,042
—
1,042
4,464
1,513
5,977
3,398
1,665
5,063
$
$
$
$
$
$
74
—
74
221
91
312
301
73
374
Assets
Derivative instruments
Call options
Other assets
Interest rate caps
Interest rate swap
Liabilities
A Troubled Debt Restructuring ("TDR") is a situation where we have granted a concession to a borrower for economic or legal reasons related
to the borrower's financial difficulties that we would not otherwise consider. A mortgage loan that has been granted new terms, including workout
terms as described previously, would be considered a TDR if it meets conditions that would indicate a borrower is experiencing financial difficulty
and the new terms constitute a concession on our part. We analyze all loans where we have agreed to workout terms and all loans that we have
refinanced to determine if they meet the definition of a TDR. We consider the following factors in determining whether or not a borrower is
experiencing financial difficulty:
Policy benefit reserves - annuity products
Fixed index annuities - embedded derivatives, net
Other liabilities
Interest rate swap
•
•
•
•
•
•
borrower is in default,
borrower has declared bankruptcy,
there is growing concern about the borrower's ability to continue as a going concern,
borrower has insufficient cash flows to service debt,
borrower's inability to obtain funds from other sources, and
there is a breach of financial covenants by the borrower.
If the borrower is determined to be in financial difficulty, we consider the following conditions to determine if the borrower is granted a concession:
December 31,
2018
2017
(Dollars in thousands)
$
$
$
$
205,149
$
1,568,380
597
354
415
—
206,100
$
1,568,795
8,165,405
$
8,790,427
—
789
8,165,405
$
8,791,216
assets used to satisfy debt are less than our recorded investment,
interest rate is modified,
•
•
• maturity date extension at an interest rate less than market rate,
•
•
•
capitalization of interest,
delaying principal and/or interest for a period of three months or more, and
partial forgiveness of the balance or charge-off.
Mortgage loan workouts, refinances or restructures that are classified as TDRs are individually evaluated and measured for impairment. There
were no mortgage loans on commercial real estate that we determined to be a TDR at December 31, 2018. A summary of mortgage loans on
commercial real estate with outstanding principal at December 31, 2017 that we determined to be TDRs are as follows:
Geographic Region
Year ended December 31, 2017
South Atlantic
East
Number of
TDRs
Principal
Balance
Outstanding
Specific Loan
Loss Allowance
(Dollars in thousands)
Net
Carrying
Amount
1
1
2
$
$
2,947
1,933
4,880
$
$
— $
(467)
(467) $
2,947
1,466
4,413
F-30
F-31
The changes in fair value of derivatives included in the consolidated statements of operations are as follows:
Change in fair value of derivatives:
Call options
Interest rate swap
Interest rate caps
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
$
$
$
$
(778,899) $
1,678,283
$
165,029
869
182
(777,848) $
1,677,871
255
(667)
$
$
778,137
745,581
(1,389,491) $
919,735
$
(482)
(328)
164,219
145,045
398,420
543,465
Change in fair value of embedded derivatives:
Fixed index annuities - embedded derivatives (see Note 2)
(2,167,628) $
174,154
Other changes in difference between policy benefit reserves computed using
derivative accounting vs. long-duration contracts accounting
The amounts presented as "Other changes in difference between policy benefit reserves computed using derivative accounting vs. long-duration
contracts accounting" represents 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 derivatives that is presented as Level 3 liabilities in Note 2.
We have fixed index annuity products that guarantee the return of principal to the policyholder and credit interest based on a percentage of the
gain in a specified market index. When fixed index annuity deposits are received, a portion of the deposit is used to purchase derivatives
consisting of call options on the applicable market indices to fund the index credits due to fixed index annuity policyholders. Substantially all
such call options are one year options purchased to match the funding requirements of the underlying policies. The call options are marked to
fair value with the change in fair value included as a component of revenues. The change in fair value of derivatives includes the gains or losses
recognized at the expiration of the option term and the changes in fair value for open positions. On the respective anniversary dates of the index
policies, the index used to compute the index credit is reset and we purchase new call options to fund the next index credit. We manage the cost
of these purchases through the terms of our fixed index annuities, which permit us to change caps, participation rates, and/or asset fees, subject
to guaranteed minimums on each policy's anniversary date. By adjusting caps, participation rates, or asset fees, we can generally manage option
costs except in cases where the contractual features would prevent further modifications.
December 31, 2018
Mortgage loans with an allowance
Mortgage loans with no related allowance
December 31, 2017
Mortgage loans with an allowance
Mortgage loans with no related allowance
December 31, 2016
Mortgage loans with an allowance
Mortgage loans with no related allowance
Average Recorded
Investment
Interest Income
Recognized
(Dollars in thousands)
$
$
$
$
$
$
1,042
—
1,042
4,464
1,513
5,977
3,398
1,665
5,063
$
$
$
$
$
$
74
—
74
221
91
312
301
73
374
experiencing financial difficulty:
borrower is in default,
borrower has declared bankruptcy,
there is growing concern about the borrower's ability to continue as a going concern,
borrower has insufficient cash flows to service debt,
borrower's inability to obtain funds from other sources, and
there is a breach of financial covenants by the borrower.
assets used to satisfy debt are less than our recorded investment,
• maturity date extension at an interest rate less than market rate,
interest rate is modified,
capitalization of interest,
delaying principal and/or interest for a period of three months or more, and
partial forgiveness of the balance or charge-off.
•
•
•
•
•
•
•
•
•
•
•
If the borrower is determined to be in financial difficulty, we consider the following conditions to determine if the borrower is granted a concession:
Mortgage loan workouts, refinances or restructures that are classified as TDRs are individually evaluated and measured for impairment. There
were no mortgage loans on commercial real estate that we determined to be a TDR at December 31, 2018. A summary of mortgage loans on
commercial real estate with outstanding principal at December 31, 2017 that we determined to be TDRs are as follows:
Geographic Region
Year ended December 31, 2017
South Atlantic
East
Number of
TDRs
Principal
Balance
Outstanding
Specific Loan
Loss Allowance
(Dollars in thousands)
Net
Carrying
Amount
1
1
2
$
$
2,947
1,933
4,880
$
$
— $
(467)
(467) $
2,947
1,466
4,413
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Derivative Instruments
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. The fair value of our derivative instruments, including derivative instruments embedded in fixed index
annuity contracts, presented in the consolidated balance sheets are as follows:
A Troubled Debt Restructuring ("TDR") is a situation where we have granted a concession to a borrower for economic or legal reasons related
to the borrower's financial difficulties that we would not otherwise consider. A mortgage loan that has been granted new terms, including workout
terms as described previously, would be considered a TDR if it meets conditions that would indicate a borrower is experiencing financial difficulty
and the new terms constitute a concession on our part. We analyze all loans where we have agreed to workout terms and all loans that we have
refinanced to determine if they meet the definition of a TDR. We consider the following factors in determining whether or not a borrower is
Policy benefit reserves - annuity products
Fixed index annuities - embedded derivatives, net
Other liabilities
Interest rate swap
Assets
Derivative instruments
Call options
Other assets
Interest rate caps
Interest rate swap
Liabilities
December 31,
2018
2017
(Dollars in thousands)
$
$
$
$
205,149
$
1,568,380
597
354
415
—
206,100
$
1,568,795
8,165,405
$
8,790,427
—
789
8,165,405
$
8,791,216
The changes in fair value of derivatives included in the consolidated statements of operations are as follows:
Change in fair value of derivatives:
Call options
Interest rate swap
Interest rate caps
Change in fair value of embedded derivatives:
Fixed index annuities - embedded derivatives (see Note 2)
Other changes in difference between policy benefit reserves computed using
derivative accounting vs. long-duration contracts accounting
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
$
$
$
$
(778,899) $
1,678,283
$
165,029
869
182
255
(667)
(777,848) $
1,677,871
(2,167,628) $
174,154
$
$
778,137
745,581
(1,389,491) $
919,735
$
(482)
(328)
164,219
145,045
398,420
543,465
The amounts presented as "Other changes in difference between policy benefit reserves computed using derivative accounting vs. long-duration
contracts accounting" represents 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 derivatives that is presented as Level 3 liabilities in Note 2.
We have fixed index annuity products that guarantee the return of principal to the policyholder and credit interest based on a percentage of the
gain in a specified market index. When fixed index annuity deposits are received, a portion of the deposit is used to purchase derivatives
consisting of call options on the applicable market indices to fund the index credits due to fixed index annuity policyholders. Substantially all
such call options are one year options purchased to match the funding requirements of the underlying policies. The call options are marked to
fair value with the change in fair value included as a component of revenues. The change in fair value of derivatives includes the gains or losses
recognized at the expiration of the option term and the changes in fair value for open positions. On the respective anniversary dates of the index
policies, the index used to compute the index credit is reset and we purchase new call options to fund the next index credit. We manage the cost
of these purchases through the terms of our fixed index annuities, which permit us to change caps, participation rates, and/or asset fees, subject
to guaranteed minimums on each policy's anniversary date. By adjusting caps, participation rates, or asset fees, we can generally manage option
costs except in cases where the contractual features would prevent further modifications.
F-30
F-31
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our strategy attempts to mitigate any potential risk of loss due to the nonperformance of the counterparties to these call options through a regular
monitoring process which evaluates the program's effectiveness. We do not purchase call options that would require payment or collateral to
another institution and our call options do not contain counterparty credit-risk-related contingent features. We are exposed to risk of loss in the
event of nonperformance by the counterparties and, accordingly, we purchase our option contracts from multiple counterparties and evaluate
the creditworthiness of all counterparties prior to purchase of the contracts. All of these options have been purchased from nationally recognized
financial institutions with a Standard and Poor's credit rating of A- or higher at the time of purchase and the maximum credit exposure to any
single counterparty is subject to concentration limits. We also have credit support agreements that allow us to request the counterparty to provide
collateral to us when the fair value of our exposure to the counterparty exceeds specified amounts.
The notional amount and fair value of our call options by counterparty and each counterparty's current credit rating are as follows:
December 31,
2018
2017
Details regarding the interest rate caps are as follows:
Maturity Date
Floating Rate
Cap Rate
Counterparty
Fair Value
Fair Value
July 7, 2021
July 8, 2021
July 29, 2021
LIBOR
LIBOR
LIBOR
2.50%
2.50%
2.50%
SunTrust
SunTrust
SunTrust
Notional
Amount
$
$
40,000
12,000
27,000
79,000
December 31,
2018
2017
(Dollars in thousands)
302
$
91
204
597
$
207
62
146
415
$
$
Counterparty
Bank of America
Barclays
BNP Paribas
Canadian Imperial Bank of Commerce
Citibank, N.A.
Credit Suisse
J.P. Morgan
Morgan Stanley
Royal Bank of Canada
Societe Generale
SunTrust
Wells Fargo
Exchange traded
Credit Rating
(S&P)
Credit Rating
(Moody's)
Notional
Amount
Fair Value
Notional
Amount
Fair Value
The interest rate swap converts floating rates to fixed rates for seven years which began in March 2014. The interest rate caps cap our interest
rates for seven years which began in July 2014.
A+
A
A
A+
A+
A
A+
A+
AA-
A
A-
A+
Aa3
A2
Aa3
Aa2
A1
A1
Aa2
A1
A2
A1
Baa1
Aa2
$
6,518,808
$
6,704
$
4,645,366
$
(Dollars in thousands)
2,301,414
—
4,856,150
4,792,208
2,877,916
3,701,964
3,560,044
1,871,305
2,343,165
1,755,030
4,618,569
224,204
27,032
—
29,313
27,239
12,887
17,564
1,561
14,011
21,681
12,047
33,398
1,712
4,135,537
1,411,989
2,808,030
4,104,666
3,538,855
1,753,649
3,408,179
3,027,469
—
2,331,168
4,036,255
296,840
237,955
154,127
73,650
84,268
219,900
137,384
109,689
184,323
104,141
—
90,399
162,781
9,763
$
39,420,777
$
205,149
$
35,498,003
$
1,568,380
As of December 31, 2018 and 2017, we held $0.2 billion and $1.6 billion, respectively, of cash and cash equivalents and other securities from
counterparties for derivative collateral, which is included in Other liabilities on our consolidated balance sheets. This derivative collateral limits
the maximum amount of economic loss due to credit risk that we would incur if parties to the call options failed completely to perform according
to the terms of the contracts to $16.1 million and $11.9 million at December 31, 2018 and 2017, respectively.
The future index credits on our fixed index annuities are treated as a "series of embedded derivatives" over the expected life of the applicable
contract. We do not purchase call options to fund the index liabilities which may arise after the next policy anniversary date. We must value
both the call options and the related forward embedded options in the policies at fair value.
We entered into an interest rate swap and interest rate caps to manage interest rate risk associated with the floating rate component on certain
of our subordinated debentures. See Note 10 for more information on our subordinated debentures. The terms of the interest rate swap provide
that we pay a fixed rate of interest and receive a floating rate of interest. The terms of the interest rate caps limit the three month LIBOR to
2.50%. The interest rate swap and caps are not effective hedges under accounting guidance for derivative instruments and hedging activities.
Therefore, we record the interest rate swap and caps at fair value and any net cash payments received or paid are included in the change in fair
value of derivatives in the consolidated statements of operations.
Details regarding the interest rate swap are as follows:
The following table presents a rollforward of the liability for lifetime income benefit riders (net of coinsurance ceded):
Maturity Date
Notional
Amount
Receive Rate
Pay Rate
Counterparty
Fair Value
Fair Value
(Dollars in thousands)
March 15, 2021
$
85,500
LIBOR
2.415%
SunTrust
$
354
$
(789)
December 31,
2018
2017
F-32
F-33
6. Deferred Policy Acquisition Costs, Deferred Sales Inducements and Liability for Lifetime Income Benefit Riders
Policy acquisition costs deferred and amortized are as follows:
Sales inducements deferred and amortized are as follows:
Balance at beginning of year
Costs deferred during the year:
Commissions
Policy issue costs
Amortization:
Amortization
Impact of unlocking
Effect of net unrealized gains/losses
Balance at end of year
Balance at beginning of year
Costs deferred during the year
Amortization:
Amortization
Impact of unlocking
Effect of net unrealized gains/losses
Balance at end of year
Balance at beginning of year
Benefit expense accrual
Impact of unlocking
Claim payments
Balance at end of year
December 31,
2018
2017
2016
(Dollars in thousands)
$
2,714,523
$
2,905,377
$
2,905,136
384,432
3,790
(358,563)
30,572
761,084
401,124
5,517
(304,162)
48,198
(341,531)
538,863
4,462
(325,848)
(48,164)
(169,072)
$
3,535,838
$
2,714,523
$
2,905,377
December 31,
2018
2017
2016
(Dollars in thousands)
$
2,001,892
$
2,208,218
$
179,465
216,172
(243,666)
21,465
557,565
(210,886)
34,274
(245,886)
$
2,516,721
$
2,001,892
$
2,208,218
2,232,148
353,966
(215,406)
(35,760)
(126,730)
December 31,
2018
2017
2016
(Dollars in thousands)
704,441
$
533,391
$
157,333
(53,607)
—
149,442
21,608
—
808,167
$
704,441
$
$
$
351,946
139,443
42,002
—
533,391
monitoring process which evaluates the program's effectiveness. We do not purchase call options that would require payment or collateral to
another institution and our call options do not contain counterparty credit-risk-related contingent features. We are exposed to risk of loss in the
event of nonperformance by the counterparties and, accordingly, we purchase our option contracts from multiple counterparties and evaluate
the creditworthiness of all counterparties prior to purchase of the contracts. All of these options have been purchased from nationally recognized
financial institutions with a Standard and Poor's credit rating of A- or higher at the time of purchase and the maximum credit exposure to any
single counterparty is subject to concentration limits. We also have credit support agreements that allow us to request the counterparty to provide
collateral to us when the fair value of our exposure to the counterparty exceeds specified amounts.
The notional amount and fair value of our call options by counterparty and each counterparty's current credit rating are as follows:
Canadian Imperial Bank of Commerce
Counterparty
Bank of America
Barclays
BNP Paribas
Citibank, N.A.
Credit Suisse
J.P. Morgan
Morgan Stanley
Royal Bank of Canada
Societe Generale
SunTrust
Wells Fargo
Exchange traded
A+
A
A
A+
A+
A
A+
A+
A
A-
A+
AA-
Aa3
A2
Aa3
Aa2
A1
A1
Aa2
A1
A2
A1
Baa1
Aa2
December 31,
2018
2017
$
6,518,808
$
6,704
$
4,645,366
$
(Dollars in thousands)
2,301,414
—
4,856,150
4,792,208
2,877,916
3,701,964
3,560,044
1,871,305
2,343,165
1,755,030
4,618,569
224,204
27,032
—
29,313
27,239
12,887
17,564
1,561
14,011
21,681
12,047
33,398
1,712
4,135,537
1,411,989
2,808,030
4,104,666
3,538,855
1,753,649
3,408,179
3,027,469
—
2,331,168
4,036,255
296,840
237,955
154,127
73,650
84,268
219,900
137,384
109,689
184,323
104,141
—
90,399
162,781
9,763
$
39,420,777
$
205,149
$
35,498,003
$
1,568,380
the maximum amount of economic loss due to credit risk that we would incur if parties to the call options failed completely to perform according
to the terms of the contracts to $16.1 million and $11.9 million at December 31, 2018 and 2017, respectively.
