As retirement evolves, American Equit y is focused
on products and practices that fit the ever -changing
needs and goals of retirees. W e are committed to
the core service pri nciples that have established us
as a top -tier carrier. Our aim is continued quality
service that is second to none, through innovativ e
technologies, as well as traditional methods.
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6000 Westown Parkway
West Des Moines, Iowa 50266
515-221-0002
888-221-1234
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www.american-equity.com
AEL-AR-19
3063_Cover.indd 1
3063_Cover.indd 1
©2020 American Equity. All Rights Reserved.
3/27/20 3:28 PM
3/27/20 3:28 PM
LETTER FROM THE CHAIRMAN1 For a reconciliation of net income to non-GAAP operating income, please see page 4. Net income return on average equity was 9.6%.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. Some key highlights include:• 4% increase in policyholder funds under management.• Record non-GAAP operating income1 of $548 million or $5.97 per diluted share.• Non-GAAP operating return on equity1 of 21.4%.• Investment impairment losses of 0.4% of average equity after the effects of deferred acquisition costs and income taxes.• Issued $400 million of perpetual preferred stock.• Paid annual cash dividend of $0.30 per share.The increase in policyholder funds under management was fueled by a 17% increase in net sales. We had strong sales momentum heading into the year following the 2018 introduction of two products for distribution by American Equity Life’s independent agents. However, as investment yields declined over the course of the year, we reduced rates and product terms and ended the year in a less competitive position. We plan to launch new products in 2020 and also expect Eagle Life to begin receiving sales from a very large independent broker-dealer.Non-GAAP operating income1 included a significant benefit from unlocking of actuarial assumptions. However, year over year results excluding the impact of unlocking were up more than 20% with the increase largely attributable to an increase in our investment spread. Investment spread benefited from active rate management and declining option costs and trendable spread JOHN M. MATOVINAChairman of the Boardincreased each quarter of 2019 with fourth quarter 2019 trendable spread 15 basis points higher than the fourth quarter 2018.The perpetual preferred stock issuance improved our balance sheet strength. We redeemed $165 million of subordinated debentures with a portion of the net proceeds and have almost $225 million available for general corporate purposes. Since American Equity’s beginning, excellent customer service has been our difference maker. We were very pleased to rank 4th for customer satisfaction in the J.D. Power 2019 U.S. Life Insurance Study. American Equity Life’s customer satisfaction index score outpaced the annuity industry average as well as all other leading fixed index annuity carriers. This is the first year the annuity provider category was included in J.D. Power’s “Overall Customer Satisfaction Index Ranking” for the U.S. Life Insurance Study. On March 1, 2020, my tenure as Chief Executive Officer came to a close. It has been an honor to serve as American Equity’s CEO and the hiring of Anant Bhalla as my successor places our company in good hands for the future. We are a stronger and better company today than a year ago and expect to enjoy continuing success under Anant’s leadership in the years ahead.On behalf of the board of directors, our management team, and our 600 employees, thank you for your ownership in American Equity.Shareholder InformationTo 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, CFAVICE PRESIDENT – INVESTOR RELATIONS6000 Westown ParkwayWest Des Moines, IA 50266(515) 273-3763 • Fax (515) 221-0744Email: sschwartz@american-equity.comSTOCK LISTINGAmerican Equity is listed on the New York Stock Exchange under the Ticker symbol AEL.WEBSITEAmerican 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 MEETINGJune 4, 2020, 1:30 p.m.AEL HeadquartersCORPORATE HEADQUARTERSAmerican Equity InvestmentLife Holding Company®6000 Westown ParkwayWest Des Moines, IA 50266(515) 221-0002 • www.american-equity.com STOCK TRANSFER AND REGISTRARComputershare Trust Company, N.A.P.O. Box 43078Providence, RI 02940-3078(877) 282-1169 • www.computershare.com INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMKPMG LLP2500 Ruan CenterDes Moines, IA 50309American Equity Investment Life Holding Company® Board of DirectorsJOHN M. MATOVINAChairman of the BoardAmerican Equity Investment Life Holding Co.ANANT BHALLAChief Executive Officer & PresidentAmerican Equity Investment Life Holding Co.JOYCE A. CHAPMANRetired ExecutiveWest BankBRENDA J. CUSHINGRetired ExecutiveAthene HoldingJAMES M. GERLACHRetired ExecutiveAmerican Equity Investment Life Holding Co.ROBERT L. HOWERetired Deputy Commissioner andChief Examiner, State of IowaWILLIAM R. KUNKELGeneral CounselArchdiocese of ChicagoALAN D. MATULAChief Information OfficerWeber-Stephen Products LLCDAVID S. MULCAHYChairman of the BoardMonarch Materials Group, Inc.GERARD D. NEUGENTCo-Chairman & Chief Executive OfficerKnapp Properties, Inc.DEBRA J. RICHARDSONRetired ExecutiveAmerican Equity Investment Life Holding Co.A.J. STRICKLAND, IIIProfessorUniversity of Alabama School of Business23063_Cover.indd 23063_Cover.indd 23/27/20 3:28 PM3/27/20 3:28 PM MESSAGE FROM THE CEO
I am delighted and honored to join the American
Equity family.
American Equity has the reputation of being a
company whose products and business practices
never embarrass a distributor or hurt a policyholder .
Our service sta ndards are unparalleled in our
industry. Anyone who interacts with our employees,
the majority of whom are front -line focused,
experiences these values. Each touch point with
a client or producer is a moment of truth, where
American Equity wins hearts and minds more t han
others in our marketplace.
This results in real financial benefits. Once we get a
distribution partner writing our business; we tend to
retain a relationship with them, even if quarterly sales
ebb and flow based on product competitiveness.
Our focus on “ease of doing ” business, transparent
product offerings, and leveraging newer tools
stands out when compared to other insurers with
either multiple legacy lines that create process and
systems complexity or a corporate focus on asset
aggregation over customer centricity . This is why we
remain a core carrier for many producers, like the
974 agents who were million- dollar plus producers
in 2019. All this while tru ly staying low cost, is the
American Equity advantage.
For multiple reasons, the retirement market is an
attractive, growth market for new entrants and
anyone can buy their way into this industry . It is not
easy to build a moat around a business that delivers
sustained positive financial outcomes like ours.
Our market place is more competitive than in the
past, especially with newer entrants with either
different risk appetites or return thresholds. W e can
and will get even better at optimizing both sides
of our balance sheet in order to offer competitive
products, while earning attractive returns for our
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shareholders. Since late 2017,
we have focused on gaining
incremental investment yield, while,
in a measured way, repositioning the
source of credit risk in the portfolio away
from public corporate credits. Over the
coming years, we intend to accelerate efforts to
add risk diversifying asset classes not traditionally
in our portfolio by partnering with multiple best -
in-class third party investmen t managers. Potential
examples of this are private asset classes with
physical underlying assets in real estate and
infrastructure.
American Equity has many attributes of a front
line obsessed, data rich distribution company in
addition to being a financially discipline d, at scale
annuity manufacturer. We have the resources and
willingness to invest in evolving our capabilities,
whether it is in tech nology, investments or any other
part of our value chain, to further differentiate
ourselves to continue to win in our core existing
markets and expand into meaningful adjacencies.
I look forward to sharing more with you in the coming
years and thank you for your cont inued support.
ANANT BHALLA
Chief Executive Officer
& President
3
3/27/20 3:40 PM
3/27/20 3:40 PM
FINANCIAL HIGHLIGHTS
YEARS ENDED DECEMBER 31
(Dollars in thousands, except for per share data)
2019
2018
2017
2016
2015
Total assets
Total stockholders’ equity
$ 69,696,552
$ 61,625,564
$ 62,030,736
$ 56,053,472
$ 49,029,392
$ 4,570,119
$ 2,399,101
$ 2,850,157
$ 2,291,595
$ 1,944,535
Total common stockholders’ equity(b)
$ 4,170,119
$ 2,399,101
$ 2,850,157
$ 2,291,595
$ 1,944,535
Accumulated other comprehensive income (loss)
(AOCI)
Total common stockholders’ equity excluding
AOCI(b)
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
Dividends declared per common share
Book value per common share
Book value per common share excluding AOCI(b)
$ 1,497,921
$
(52,432)
$
724,599
$
339,966
$
201,663
$ 2,672,198
$ 2,451,533
$ 2,125,558
$ 1,951,629
$ 1,742,872
$ 4,963,213
$ 4,404,963
$ 4,177,210
$ 7,128,199
$ 7,083,979
$
$
$
$
$
$
$
246,090
548,183
2.68
5.97
0.30
45.77
29.33
$
$
$
$
$
$
$
458,016
425,740
$
$
174,645
285,050
$
$
83,243
122,344
$
$
219,830
195,820
5.01
$
1.93
$
0.97
$
2.72
4.66
$
3.16
$
1.43
$
2.42
0.28
26.55
27.13
$
$
$
0.26
31.91
23.79
$
$
$
0.24
26.04
22.17
$
$
$
0.22
23.83
21.36
NON-GAAP FINANCIAL MEASURES(a)
Reconciliation of net income to non-GAAP operating income:
Net income
$
246,090
$
458,016
$
174,645
$
83,243
$
219,830
Net realized investment gains/losses, including
OTTI
Change in fair value of derivatives and
embedded derivatives — fixed index annuities
Change in fair value of derivatives — interest
rate caps and swap
Litigation reserve
Income taxes
7,361
45,450
(5,093)
7,188
5,737
373,221
(72,181)
121,846
56,634
(44,055)
1,247
(1,892)
(1,224)
(1,265)
——
——
——
(1,957)
1,296
——
(79,736)
(3,653)
(5,124)
(21,499)
13,012
Non-GAAP operating income
$
548,183
$ 425,740
$
285,050
$
122,344
$
195,820
(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.
(b) Total common stockholders’ equity and book value per common share excluding AOCI, non-GAAP financial measures, are based on common 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 securities, we believe these non-GAAP financial measures provide useful
supplemental information. Total common stockholders’ equity and total common stockholders’ equity excluding AOCI, non-GAAP financial measures, exclude equity available to preferred
stockholders. Equity available to preferred stockholders is equal to the redemption value of outstanding preferred stock plus share dividends declared by not yet issued.
4
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4/10/20 4:53 PM
4/10/20 4:53 PM
5TOTAL ANNUITY DEPOSITSTOTAL ASSETS0123456787.120164.220174.42018Billions of Dollars5.020197.1201501020304050607056.1201662.0201761.62018Billions of Dollars69.7201949.02015CREDIT QUALITY OF FIXED MATURITY SECURITIESNAIC 239.4%NAIC 158.4%NAIC 31.9%NAIC 40.2%NAIC 6—%NAIC 50.1%COMPARISON OF CUMULATIVE FIVE-YEAR TOTAL RETURN*American Equity Investment Life Holding Co.S&P 500 IndexS&P 500 Financials Index$0$50$100$150$200JUNE30, 2015DEC.31, 2015JUNE30, 2016DEC.31, 2016JUNE30, 2017DEC.31, 2017JUNE30, 2018DEC.31, 2018JUNE30, 2019DEC.31, 2019DEC.31, 2014*$100 invested on December 31, 2014 in stock or index, including reinvestment of dividends.3063_Insert.indd 53063_Insert.indd 53/27/20 3:40 PM3/27/20 3:40 PM 6THE ONE WHO WORKS FOR YOU®COMMUNITY It’s easy to say a company has a service-centered business culture. At American Equity, we take that commitment outside the office walls. We serve our community the same way we do business, going above and beyond to help others meet their needs. This is done through financial support as well as with the time and talent of our team members. These efforts help causes improve and advance community education, health, human services, culture and arts.Along with our corporate giving initiatives, each quarter, we sponsor an Iowa-based charity. Additionally, every permanent, full-time employee is allotted 8 hours of paid Volunteer Time Off to contribute to charities they are passionate about. In 2019, our team donated more than 2,000 hours to company-sponsored activities and charities of their choosing.LEADERSHIPUnder the stewardship of John Matovina as Chief Executive Officer and President, American Equity realized substantial growth in business, market capitalization, and diversification of its distribution networks, while scaling the company to over $50 billion in funds under management. Success at this level does not happen by accident. While the industry and organization have seen a lot of changes over the last eight years, Mr. Matovina retained strong emphasis on the founding principles that have always been the hallmark of our integrity. As a result, American Equity maintains its reputation for being a company whose products and practices never embarrass a distributor or hurt a contract owner. His leadership will continue as non-executive Chairman of the Board. We thank him for his service and congratulate him on a well-deserved retirement.SUSTAINABILITYWhile financial results are most indicative of recent experience and current underlying fundamentals, we believe it is our sustainability practices that will ensure the company’s long-term success. Developing our employees to be effective leaders is indisputably important to our future success. We offer extensive training and development at all levels, including dedicated technical trainers, on-demand resources, a progressive Leadership Development Model with aligned coursework and a program for emerging leaders.In 2019, we were named by the “Des Moines Register” as a Top Workplace in Iowa, by a vote of area employees. This was the ninth consecutive year that American Equity earned this distinction.3063_Insert.indd 63063_Insert.indd 63/27/20 3:40 PM3/27/20 3:40 PM 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, 2019
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)
42-1447959
(I.R.S. Employer Identification No.)