The future index credits on our fixed index annuities are treated as a "series of embedded derivatives" over the expected life of the applicable
contract. We do not purchase call options to fund the index liabilities which may arise after the next policy anniversary date. We must value
both the call options and the related forward embedded options in the policies at fair value.
We entered into an interest rate swap and interest rate caps to manage interest rate risk associated with the floating rate component on certain
of our subordinated debentures. See Note 10 for more information on our subordinated debentures. The terms of the interest rate swap provide
that we pay a fixed rate of interest and receive a floating rate of interest. The terms of the interest rate caps limit the three month LIBOR to
2.50%. The interest rate swap and caps are not effective hedges under accounting guidance for derivative instruments and hedging activities.
Therefore, we record the interest rate swap and caps at fair value and any net cash payments received or paid are included in the change in fair
value of derivatives in the consolidated statements of operations.
Details regarding the interest rate swap are as follows:
Maturity Date
Receive Rate
Pay Rate
Counterparty
Fair Value
Fair Value
Notional
Amount
March 15, 2021
$
85,500
LIBOR
2.415%
SunTrust
$
354
$
(789)
December 31,
2018
2017
(Dollars in thousands)
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our strategy attempts to mitigate any potential risk of loss due to the nonperformance of the counterparties to these call options through a regular
Details regarding the interest rate caps are as follows:
Maturity Date
July 7, 2021
July 8, 2021
July 29, 2021
Notional
Amount
$
$
40,000
12,000
27,000
79,000
Floating Rate
Cap Rate
Counterparty
Fair Value
Fair Value
LIBOR
LIBOR
LIBOR
2.50%
2.50%
2.50%
SunTrust
SunTrust
SunTrust
(Dollars in thousands)
302
$
91
204
597
$
207
62
146
415
$
$
December 31,
2018
2017
Credit Rating
(S&P)
Credit Rating
(Moody's)
Notional
Amount
Fair Value
Fair Value
Notional
Amount
The interest rate swap converts floating rates to fixed rates for seven years which began in March 2014. The interest rate caps cap our interest
rates for seven years which began in July 2014.
6. Deferred Policy Acquisition Costs, Deferred Sales Inducements and Liability for Lifetime Income Benefit Riders
Policy acquisition costs deferred and amortized are as follows:
As of December 31, 2018 and 2017, we held $0.2 billion and $1.6 billion, respectively, of cash and cash equivalents and other securities from
counterparties for derivative collateral, which is included in Other liabilities on our consolidated balance sheets. This derivative collateral limits
Sales inducements deferred and amortized are as follows:
Balance at beginning of year
Costs deferred during the year:
Commissions
Policy issue costs
Amortization:
Amortization
Impact of unlocking
Effect of net unrealized gains/losses
Balance at end of year
Balance at beginning of year
Costs deferred during the year
Amortization:
Amortization
Impact of unlocking
Effect of net unrealized gains/losses
Balance at end of year
December 31,
2018
2017
2016
(Dollars in thousands)
$
2,714,523
$
2,905,377
$
2,905,136
384,432
3,790
(358,563)
30,572
761,084
401,124
5,517
(304,162)
48,198
(341,531)
538,863
4,462
(325,848)
(48,164)
(169,072)
$
3,535,838
$
2,714,523
$
2,905,377
December 31,
2018
2017
2016
(Dollars in thousands)
$
2,001,892
$
2,208,218
$
179,465
216,172
(243,666)
21,465
557,565
(210,886)
34,274
(245,886)
2,232,148
353,966
(215,406)
(35,760)
(126,730)
$
2,516,721
$
2,001,892
$
2,208,218
The following table presents a rollforward of the liability for lifetime income benefit riders (net of coinsurance ceded):
Balance at beginning of year
Benefit expense accrual
Impact of unlocking
Claim payments
Balance at end of year
December 31,
2018
2017
2016
(Dollars in thousands)
704,441
$
533,391
$
157,333
(53,607)
—
149,442
21,608
—
808,167
$
704,441
$
$
$
351,946
139,443
42,002
—
533,391
F-32
F-33
We periodically revise the key assumptions used in the calculation of amortization of deferred policy acquisition costs and deferred sales
inducements retrospectively through an unlocking process when estimates of current or future gross profits/margins (including the impact of
realized investment gains and losses) to be realized from a group of products are revised. In addition, we periodically revise the assumptions
used in determining the liability for lifetime income benefit riders as experience develops that is different from our assumptions.
The most significant revisions made during 2018 as a result of our quarterly reviews were account balance true-ups which were favorable to us
due to stronger index credits than we assumed due to strong equity market performance and adjustments to generally decrease lapse rate
assumptions to reflect better persistency experienced than assumed. The favorable impact of the account balance true-ups and lapse rate
assumption changes was partially offset by revisions to lower our future investment spread assumptions primarily due to an increase in the cost
of money we have been experiencing.
The most significant revisions made during 2017 as a result of our quarterly reviews were account balance true-ups which were favorable to us
due to stronger index credits than we assumed due to strong equity market performance and adjustments to generally decrease lapse rate
assumptions to reflect better persistency experienced than assumed. The favorable impact of the account balance true-ups and lapse rate
assumption changes was partially offset by reductions in estimated future gross profits attributable to revisions to assumptions used in determining
the liability for lifetime income benefit riders as well as an increase in estimated expenses associated with a reinsurance agreement with an
unaffiliated reinsurer.
The most significant revisions during 2016 as a result of our quarterly reviews were adjustments to lower future spread assumptions as actual
investment spreads being earned showed investment spread and gross profits being less than what we were assuming in our models due to
decreases in the average yield on invested assets resulting from the continued low interest rate environment. We also made adjustments to extend
the period of time in which we assume investment spread will grade up to our long-term spread targets by an additional two years as yields
obtained on investment purchases were much lower than we had anticipated as a result of the overall decline in investment yields that followed
the Brexit vote. In addition, revisions to assumptions used in determining the liability for lifetime income benefit riders during 2016 resulted
in a decrease in estimated future gross profits.
The 2018, 2017 and 2016 revisions to the liability for lifetime income benefit riders were consistent with the revisions used in the calculation
of amortization of deferred policy acquisition costs and deferred sales inducements described above. The 2018 revisions were primarily
attributable to account balance true-ups and future investment spread assumptions. The impact of the account balance true-ups and future
investment spread changes was partially offset by the lapse rate assumptions changes described above. The 2017 revisions were primarily due
to the lapse rate assumption changes described above and changes to our account value growth projections. The 2016 revisions were primarily
due to actual index credits on policies being lower than projected over the past four quarters.
7. Reinsurance and Policy Provisions
Coinsurance
We have two coinsurance agreements with EquiTrust Life Insurance Company ("EquiTrust"), covering 70% of certain of American Equity Life's
fixed index and fixed rate annuities issued from August 1, 2001 through December 31, 2001, 40% of those contracts issued during 2002 and
2003, and 20% of those contracts issued from January 1, 2004 to July 31, 2004. The business reinsured under these agreements may not be
recaptured. Coinsurance deposits (aggregate policy benefit reserves transferred to EquiTrust under these agreements) were $560.8 million and
$649.9 million at December 31, 2018 and 2017, respectively. We remain liable to policyholders with respect to the policy liabilities ceded to
EquiTrust should EquiTrust fail to meet the obligations it has coinsured. None of the coinsurance deposits with EquiTrust are deemed by
management to be uncollectible. The balance due under these agreements to EquiTrust was $2.2 million and $11.0 million at December 31,
2018 and 2017, respectively, and represents the fair value of call options held by us to fund index credits related to the ceded business net of
cash due to or from EquiTrust related to monthly settlements of policy activity and other expenses.
We have three coinsurance agreements with Athene Life Re Ltd. ("Athene"), an unauthorized life reinsurer domiciled in Bermuda. One agreement
ceded 20% of certain of American Equity Life's fixed index annuities issued from January 1, 2009 through March 31, 2010. The business
reinsured under this agreement is no longer eligible for recapture. The second agreement ceded 80% of American Equity Life's multi-year rate
guaranteed annuities issued from July 1, 2009 through December 31, 2013 and 80% of Eagle Life's multi-year rate guaranteed annuities issued
from November 20, 2013 through December 31, 2013. The business reinsured under this agreement may not be recaptured. The third agreement
cedes 80% of American Equity Life's and Eagle Life's multi-year rate guaranteed annuities issued on or after January 1, 2014, 80% of Eagle
Life's fixed index annuities issued prior to January 1, 2017, 50% of Eagle Life's fixed index annuities issued from January 1, 2017 through
December 31, 2018 and 80% of certain of American Equity Life's fixed index annuities issued from August 1, 2016 through December 31, 2016.
The reinsurance agreement specifies that the coinsurance percentage for Eagle Life's fixed index annuities decreases to 20% for policies issued
on or after January 1, 2019. The business reinsured under this agreement may not be recaptured. Coinsurance deposits (aggregate policy benefit
reserves transferred to Athene under these agreements) were $4.4 billion and $4.2 billion at December 31, 2018 and 2017, respectively. American
Equity Life is an intermediary for reinsurance of Eagle Life's business ceded to Athene. American Equity Life and Eagle Life remain liable to
policyholders with respect to the policy liabilities ceded to Athene should Athene fail to meet the obligations it has coinsured. The annuity
deposits that have been ceded to Athene are held in trusts and American Equity Life is named as the sole beneficiary of the trusts. The assets in
the trusts are required to remain at a value that is sufficient to support the current balance of policy benefit liabilities of the ceded business on a
statutory basis. If the value of the trust accounts would ever be less than the amount of the ceded policy benefit liabilities on a statutory basis,
Athene is required to either establish a letter of credit or deposit securities in the trusts for the amount of any shortfall. None of the coinsurance
deposits with Athene are deemed by management to be uncollectible. The balance due under these agreements to Athene was $16.2 million and
$79.9 million at December 31, 2018 and 2017, respectively, and represents the fair value of call options held by us to fund index credits related
to the ceded business net of cash due from Athene related to monthly settlements of policy activity.
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Amounts ceded to EquiTrust and Athene under these agreements are as follows:
Consolidated Statements of Operations
Annuity product charges
Change in fair value of derivatives
Interest sensitive and index product benefits
Change in fair value of embedded derivatives
Other operating costs and expenses
Consolidated Statements of Cash Flows
Annuity deposits
Cash payments to policyholders
Financing Arrangements
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
$
$
$
$
$
$
7,074
$
(41,487)
(34,413) $
165,485
$
(92,649)
20,415
$
$
$
6,458
94,382
100,840
177,332
35,561
19,877
93,251
$
232,770
$
5,366
18,446
23,812
93,487
23,848
24,039
141,374
(413,222) $
(387,280) $
(1,736,054)
389,384
380,683
418,499
(23,838) $
(6,597) $
(1,317,555)
We have a reinsurance transaction with Hannover Life Reassurance Company of America ("Hannover"), which is treated as reinsurance under
statutory accounting practices and as a financing arrangement under GAAP. The statutory surplus benefit under this agreement is eliminated
under GAAP and the associated charges are recorded as risk charges and included in other operating costs and expenses in the consolidated
statements of operations. The transaction became effective July 1, 2013 (the "2013 Hannover Transaction").
The 2013 Hannover Transaction, which was amended effective October 1, 2016, is a yearly renewable term reinsurance agreement for statutory
purposes covering 45.6% of waived surrender charges related to penalty free withdrawals, deaths and lifetime income benefit rider payments as
well as lifetime income benefit rider payments in excess of policy fund values on certain business. We may recapture the risks reinsured under
this agreement as of the end of any quarter after December 31, 2020 and the agreement, as amended, makes it punitive to us if we do not recapture
the business ceded no later than the first quarter of 2021. The reserve credit recorded on a statutory basis by American Equity Life was $780.0
million and $737.3 million at December 31, 2018 and 2017, respectively. We pay quarterly reinsurance premiums under this agreement with
an experience refund calculated on a quarterly basis and a risk charge based on the pretax statutory benefit as of the end of each calendar quarter.
Risk charges attributable to the 2013 Hannover Transaction were $30.8 million, $28.5 million, and $27.7 million during 2018, 2017 and 2016,
respectively.
Indemnity Reinsurance
In the normal course of business, we seek to limit our exposure to loss on any single insured and to recover a portion of benefits paid under our
annuity, life and accident and health insurance products by ceding reinsurance to other insurance enterprises or reinsurers. Reinsurance contracts
do not relieve us of our obligations to our policyholders. To the extent that reinsuring companies are later unable to meet obligations under
reinsurance agreements, our life insurance subsidiaries would be liable for these obligations, and payment of these obligations could result in
losses to us. To limit the possibility of such losses, we evaluate the financial condition of our reinsurers, and monitor concentrations of credit
risk. No allowance for uncollectible amounts has been established against our asset for amounts receivable from other insurance companies as
none of the receivables are deemed by management to be uncollectible.
F-34
F-35
We periodically revise the key assumptions used in the calculation of amortization of deferred policy acquisition costs and deferred sales
inducements retrospectively through an unlocking process when estimates of current or future gross profits/margins (including the impact of
realized investment gains and losses) to be realized from a group of products are revised. In addition, we periodically revise the assumptions
used in determining the liability for lifetime income benefit riders as experience develops that is different from our assumptions.
The most significant revisions made during 2018 as a result of our quarterly reviews were account balance true-ups which were favorable to us
due to stronger index credits than we assumed due to strong equity market performance and adjustments to generally decrease lapse rate
assumptions to reflect better persistency experienced than assumed. The favorable impact of the account balance true-ups and lapse rate
assumption changes was partially offset by revisions to lower our future investment spread assumptions primarily due to an increase in the cost
of money we have been experiencing.
The most significant revisions made during 2017 as a result of our quarterly reviews were account balance true-ups which were favorable to us
due to stronger index credits than we assumed due to strong equity market performance and adjustments to generally decrease lapse rate
assumptions to reflect better persistency experienced than assumed. The favorable impact of the account balance true-ups and lapse rate
assumption changes was partially offset by reductions in estimated future gross profits attributable to revisions to assumptions used in determining
the liability for lifetime income benefit riders as well as an increase in estimated expenses associated with a reinsurance agreement with an
unaffiliated reinsurer.
The most significant revisions during 2016 as a result of our quarterly reviews were adjustments to lower future spread assumptions as actual
investment spreads being earned showed investment spread and gross profits being less than what we were assuming in our models due to
decreases in the average yield on invested assets resulting from the continued low interest rate environment. We also made adjustments to extend
the period of time in which we assume investment spread will grade up to our long-term spread targets by an additional two years as yields
obtained on investment purchases were much lower than we had anticipated as a result of the overall decline in investment yields that followed
the Brexit vote. In addition, revisions to assumptions used in determining the liability for lifetime income benefit riders during 2016 resulted
in a decrease in estimated future gross profits.
The 2018, 2017 and 2016 revisions to the liability for lifetime income benefit riders were consistent with the revisions used in the calculation
of amortization of deferred policy acquisition costs and deferred sales inducements described above. The 2018 revisions were primarily
attributable to account balance true-ups and future investment spread assumptions. The impact of the account balance true-ups and future
investment spread changes was partially offset by the lapse rate assumptions changes described above. The 2017 revisions were primarily due
to the lapse rate assumption changes described above and changes to our account value growth projections. The 2016 revisions were primarily
due to actual index credits on policies being lower than projected over the past four quarters.
7. Reinsurance and Policy Provisions
Coinsurance
We have two coinsurance agreements with EquiTrust Life Insurance Company ("EquiTrust"), covering 70% of certain of American Equity Life's
fixed index and fixed rate annuities issued from August 1, 2001 through December 31, 2001, 40% of those contracts issued during 2002 and
2003, and 20% of those contracts issued from January 1, 2004 to July 31, 2004. The business reinsured under these agreements may not be
recaptured. Coinsurance deposits (aggregate policy benefit reserves transferred to EquiTrust under these agreements) were $560.8 million and
$649.9 million at December 31, 2018 and 2017, respectively. We remain liable to policyholders with respect to the policy liabilities ceded to
EquiTrust should EquiTrust fail to meet the obligations it has coinsured. None of the coinsurance deposits with EquiTrust are deemed by
management to be uncollectible. The balance due under these agreements to EquiTrust was $2.2 million and $11.0 million at December 31,
2018 and 2017, respectively, and represents the fair value of call options held by us to fund index credits related to the ceded business net of
cash due to or from EquiTrust related to monthly settlements of policy activity and other expenses.