6000 Westown Parkway
West Des Moines, Iowa 50266
(Address of principal executive offices, including zip code)
(515) 221-0002
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock, par value $1
Depositary Shares, each representing a 1/1,000th
interest in a share of 5.95% Fixed-Rate Reset Non-
Cumulative Preferred Stock, Series A
Trading Symbol(s)
AEL
AELPRA
Name of each exchange on which registered
New York Stock Exchange
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 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
Non-accelerated filer
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 $2,432,845,919 based on the
closing price of $27.16 per share, the closing price of the common stock on the New York Stock Exchange on June 28, 2019.
Shares of common stock outstanding as of February 19, 2020: 91,291,805
Documents incorporated by reference: Portions of the registrant's definitive proxy statement for the annual meeting of shareholders to be held
June 4, 2020, which will be filed within 120 days after December 31, 2019, 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, 2019
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, 2019.
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
47
48
48
48
48
49
49
52
F-1
(This page has been left blank intentionally.)
PART I
Item 1. Business
Introduction
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 14% to $56.1
billion for the first nine months of 2019 from $49.3 billion for the first nine months of 2018. Total industry sales of fixed index annuities have
increased 46% over the five-year period from 2014 to 2018 (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.
2018
2017
2016
2015
2014
For the Year Ended December 31,
(Dollars in thousands)
Total industry sales of fixed index annuities
$
68,471,294
$ 53,992,850
$
58,235,265
$
53,069,850
$
46,896,350
Increase (decrease) from prior year
Increase (decrease) from prior year
14,478,444
(4,242,415)
5,165,415
6,173,500
8,249,486
26.8%
(7.3)%
9.7%
13.2 %
21.3%
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 42 national marketing
organizations, through which nearly 21,000 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 10
third party wholesale distribution partners, through which there are 75 selling agreements and more than 8,300 representatives.
Seventeen of these selling agreements are with broker/dealers affiliated with banks. We are developing our employee wholesaling
force, which will be a key to our success at Eagle Life. Beginning in 2020, the majority of our third-party wholesaling partners will
no longer market Eagle Life products to new accounts as new account acquisition will be handled almost entirely on an internal basis.
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 2019. 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 the first
to have a no-fee lifetime income benefit rider on certain products. 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.
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 digital 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 for an annuity, 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,
2019
2018
2017
Deposits
Collected
Deposits
as a % of
Total
Deposits
Collected
Deposits
as a % of
Total
Deposits
Collected
Deposits
as a % of
Total
(Dollars in thousands)
Fixed index annuities
$
4,705,541
95% $
4,221,282
96% $
3,966,839
Annual reset fixed rate annuities
Multi-year fixed rate annuities
Single premium immediate annuities
11,444
234,226
12,002
—%
5%
—%
47,191
112,677
23,813
1%
3%
—%
74,829
110,596
24,946
$
4,963,213
100% $
4,404,963
100% $
4,177,210
95 %
2 %
3 %
— %
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 76%, 81% and 87% of our net annuity account
values at December 31, 2019, 2018 and 2017, respectively. The initial annuity deposit on these policies is increased at issuance by a specified
premium bonus ranging from 5% 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.
2
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 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 0.5% 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 ("MYGAs"). 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 MYGAs 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 deferred annuities ranges from 1.70% 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, 2019, 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, 2019
were 1.75% 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)
2019
December 31,
2018
(Dollars in thousands)
2017
12.7
6.7
10.8%
13.2
7.5
12.1%
13.4
8.1
13.0%
$
53,233,898
$
51,053,450
$
48,400,755
3
A significant amount of our fixed index annuity policies and many of our annual reset fixed rate deferred annuities have been 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. 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 since 2013
we have issued 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 these riders through the lifetime income benefit base 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 approximately 38% of the annuity deposits and insurance
premiums collected during 2019, 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 2019 were: Florida (8.7%), Texas (8.0%), Pennsylvania (6.2%),
California (5.6%) and Illinois (4.5%).
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 certain of 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 developing our employee wholesaling force, which will be a key
to our success at Eagle Life. Beginning in 2020, the majority of our third-party wholesaling partners will no longer market Eagle Life products
to new accounts as new account acquisition will be handled almost entirely on an internal basis. American Equity Life to a lesser extent also
sells through broker/dealers and we have introduced products specifically for this distribution channel.
4
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.
August 2019 - current
September 2018 - August 2019
May 2013 - September 2018
A-
A-
BBB+
BBB+
A-
BBB+
BBB+
Stable
Stable
Positive
Stable
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 2019, A.M. Best affirmed its rating outlook on the U.S. life/annuity sector as 'stable', reflecting its view that the sector is well-
capitalized, liquidity positions have improved and the regulatory environment is manageable. In December 2019, Fitch changed its rating outlook
on the U.S. life insurance sector to 'negative' from 'stable', reflecting its view that the continued low interest rate environment affects reserve
and capital adequacy and will bleed into earnings over time and that within the long term care insurance space, statutory reserving is based on
overly aggressive assumptions. In January 2020, 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.
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 certain of Eagle Life's fixed index annuities issued from
January 1, 2017 through December 31, 2018, 20% of certain of Eagle Life's fixed index annuities issued on or after January 1, 2019 and 80%
of certain of American Equity Life's fixed index annuities issued from August 1, 2016 through December 31, 2016. 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 secured by assets held in trusts and American
Equity Life is 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, which replaced a previous agreement with
Hannover, became effective April 1, 2019 and is a coinsurance funds withheld reinsurance agreement for statutory purposes covering 80% of
lifetime income benefit rider payments in excess of policy fund values and waived surrender charges related to penalty free withdrawals on
certain business. We may recapture the risks reinsured under this agreement without penalty as of the end of the accounting period in which
every reinsured policy in the issue year cohort reaches its 12th anniversary date. We can elect to recapture the business by issue year cohort any
time prior to the 12th anniversary date however we are subject to paying a make-whole payment to Hannover in the event of an early recapture.
The agreement also makes it punitive to us if we do not recapture the business on or before the 12th anniversary of each issue year cohort.
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
limit the amount of dividends and surplus note payments that can be paid without obtaining regulatory approval.
6
Our life subsidiaries are subject to periodic examinations by state regulatory authorities. The Iowa Insurance Division is currently conducting
financial examinations of American Equity Life and Eagle Life for the five-year period ending December 31, 2018. In addition, the New York
Insurance Department is currently conducting its financial examination of American Equity Life Insurance Company of New York for the five-
year period ending December 31, 2018.
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 2020, up to $349.0 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 $2.1 billion of
statutory earned surplus at December 31, 2019.
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:
•
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•
•
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; 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.
7
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, 2019, indicated that American Equity Life's ratio of total adjusted capital to the highest level at which
regulatory action might be initiated was 372%.
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, 2019, we had 608 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
decrease the unrealized gain 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.
8
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, certain
structured 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 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 certain options generally increases with increases in the volatility
of 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 fixed 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 2020, 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, structured
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.
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.
Our securities lending program subjects us to potential liquidity and other risks.
We have a securities lending program whereby we loan certain securities to approved borrowers. Securities are lent to borrowers, through a
lending agent, on an overnight or, with our prior approval, a term basis. Borrowers post cash collateral in an amount equal to or greater than
102% of the security’s market value which is invested by the lending agent in money market funds or repurchase agreements meeting investment
guidelines approved by us. We retain control of all loaned securities and receive all principal and interest payments that would normally be paid
to us if we did not lend the securities.
Our securities lending program exposes us to liquidity, counterparty and spread risks. Counterparty risk is mitigated by over-collateralization
requirements, daily mark to market, and indemnification by the lending agent for shortfalls in collateral in the event of borrower default. The
lending agent monitors spread risk to ensure that the interest rate paid by us to borrowers does not exceed the rate of return on cash collateral
investments. We regularly monitor the overall securities lending program, including the lending agent, borrowers, and the appropriateness of
cash collateral investments.
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
attached to a majority 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 2020 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.
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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
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 $4.6 billion of policy benefit reserves at December 31, 2019 and two coinsurance agreements
with EquiTrust covering $0.5 billion of policy benefit reserves at December 31, 2019. Since Athene is an unauthorized reinsurer, the annuity
deposits ceded to Athene are secured by assets held in trusts and American Equity Life is 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. The annuity deposits
ceded to Equitrust are not secured and in the event of an insolvency of Equitrust acting as a reinsurer, our claims would be subordinated to those
of Equitrust's policyholders. 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. If American Equity Life was
forced to recapture any significant blocks of business ceded as a result of a reinsurer being unable or unwilling to perform under the applicable
agreement, it may face a shortfall in capital to support the recaptured business resulting in a potential decline in its RBC ratio, exposure to a
ratings downgrade or other negative effects.
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. If we are unable to maintain our current level of
reinsurance, the decrease in statutory surplus of American Equity Life could be material to its capital position which may result in a potential
decline in its RBC ratio, exposure to a ratings downgrade or other negative effects.
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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 experience, 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 valuation 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 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. 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 estimated 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.
12
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 or security breach of our information technology or communications systems could adversely affect
our reputation, business, financial condition, results of operations and cash flows.
Our business is highly dependent on our ability to access our information technology (IT) systems to perform necessary business functions such
as providing customer support, maintaining existing policies, paying claims, managing our investment portfolios, and producing financial
statements.
While systems and processes are designed to support complex transactions and avoid negative outcomes such as systems failures, fraud, processing
errors and regulatory breaches, any of these outcomes could have an adverse effect on our business, financial condition, results of operations
and cash flows. We must also commit significant resources to maintain and enhance our existing systems to keep pace with industry standards
and evolving customer preferences. If we fail to keep up-to-date information systems, we may not be able to rely on information for product
design, product pricing and risk management decisions.
Despite the existence of extensive backup and recovery systems and contingency plans, we cannot guarantee investors that system interruptions
or similar IT failures will not occur, or if they do occur, that they can be remediated promptly. All IT systems are vulnerable to disruptions
resulting from natural or man-made disasters, acts of terrorism or civil disobedience, pandemics or other events beyond an organization’s control.
The occurrence of any of these events could have an adverse effect on our business, results of operations and financial condition. We retain
confidential information within our IT infrastructure, and we rely on both a complex information security controls framework that leverages
multiple leading industry control standards, as well as extensive commercial control technologies to maintain the security of those systems. Any
attacker that is able to circumvent our comprehensive information security controls infrastructure could access, view, misappropriate, alter, or
delete any information contained within 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, investigation, and notification
of a breach of data security for insurance companies. An increasing number of state insurance regulatory agencies have adopted a version of the
NAIC’s model regulation and now require that effected persons be notified if a security breach results in the disclosure of their personally
identifiable information. Any compromise of the cybersecurity of our computer systems that results in the unauthorized disclosure of personally
identifiable customer information could damage our reputation in the marketplace, deter people from purchasing our products, subject us to civil
and criminal liability and require us to incur significant technical, legal and other expenses. While there have been attempts to penetrate our IT
cybersecurity defenses, there is no evidence that any of the attacks have been successful or that a data 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.