We have three coinsurance agreements with Athene Life Re Ltd. ("Athene"), an unauthorized life reinsurer domiciled in Bermuda. One agreement
ceded 20% of certain of American Equity Life's fixed index annuities issued from January 1, 2009 through March 31, 2010. The business
reinsured under this agreement is no longer eligible for recapture. The second agreement ceded 80% of American Equity Life's multi-year rate
guaranteed annuities issued from July 1, 2009 through December 31, 2013 and 80% of Eagle Life's multi-year rate guaranteed annuities issued
from November 20, 2013 through December 31, 2013. The business reinsured under this agreement may not be recaptured. The third agreement
cedes 80% of American Equity Life's and Eagle Life's multi-year rate guaranteed annuities issued on or after January 1, 2014, 80% of Eagle
Life's fixed index annuities issued prior to January 1, 2017, 50% of Eagle Life's fixed index annuities issued from January 1, 2017 through
December 31, 2018 and 80% of certain of American Equity Life's fixed index annuities issued from August 1, 2016 through December 31, 2016.
The reinsurance agreement specifies that the coinsurance percentage for Eagle Life's fixed index annuities decreases to 20% for policies issued
on or after January 1, 2019. The business reinsured under this agreement may not be recaptured. Coinsurance deposits (aggregate policy benefit
reserves transferred to Athene under these agreements) were $4.4 billion and $4.2 billion at December 31, 2018 and 2017, respectively. American
Equity Life is an intermediary for reinsurance of Eagle Life's business ceded to Athene. American Equity Life and Eagle Life remain liable to
policyholders with respect to the policy liabilities ceded to Athene should Athene fail to meet the obligations it has coinsured. The annuity
deposits that have been ceded to Athene are held in trusts and American Equity Life is named as the sole beneficiary of the trusts. The assets in
the trusts are required to remain at a value that is sufficient to support the current balance of policy benefit liabilities of the ceded business on a
statutory basis. If the value of the trust accounts would ever be less than the amount of the ceded policy benefit liabilities on a statutory basis,
Athene is required to either establish a letter of credit or deposit securities in the trusts for the amount of any shortfall. None of the coinsurance
deposits with Athene are deemed by management to be uncollectible. The balance due under these agreements to Athene was $16.2 million and
$79.9 million at December 31, 2018 and 2017, respectively, and represents the fair value of call options held by us to fund index credits related
to the ceded business net of cash due from Athene related to monthly settlements of policy activity.
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Amounts ceded to EquiTrust and Athene under these agreements are as follows:
Consolidated Statements of Operations
Annuity product charges
Change in fair value of derivatives
Interest sensitive and index product benefits
Change in fair value of embedded derivatives
Other operating costs and expenses
Consolidated Statements of Cash Flows
Annuity deposits
Cash payments to policyholders
Financing Arrangements
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
$
$
$
$
$
$
7,074
$
(41,487)
(34,413) $
165,485
$
(92,649)
20,415
$
$
$
6,458
94,382
100,840
177,332
35,561
19,877
93,251
$
232,770
$
5,366
18,446
23,812
93,487
23,848
24,039
141,374
(413,222) $
(387,280) $
(1,736,054)
389,384
380,683
418,499
(23,838) $
(6,597) $
(1,317,555)
We have a reinsurance transaction with Hannover Life Reassurance Company of America ("Hannover"), which is treated as reinsurance under
statutory accounting practices and as a financing arrangement under GAAP. The statutory surplus benefit under this agreement is eliminated
under GAAP and the associated charges are recorded as risk charges and included in other operating costs and expenses in the consolidated
statements of operations. The transaction became effective July 1, 2013 (the "2013 Hannover Transaction").
The 2013 Hannover Transaction, which was amended effective October 1, 2016, is a yearly renewable term reinsurance agreement for statutory
purposes covering 45.6% of waived surrender charges related to penalty free withdrawals, deaths and lifetime income benefit rider payments as
well as lifetime income benefit rider payments in excess of policy fund values on certain business. We may recapture the risks reinsured under
this agreement as of the end of any quarter after December 31, 2020 and the agreement, as amended, makes it punitive to us if we do not recapture
the business ceded no later than the first quarter of 2021. The reserve credit recorded on a statutory basis by American Equity Life was $780.0
million and $737.3 million at December 31, 2018 and 2017, respectively. We pay quarterly reinsurance premiums under this agreement with
an experience refund calculated on a quarterly basis and a risk charge based on the pretax statutory benefit as of the end of each calendar quarter.
Risk charges attributable to the 2013 Hannover Transaction were $30.8 million, $28.5 million, and $27.7 million during 2018, 2017 and 2016,
respectively.
Indemnity Reinsurance
In the normal course of business, we seek to limit our exposure to loss on any single insured and to recover a portion of benefits paid under our
annuity, life and accident and health insurance products by ceding reinsurance to other insurance enterprises or reinsurers. Reinsurance contracts
do not relieve us of our obligations to our policyholders. To the extent that reinsuring companies are later unable to meet obligations under
reinsurance agreements, our life insurance subsidiaries would be liable for these obligations, and payment of these obligations could result in
losses to us. To limit the possibility of such losses, we evaluate the financial condition of our reinsurers, and monitor concentrations of credit
risk. No allowance for uncollectible amounts has been established against our asset for amounts receivable from other insurance companies as
none of the receivables are deemed by management to be uncollectible.
F-34
F-35
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Income Taxes
We file consolidated federal income tax returns that include all of our wholly-owned subsidiaries. Our income tax expense as presented in the
consolidated financial statements is summarized as follows:
Deferred income tax assets or liabilities are established for temporary differences between the financial reporting amounts and tax bases of assets
and liabilities that will result in deductible or taxable amounts, respectively, in future years. The tax effects of temporary differences that give
rise to the deferred tax assets and liabilities at December 31, 2018 and 2017, are as follows:
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
Consolidated statements of operations:
Current income taxes
Deferred income taxes (benefits)
Total income tax expense included in consolidated statements of operations
Stockholders' equity:
Expense (benefit) relating to:
Change in net unrealized investment losses
Share-based compensation
$
120,289
$
188,356
$
(12,563)
107,726
(240,459)
—
(46,730)
141,626
177,162
—
Total income tax expense (benefit) included in consolidated financial statements
$
(132,733) $
318,788
$
57,412
(10,408)
47,004
74,471
(527)
120,948
Income tax expense in the consolidated statements of operations differed from the amount computed at the applicable statutory federal income
tax rates of 21% for the year ended December 31, 2018 and 35% for the years ended December 31, 2017 and 2016 as follows:
Income before income taxes
Income tax expense on income before income taxes
Tax effect of:
State income taxes
Tax exempt net investment income
Impact of Tax Reform
Worthless stock deduction
Other
Income tax expense
Effective tax rate
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
$
$
565,742
118,806
$
$
316,271
110,695
$
$
130,247
45,586
5,777
(4,223)
—
(7,448)
(5,186)
1,961
(4,288)
35,932
—
(2,674)
$
107,726
$
141,626
$
19.0%
44.8%
2,559
(2,167)
—
—
1,026
47,004
36.1%
Tax Reform was enacted on December 22, 2017, reducing the statutory federal income tax rate from 35% to 21% effective January 1, 2018. The
primary impact on our 2017 financial results was the impact of the reduction in the U.S. statutory tax rate from 35% to 21% on our deferred tax
balances as of December 31, 2017.
December 31,
2018
2017
(Dollars in thousands)
$
1,538,371
$
9,804
19,928
141,075
—
3,368
3,334
3,169
2,286
9,439
1,730,774
—
—
(172,578)
(37,795)
(12,620)
(1,614)
(1,439,605)
1,842,049
11,262
—
—
6,852
3,724
3,827
3,383
3,196
10,253
1,884,546
(220,533)
(179,776)
(197,233)
(34,849)
—
(1,499)
(1,846,399)
38,147
Deferred income tax assets:
Policy benefit reserves
Other than temporary impairments
Net unrealized losses on available for sale securities
Derivative instruments
Amounts due reinsurer
Other policyholder funds
Deferred compensation
Share-based compensation
State net operating loss carryforwards
Other
Gross deferred tax assets
Deferred income tax liabilities:
Derivative instruments
Policy benefit reserves
Investment income items
Amounts due reinsurer
Other
Gross deferred tax liabilities
Net deferred income tax asset
Deferred policy acquisition costs and deferred sales inducements
(1,214,998)
(1,212,509)
Net unrealized gains on available for sale fixed maturity and equity securities
$
291,169
$
Included in the deferred income taxes is the expected income tax benefit attributable to unrealized losses on available for sale fixed maturity
securities. There is no valuation allowance provided for the deferred income tax asset attributable to unrealized losses on available for sale fixed
maturity securities. Management expects that the passage of time will result in the reversal of these unrealized losses due to the fair value
increasing as these securities near maturity. We have the intent and ability to hold these securities to maturity, because we generate adequate
cash flow from new business to fund all foreseeable cash flow needs and do not believe it would be necessary to liquidate these securities at a
loss to meet cash flow needs. In addition, we have the ability to sell fixed maturity securities in unrealized gain positions to offset realized
deferred income tax assets attributable to unrealized losses on available for sale fixed maturity securities.
Realization of our deferred income tax assets is more likely than not based on expectations as to our future taxable income and considering all
other available evidence, both positive and negative. Therefore, no valuation allowance against deferred income tax assets has been established
as of December 31, 2018 and 2017.
There were no material income tax contingencies requiring recognition in our consolidated financial statements as of December 31, 2018. We
are no longer subject to income tax examinations by tax authorities for years 2014 and prior.
At December 31, 2018, we have no net operating loss carryforwards for federal income tax purposes.
F-36
F-37
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Income Taxes
We file consolidated federal income tax returns that include all of our wholly-owned subsidiaries. Our income tax expense as presented in the
consolidated financial statements is summarized as follows:
Deferred income tax assets or liabilities are established for temporary differences between the financial reporting amounts and tax bases of assets
and liabilities that will result in deductible or taxable amounts, respectively, in future years. The tax effects of temporary differences that give
rise to the deferred tax assets and liabilities at December 31, 2018 and 2017, are as follows:
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
Total income tax expense included in consolidated statements of operations
Consolidated statements of operations:
Current income taxes
Deferred income taxes (benefits)
Stockholders' equity:
Expense (benefit) relating to:
Change in net unrealized investment losses
Share-based compensation
$
120,289
$
188,356
$
(12,563)
107,726
(240,459)
—
(46,730)
141,626
177,162
—
Total income tax expense (benefit) included in consolidated financial statements
$
(132,733) $
318,788
$
Income tax expense in the consolidated statements of operations differed from the amount computed at the applicable statutory federal income
tax rates of 21% for the year ended December 31, 2018 and 35% for the years ended December 31, 2017 and 2016 as follows:
57,412
(10,408)
47,004
74,471
(527)
120,948
2,559
(2,167)
—
—
1,026
47,004
36.1%
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
565,742
316,271
130,247
$
$
$
$
$
$
5,777
(4,223)
—
(7,448)
(5,186)
1,961
(4,288)
35,932
—
(2,674)
$
107,726
$
141,626
$
19.0%
44.8%
Income before income taxes
Tax effect of:
State income taxes
Tax exempt net investment income
Impact of Tax Reform
Worthless stock deduction
Other
Income tax expense
Effective tax rate
Income tax expense on income before income taxes
118,806
110,695
45,586
Tax Reform was enacted on December 22, 2017, reducing the statutory federal income tax rate from 35% to 21% effective January 1, 2018. The
primary impact on our 2017 financial results was the impact of the reduction in the U.S. statutory tax rate from 35% to 21% on our deferred tax
balances as of December 31, 2017.
Deferred income tax assets:
Policy benefit reserves
Other than temporary impairments
Net unrealized losses on available for sale securities
Derivative instruments
Amounts due reinsurer
Other policyholder funds
Deferred compensation
Share-based compensation
State net operating loss carryforwards
Other
Gross deferred tax assets
Deferred income tax liabilities:
December 31,
2018
2017
(Dollars in thousands)
$
1,538,371
$
9,804
19,928
141,075
—
3,368
3,334
3,169
2,286
9,439
1,730,774
1,842,049
11,262
—
—
6,852
3,724
3,827
3,383
3,196
10,253
1,884,546
Deferred policy acquisition costs and deferred sales inducements
(1,214,998)
(1,212,509)
Net unrealized gains on available for sale fixed maturity and equity securities
Derivative instruments
Policy benefit reserves
Investment income items
Amounts due reinsurer
Other
Gross deferred tax liabilities
Net deferred income tax asset
—
—
(172,578)
(37,795)
(12,620)
(1,614)
(1,439,605)
$
291,169
$
(220,533)
(179,776)
(197,233)
(34,849)
—
(1,499)
(1,846,399)
38,147
Included in the deferred income taxes is the expected income tax benefit attributable to unrealized losses on available for sale fixed maturity
securities. There is no valuation allowance provided for the deferred income tax asset attributable to unrealized losses on available for sale fixed
maturity securities. Management expects that the passage of time will result in the reversal of these unrealized losses due to the fair value
increasing as these securities near maturity. We have the intent and ability to hold these securities to maturity, because we generate adequate
cash flow from new business to fund all foreseeable cash flow needs and do not believe it would be necessary to liquidate these securities at a
loss to meet cash flow needs. In addition, we have the ability to sell fixed maturity securities in unrealized gain positions to offset realized
deferred income tax assets attributable to unrealized losses on available for sale fixed maturity securities.
Realization of our deferred income tax assets is more likely than not based on expectations as to our future taxable income and considering all
other available evidence, both positive and negative. Therefore, no valuation allowance against deferred income tax assets has been established
as of December 31, 2018 and 2017.
There were no material income tax contingencies requiring recognition in our consolidated financial statements as of December 31, 2018. We
are no longer subject to income tax examinations by tax authorities for years 2014 and prior.
At December 31, 2018, we have no net operating loss carryforwards for federal income tax purposes.
F-36
F-37
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Notes and Loan Payable and Amounts Due Under Repurchase Agreements
10. Subordinated Debentures
Notes payable includes the following:
Senior notes due 2027
Principal
Unamortized debt issue costs
Unamortized discount
December 31,
2018
2017
(Dollars in thousands)
$
$
500,000
$
(5,102)
(307)
494,591
$
500,000
(5,572)
(335)
494,093
On June 16, 2017, we issued $500 million aggregate principal amount of senior unsecured notes due 2027 which bear interest at 5.0% per year
and will mature on June 15, 2027 (the “2027 Notes”). The 2027 Notes were issued at a $0.3 million discount, which is being amortized over
the term of the 2027 Notes using the effective interest method. Contractual interest is payable semi-annually in arrears each June 15th and
December 15th. The initial transaction fees and costs totaling $5.8 million were capitalized as deferred financing costs and are being amortized
over the term of the 2027 Notes using the effective interest method. We used the net proceeds from the issuance of the 2027 Notes to prepay
our $100 million term loan (the "Term Loan") that was scheduled to mature in 2019 on June 16, 2017, and to redeem our $400 million notes
that were scheduled to mature in 2021 (the "2021 Notes") on July 17, 2017. We paid $413.3 million to redeem the 2021 Notes which included
a redemption premium equal to 3.313% of the $400 million principal amount of the 2021 Notes. We incurred a loss of $18.4 million in 2017
on the redemption of the 2021 Notes.
On September 30, 2016, we entered into a credit agreement with six banks that provided for a $150 million unsecured revolving line of credit
(the "Revolving Facility") that terminates on September 30, 2021 and a $100 million term loan that was scheduled to terminate on September
30, 2019 but was repaid on June 16, 2017 without penalty. We utilized the proceeds from the Term Loan to make a contribution to the capital
and surplus of our subsidiary, American Equity Life. Any proceeds from the Revolving Facility will be used to finance our general corporate
purposes. Interest was payable quarterly on the Term Loan. The interest rate for all borrowings under the credit agreement is floating at a rate
based on our election that will be equal to the alternate base rate (as defined in the credit agreement) plus the applicable margin or the adjusted
LIBOR rate (as defined in the credit agreement) plus the applicable margin. We also pay a commitment fee based on the available unused portion
of the Revolving Facility. The applicable margin and commitment fee rate are based on our credit rating and can change throughout the period
of the borrowings. Based upon our current credit rating, the applicable margin is 0.75% for alternate base rate borrowings and 1.75% for adjusted
LIBOR rate borrowings, and the commitment fee is 0.275%. The interest rate in effect on the Term Loan was 3.125% in 2017. Under this
agreement, we are required to maintain a minimum risk-based capital ratio at our subsidiary, American Equity Life, of 275%, a maximum ratio
of adjusted debt to total adjusted capital of 0.35, and a minimum level of statutory surplus at American Equity Life equal to the sum of 1) 80% of
statutory surplus at June 30, 2016, 2) 50% of the statutory net income for each fiscal quarter ending after June 30, 2016, and 3) 50% of all capital
contributed to American Equity Life after June 30, 2016. The Revolving Facility contains an accordion feature that allows us, on up
to three occasions and subject to credit availability, to increase the credit facility by an additional $50 million in the aggregate. We also have
the ability to extend the maturity date of the Revolving Facility by an additional one year past the initial maturity date of September 30, 2021
with the consent of the extending banks. There are currently no guarantors of the Revolving Facility, but certain of our subsidiaries must guarantee
our obligations under the credit agreement if such subsidiaries guarantee other material amounts of our debt. No amounts were outstanding
under the Revolving Facility at December 31, 2018 and 2017. As of December 31, 2018, $838.6 million is unrestricted and could be distributed
to shareholders and still be in compliance with all covenants under this credit agreement.
As part of our investment strategy, we enter into securities repurchase agreements (short-term collateralized borrowings). The maximum amount
borrowed during 2018, 2017 and 2016 was $544.1 million, $274.5 million and $113.0 million, respectively. When we do borrow cash on these
repurchase agreements, we pledge collateral in the form of debt securities with fair values approximately equal to the amount due and we use
the cash to purchase debt securities ahead of the time we collect the cash from selling annuity policies to avoid a lag between the investment of
funds and the obligation to credit interest to policyholders. We earn investment income on the securities purchased with these borrowings at a
rate in excess of the cost of these borrowings. Such borrowings averaged $51.8 million, $40.0 million and $4.5 million for the years ended
December 31, 2018, 2017 and 2016, respectively. The weighted average interest rate on amounts due under repurchase agreements was 1.90%,
0.84% and 0.66% for the years ended December 31, 2018, 2017 and 2016, respectively.
Our wholly-owned subsidiary trusts (which are not consolidated) have issued fixed rate and floating rate trust preferred securities and have used
the proceeds from these offerings to purchase subordinated debentures from us. We also issued subordinated debentures to the trusts in exchange
for all of the common securities of each trust. The sole assets of the trusts are the subordinated debentures and any interest accrued thereon.
The interest payment dates on the subordinated debentures correspond to the distribution dates on the trust preferred securities issued by the
trusts. The trust preferred securities mature simultaneously with the subordinated debentures. Our obligations under the subordinated debentures
and related agreements provide a full and unconditional guarantee of payments due under the trust preferred securities. All subordinated debentures
are callable by us at any time, except for the Trust II subordinated debt obligations.
Following is a summary of subordinated debt obligations to the trusts at December 31, 2018 and 2017:
American Equity Capital Trust II
American Equity Capital Trust III
American Equity Capital Trust IV
American Equity Capital Trust VII
American Equity Capital Trust VIII
American Equity Capital Trust IX
American Equity Capital Trust X
American Equity Capital Trust XI
American Equity Capital Trust XII
Unamortized debt issue costs
2018
2017
Interest Rate
Due Date
December 31,
(Dollars in thousands)
$
77,551
$
77,298
5%
June 1, 2047
April 29, 2034
27,840
*LIBOR + 3.90%
12,372
*LIBOR + 4.00%
January 8, 2034
10,830
*LIBOR + 3.75%
December 14, 2034
20,620
*LIBOR + 3.75%
December 15, 2034
15,470
*LIBOR + 3.65%
June 15, 2035
20,620
*LIBOR + 3.65%
September 15, 2035
20,620
*LIBOR + 3.65%
December 15, 2035
41,238
*LIBOR + 3.50%
April 7, 2036
27,840
12,372
10,830
20,620
15,470
20,620
20,620
41,238
247,161
(4,179)
$
242,982
$
246,908
(4,343)
242,565
*—three month London Interbank Offered Rate
The principal amount of the subordinated debentures issued by us to American Equity Capital Trust II ("Trust II") is $100.0 million. These
debentures were assigned a fair value of $74.7 million at the date of issue (based upon an effective yield-to-maturity of 6.8%). The difference
between the fair value at the date of issue and the principal amount is being accreted over the life of the debentures. The trust preferred securities
issued by Trust II were issued to Iowa Farm Bureau Federation, which owns more than 50% of the voting capital stock of FBL Financial
Group, Inc. ("FBL"). The consideration received by Trust II in connection with the issuance of its trust preferred securities consisted of fixed
income securities of equal value which were issued by FBL.
11. Retirement and Share-based Compensation Plans
We have adopted a contributory defined contribution plan which is qualified under Section 401(k) of the Internal Revenue Code. The plan
covers substantially all of our full-time employees subject to minimum eligibility requirements. Employees can contribute a percentage of their
annual salary (up to a maximum annual contribution of $18,500 in 2018, $18,000 in 2017 and 2016) to the plan. We contribute an additional
amount, subject to limitations, based on the voluntary contribution of the employee. Further, the plan provides for additional employer
contributions based on the discretion of the Board of Directors. Plan contributions charged to expense were $1.7 million, $1.4 million and $1.3
million for the years ended December 31, 2018, 2017 and 2016, respectively.
The following table summarizes compensation expense recognized for employees and directors as a result of share-based compensation:
ESOP
Employee Incentive Plans
Director Equity Plans
Year Ended December 31,
2018
2017
2016
$
$
(Dollars in thousands)
2,194
$
1,474
$
5,434
966
2,155
812
8,594
$
4,441
$
2,522
1,207
685
4,414
The principal purpose of the American Equity Investment Employee Stock Ownership Plan ("ESOP") is to provide each eligible employee with
an equity interest in us. Employees become eligible once they have completed a minimum of six months of service. Employees become 100%
vested after two years of service. Our contribution to the ESOP is determined by the Board of Directors.
F-38
F-39
Notes payable includes the following:
Senior notes due 2027
Principal
Unamortized debt issue costs
Unamortized discount
December 31,
2018
2017
(Dollars in thousands)
$
$
500,000
$
(5,102)
(307)
494,591
$
500,000
(5,572)
(335)
494,093
On June 16, 2017, we issued $500 million aggregate principal amount of senior unsecured notes due 2027 which bear interest at 5.0% per year
and will mature on June 15, 2027 (the “2027 Notes”). The 2027 Notes were issued at a $0.3 million discount, which is being amortized over
the term of the 2027 Notes using the effective interest method. Contractual interest is payable semi-annually in arrears each June 15th and
December 15th. The initial transaction fees and costs totaling $5.8 million were capitalized as deferred financing costs and are being amortized
over the term of the 2027 Notes using the effective interest method. We used the net proceeds from the issuance of the 2027 Notes to prepay
our $100 million term loan (the "Term Loan") that was scheduled to mature in 2019 on June 16, 2017, and to redeem our $400 million notes
that were scheduled to mature in 2021 (the "2021 Notes") on July 17, 2017. We paid $413.3 million to redeem the 2021 Notes which included
a redemption premium equal to 3.313% of the $400 million principal amount of the 2021 Notes. We incurred a loss of $18.4 million in 2017
on the redemption of the 2021 Notes.
On September 30, 2016, we entered into a credit agreement with six banks that provided for a $150 million unsecured revolving line of credit
(the "Revolving Facility") that terminates on September 30, 2021 and a $100 million term loan that was scheduled to terminate on September
30, 2019 but was repaid on June 16, 2017 without penalty. We utilized the proceeds from the Term Loan to make a contribution to the capital
and surplus of our subsidiary, American Equity Life. Any proceeds from the Revolving Facility will be used to finance our general corporate
purposes. Interest was payable quarterly on the Term Loan. The interest rate for all borrowings under the credit agreement is floating at a rate
based on our election that will be equal to the alternate base rate (as defined in the credit agreement) plus the applicable margin or the adjusted
LIBOR rate (as defined in the credit agreement) plus the applicable margin. We also pay a commitment fee based on the available unused portion
of the Revolving Facility. The applicable margin and commitment fee rate are based on our credit rating and can change throughout the period
of the borrowings. Based upon our current credit rating, the applicable margin is 0.75% for alternate base rate borrowings and 1.75% for adjusted
LIBOR rate borrowings, and the commitment fee is 0.275%. The interest rate in effect on the Term Loan was 3.125% in 2017. Under this
agreement, we are required to maintain a minimum risk-based capital ratio at our subsidiary, American Equity Life, of 275%, a maximum ratio
of adjusted debt to total adjusted capital of 0.35, and a minimum level of statutory surplus at American Equity Life equal to the sum of 1) 80% of
statutory surplus at June 30, 2016, 2) 50% of the statutory net income for each fiscal quarter ending after June 30, 2016, and 3) 50% of all capital
contributed to American Equity Life after June 30, 2016. The Revolving Facility contains an accordion feature that allows us, on up
to three occasions and subject to credit availability, to increase the credit facility by an additional $50 million in the aggregate. We also have
the ability to extend the maturity date of the Revolving Facility by an additional one year past the initial maturity date of September 30, 2021
with the consent of the extending banks. There are currently no guarantors of the Revolving Facility, but certain of our subsidiaries must guarantee
our obligations under the credit agreement if such subsidiaries guarantee other material amounts of our debt. No amounts were outstanding
under the Revolving Facility at December 31, 2018 and 2017. As of December 31, 2018, $838.6 million is unrestricted and could be distributed
to shareholders and still be in compliance with all covenants under this credit agreement.
As part of our investment strategy, we enter into securities repurchase agreements (short-term collateralized borrowings). The maximum amount
borrowed during 2018, 2017 and 2016 was $544.1 million, $274.5 million and $113.0 million, respectively. When we do borrow cash on these
repurchase agreements, we pledge collateral in the form of debt securities with fair values approximately equal to the amount due and we use
the cash to purchase debt securities ahead of the time we collect the cash from selling annuity policies to avoid a lag between the investment of
funds and the obligation to credit interest to policyholders. We earn investment income on the securities purchased with these borrowings at a
rate in excess of the cost of these borrowings. Such borrowings averaged $51.8 million, $40.0 million and $4.5 million for the years ended
December 31, 2018, 2017 and 2016, respectively. The weighted average interest rate on amounts due under repurchase agreements was 1.90%,
0.84% and 0.66% for the years ended December 31, 2018, 2017 and 2016, respectively.
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Notes and Loan Payable and Amounts Due Under Repurchase Agreements
10. Subordinated Debentures
Our wholly-owned subsidiary trusts (which are not consolidated) have issued fixed rate and floating rate trust preferred securities and have used
the proceeds from these offerings to purchase subordinated debentures from us. We also issued subordinated debentures to the trusts in exchange
for all of the common securities of each trust. The sole assets of the trusts are the subordinated debentures and any interest accrued thereon.
The interest payment dates on the subordinated debentures correspond to the distribution dates on the trust preferred securities issued by the
trusts. The trust preferred securities mature simultaneously with the subordinated debentures. Our obligations under the subordinated debentures
and related agreements provide a full and unconditional guarantee of payments due under the trust preferred securities. All subordinated debentures
are callable by us at any time, except for the Trust II subordinated debt obligations.
Following is a summary of subordinated debt obligations to the trusts at December 31, 2018 and 2017:
December 31,
2018
2017
Interest Rate
Due Date
American Equity Capital Trust II
American Equity Capital Trust III
American Equity Capital Trust IV
American Equity Capital Trust VII
American Equity Capital Trust VIII
American Equity Capital Trust IX
American Equity Capital Trust X
American Equity Capital Trust XI
American Equity Capital Trust XII
Unamortized debt issue costs
(Dollars in thousands)
$
77,551
$
77,298
5%
27,840
12,372
10,830
20,620
15,470
20,620
20,620
41,238
247,161
(4,179)
$
242,982
$
June 1, 2047
April 29, 2034
27,840
*LIBOR + 3.90%
12,372
*LIBOR + 4.00%
January 8, 2034
10,830
*LIBOR + 3.75%
December 14, 2034
20,620
*LIBOR + 3.75%
December 15, 2034
15,470
*LIBOR + 3.65%
June 15, 2035
20,620
*LIBOR + 3.65%
September 15, 2035
20,620
*LIBOR + 3.65%
December 15, 2035
41,238
*LIBOR + 3.50%
April 7, 2036
246,908
(4,343)
242,565
*—three month London Interbank Offered Rate
The principal amount of the subordinated debentures issued by us to American Equity Capital Trust II ("Trust II") is $100.0 million. These
debentures were assigned a fair value of $74.7 million at the date of issue (based upon an effective yield-to-maturity of 6.8%). The difference
between the fair value at the date of issue and the principal amount is being accreted over the life of the debentures. The trust preferred securities
issued by Trust II were issued to Iowa Farm Bureau Federation, which owns more than 50% of the voting capital stock of FBL Financial
Group, Inc. ("FBL"). The consideration received by Trust II in connection with the issuance of its trust preferred securities consisted of fixed
income securities of equal value which were issued by FBL.
11. Retirement and Share-based Compensation Plans
We have adopted a contributory defined contribution plan which is qualified under Section 401(k) of the Internal Revenue Code. The plan
covers substantially all of our full-time employees subject to minimum eligibility requirements. Employees can contribute a percentage of their
annual salary (up to a maximum annual contribution of $18,500 in 2018, $18,000 in 2017 and 2016) to the plan. We contribute an additional
amount, subject to limitations, based on the voluntary contribution of the employee. Further, the plan provides for additional employer
contributions based on the discretion of the Board of Directors. Plan contributions charged to expense were $1.7 million, $1.4 million and $1.3
million for the years ended December 31, 2018, 2017 and 2016, respectively.
The following table summarizes compensation expense recognized for employees and directors as a result of share-based compensation:
ESOP
Employee Incentive Plans
Director Equity Plans
Year Ended December 31,
2018
2017
2016
$
$
(Dollars in thousands)
2,194
$
1,474
$
5,434
966
2,155
812
8,594
$
4,441
$
2,522
1,207
685
4,414
The principal purpose of the American Equity Investment Employee Stock Ownership Plan ("ESOP") is to provide each eligible employee with
an equity interest in us. Employees become eligible once they have completed a minimum of six months of service. Employees become 100%
vested after two years of service. Our contribution to the ESOP is determined by the Board of Directors.
F-38
F-39
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In 2016, we adopted the 2016 Employee Incentive Plan which authorized the issuance of up to 2,500,000 shares of our Common stock in the
form of grants of options, stock appreciation rights, restricted stock awards and restricted stock units. At December 31, 2018, we had 1,967,395
shares of common stock available for future grant under the 2016 Employee Incentive Plan. The 2009 Employee Incentive Plan, which expired
in June 2014, authorized the issuance of up to 2,500,000 shares of our common stock in the form of grants of options, stock appreciation rights,
restricted stock awards and restricted stock units. All options granted under this plan had six or ten year terms and a three year vesting period
after which they become fully exercisable immediately.
We have a long-term performance incentive plan under which certain members of our senior management team are granted restricted stock units
pursuant to the 2016 Employee Incentive Plan. During 2018, 2017 and 2016, we granted 105,617, 84,476 and 208,565 restricted stock units
under this plan, respectively. For the 2018 and 2017 grant, vesting is tied to threshold, target and maximum performance goals for the three
year periods ending December 31, 2020 and December 31, 2019, respectively. Fifty percent of the restricted stock units will vest if we meet
threshold goals, 100% of the restricted stock units will vest if we meet target performance goals and 150% of the restricted stock units will vest
if we meet maximum performance goals. For the 2016 grant, vesting is tied to threshold and target performance goals for the three year period
ending December 31, 2018. Fifty percent of the restricted stock units will vest if we meet threshold goals and 100% of the restricted stock units
will vest if we meet target performance goals. Compensation expense is recognized over the three year vesting period based on the likelihood
of meeting threshold, target and maximum goals. Restricted stock units that ultimately vest are payable in an equal number of shares of our
common stock. Restricted stock units are accounted for as equity awards and the estimated fair value of restricted stock units is based upon the
closing price of our common stock on the date of grant.
During 2018, 2017 and 2016, we issued 36,270, 39,826 and 43,373, respectively, shares of restricted common stock under the 2016 Employee
Incentive Plan to certain employees. These shares will generally vest on the date three years following the grant date provided the participant
remains employed with us. The 2017 grant included 6,727 shares that vested on the date one year following the grant date provided the participant
remained employed with us. Compensation expense is recognized over the one year or three year vesting period. Shares vest immediately for
participants over 65 years of age with 10 years of service with us, and compensation expense under this plan for these participants was recognized
upon approval of the incentive award by the compensation committee. During 2016, the shares of restricted stock granted during 2015 were
canceled due to an administrative issue related to the grant, which was made under an expired equity plan. During 2016, we issued 21,806 shares
of common stock to the employees impacted by the cancellation taking into consideration the canceled 2015 grants.