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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 capital adequacy 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, 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. The NAIC has adopted best interest enhancements to the existing Suitability in Annuity Transactions Model Law. State legislation and/
or regulation adopting the best interest standard is expected in 2020. Some states may adopt a heightened fiduciary standard of conduct.
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. 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 became 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, including those surrounding the use of derivatives.
The Dodd-Frank Act and any such regulations may subject us to additional restrictions on our derivative positions which may have an adverse
effect on our ability to manage risks associated with our business, including our fixed index annuity business, or on the cost of the derivatives
purchased for our fixed index annuity business.
We are subject to numerous federal and state regulations regarding the privacy and security of personal information. These laws vary by
jurisdiction. Recent regulations with a significant impact on our operations include the New York Department of Financial Services Part 500
cybersecurity requirements for financial services companies and the California Consumer Privacy Act. The New York Department of Financial
Services Part 500 cybersecurity requirements became effective January 1, 2017 and focus on minimum standards for cybersecurity programs.
The California Consumer Privacy Act became effective January 1, 2020 and contains protections for individuals, including but not limited to
notification requirements for data breaches, the right to access personal data and the right to be forgotten. It applies to companies doing business
in California. Similar standards are set forth in the NAIC’s Insurance Data Security Model Law. It is anticipated that additional federal and
state regulations will be enacted in the future. Changes in cybersecurity and privacy regulations or the enactment of new regulations may increase
our compliance costs and failure to comply with these regulations may lead to reputational damage, fines or civil damages, and increased
regulatory scrutiny.
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.
14
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. 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. In addition, state
regulatory bodies, such as state insurance departments, the SEC and the Department of Labor ("DOL") regularly make inquiries and conduct
examinations or investigations concerning our compliance with, among other things, insurance laws, securities laws and the Employee Retirement
Income Security Act of 1974, as amended.
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 and 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/or maintain or strengthen our current capital position, it could result in a
downgrade of the ratings applicable to our senior unsecured indebtedness. A downgrade would likely reduce the fair value of our common and
preferred stock and may increase our cost of capital.
Financial strength ratings are important factors used by distributors and sales agents in determining which insurer's annuities to market. 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, a ratings downgrade could cause distributors and sales 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. 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. The lease for our home office building expires on November 30,
2026. We have two separate leases for additional space in a building in West Des Moines, one which expires on March 15, 2023 and the other
which expires on August 1, 2025. 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
15
PART II
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.
2019
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$33.57
$30.91
$27.80
$30.96
$35.79
$37.16
$38.57
$36.39
$26.34
$25.84
$20.16
$21.75
$28.90
$27.06
$34.51
$25.27
As of February 14, 2020, there were approximately 27,800 holders of our common stock. In 2019 and 2018, we paid an annual cash dividend
of $0.30 and $0.28, 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, 2019 - January 31, 2019
February 1, 2019 - February 28, 2019
March 1, 2019 - March 31, 2019
April 1, 2019 - April 30, 2019
May 1, 2019 - May 31, 2019
June 1, 2019 - June 30, 2019
July 1, 2019 - July 31, 2019
August 1, 2019 - August 31, 2019
September 1, 2019 - September 30, 2019
October 1, 2019 - October 31, 2019
November 1, 2019 - November 30, 2019
December 1, 2019 - December 31, 2019
Total
Total Number of
Shares Purchased (a)
Average Price
Paid Per Share
— $
— $
— $
— $
— $
14,538
822
755
$
$
$
— $
— $
— $
— $
16,115
—
—
—
—
—
28.09
26.49
23.97
—
—
—
—
(a) Includes the number of shares of common stock utilized to execute certain stock incentive awards.
16
Item 6. Selected Consolidated Financial Data
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.
Year ended December 31,
2019
2018
2017
2016
2015
(Dollars in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenues
Premiums and other considerations
$
23,534
$
26,480
$
34,228
$
43,767
$
36,048
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
240,035
224,488
2,307,635
2,147,812
906,906
(777,848)
200,494
1,991,997
1,677,871
173,579
136,168
1,849,872
1,692,192
164,219
(336,146)
6,962
(18,726)
(37,178)
(36,656)
10,509
(4,630)
11,524
(22,679)
10,211
(19,536)
3,464,345
1,547,098
3,891,652
2,220,282
1,518,937
35,418
1,287,576
1,454,042
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)
176,302
550,192
432,576
625,178
495,504
41,289
154,153
3,148,780
315,565
69,475
40,989
129,301
981,356
565,742
107,726
44,492
111,691
41,206
102,231
41,088
96,218
3,575,381
2,090,035
1,181,623
316,271
141,626
130,247
47,004
337,314
117,484
246,090
$
458,016
$
174,645
$
83,243
$
219,830
$
2.70
2.68
0.30
$
5.07
5.01
0.28
$
1.96
1.93
0.26
$
0.98
0.97
0.24
2.78
2.72
0.22
$
$
Non-GAAP Financial Measures (a):
Reconciliation from net income to non-GAAP operating income:
Net income
$
246,090
$
458,016
$
174,645
$
83,243
$
219,830
Net realized investment gains/losses, including OTTI
7,361
45,450
(5,093)
7,188
5,737
Change in fair value of derivatives and embedded derivatives -
fixed index annuities
Change in fair value of derivatives - interest rate caps and swap
Litigation reserve
Income taxes
Non-GAAP operating income
Non-GAAP operating income per common share
Non-GAAP operating income per common share - assuming dilution
373,221
1,247
—
(79,736)
548,183
6.01
5.97
$
$
(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
$
$
17
Consolidated Balance Sheet Data:
Total investments
Total assets
Policy benefit reserves
Notes and loan payable
Subordinated debentures
Accumulated other comprehensive income (loss) ("AOCI")
Total stockholders' equity
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
Equity available to preferred stockholders (b)
Total common stockholders' equity (c)
Total common stockholder's equity excluding AOCI (c)
Book value per common share (c)
Book value per common share excluding AOCI (c)
As of and for the Year Ended December 31,
2019
2018
2017
2016
2015
(Dollars in thousands, except per share data)
$ 56,877,573
$ 49,427,498
$ 50,300,705
$ 44,757,568
$ 39,570,332
69,696,552
61,625,564
62,030,736
56,053,472
49,029,392
61,893,945
57,606,009
56,142,673
51,637,026
45,495,431
495,116
157,265
1,497,921
4,570,119
494,591
242,982
(52,432)
494,093
242,565
724,599
493,755
241,853
339,966
393,227
241,452
201,663
2,399,101
2,850,157
2,291,595
1,944,535
3,824,457
3,542,339
3,260,328
2,933,193
2,593,472
210,002
162,267
400,000
4,170,119
2,672,198
45.77
29.33
372,830
222,734
—
2,399,101
2,451,533
26.55
27.13
565,295
386,274
—
2,850,157
2,125,558
31.91
23.79
144,159
80,699
—
2,291,595
1,951,629
26.04
22.17
227,865
132,723
—
1,944,535
1,742,872
23.83
21.36
(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) Equity available to preferred stockholders is equal to the redemption value of outstanding preferred stock plus share dividends declared
but not yet issued.