During 2018, we granted 85,500 time-based restricted stock units under the 2016 Employee Incentive Plan to certain employees. These restricted
stock units will generally vest on the date one year following the grant date provided the participant remains employed with us. The 2018 grant
includes 6,000 restricted stock units that will vest on the date three years following the grant date provided the participant remains employed
with us. Compensation expense is recognized over the one year or three year vesting period. Restricted stock units that ultimately vest are
payable in an equal number of shares of our common stock. Restricted stock units are accounted for as equity awards and the estimated fair
value of restricted stock units is based upon the closing price of our common stock on the date of grant.
The 2013 Director Equity and Incentive Plan authorizes the grant of options, stock appreciation rights, restricted stock awards and restricted
stock units convertible into or based upon our common stock of up to 250,000 shares to our Directors. During 2018, 2017 and 2016, we issued
28,600, 33,000 and 47,500 shares of common stock, respectively, all of which are restricted stock, and which vest the earlier of the next annual
meeting date or one year from the grant date provided the individual remains a Director during that time period. At December 31, 2018, we had
54,900 shares of common stock available for future grant under the 2013 Director and Equity Incentive Plan.
During 2014, we established the 2014 Independent Insurance Agent Restricted Stock and Restricted Stock Unit Plan, which was amended during
2016. Under the amended plan, agents of American Equity Life may receive grants of restricted stock and restricted stock units based upon
their individual sales. The plan authorizes grants of up to 1,800,000 shares of our common stock. At December 31, 2018, we had 667,626 shares
of common stock available for future grant under the amended 2014 Independent Insurance Agent Restricted Stock and Restricted Stock Unit
Plan. We recognize commission expense and an increase to additional paid-in capital as share-based compensation equal to the fair value of the
restricted stock and restricted stock units as they are earned.
In January 2017, American Equity Life's agents were granted 363,624 restricted stock units based on their production during 2016, and we
recorded commission expense (capitalized as deferred policy acquisition costs) of $2.6 million in 2016. In January 2018, agents vested in 138,820
restricted stock units granted in January 2017 based on their continued service as an independent agent and their 2017 individual sales of our
products, and for which we recorded commission expense (capitalized as deferred policy acquisition costs) of $1.3 million in 2017. In January
2019, agents vested in 57,562 restricted stock units granted in January 2017 based on their continued service as an independent agent and their
2018 individual sales of our products, and for which we recorded commission expense (capitalized as deferred policy acquisition costs) of $1.6
million in 2018.
In January 2016, American Equity Life's agents were granted 650,683 restricted stock units based on their production during 2015. In January
2017, agents vested in 246,532 restricted stock units granted in January 2016 based on their continued service as an independent agent and their
2016 individual sales of our products, and for which we recorded commission expense (capitalized as deferred policy acquisition costs) of $1.7
million in 2016. In January 2018, agents vested in 100,586 restricted stock units granted in January 2016 based on their continued service as
an independent agent and their 2017 individual sales of our products, and for which we recorded commission expense (capitalized as deferred
policy acquisition costs) of $2.2 million in 2017. In January 2019, agents vested in 89,367 restricted stock units granted in January 2016 based
on their continued service as an independent agent and their 2018 individual sales of our products, and for which we recorded commission
expense (capitalized as deferred policy acquisition costs) of $2.4 million in 2018.
For the restricted stock units granted to agents in January of 2017 and 2016, 20% of the restricted stock units vested one year from the grant
date if the agent was in good standing with American Equity Life at that date. The remaining 80% of the restricted stock units granted to
retirement eligible individuals vest over a three year period if the agent remains in good standing with American Equity Life. The remaining
80% of the restricted stock units granted to non-retirement eligible individuals vest based on the agent's individual sales and continued service
as an independent agent over a period of time not to exceed five years.
In January 2015, American Equity Life's agents were granted 27,985 shares of restricted stock and 221,489 restricted stock units based on their
production during 2014. In January 2017, agents vested in 36,609 restricted stock units granted in January 2015 based on their continued service
as an independent agent and their 2016 individual sales of our products, and for which we recorded commission expense (capitalized as deferred
policy acquisition costs) of $0.6 million in 2016. In January 2018, agents vested in 32,815 restricted stock units granted in January 2015 based
on their continued service as an independent agent and their 2017 individual sales of our products, and for which we recorded commission
expense (capitalized as deferred policy acquisition costs) of $0.8 million in 2017. In January 2019, agents vested in 28,575 restricted stock units
granted in January 2015 based on their continued service as an independent agent and their 2018 individual sales of our products, and for which
we recorded commission expense (capitalized as deferred policy acquisition costs) of $0.9 million in 2018. The restricted stock was granted to
retirement eligible individuals and vested immediately upon grant. 20% of the restricted stock units vested one year from the grant date if the
agent was in good standing with American Equity Life at that date. The remaining 80% of the restricted stock units granted vest based on the
agent's individual sales and continued service as an independent agent over a period of time not to exceed five years.
Our 1996 Stock Option Plan, 2000 Employee Stock Option Plan, 2000 Directors Stock Option Plan and 2011 Director Stock Option Plan
authorized grants of options to officers, directors and employees for an aggregate of up to 3,475,000 shares of our common stock. All options
granted under these plans have ten year terms and a six month or three year vesting period after which they become fully exercisable immediately.
At December 31, 2018, we had 18,000 shares of common stock available for future grant under the 2011 Director Stock Option Plan.
During 2007, 2010 and 2012 we established Independent Insurance Agent Stock Option plans. Under these plans, agents of American Equity
Life received grants of options to acquire shares of our common stock based upon their individual sales. The plans authorize grants of options
to agents for an aggregate of up to 8,000,000 shares of our common stock. We recognize commission expense and an increase to additional
paid-in capital as share-based compensation equal to the fair value of the options as they are earned.
Changes in the number of stock options granted to employees and agents outstanding during the years ended December 31, 2018, 2017 and 2016
are as follows:
Outstanding at January 1, 2016
Granted
Canceled
Exercised
Granted
Canceled
Exercised
Granted
Canceled
Exercised
Outstanding at December 31, 2016
Outstanding at December 31, 2017
Outstanding at December 31, 2018
Number of
Shares
Weighted-Average
Exercise Price
per Share
Total
Exercise
Price
(Dollars in thousands, except per share data)
3,443,991
$
15.17
$
(24,700)
(500,345)
2,918,946
(57,200)
(881,481)
1,980,265
—
—
—
(40,850)
(717,550)
1,221,865
—
14.83
9.97
16.06
—
13.66
15.90
16.20
—
18.87
13.99
17.41
$
52,240
—
(366)
(4,989)
46,885
—
(781)
(14,020)
32,084
—
(771)
(10,040)
21,273
F-40
F-41
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In 2016, we adopted the 2016 Employee Incentive Plan which authorized the issuance of up to 2,500,000 shares of our Common stock in the
form of grants of options, stock appreciation rights, restricted stock awards and restricted stock units. At December 31, 2018, we had 1,967,395
shares of common stock available for future grant under the 2016 Employee Incentive Plan. The 2009 Employee Incentive Plan, which expired
in June 2014, authorized the issuance of up to 2,500,000 shares of our common stock in the form of grants of options, stock appreciation rights,
restricted stock awards and restricted stock units. All options granted under this plan had six or ten year terms and a three year vesting period
after which they become fully exercisable immediately.
We have a long-term performance incentive plan under which certain members of our senior management team are granted restricted stock units
pursuant to the 2016 Employee Incentive Plan. During 2018, 2017 and 2016, we granted 105,617, 84,476 and 208,565 restricted stock units
under this plan, respectively. For the 2018 and 2017 grant, vesting is tied to threshold, target and maximum performance goals for the three
year periods ending December 31, 2020 and December 31, 2019, respectively. Fifty percent of the restricted stock units will vest if we meet
threshold goals, 100% of the restricted stock units will vest if we meet target performance goals and 150% of the restricted stock units will vest
if we meet maximum performance goals. For the 2016 grant, vesting is tied to threshold and target performance goals for the three year period
ending December 31, 2018. Fifty percent of the restricted stock units will vest if we meet threshold goals and 100% of the restricted stock units
will vest if we meet target performance goals. Compensation expense is recognized over the three year vesting period based on the likelihood
of meeting threshold, target and maximum goals. Restricted stock units that ultimately vest are payable in an equal number of shares of our
common stock. Restricted stock units are accounted for as equity awards and the estimated fair value of restricted stock units is based upon the
closing price of our common stock on the date of grant.
During 2018, 2017 and 2016, we issued 36,270, 39,826 and 43,373, respectively, shares of restricted common stock under the 2016 Employee
Incentive Plan to certain employees. These shares will generally vest on the date three years following the grant date provided the participant
remains employed with us. The 2017 grant included 6,727 shares that vested on the date one year following the grant date provided the participant
remained employed with us. Compensation expense is recognized over the one year or three year vesting period. Shares vest immediately for
participants over 65 years of age with 10 years of service with us, and compensation expense under this plan for these participants was recognized
upon approval of the incentive award by the compensation committee. During 2016, the shares of restricted stock granted during 2015 were
canceled due to an administrative issue related to the grant, which was made under an expired equity plan. During 2016, we issued 21,806 shares
of common stock to the employees impacted by the cancellation taking into consideration the canceled 2015 grants.
During 2018, we granted 85,500 time-based restricted stock units under the 2016 Employee Incentive Plan to certain employees. These restricted
stock units will generally vest on the date one year following the grant date provided the participant remains employed with us. The 2018 grant
includes 6,000 restricted stock units that will vest on the date three years following the grant date provided the participant remains employed
with us. Compensation expense is recognized over the one year or three year vesting period. Restricted stock units that ultimately vest are
payable in an equal number of shares of our common stock. Restricted stock units are accounted for as equity awards and the estimated fair
value of restricted stock units is based upon the closing price of our common stock on the date of grant.
The 2013 Director Equity and Incentive Plan authorizes the grant of options, stock appreciation rights, restricted stock awards and restricted
stock units convertible into or based upon our common stock of up to 250,000 shares to our Directors. During 2018, 2017 and 2016, we issued
28,600, 33,000 and 47,500 shares of common stock, respectively, all of which are restricted stock, and which vest the earlier of the next annual
meeting date or one year from the grant date provided the individual remains a Director during that time period. At December 31, 2018, we had
54,900 shares of common stock available for future grant under the 2013 Director and Equity Incentive Plan.
During 2014, we established the 2014 Independent Insurance Agent Restricted Stock and Restricted Stock Unit Plan, which was amended during
2016. Under the amended plan, agents of American Equity Life may receive grants of restricted stock and restricted stock units based upon
their individual sales. The plan authorizes grants of up to 1,800,000 shares of our common stock. At December 31, 2018, we had 667,626 shares
of common stock available for future grant under the amended 2014 Independent Insurance Agent Restricted Stock and Restricted Stock Unit
Plan. We recognize commission expense and an increase to additional paid-in capital as share-based compensation equal to the fair value of the
restricted stock and restricted stock units as they are earned.
In January 2017, American Equity Life's agents were granted 363,624 restricted stock units based on their production during 2016, and we
recorded commission expense (capitalized as deferred policy acquisition costs) of $2.6 million in 2016. In January 2018, agents vested in 138,820
restricted stock units granted in January 2017 based on their continued service as an independent agent and their 2017 individual sales of our
products, and for which we recorded commission expense (capitalized as deferred policy acquisition costs) of $1.3 million in 2017. In January
2019, agents vested in 57,562 restricted stock units granted in January 2017 based on their continued service as an independent agent and their
2018 individual sales of our products, and for which we recorded commission expense (capitalized as deferred policy acquisition costs) of $1.6
million in 2018.
In January 2016, American Equity Life's agents were granted 650,683 restricted stock units based on their production during 2015. In January
2017, agents vested in 246,532 restricted stock units granted in January 2016 based on their continued service as an independent agent and their
2016 individual sales of our products, and for which we recorded commission expense (capitalized as deferred policy acquisition costs) of $1.7
million in 2016. In January 2018, agents vested in 100,586 restricted stock units granted in January 2016 based on their continued service as
an independent agent and their 2017 individual sales of our products, and for which we recorded commission expense (capitalized as deferred
policy acquisition costs) of $2.2 million in 2017. In January 2019, agents vested in 89,367 restricted stock units granted in January 2016 based
on their continued service as an independent agent and their 2018 individual sales of our products, and for which we recorded commission
expense (capitalized as deferred policy acquisition costs) of $2.4 million in 2018.
For the restricted stock units granted to agents in January of 2017 and 2016, 20% of the restricted stock units vested one year from the grant
date if the agent was in good standing with American Equity Life at that date. The remaining 80% of the restricted stock units granted to
retirement eligible individuals vest over a three year period if the agent remains in good standing with American Equity Life. The remaining
80% of the restricted stock units granted to non-retirement eligible individuals vest based on the agent's individual sales and continued service
as an independent agent over a period of time not to exceed five years.
In January 2015, American Equity Life's agents were granted 27,985 shares of restricted stock and 221,489 restricted stock units based on their
production during 2014. In January 2017, agents vested in 36,609 restricted stock units granted in January 2015 based on their continued service
as an independent agent and their 2016 individual sales of our products, and for which we recorded commission expense (capitalized as deferred
policy acquisition costs) of $0.6 million in 2016. In January 2018, agents vested in 32,815 restricted stock units granted in January 2015 based
on their continued service as an independent agent and their 2017 individual sales of our products, and for which we recorded commission
expense (capitalized as deferred policy acquisition costs) of $0.8 million in 2017. In January 2019, agents vested in 28,575 restricted stock units
granted in January 2015 based on their continued service as an independent agent and their 2018 individual sales of our products, and for which
we recorded commission expense (capitalized as deferred policy acquisition costs) of $0.9 million in 2018. The restricted stock was granted to
retirement eligible individuals and vested immediately upon grant. 20% of the restricted stock units vested one year from the grant date if the
agent was in good standing with American Equity Life at that date. The remaining 80% of the restricted stock units granted vest based on the
agent's individual sales and continued service as an independent agent over a period of time not to exceed five years.
Our 1996 Stock Option Plan, 2000 Employee Stock Option Plan, 2000 Directors Stock Option Plan and 2011 Director Stock Option Plan
authorized grants of options to officers, directors and employees for an aggregate of up to 3,475,000 shares of our common stock. All options
granted under these plans have ten year terms and a six month or three year vesting period after which they become fully exercisable immediately.
At December 31, 2018, we had 18,000 shares of common stock available for future grant under the 2011 Director Stock Option Plan.
During 2007, 2010 and 2012 we established Independent Insurance Agent Stock Option plans. Under these plans, agents of American Equity
Life received grants of options to acquire shares of our common stock based upon their individual sales. The plans authorize grants of options
to agents for an aggregate of up to 8,000,000 shares of our common stock. We recognize commission expense and an increase to additional
paid-in capital as share-based compensation equal to the fair value of the options as they are earned.
Changes in the number of stock options granted to employees and agents outstanding during the years ended December 31, 2018, 2017 and 2016
are as follows:
Outstanding at January 1, 2016
Granted
Canceled
Exercised
Outstanding at December 31, 2016
Granted
Canceled
Exercised
Outstanding at December 31, 2017
Granted
Canceled
Exercised
Outstanding at December 31, 2018
Number of
Shares
Weighted-Average
Exercise Price
per Share
Total
Exercise
Price
(Dollars in thousands, except per share data)
3,443,991
$
15.17
$
—
(24,700)
(500,345)
2,918,946
—
(57,200)
(881,481)
1,980,265
—
(40,850)
(717,550)
1,221,865
—
14.83
9.97
16.06
—
13.66
15.90
16.20
—
18.87
13.99
17.41
$
52,240
—
(366)
(4,989)
46,885
—
(781)
(14,020)
32,084
—
(771)
(10,040)
21,273
F-40
F-41
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes information about stock options outstanding at December 31, 2018:
Range of Exercise Prices
$5.07 - $8.02
$9.27 - $11.35
$12.04 - $24.79
$5.07 - $24.79
Stock Options Outstanding and Vested
Number of
Awards
Remaining
Life (yrs)
Weighted-Average
Exercise Price
Per Share
122,500
252,515
846,850
1,221,865
$
0.36
1.54
1.84
1.63
6.77
9.97
21.17
17.41
The aggregate intrinsic value for stock options outstanding and vested awards was $12.9 million at December 31, 2018. For the years ended
December 31, 2018, 2017 and 2016, the total intrinsic value of options exercised by officers, directors and employees was $3.0 million,
$1.5 million and $4.0 million, respectively. Intrinsic value for stock options is calculated as the difference between the exercise price of the
underlying awards and the price of our common stock as of the reporting date. Cash received from stock options exercised for the years ended
December 31, 2018, 2017 and 2016 was $10.0 million, $14.0 million and $5.0 million, respectively.