(c) Total common stockholders’ equity and book value per common share excluding AOCI, non-GAAP financial measures, are based on
common 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 securities, we believe these non-GAAP financial measures provide useful supplemental information.
Total common stockholders' equity and total common stockholder's equity excluding AOCI, non-GAAP financial measures, exclude equity
available to preferred stockholders. Book value per common share including and excluding AOCI are calculated as total common
stockholders’ equity and total common stockholders’ equity excluding AOCI divided by the total number of shares of common stock
outstanding.
18
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, 2019 and 2018, and our consolidated results
of operations for the three years in the period ended December 31, 2019, 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 2019, our sales were $5.0 billion which has resulted in cash and investments
in excess of $59 billion at December 31, 2019. 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 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 2019 as compared to 2018 due to the launch of new products during 2018 and improvements in our competitive position in the accumulation
and guaranteed income markets. These factors were partially mitigated by 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. Active management of policyholder crediting rates resulted in a
lower aggregate cost of money during 2019 and contributed to an increase in aggregate investment spread during 2019. We continue to have
flexibility to reduce our crediting rates if necessary and could decrease our cost of money by approximately 59 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. During 2018, we
opportunistically replaced lower yielding securities with higher yielding securities and sold $2.1 billion in book value of lower yielding securities
for a yield pick-up of approximately 170 basis points on these investments. While we anticipated pursuing additional portfolio realignment
opportunities in 2019, market conditions were not conducive to such realignment during 2019. Investment yields on fixed income securities
purchased and commercial mortgage loans funded in 2019 decreased compared to 2018 due to a general decline in interest rates and credit
spreads tightening.
On November 21, 2019 we issued $400 million of 5.95% fixed-rate reset non-cumulative preferred stock and received net proceeds of $388.9
million. We used a portion of the proceeds to redeem $165 million of our floating rate subordinated debentures in the fourth quarter of 2019 and
the first quarter of 2020 and have $225 million of net proceeds available for general corporate purposes.
19
Our Business and Profitability
We specialize in the sale of individual annuities (primarily fixed index deferred annuities). Under U.S. GAAP, premium collections for deferred
annuities are reported as deposit liabilities instead of as revenues. Similarly, cash payments to policyholders are reported as decreases in the
liabilities for policyholder account balances and not as expenses. Sources of revenues for products accounted for as deposit liabilities are net
investment income, surrender charges assessed against policy withdrawals and fees deducted from policyholder account balances for lifetime
income benefit riders, net realized gains (losses) on investments and changes in fair value of derivatives. Components of expenses for products
accounted for as deposit liabilities are interest sensitive and index product benefits (primarily interest credited to account balances and changes
in the liability for lifetime income benefit riders), changes in fair value of embedded derivatives, amortization of deferred sales inducements and
deferred policy acquisition costs, other operating costs and expenses and income taxes.
Our 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 appropriately price for lifetime income benefit riders offered on certain of our fixed rate and fixed index annuity policies,
• our ability to manage interest rates credited to policyholders and costs of the options purchased to fund the annual index credits on our
fixed index annuities,
• our ability to manage the costs of acquiring new business (principally commissions paid to agents and distribution partners and bonuses
credited to policyholders),
• our ability to manage our operating expenses, and
• income taxes.
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,
2019
4.52%
1.84%
2.68%
0.06%
0.03%
2018
4.47%
1.87%
2.60%
0.08%
0.05%
2017
4.46%
1.74%
2.72%
0.08%
0.06%
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 increased during 2019 compared to 2018 due to an increase in the average yield on invested assets and a decrease
in the cost of money. The increase in the average yield on investments was primarily attributable to our opportunistic replacement of lower
yielding securities with higher yielding securities throughout 2018 as previously discussed. In addition, the increase in average yield earned for
2019 as compared to 2018 was due to increases in investment income on our floating rate investment securities due to an increase in the average
benchmark rates associated with these investments during 2019 as compared to 2018. The decrease in the cost of money was due to decreases
in option costs for certain index strategies during 2019 which in part was due to our active management of new business and renewal rates.
20
Results of Operations for the Three Years Ended December 31, 2019
Annuity deposits by product type collected during 2019, 2018 and 2017, were as follows:
Product Type
American Equity Life:
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,
2019
2018
2017
(Dollars in thousands)
$
4,058,638
$
3,560,881
$
3,390,144
11,245
1,613
12,002
45,636
3,581
23,813
74,829
23,424
24,946
4,083,498
3,633,911
3,513,343
646,903
199
232,613
879,715
4,705,541
11,444
234,226
12,002
4,963,213
290,040
660,401
1,555
109,096
771,052
4,221,282
47,191
112,677
23,813
4,404,963
413,222
$
4,673,173
$
3,991,741
$
576,695
—
87,172
663,867
3,966,839
74,829
110,596
24,946
4,177,210
387,280
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, 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 fifth for the nine-months ended September 30,
2019 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 13% during 2019 compared to 2018 and increased 5% during 2018 compared to 2017.