We have deferred compensation arrangements with certain officers, directors, and consultants, whereby these individuals agreed to take our
common stock at a future date in lieu of cash payments at the time of service. The common stock is to be issued in conjunction with a "trigger
event," as that term is defined in the individual agreements. At both December 31, 2018 and 2017, these individuals have earned, and we have
reserved for future issuance, 364,000 shares of common stock, respectively, pursuant to these arrangements. No equity-based deferred
compensation arrangements were in effect during 2018, 2017 or 2016.
We have deferred compensation agreements with certain former officers whereby these individuals have deferred certain salary and bonus
compensation which is deposited into the American Equity Officer Rabbi Trust (Officer Rabbi Trust). The amounts deferred for certain former
employees are invested in assets at the direction of the former employee. The assets of the Officer Rabbi Trust are included in our assets and a
corresponding deferred compensation liability is recorded. The deferred compensation liability is recorded at the fair market value of the assets
in the Officer Rabbi Trust with the change in fair value included as a component of compensation expense. The deferred compensation liability
related to these agreements was $1.5 million and $2.0 million at December 31, 2018 and 2017, respectively. The Officer Rabbi Trust held 32,597
shares and 34,539 shares of our common stock at December 31, 2018 and 2017, respectively, which are treated as treasury shares.
12. Statutory Financial Information and Dividend Restrictions
Statutory accounting practices prescribed or permitted by regulatory authorities for our life insurance subsidiaries differ from GAAP. Net income
for our primary life insurance subsidiary as determined in accordance with statutory accounting practices was as follows:
American Equity Life
$
210,049
$
375,900
$
75,035
Statutory capital and surplus for our primary life insurance subsidiary was as follows:
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
American Equity Life
December 31,
2018
2017
(Dollars in thousands)
$
3,251,881
$
3,005,654
American Equity Life is domiciled in the State of Iowa and is regulated by the Iowa Insurance Division. In some instances, the Iowa Insurance
Division has adopted prescribed or permitted statutory accounting practices that differ from the required accounting outlined in National
Association of Insurance Commissioners ("NAIC") Statutory Accounting Principles ("SAP"). For the year ended December 31, 2018, American
Equity Life's use of prescribed statutory accounting practices resulted in higher statutory capital and surplus of $232.4 million relative to NAIC
SAP due to its accounting for call option derivative instruments and fixed index annuity reserves. For the year ended December 31, 2017,
American Equity Life's use of the same prescribed statutory accounting practice resulted in lower statutory capital and surplus of $109.7 million.
We purchase call options to hedge the growth in interest credited on fixed index products. The Iowa Insurance Division allows an insurer to
elect (1) to use an amortized cost method to account for such call options and (2) to use a fixed index annuity reserve calculation methodology
under which call options associated with the current index interest crediting term are valued at zero.
Life insurance companies are subject to the NAIC risk-based capital (RBC) requirements which are intended to be used by insurance regulators
as an early warning tool to identify deteriorating or weakly capitalized insurance companies for the purpose of initiating regulatory action.
Calculations using the NAIC formula indicated that American Equity Life's ratio of total adjusted capital to the highest level of required capital
at which regulatory action might be initiated (Company Action Level) is as follows:
December 31,
2018
2017
(Dollars in thousands)
$
3,542,339
$
3,260,328
983,169
360%
861,419
378%
Total adjusted capital
Company Action Level RBC
Ratio of adjusted capital to Company Action Level RBC
Prior approval of regulatory authorities is required for the payment of dividends to the parent company by American Equity Life which exceed
an annual limitation. American Equity Life may pay dividends without prior approval, unless such payments, together with all other such
payments within the preceding twelve months, exceed the greater of (1) net gain from operations before net realized capital gains/losses for the
preceding calendar year or, (2) 10% of the American Equity Life's surplus at the preceding year-end. The amount of dividends permitted to be
paid by American Equity Life to its parent company without prior approval of regulatory authorities is $325.2 million as of December 31, 2018.
No dividends were paid by any of our insurance subsidiaries for any of the years presented in these financial statements.
The Parent Company relies on its subsidiaries for cash flow, which has primarily been in the form of investment management fees. Retained
earnings in our consolidated financial statements primarily represent undistributed earnings of American Equity Life. As such, our ability to
pay dividends is limited by the regulatory restriction placed upon insurance companies as described above. In addition, American Equity Life
retains funds to allow for sufficient capital for growth.
13. Commitments and Contingencies
We lease our home office space and certain equipment under various operating leases. Rent expense for the years ended December 31, 2018,
2017 and 2016 totaled $3.2 million, $2.9 million and $2.8 million, respectively. At December 31, 2018, the aggregate future minimum lease
payments are $13.4 million. The following represents payments due by period for operating lease obligations as of December 31, 2018 (dollars
in thousands):
Year Ending December 31:
2019
2020
2021
2022
2023
2024 and thereafter
$
1,986
2,037
1,841
1,680
1,481
4,364
We are occasionally involved in litigation, both as a defendant and as a plaintiff. In addition, state regulatory bodies, such as state insurance
departments, the SEC, FINRA, the DOL, and other regulatory bodies regularly make inquiries and conduct examinations or investigations
concerning our compliance with, among other things, insurance laws, securities laws, the Employee Retirement Income Security Act of 1974,
as amended, and laws governing the activities of broker/dealers.
In accordance with applicable accounting guidelines, we establish an accrued liability for litigation and regulatory matters when those matters
present loss contingencies that are both probable and estimable. As a litigation or regulatory matter is developing we, in conjunction with outside
counsel, evaluate on an ongoing basis whether the matter presents a loss contingency that meets conditions indicating the need for accrual and/
or disclosure, and if not the matter will continue to be monitored for further developments. If and when the loss contingency related to litigation
or regulatory matters is deemed to be both probable and estimable, we will establish an accrued liability with respect to that matter and will
continue to monitor the matter for further developments that may affect the amount of the accrued liability.
There can be no assurance that any pending or future litigation will not have a material adverse effect on our business, financial condition, or
results of operations.
In addition to our commitments to fund mortgage loans, we have unfunded commitments at December 31, 2018 to limited partnerships of $56.0
million and to privately placed corporate securities of $109.7 million.
F-42
F-43
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes information about stock options outstanding at December 31, 2018:
Range of Exercise Prices
$5.07 - $8.02
$9.27 - $11.35
$12.04 - $24.79
$5.07 - $24.79
Stock Options Outstanding and Vested
Number of
Awards
Remaining
Life (yrs)
Weighted-Average
Exercise Price
Per Share
122,500
252,515
846,850
1,221,865
$
0.36
1.54
1.84
1.63
6.77
9.97
21.17
17.41
The aggregate intrinsic value for stock options outstanding and vested awards was $12.9 million at December 31, 2018. For the years ended
December 31, 2018, 2017 and 2016, the total intrinsic value of options exercised by officers, directors and employees was $3.0 million,
$1.5 million and $4.0 million, respectively. Intrinsic value for stock options is calculated as the difference between the exercise price of the
underlying awards and the price of our common stock as of the reporting date. Cash received from stock options exercised for the years ended
December 31, 2018, 2017 and 2016 was $10.0 million, $14.0 million and $5.0 million, respectively.
We have deferred compensation arrangements with certain officers, directors, and consultants, whereby these individuals agreed to take our
common stock at a future date in lieu of cash payments at the time of service. The common stock is to be issued in conjunction with a "trigger
event," as that term is defined in the individual agreements. At both December 31, 2018 and 2017, these individuals have earned, and we have
reserved for future issuance, 364,000 shares of common stock, respectively, pursuant to these arrangements. No equity-based deferred
compensation arrangements were in effect during 2018, 2017 or 2016.
We have deferred compensation agreements with certain former officers whereby these individuals have deferred certain salary and bonus
compensation which is deposited into the American Equity Officer Rabbi Trust (Officer Rabbi Trust). The amounts deferred for certain former
employees are invested in assets at the direction of the former employee. The assets of the Officer Rabbi Trust are included in our assets and a
corresponding deferred compensation liability is recorded. The deferred compensation liability is recorded at the fair market value of the assets
in the Officer Rabbi Trust with the change in fair value included as a component of compensation expense. The deferred compensation liability
related to these agreements was $1.5 million and $2.0 million at December 31, 2018 and 2017, respectively. The Officer Rabbi Trust held 32,597
shares and 34,539 shares of our common stock at December 31, 2018 and 2017, respectively, which are treated as treasury shares.
12. Statutory Financial Information and Dividend Restrictions
Statutory accounting practices prescribed or permitted by regulatory authorities for our life insurance subsidiaries differ from GAAP. Net income
for our primary life insurance subsidiary as determined in accordance with statutory accounting practices was as follows:
American Equity Life
$
210,049
$
375,900
$
75,035
Statutory capital and surplus for our primary life insurance subsidiary was as follows:
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
December 31,
2018
2017
(Dollars in thousands)
$
3,251,881
$
3,005,654
American Equity Life
American Equity Life is domiciled in the State of Iowa and is regulated by the Iowa Insurance Division. In some instances, the Iowa Insurance
Division has adopted prescribed or permitted statutory accounting practices that differ from the required accounting outlined in National
Association of Insurance Commissioners ("NAIC") Statutory Accounting Principles ("SAP"). For the year ended December 31, 2018, American
Equity Life's use of prescribed statutory accounting practices resulted in higher statutory capital and surplus of $232.4 million relative to NAIC
SAP due to its accounting for call option derivative instruments and fixed index annuity reserves. For the year ended December 31, 2017,
American Equity Life's use of the same prescribed statutory accounting practice resulted in lower statutory capital and surplus of $109.7 million.
We purchase call options to hedge the growth in interest credited on fixed index products. The Iowa Insurance Division allows an insurer to
elect (1) to use an amortized cost method to account for such call options and (2) to use a fixed index annuity reserve calculation methodology
under which call options associated with the current index interest crediting term are valued at zero.
Life insurance companies are subject to the NAIC risk-based capital (RBC) requirements which are intended to be used by insurance regulators
as an early warning tool to identify deteriorating or weakly capitalized insurance companies for the purpose of initiating regulatory action.
Calculations using the NAIC formula indicated that American Equity Life's ratio of total adjusted capital to the highest level of required capital
at which regulatory action might be initiated (Company Action Level) is as follows:
Total adjusted capital
Company Action Level RBC
Ratio of adjusted capital to Company Action Level RBC
December 31,
2018
2017
(Dollars in thousands)
$
3,542,339
$
3,260,328
983,169
360%
861,419
378%
Prior approval of regulatory authorities is required for the payment of dividends to the parent company by American Equity Life which exceed
an annual limitation. American Equity Life may pay dividends without prior approval, unless such payments, together with all other such
payments within the preceding twelve months, exceed the greater of (1) net gain from operations before net realized capital gains/losses for the
preceding calendar year or, (2) 10% of the American Equity Life's surplus at the preceding year-end. The amount of dividends permitted to be
paid by American Equity Life to its parent company without prior approval of regulatory authorities is $325.2 million as of December 31, 2018.
No dividends were paid by any of our insurance subsidiaries for any of the years presented in these financial statements.
The Parent Company relies on its subsidiaries for cash flow, which has primarily been in the form of investment management fees. Retained
earnings in our consolidated financial statements primarily represent undistributed earnings of American Equity Life. As such, our ability to
pay dividends is limited by the regulatory restriction placed upon insurance companies as described above. In addition, American Equity Life
retains funds to allow for sufficient capital for growth.
13. Commitments and Contingencies
We lease our home office space and certain equipment under various operating leases. Rent expense for the years ended December 31, 2018,
2017 and 2016 totaled $3.2 million, $2.9 million and $2.8 million, respectively. At December 31, 2018, the aggregate future minimum lease
payments are $13.4 million. The following represents payments due by period for operating lease obligations as of December 31, 2018 (dollars
in thousands):
Year Ending December 31:
2019
2020
2021
2022
2023
2024 and thereafter
$
1,986
2,037
1,841
1,680
1,481
4,364
We are occasionally involved in litigation, both as a defendant and as a plaintiff. In addition, state regulatory bodies, such as state insurance
departments, the SEC, FINRA, the DOL, and other regulatory bodies regularly make inquiries and conduct examinations or investigations
concerning our compliance with, among other things, insurance laws, securities laws, the Employee Retirement Income Security Act of 1974,
as amended, and laws governing the activities of broker/dealers.
In accordance with applicable accounting guidelines, we establish an accrued liability for litigation and regulatory matters when those matters
present loss contingencies that are both probable and estimable. As a litigation or regulatory matter is developing we, in conjunction with outside
counsel, evaluate on an ongoing basis whether the matter presents a loss contingency that meets conditions indicating the need for accrual and/
or disclosure, and if not the matter will continue to be monitored for further developments. If and when the loss contingency related to litigation
or regulatory matters is deemed to be both probable and estimable, we will establish an accrued liability with respect to that matter and will
continue to monitor the matter for further developments that may affect the amount of the accrued liability.
There can be no assurance that any pending or future litigation will not have a material adverse effect on our business, financial condition, or
results of operations.
In addition to our commitments to fund mortgage loans, we have unfunded commitments at December 31, 2018 to limited partnerships of $56.0
million and to privately placed corporate securities of $109.7 million.
F-42
F-43
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Earnings Per Share and Stockholders' Equity
Earnings Per Share
15. Quarterly Financial Information (Unaudited)
Unaudited quarterly results of operations are summarized below.
The following table sets forth the computation of earnings per common share and earnings per common share - assuming dilution:
Year Ended December 31,
2018
2017
2016
(Dollars in thousands, except per share data)
Numerator:
Net income - numerator for earnings per common share
$
458,016
$
174,645
$
83,243
Denominator:
Weighted average common shares outstanding
90,347,915
88,982,442
84,793,151
Effect of dilutive securities:
Warrants
Stock options and deferred compensation agreements
Restricted stock and restricted stock units
—
709,433
365,237
—
945,612
382,954
15,136
456,236
340,646
Denominator for earnings per common share - assuming dilution
91,422,585
90,311,008
85,605,169
Earnings per common share
Earnings per common share - assuming dilution
$
$
5.07
5.01
$
$
1.96
1.93
$
$
0.98
0.97
Options to purchase shares of our common stock that were outstanding during the respective periods indicated but were not included in the
computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares
are as follows:
Period
Year ended December 31, 2018
Year ended December 31, 2017
Year ended December 31, 2016
Stockholders' Equity
Number of
Shares
—
—
1,054,091
Range of
Exercise Prices
Minimum
Maximum
$—
$—
$24.79
$—
$—
$24.79
In August 2015, we completed an underwritten public offering of 8,600,000 shares of our common stock at a public offering price of $25.25 per
share, of which 4,300,000 shares were subject to a forward sale agreement. The underwriters exercised in full their option to purchase 1,290,000
additional shares of common stock, which were subject to a separate forward sale agreement. We settled the forward sale agreements on August
1, 2016 and issued 5,590,000 shares of our common stock and received $134.7 million in net proceeds. We contributed the net proceeds from
the settlement to the capital and surplus of American Equity Life.
The forward sale agreements had no initial fair value since they were entered into at the then market price of the common stock. The forward
sale agreements were equity instruments and qualified for an exception from derivative and fair value accounting.
2018
2017
2018
Premiums and product charges
Net investment income
Change in fair value of derivatives
Net realized gains (losses) on investments, excluding OTTI losses
Net OTTI losses recognized in operations
Total revenues
Net income
Earnings per common share
Earnings per common share - assuming dilution
2017
Premiums and product charges
Net investment income
Change in fair value of derivatives
Net realized gains on investments, excluding OTTI losses
Net OTTI losses recognized in operations
Loss on extinguishment of debt
Total revenues
Net income
Earnings per common share
Earnings per common share - assuming dilution
Quarter Ended
March 31,
June 30,
September 30,
December 31,
(Dollars in thousands, except per share data)
$
59,776
$
60,763
$
65,605
$
510,784
(451,083)
302
(907)
118,872
140,962
1.57
1.55
485,597
386,533
2,338
(141)
—
927,301
53,939
0.61
0.60
533,282
132,205
(38,381)
(2,396)
685,473
93,903
1.04
1.03
493,489
266,820
3,873
(949)
(428)
819,128
26,946
0.30
0.30
549,391
595,311
(2,196)
(14,373)
1,193,738
169,328
1.87
1.85
500,202
362,525
1,579
(464)
(18,389)
905,953
56,957
0.64
0.63
64,824
554,355
(1,054,281)
3,097
(18,980)
(450,985)
53,823
0.59
0.59
64,925
512,709
661,993
2,719
(3,076)
—
1,239,270
36,803
0.41
0.41
$
52,974
$
56,323
$
60,500
$
Earnings per common share for each quarter is computed independently of earnings per common share for the year. As a result, the sum of the
quarterly earnings per common share amounts may not equal the earnings per common share for the year.