Annuity deposits after coinsurance ceded increased 17% during 2019 compared to 2018 and increased 5% in 2018 as compared to 2017. The
increase in sales in 2019 was due to the launch of new products during 2018 and improvements in our competitive position in the accumulation
and guaranteed income markets. These factors were partially mitigated by 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.
2018 sales were positively impacted by 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 fiduciary rule being vacated. These factors were partially mitigated by continued competitive pressures within each of our
distribution channels.
We coinsure 80% of the annuity deposits received from MYGA fixed annuity products and 20% of certain fixed index annuities sold by Eagle
Life through broker/dealers and banks. The decrease in coinsurance ceded premiums in 2019 was attributable to a decrease in the coinsurance
percentage for fixed index annuities sold by Eagle Life from 50% for 2018 to 20% for 2019 partially offset by an increase in deposits received
from MYGA fixed annuity products during 2019. The increase in coinsurance ceded premiums in 2018 was attributable to an increase in deposits
received from fixed index annuities sold by Eagle Life during 2018.
Net income decreased 46% to $246.1 million in 2019 and increased 162% to $458.0 million in 2018 from $174.6 million in 2017.
21
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
5% to $52.3 billion for the year ended December 31, 2019 compared to $49.9 billion in 2018 and 6% for the year ended December 31, 2018
compared to $46.8 billion in 2017. Our investment spread measured in dollars was $1.3 billion, $1.2 billion, and $1.2 billion for the years ended
December 31, 2019, 2018 and 2017, respectively. As previously mentioned, our investment spread has been positively impacted by our
opportunistic replacement of lower yielding securities with higher yielding securities during 2018, however yields in general continue to be
negatively impacted by the extended low interest rate environment (see Net investment income). Our investment spread has also been positively
impacted by our active management of new business and renewal rates.
Net income for the year ended December 31, 2019 was negatively impacted by net realized investment losses of $11.7 million, of which $18.7
million was recognized as OTTI partially offset by $7.0 million of net realized gains. 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 OTTI losses recognized in operations and Net realized gains (losses) on investments, excluding
OTTI losses and Note 3 to our audited consolidated financial statements for discussion of OTTI losses recognized in operations and net realized
gains (losses) on investments.
Net income for the years ended December 31, 2019 and 2018 was positively impacted by a decrease in the statutory federal income tax rate
effective January 1, 2018 resulting from the Tax Cuts and Jobs Act of 2017 ("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, 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 interest rates used to
discount the embedded derivative liability. Net income for the year ended December 31, 2019 was negatively impacted by decreases in the
discount rates used to estimate the fair value of our embedded derivative liabilities, the impact of which was partially offset by decreases in
amortization of deferred policy acquisition costs and deferred sales inducements related to the change in fair value of derivatives and embedded
derivatives. Net income for the year ended December 31, 2018 was positively impacted by increases in the discount rates used to estimate our
embedded derivative liabilities while net income for the year ended December 31, 2017 was negatively impacted by decreases in the discount
rates used to estimate our embedded derivative liabilities the impacts of which were partially offset by changes in amortization of deferred policy
acquisition costs and deferred sales inducements related to the change in fair value of derivatives and embedded derivatives. See Change in fair
value of derivatives, Change in fair value of embedded derivatives, Amortization of deferred sales inducements and Amortization of
deferred policy acquisition costs.
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 (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 and the embedded derivative component of our fixed index annuity policy benefit
reserves as experience develops that is different from our assumptions.
Net income for 2019, 2018 and 2017 includes effects from revisions to assumptions as follows:
Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
Decrease in amortization of deferred sales inducements
$
(104,707) $
(21,465) $
Decrease in amortization of deferred policy acquisition costs
Increase (decrease) in interest sensitive and index product benefits
Increase in change in fair value of embedded derivatives
Effect on net income
(192,982)
315,383
28,208
(35,987)
(30,572)
(53,607)
8,458
76,194
(34,274)
(48,198)
21,608
21,007
25,667
We review these assumptions quarterly and as a result of these reviews, we made updates to assumptions during each year. In addition, we
implemented an enhanced actuarial valuation system during 2019, and as a result, our 2019 assumption updates include model refinements
resulting from the implementation.
The most significant assumption changes from the 2019 review were to lapse and utilization assumptions. We have credible lapse and utilization
data based upon a comprehensive experience study spanning over 10 years on our products with lifetime income benefit riders and have
experienced lapse rates that are lower than previously estimated.
22
Lower lapse assumptions result in an expectation that more policies will remain in force than previously anticipated which results in a greater
amount of benefit payments in excess of account value and the need for a greater liability for lifetime income benefit riders. The decrease in
lapse rate assumptions also results in policies being in force for a longer period of time and an increase in expected gross profits as compared
to previous estimates. The higher level of expected future gross profits results in an increase in the balances of deferred policy acquisition costs
and deferred sales inducements.
Our experience study also indicated that the ultimate utilization of certain lifetime income benefit riders is expected to be less than our prior
assumptions and the timing of utilization of lifetime income benefit riders is later than in our prior assumptions. We have reduced our ultimate
utilization assumptions for fee riders from 75% to 60% and for no-fee riders from 37.5% to 30%, for policies issued in 2014 and prior years.
The net effect of the utilization assumption revisions resulted in a decrease in the liability for lifetime income benefit riders and partially offset
the increase in the reserve for lifetime income benefit riders from the change in lapse assumptions.
In addition, we revised our assumptions regarding future crediting rates on policies. We are assuming a 3.80% U.S. Treasury rate with a 20 year
mean reversion period. Our assumption for aggregate spread is 2.60% which translates to an ultimate discount rate of 2.90%. While the aggregate
spread of 2.60% did not change from prior estimates, our estimates of the profitability of individual cohorts has changed with the use of an
aggregate portfolio yield across all cohorts. This assumption revision resulted in a change in the allocation of profitability by cohort, which
caused a reduction in the deferred policy acquisition costs and deferred sales inducements assets and partially offset the increase in the deferred
policy acquisition costs and deferred sales inducements assets from the change in lapse assumptions.