The differences between the change in fair value of derivatives for each quarter primarily correspond to the performance of the indices upon
which our call options are based. The comparability of net income is impacted by the application of fair value accounting to our fixed index
annuity business as follows:
March 31,
June 30,
September 30,
December 31,
Quarter Ended
(Dollars in thousands)
$
(61,794) $
(23,593) $
427
$
7,069
37,075
30,806
28,298
3,518
F-44
F-45
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year Ended December 31,
2018
2017
2016
(Dollars in thousands, except per share data)
Net income - numerator for earnings per common share
$
458,016
$
174,645
$
83,243
Numerator:
Denominator:
Effect of dilutive securities:
Warrants
Stock options and deferred compensation agreements
Restricted stock and restricted stock units
Weighted average common shares outstanding
90,347,915
88,982,442
84,793,151
—
709,433
365,237
—
945,612
382,954
15,136
456,236
340,646
Denominator for earnings per common share - assuming dilution
91,422,585
90,311,008
85,605,169
Earnings per common share
Earnings per common share - assuming dilution
$
$
5.07
5.01
$
$
1.96
1.93
$
$
0.98
0.97
Options to purchase shares of our common stock that were outstanding during the respective periods indicated but were not included in the
computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares
are as follows:
Period
Year ended December 31, 2018
Year ended December 31, 2017
Year ended December 31, 2016
Stockholders' Equity
Number of
Shares
—
—
1,054,091
Range of
Exercise Prices
Minimum
Maximum
$—
$—
$24.79
$—
$—
$24.79
In August 2015, we completed an underwritten public offering of 8,600,000 shares of our common stock at a public offering price of $25.25 per
share, of which 4,300,000 shares were subject to a forward sale agreement. The underwriters exercised in full their option to purchase 1,290,000
additional shares of common stock, which were subject to a separate forward sale agreement. We settled the forward sale agreements on August
1, 2016 and issued 5,590,000 shares of our common stock and received $134.7 million in net proceeds. We contributed the net proceeds from
the settlement to the capital and surplus of American Equity Life.
14. Earnings Per Share and Stockholders' Equity
Earnings Per Share
15. Quarterly Financial Information (Unaudited)
Unaudited quarterly results of operations are summarized below.
The following table sets forth the computation of earnings per common share and earnings per common share - assuming dilution:
2018
Premiums and product charges
Net investment income
Change in fair value of derivatives
Net realized gains (losses) on investments, excluding OTTI losses
Net OTTI losses recognized in operations
Total revenues
Net income
Earnings per common share
Earnings per common share - assuming dilution
2017
Premiums and product charges
Net investment income
Change in fair value of derivatives
Net realized gains on investments, excluding OTTI losses
Net OTTI losses recognized in operations
Loss on extinguishment of debt
Total revenues
Net income
Earnings per common share
Earnings per common share - assuming dilution
Quarter Ended
March 31,
June 30,
September 30,
December 31,
(Dollars in thousands, except per share data)
$
59,776
$
60,763
$
65,605
$
510,784
(451,083)
302
(907)
118,872
140,962
1.57
1.55
533,282
132,205
(38,381)
(2,396)
685,473
93,903
1.04
1.03
549,391
595,311
(2,196)
(14,373)
1,193,738
169,328
1.87
1.85
$
52,974
$
56,323
$
60,500
$
485,597
386,533
2,338
(141)
—
927,301
53,939
0.61
0.60
493,489
266,820
3,873
(949)
(428)
819,128
26,946
0.30
0.30
500,202
362,525
1,579
(464)
(18,389)
905,953
56,957
0.64
0.63
64,824
554,355
(1,054,281)
3,097
(18,980)
(450,985)
53,823
0.59
0.59
64,925
512,709
661,993
2,719
(3,076)
—
1,239,270
36,803
0.41
0.41
The forward sale agreements had no initial fair value since they were entered into at the then market price of the common stock. The forward
sale agreements were equity instruments and qualified for an exception from derivative and fair value accounting.
2018
2017
Quarter Ended
March 31,
June 30,
September 30,
December 31,
(Dollars in thousands)
$
(61,794) $
(23,593) $
427
$
7,069
37,075
30,806
28,298
3,518
Earnings per common share for each quarter is computed independently of earnings per common share for the year. As a result, the sum of the
quarterly earnings per common share amounts may not equal the earnings per common share for the year.
The differences between the change in fair value of derivatives for each quarter primarily correspond to the performance of the indices upon
which our call options are based. The comparability of net income is impacted by the application of fair value accounting to our fixed index
annuity business as follows:
F-44
F-45
Schedule I—Summary of Investments—
Other Than Investments in Related Parties
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
December 31, 2018
Column A
Column B
Column C
Column D
Schedule II—Condensed Financial Information of Registrant
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
Condensed Balance Sheets
(Dollars in thousands)
Type of Investment
Fixed maturity securities:
Available for sale:
United States Government full faith and credit
United States Government sponsored agencies
United States municipalities, states and territories
Foreign government obligations
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Total fixed maturity securities
Mortgage loans on real estate
Derivative instruments
Other investments
Total investments
Amortized
Cost (1)
Fair
Value
(Dollars in thousands)
Amount at
which shown
in the balance
sheet
$
11,872
$
11,652
$
11,652
1,208,468
3,880,703
226,860
1,138,529
4,126,267
230,274
1,138,529
4,126,267
230,274
28,483,138
28,371,514
28,371,514
1,134,623
5,492,271
5,693,255
46,131,190
2,943,091
441,616
355,531
1,202,159
5,379,003
5,464,329
45,923,727
2,920,612
205,149
1,202,159
5,379,003
5,464,329
45,923,727
2,943,091
205,149
355,531
$
49,871,428
$
49,427,498
Federal income tax payable
(1) On the basis of cost adjusted for other than temporary impairments, repayments and amortization of premiums and accrual of discounts for
fixed maturity securities and short-term investments, original cost for derivative instruments and unpaid principal balance less allowance
for credit losses for mortgage loans.
See accompanying Report of Independent Registered Public Accounting Firm.
Federal income tax recoverable, including amount from subsidiaries
Assets
Cash and cash equivalents
Equity securities of subsidiary trusts
Receivable from subsidiaries
Deferred income taxes
Other assets
Total assets
Investment in and advances to subsidiaries
Liabilities and Stockholders' Equity
Liabilities:
Notes and loan payable
Subordinated debentures payable to subsidiary trusts
Other liabilities
Total liabilities
Stockholders' equity:
Common stock
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
December 31,
2018
2017
$
68,876
$
22,486
$
3,154,178
$
3,591,056
$
494,591
$
7,437
1,170
7,905
—
2,751
88,139
3,066,039
242,982
8,892
8,612
755,077
90,369
811,186
(52,432)
1,549,978
2,399,101
7,429
166
7,945
1,059
1,566
40,651
3,550,405
494,093
242,565
—
4,241
740,899
89,331
791,446
724,599
1,244,781
2,850,157
$
3,154,178
$
3,591,056
See accompanying note to condensed financial statements.
See accompanying Report of Independent Registered Public Accounting Firm.
F-46
F-47
Schedule I—Summary of Investments—
Other Than Investments in Related Parties
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
December 31, 2018
Column A
Column B
Column C
Column D
Schedule II—Condensed Financial Information of Registrant
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
Condensed Balance Sheets
(Dollars in thousands)
Type of Investment
Fixed maturity securities:
Available for sale:
United States Government full faith and credit
United States Government sponsored agencies
United States municipalities, states and territories
Foreign government obligations
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Total fixed maturity securities
Mortgage loans on real estate
Derivative instruments
Other investments
Total investments
Amortized
Cost (1)
Fair
Value
(Dollars in thousands)
Amount at
which shown
in the balance
sheet
$
11,872
$
11,652
$
11,652
28,483,138
28,371,514
28,371,514
1,208,468
3,880,703
226,860
1,134,623
5,492,271
5,693,255
46,131,190
2,943,091
441,616
355,531
1,138,529
4,126,267
230,274
1,202,159
5,379,003
5,464,329
45,923,727
2,920,612
205,149
1,138,529
4,126,267
230,274
1,202,159
5,379,003
5,464,329
45,923,727
2,943,091
205,149
355,531
Assets
Cash and cash equivalents
Equity securities of subsidiary trusts
Receivable from subsidiaries
Deferred income taxes
Federal income tax recoverable, including amount from subsidiaries
Other assets
Investment in and advances to subsidiaries
Total assets
Liabilities and Stockholders' Equity
Liabilities:
Notes and loan payable
Subordinated debentures payable to subsidiary trusts
$
49,871,428
$
49,427,498
Federal income tax payable
(1) On the basis of cost adjusted for other than temporary impairments, repayments and amortization of premiums and accrual of discounts for
fixed maturity securities and short-term investments, original cost for derivative instruments and unpaid principal balance less allowance
for credit losses for mortgage loans.
See accompanying Report of Independent Registered Public Accounting Firm.
Other liabilities
Total liabilities
Stockholders' equity:
Common stock
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
December 31,
2018
2017
$
68,876
$
22,486
7,437
1,170
7,905
—
2,751
88,139
3,066,039
7,429
166
7,945
1,059
1,566
40,651
3,550,405
$
3,154,178
$
3,591,056
$
494,591
$
242,982
8,892
8,612
755,077
90,369
811,186
(52,432)
1,549,978
2,399,101
494,093
242,565
—
4,241
740,899
89,331
791,446
724,599
1,244,781
2,850,157
$
3,154,178
$
3,591,056
See accompanying note to condensed financial statements.
See accompanying Report of Independent Registered Public Accounting Firm.
F-46
F-47
Schedule II—Condensed Financial Information of Registrant (Continued)
Schedule II—Condensed Financial Information of Registrant (Continued)
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
Condensed Statements of Operations
(Dollars in thousands)
Condensed Statements of Cash Flows
(Dollars in thousands)
Revenues:
Net investment income
Dividends from subsidiary trusts
Dividends from dissolved subsidiaries
Investment advisory fees
Surplus note interest from subsidiary
Change in fair value of derivatives
Loss on extinguishment of debt
Total revenues
Expenses:
Interest expense on notes and loan payable
Interest expense on subordinated debentures issued to subsidiary trusts
Other operating costs and expenses
Total expenses
Income before income taxes and equity in undistributed income of subsidiaries
Income tax expense
Income before equity in undistributed income of subsidiaries
Equity in undistributed income of subsidiaries
Net income
Year Ended December 31,
2018
2017
2016
Operating activities
Net income
$
$
773
461
10,393
92,335
4,080
1,051
—
109,093
25,498
15,491
18,579
59,568
49,525
2,603
46,922
$
492
410
—
83,941
4,080
(412)
(18,817)
69,694
30,368
14,124
9,234
53,726
15,968
6,895
9,073
411,094
165,572
$
458,016
$
174,645
$
78
384
—
75,706
4,080
(810)
—
79,438
28,248
12,958
8,551
49,757
29,681
12,073
17,608
65,635
83,243
See accompanying note to condensed financial statements.
See accompanying Report of Independent Registered Public Accounting Firm.
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for depreciation and amortization
Accrual of discount on equity security
Equity in undistributed income of subsidiaries
Change in fair value of derivatives
Loss on extinguishment of debt
Accrual of discount on debenture issued to subsidiary trust
Share-based compensation
Deferred income taxes
Changes in operating assets and liabilities:
Receivable from subsidiaries
Federal income tax recoverable/payable
Other assets
Other liabilities
Net cash provided by operating activities
Investing activities
Capital contributions to subsidiaries
Purchases of property, plant and equipment
Net cash used in investing activities
Financing activities
Financing fees incurred and deferred
Repayment of notes payable
Repayment of loan payable
Proceeds from issuance of notes payable
Proceeds from issuance of loan payable
Proceeds from issuance of common stock
Dividends paid
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest on notes and loan payable
Interest on subordinated debentures
Non-cash financing activity:
Year Ended December 31,
2018
2017
2016
$
458,016
$
174,645
$
83,243
1,610
(7)
(165,572)
(657)
18,817
236
951
1,583
16
(4,673)
158
(12,427)
14,680
(413,252)
(100,000)
499,650
—
14,028
(23,152)
(28,543)
(13,908)
36,394
1,946
(7)
(65,635)
(698)
—
221
818
2,117
(125)
11,361
(326)
2,546
35,461
—
—
—
100,000
139,654
(21,114)
217,084
(2,509)
38,903
36,394
— $
— $
(255,000)
(45)
(45)
(54)
(255,054)
— $
(5,817) $
(1,456)
916
(8)
(411,094)
(1,325)
—
254
1,626
40
(1,004)
9,951
(229)
4,860
62,003
(29)
(29)
—
—
—
—
9,681
(25,265)
(15,584)
46,390
22,486
$
$
$
$
68,876
$
22,486
$
25,000
$
40,537
$
13,593
14,573
27,164
12,454
Common stock issued to settle warrants that have expired
—
—
93
See accompanying note to condensed financial statements.
See accompanying Report of Independent Registered Public Accounting Firm.
F-48
F-49
Schedule II—Condensed Financial Information of Registrant (Continued)
Schedule II—Condensed Financial Information of Registrant (Continued)
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
Condensed Statements of Operations
(Dollars in thousands)
Condensed Statements of Cash Flows
(Dollars in thousands)
Revenues:
Net investment income
Dividends from subsidiary trusts
Dividends from dissolved subsidiaries
Investment advisory fees
Surplus note interest from subsidiary
Change in fair value of derivatives
Loss on extinguishment of debt
Total revenues
Expenses:
Interest expense on notes and loan payable
Interest expense on subordinated debentures issued to subsidiary trusts
Other operating costs and expenses
Total expenses
Income before income taxes and equity in undistributed income of subsidiaries
Income tax expense
Income before equity in undistributed income of subsidiaries
Equity in undistributed income of subsidiaries
Net income
$
$
773
461
10,393
92,335
4,080
1,051
—
109,093
25,498
15,491
18,579
59,568
49,525
2,603
46,922
$
492
410
—
83,941
4,080
(412)
(18,817)
69,694
30,368
14,124
9,234
53,726
15,968
6,895
9,073
78
384
—
75,706
4,080
(810)
—
79,438
28,248
12,958
8,551
49,757
29,681
12,073
17,608
65,635
83,243
411,094
165,572
$
458,016
$
174,645
$
See accompanying note to condensed financial statements.
See accompanying Report of Independent Registered Public Accounting Firm.
Year Ended December 31,
2018
2017
2016
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for depreciation and amortization
Accrual of discount on equity security
Equity in undistributed income of subsidiaries
Change in fair value of derivatives
Loss on extinguishment of debt
Accrual of discount on debenture issued to subsidiary trust
Share-based compensation
Deferred income taxes
Changes in operating assets and liabilities:
Receivable from subsidiaries
Federal income tax recoverable/payable
Other assets
Other liabilities
Net cash provided by operating activities
Investing activities
Capital contributions to subsidiaries
Purchases of property, plant and equipment
Net cash used in investing activities
Financing activities
Financing fees incurred and deferred
Repayment of notes payable
Repayment of loan payable
Proceeds from issuance of notes payable
Proceeds from issuance of loan payable
Proceeds from issuance of common stock
Dividends paid
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest on notes and loan payable
Interest on subordinated debentures
Non-cash financing activity:
Year Ended December 31,
2018
2017
2016
$
458,016
$
174,645
$
83,243
916
(8)
(411,094)
(1,325)
—
254
1,626
40
(1,004)
9,951
(229)
4,860
62,003
1,610
(7)
(165,572)
(657)
18,817
236
951
1,583
16
(4,673)
158
(12,427)
14,680
— $
— $
(29)
(29)
— $
—
—
—
—
9,681
(25,265)
(15,584)
46,390
22,486
(45)
(45)
(5,817) $
(413,252)
(100,000)
499,650
—
14,028
(23,152)
(28,543)
(13,908)
36,394
68,876
$
22,486
$
1,946
(7)
(65,635)
(698)
—
221
818
2,117
(125)
11,361
(326)
2,546
35,461
(255,000)
(54)
(255,054)
(1,456)
—
—
—
100,000
139,654
(21,114)
217,084
(2,509)
38,903
36,394
$
25,000
13,593
$
40,537
14,573
27,164
12,454
$
$
$
$
Common stock issued to settle warrants that have expired
—
—
93
See accompanying note to condensed financial statements.
See accompanying Report of Independent Registered Public Accounting Firm.
F-48
F-49
Schedule II—Condensed Financial Information of Registrant (Continued)
Schedule III—Supplementary Insurance Information
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
Note to Condensed Financial Statements
December 31, 2018
Column A
Column B
Column C
Column D
Column E
1. Basis of Presentation
The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto
of American Equity Investment Life Holding Company (Parent Company).
In the Parent Company financial statements, its investment in and advances to subsidiaries are stated at cost plus equity in undistributed income
(losses) of subsidiaries since the date of acquisition and net unrealized gains/losses on the subsidiaries' fixed maturity securities classified as
"available for sale" and equity securities.
See Notes 9 and 10 to our audited consolidated financial statements in this Form 10-K for a description of the Parent Company's notes payable
and subordinated debentures payable to subsidiary trusts.
As of December 31, 2018:
Life insurance
As of December 31, 2017:
Life insurance
As of December 31, 2016:
Life insurance
Future policy
benefits,
Deferred policy
losses, claims
acquisition
costs
and loss
expenses
Unearned
premiums
(Dollars in thousands)
Other policy
claims and
benefits
payable
3,535,838
57,606,009
— $
270,858
2,714,523
56,142,673
— $
282,884
2,905,377
51,637,026
— $
298,347
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Premium
revenue
Net
investment
income
Column H
Benefits,
claims,
losses and
settlement
expenses
(Dollars in thousands)
Amortization
of deferred
policy
acquisition
costs
Other
operating
expenses
$
$
$
250,968
2,147,812
483,075
327,991
170,290
234,722
1,991,997
3,163,234
255,964
156,183
217,346
1,849,872
1,572,586
374,012
143,437
$
$
$
For the year ended December 31, 2018:
For the year ended December 31, 2017:
Life insurance
Life insurance
Life insurance
For the year ended December 31, 2016:
See accompanying Report of Independent Registered Public Accounting Firm.
Column A
Column F
Column G
Column I
Column J
F-50
F-51
Schedule II—Condensed Financial Information of Registrant (Continued)
Schedule III—Supplementary Insurance Information
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
Note to Condensed Financial Statements
December 31, 2018
1. Basis of Presentation
The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto
of American Equity Investment Life Holding Company (Parent Company).
In the Parent Company financial statements, its investment in and advances to subsidiaries are stated at cost plus equity in undistributed income
(losses) of subsidiaries since the date of acquisition and net unrealized gains/losses on the subsidiaries' fixed maturity securities classified as
"available for sale" and equity securities.
See Notes 9 and 10 to our audited consolidated financial statements in this Form 10-K for a description of the Parent Company's notes payable
and subordinated debentures payable to subsidiary trusts.
Column A
As of December 31, 2018:
Life insurance
As of December 31, 2017:
Life insurance
As of December 31, 2016:
Life insurance
Column B
Column C
Column D
Column E
Deferred policy
acquisition
costs
Future policy
benefits,
losses, claims
and loss
expenses
Unearned
premiums
Other policy
claims and
benefits
payable
(Dollars in thousands)
$
$
$
3,535,838
2,714,523
2,905,377
$
$
$
57,606,009
56,142,673
51,637,026
$
$
$
— $
270,858
— $
282,884
— $
298,347
Column A
Column F
Column G
Premium
revenue
Net
investment
income
Column H
Benefits,
claims,
losses and
settlement
expenses
Column I
Column J
Amortization
of deferred
policy
acquisition
costs
Other
operating
expenses
(Dollars in thousands)
For the year ended December 31, 2018:
Life insurance
For the year ended December 31, 2017:
Life insurance
For the year ended December 31, 2016:
Life insurance
$
$
$
250,968
234,722
217,346
$
$
$
2,147,812
1,991,997
1,849,872
$
$
$
483,075
3,163,234
1,572,586
$
$
$
327,991
255,964
374,012
$
$
$
170,290
156,183
143,437
See accompanying Report of Independent Registered Public Accounting Firm.
F-50
F-51
Schedule IV—Reinsurance
Schedule V—Valuation and Qualifying Accounts
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
Column A
Column B
Column C
Gross amount
Ceded to
other
companies
Column D
Assumed
from
other
companies
Column E
Net amount
Column F
Percent of
amount
assumed
to net
(Dollars in thousands)
Balance
January 1,
Charged to Costs
and Expenses
Translation
Adjustment
Write-offs/
Balance
Payments/Other
December 31,
(Dollars in thousands)
Year ended December 31, 2018
Valuation allowance on mortgage loans
(7,518) $
(3,165) $
— $
2,444
$
(8,239)
53,658
$
110,370
48.62%
Year ended December 31, 2017
—
1.32%
0.14%
Valuation allowance on mortgage loans
(8,427) $
278
$
— $
631
$
(7,518)
Year ended December 31, 2016
Valuation allowance on mortgage loans
(14,142) $
(4,846) $
— $
10,561
$
(8,427)
$
$
$
1,990,716
2.91%
See accompanying Report of Independent Registered Public Accounting Firm.
Year ended December 31, 2018
Life insurance in force, at end of year
Insurance premiums and other considerations:
Annuity product charges
Traditional life, accident and health insurance, and
life contingent immediate annuity premiums
Year ended December 31, 2017
Life insurance in force, at end of year
Insurance premiums and other considerations:
Annuity product charges
Traditional life, accident and health insurance, and
life contingent immediate annuity premiums
Year ended December 31, 2016
Life insurance in force, at end of year
Insurance premiums and other considerations:
Annuity product charges
Traditional life, accident and health insurance, and
life contingent immediate annuity premiums
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
64,544
231,562
26,319
257,881
1,942,129
206,952
33,938
240,890
1,996,446
178,945
43,521
$
$
$
$
$
$
$
$
7,832
7,074
189
7,263
9,378
6,458
215
6,673
10,045
5,366
251
222,466
$
5,617
$
— $
224,488
26,480
250,968
34,228
234,722
350
350
57,965
$
$
505
505
57,849
$
$
— $
200,494
—
1.48%
0.22%
2,044,250
2.83%
— $
173,579
497
497
$
43,767
217,346
—
1.14%
0.23%
See accompanying Report of Independent Registered Public Accounting Firm.
F-52
F-53
Schedule IV—Reinsurance
Schedule V—Valuation and Qualifying Accounts
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
Year ended December 31, 2018
Valuation allowance on mortgage loans
Year ended December 31, 2017
Valuation allowance on mortgage loans
Year ended December 31, 2016
Valuation allowance on mortgage loans
$
$
$
Balance
January 1,
Charged to Costs
and Expenses
Translation
Adjustment
Write-offs/
Payments/Other
Balance
December 31,
(Dollars in thousands)
(7,518) $
(3,165) $
— $
2,444
$
(8,239)
(8,427) $
278
$
— $
631
$
(7,518)
(14,142) $
(4,846) $
— $
10,561
$
(8,427)
Life insurance in force, at end of year
1,942,129
57,965
1,990,716
2.91%
See accompanying Report of Independent Registered Public Accounting Firm.
Column A
Column B
Column C
Column E
Ceded to
other
companies
Column D
Assumed
from
other
companies
(Dollars in thousands)
Column F
Percent of
amount
assumed
to net
Gross amount
Net amount
Year ended December 31, 2018
Life insurance in force, at end of year
Insurance premiums and other considerations:
Annuity product charges
Traditional life, accident and health insurance, and
life contingent immediate annuity premiums
Year ended December 31, 2017
Insurance premiums and other considerations:
Annuity product charges
Traditional life, accident and health insurance, and
life contingent immediate annuity premiums
Year ended December 31, 2016
Insurance premiums and other considerations:
Annuity product charges
Traditional life, accident and health insurance, and
life contingent immediate annuity premiums
$
$
$
$
$
$
$
$
64,544
231,562
26,319
257,881
206,952
33,938
240,890
178,945
43,521
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
7,832
7,074
189
7,263
9,378
6,458
215
6,673
5,366
251
222,466
$
5,617
$
53,658
$
110,370
48.62%
— $
224,488
— $
200,494
350
350
505
505
497
497
$
$
$
$
$
26,480
250,968
34,228
234,722
43,767
217,346
— $
173,579
—
1.32%
0.14%
—
1.48%
0.22%
—
1.14%
0.23%
Life insurance in force, at end of year
1,996,446
10,045
57,849
2,044,250
2.83%
See accompanying Report of Independent Registered Public Accounting Firm.
F-52
F-53
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
Subsidiaries of American Equity Investment Life Holding Company
Insurance Subsidiaries:
American Equity Investment Life Insurance Company
American Equity Investment Life Insurance Company of New York
Eagle Life Insurance Company
Noninsurance Subsidiaries:
American Equity Investment Service Company
American Equity Properties, L.C.
American Equity Capital, Inc.
American Equity Capital Trust II
American Equity Capital Trust III
American Equity Capital Trust IV
American Equity Capital Trust VII
American Equity Capital Trust VIII
American Equity Capital Trust IX
American Equity Capital Trust X
American Equity Capital Trust XI
American Equity Capital Trust XII
AERL, L.C.
American Equity Advisors, Inc.
Exhibit 21.2
State of
Incorporation
New York
Iowa
Iowa
Iowa
Iowa
Iowa
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Iowa
Iowa
(This page has been left blank intentionally.)
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
Subsidiaries of American Equity Investment Life Holding Company
Insurance Subsidiaries:
American Equity Investment Life Insurance Company
American Equity Investment Life Insurance Company of New York
Eagle Life Insurance Company
Noninsurance Subsidiaries:
American Equity Investment Service Company
American Equity Properties, L.C.
American Equity Capital, Inc.
American Equity Capital Trust II
American Equity Capital Trust III
American Equity Capital Trust IV
American Equity Capital Trust VII
American Equity Capital Trust VIII
American Equity Capital Trust IX
American Equity Capital Trust X
American Equity Capital Trust XI
American Equity Capital Trust XII
AERL, L.C.
American Equity Advisors, Inc.
Exhibit 21.2
State of
Incorporation
Iowa
New York
Iowa
Iowa
Iowa
Iowa
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Iowa
Iowa
(This page has been left blank intentionally.)
Exhibit 23.1
Exhibit 31.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
American Equity Investment Life Holding Company:
We consent to the incorporation by reference in the registration statements (No. 333-213544, No. 333-207077, No. 333-201008, No. 333-184162,
No. 333-183504, No. 333-171161, No. 333-149854, and No. 333-148681) on Form S-3 and the registration statements (No. 333-214885, No.
333-213545, No. 333-175355, No. 333-167755, and No. 333-127001) on Form S-8 of American Equity Investment Life Holding Company of
our report dated February 22, 2019, with respect to the consolidated balance sheets of American Equity Investment Life Holding Company and
subsidiaries as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), changes in
stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes and financial
statement schedules I to V (collectively, the consolidated financial statements), and the effectiveness of internal control over financial reporting
as of December 31, 2018, which report appears in the December 31, 2018 annual report on Form 10 K of American Equity Investment Life
Holding Company.
/s/ KPMG LLP
Des Moines, Iowa
February 22, 2019
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John M. Matovina, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of American Equity Investment Life Holding Company;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent
functions):
information; and
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: February 22, 2019
By:
/s/ JOHN M. MATOVINA
John M. Matovina, Chief Executive Officer and President
(Principal Executive Officer)
Consent of Independent Registered Public Accounting Firm
The Board of Directors
American Equity Investment Life Holding Company:
We consent to the incorporation by reference in the registration statements (No. 333-213544, No. 333-207077, No. 333-201008, No. 333-184162,
No. 333-183504, No. 333-171161, No. 333-149854, and No. 333-148681) on Form S-3 and the registration statements (No. 333-214885, No.
333-213545, No. 333-175355, No. 333-167755, and No. 333-127001) on Form S-8 of American Equity Investment Life Holding Company of
our report dated February 22, 2019, with respect to the consolidated balance sheets of American Equity Investment Life Holding Company and
subsidiaries as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), changes in
stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes and financial
statement schedules I to V (collectively, the consolidated financial statements), and the effectiveness of internal control over financial reporting
as of December 31, 2018, which report appears in the December 31, 2018 annual report on Form 10 K of American Equity Investment Life
Holding Company.
/s/ KPMG LLP
Des Moines, Iowa
February 22, 2019
Exhibit 23.1
Exhibit 31.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John M. Matovina, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of American Equity Investment Life Holding Company;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent
functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: February 22, 2019
By:
/s/ JOHN M. MATOVINA
John M. Matovina, Chief Executive Officer and President
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
Exhibit 32.1
In connection with the Annual Report of American Equity Investment Life Holding Company (the "Company") on Form 10-K for the fiscal
year ended December 31, 2018 as filed with the Securities and Exchange Commission on or about the date hereof (the "Report"), I, John M.
Matovina, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002, that:
1.
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
and
Date: February 22, 2019
By:
/s/ JOHN M. MATOVINA
John M. Matovina, Chief Executive Officer and President
(Principal Executive Officer)
I, Ted M. Johnson, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of American Equity Investment Life Holding Company;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent
functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: February 22, 2019
By:
/s/ TED M. JOHNSON
Ted M. Johnson, Chief Financial Officer and Treasurer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
Exhibit 32.1
In connection with the Annual Report of American Equity Investment Life Holding Company (the "Company") on Form 10-K for the fiscal
year ended December 31, 2018 as filed with the Securities and Exchange Commission on or about the date hereof (the "Report"), I, John M.
Matovina, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002, that:
1.
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
and
Date: February 22, 2019
By:
/s/ JOHN M. MATOVINA
John M. Matovina, Chief Executive Officer and President
(Principal Executive Officer)
I, Ted M. Johnson, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of American Equity Investment Life Holding Company;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent
functions):
information; and
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: February 22, 2019
By:
/s/ TED M. JOHNSON
Ted M. Johnson, Chief Financial Officer and Treasurer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of American Equity Investment Life Holding Company (the "Company") on Form 10-K for the fiscal
year ended December 31, 2018 as filed with the Securities and Exchange Commission on or about the date hereof (the "Report"), I, Ted M.
Johnson, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002, that:
1.
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
and
Date: February 22, 2019
By:
/s/ TED M. JOHNSON
Ted M. Johnson, Chief Financial Officer and Treasurer
(Principal Financial Officer)
(This page has been left blank intentionally.)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of American Equity Investment Life Holding Company (the "Company") on Form 10-K for the fiscal
year ended December 31, 2018 as filed with the Securities and Exchange Commission on or about the date hereof (the "Report"), I, Ted M.
Johnson, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002, that:
1.
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
and
Date: February 22, 2019
By:
/s/ TED M. JOHNSON
Ted M. Johnson, Chief Financial Officer and Treasurer
(Principal Financial Officer)
(This page has been left blank intentionally.)
(This page has been left blank intentionally.)
American Equity Investment
Life Holding Company®
Board of Directors
JOHN M. MATOVINA
Chairman, Chief Executive Officer
and President
JOYCE A. CHAPMAN
Retired Banking Executive and
Community Volunteer
ALEXANDER M. CLARK
Senior Managing Director
Griffin Financial Group
BRENDA J. CUSHING
Consultant and Retired Executive
JAMES M. GERLACH
Retired Executive
ROBERT L. HOWE
Consultant and Retired Deputy Commissioner
Iowa Insurance Division
WILLIAM R. KUNKEL
General Counsel
Archdiocese of Chicago
ALAN D. MATULA
Chief Information Officer
Weber-Stephen Products LLC
DAVID S. MULCAHY
Chairman
Monarch Materials Group, Inc.
GERARD D. NEUGENT
Co-Chair and Chief Executive Officer
Knapp Properties, Inc.
DEBRA J. RICHARDSON
Retired Executive
A.J. STRICKLAND, III
Professor of Strategic Management
University of Alabama School of Business
Shareholder Information
To learn more about American Equity
Investment Life Holding Company®, you
can request news releases, annual reports,
financial supplements, and Forms 10-K
and 10-Q by contacting:
STEVEN D. SCHWARTZ, CFA
VICE PRESIDENT – INVESTOR RELATIONS
6000 Westown Parkway
West Des Moines, IA 50266
(515) 273-3763 • Fax (515) 221-0744
Email: sschwartz@american-equity.com
STOCK LISTING
American Equity is listed on the New York Stock
Exchange under the Ticker symbol AEL.
WEBSITE
American Equity’s website,
www.american-equity.com, is continuously
updated and includes news releases, conference
calls, stock price information, quarterly reports,
SEC filings, management presentations and more.
ANNUAL SHAREHOLDERS MEETING
June 6, 2019, 1:30 p.m.
AEL Headquarters
CORPORATE HEADQUARTERS
American Equity Investment
Life Holding Company®
6000 Westown Parkway
West Des Moines, IA 50266
(515) 221-0002 • www.american-equity.com
STOCK TRANSFER AND REGISTRAR
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
(877) 282-1169 • www.computershare.com
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
KPMG LLP
2500 Ruan Center
Des Moines, IA 50309
As retirement evolves, American Equity is focused on products
and practices that fit the ever-changing needs and goals
of retirees. We are committed to the core service principles
that have established us as a top-tier carrier. Our aim is
continued quality service that is second to none, through
innovative
technologies, as well as
traditional methods.
,
O
6000 Westown Parkway
West Des Moines, Iowa 50266
515-221-0002
888-221-1234
w
www.american-equity.com
AEL-AR-18