The most significant revisions to the calculation of the fair value of the embedded derivative component of our fixed index annuity policy benefit
reserves in 2019 were to decrease lapse rate assumptions as noted above. The impact of the lapse rate assumption changes was partially offset
by a decrease in the option budget from 3.10% to 2.90% as a result of a revised estimate of the cost of options over the 20 year mean reversion
period.
The most significant revisions from the 2018 review 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 on the deferred policy
acquisition costs and deferred sales inducements balances was partially offset by revisions to lower our future investment spread assumptions
primarily due to an increase in the cost of money we had 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 on the deferred policy acquisition costs and deferred sales inducements balances 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 2018 and 2017 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 most significant revisions to the calculation of the fair value of embedded derivative component of our fixed index annuity policy benefit
reserves in 2018 were to decrease lapse rate assumptions consistent with the 2018 changes for deferred policy acquisition costs, deferred sales
inducements and the liability for lifetime income benefit riders.
Non-GAAP operating income, a non-GAAP financial measure (see reconciliation to net income in Item 6. Selected Consolidated Financial
Data) increased 29% to $548.2 million in 2019 and 49% to $425.7 million in 2018 from $285.1 million in 2017.
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 Tax Reform, 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.
23
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 or a net loss 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 2019, 2018 and 2017 includes effects from revisions to assumptions as follows:
Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
Decrease in amortization of deferred sales inducements
$
(184,882) $
(20,466) $
Decrease in amortization of deferred policy acquisition costs
Increase (decrease) in interest sensitive and index product benefits
Effect on non-GAAP operating income
(288,332)
315,383
123,739
(28,702)
(53,607)
80,576
(31,317)
(43,716)
21,608
34,405
The impact to net income and non-GAAP operating income from assumption revisions varies due to the impact of fair value accounting for our
fixed index annuity business as non-GAAP operating income eliminates the impact of fair value accounting for our fixed index annuity business.
While the assumption revisions made during 2019, 2018 and 2017 were consistently applied, the impact to net income and non-GAAP operating
income varies due to different amortization rates being applied to gross profit adjustments included in the valuation.
Annuity product charges (surrender charges assessed against policy withdrawals and fees deducted from policyholder account balances for
lifetime income benefit riders) increased 7% to $240.0 million in 2019 and 12% to $224.5 million in 2018 from $200.5 million in 2017. 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,
2019
2018
2017
(Dollars in thousands)
71,565
168,470
240,035
662,795
10.8%
$
$
$
65,644
158,844
224,488
572,802
11.5%
$
$
$
54,624
145,870
200,494
456,084
12.0%
22,490,676
$
21,773,577
$
20,440,431
0.75%
0.73%
0.71%
$
$
$
$
The increases in annuity product charges were 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 and to increases in surrender charges due to increases in withdrawals from annuity policies subject to surrender charges due to a larger
volume of business in force and policyholder behavior, which were partially offset by lower average surrender charges collected on those
withdrawals. See Interest sensitive and index product benefits below for corresponding expense recognized on lifetime income benefit riders.
Net investment income increased 7% to $2.3 billion in 2019 and 8% to $2.1 billion in 2018 from $2.0 billion in 2017. 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 6% to $51.1 billion in 2019 and 7% to $48.1 billion in 2018 compared to $44.8
billion in 2017.
The average yield earned on average invested assets was 4.52%, 4.47% and 4.46% for 2019, 2018 and 2017, respectively. The increase in yield
earned on average invested assets in 2019 was primarily attributable to our opportunistic replacement of lower yielding securities with higher
yielding securities throughout 2018 as previously discussed. In addition, the increase in average yield earned for 2019 as compared to 2018 is
due to increases in investment income on our floating rate investment securities due to an increase in the average benchmark rates associated
with these investments during 2019 as compared to 2018. The average yield on fixed income securities purchased and commercial mortgage
loans funded was 3.88%, 4.79% and 4.16% for the years ended December 31, 2019, 2018 and 2017, respectively.
24
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,
2019
2018
2017
(Dollars in thousands)
$
$
(190,376) $
656,953
$
1,098,932
(1,435,852)
(1,059)
(591)
869
182
1,062,328
615,955
255
(667)
906,906
$
(777,848) $
1,677,871
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,
2019
2018
2017
0.0% - 22.3%
0.0% - 13.9%
0.0% - 14.7%
0.0% - 8.1%
0.0% - 14.0%
0.0% - 17.5%
0.0% - 10.0%
0.0% - 5.1%
1.0% - 13.3%
0.1% - 10.6%
0.0% - 17.0%
0.0% - 5.9%
The change in fair value of derivatives is also influenced by the aggregate costs of options purchased. During 2019 the aggregate cost of options
purchased decreased compared to 2018 due to a decrease in the average cost of options for 2019, partially offset by an increase in the amount
of fixed index annuities in force during 2019 compared to 2018. During 2018, the aggregate cost of options purchased increased compared to
2017 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 other investments 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) and Financial Condition - Investments and Note 4 to our audited consolidated financial statements for discussion of allowance
for credit losses recognized on mortgage loans on real estate.
Securities were sold at losses in 2019, 2018 and 2017 due to our long-term fundamental concern with the issuers' ability to meet their future
financial obligations. In addition, during 2018, losses on available for sale fixed maturity securities were realized 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.
Net OTTI losses recognized in operations decreased to $18.7 million in 2019 and increased to $36.7 million in 2018 from $4.6 million in
2017. The impairments recognized in 2019 were primarily on corporate securities with exposure to the offshore drilling industry. The decrease
in impairments recognized in 2019 compared to 2018 is partially related to our strategy to reposition the fixed maturity security portfolio during
2018. We sold $384 million in book value of securities in early October of 2018 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. See Financial Condition - Other Than Temporary Impairments and Note 3 to
our audited consolidated financial statements for additional discussion of other than temporary impairments recognized.
25
Interest sensitive and index product benefits decreased 20% to $1.3 billion in 2019 and decreased 20% to $1.6 billion in 2018 from $2.0
billion in 2017. 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,
2019
2018
2017
(Dollars in thousands)
$
$
587,818
$
1,285,555
$
1,594,722
204,474
495,284
221,554
103,726
257,896
171,050
1,287,576
$
1,610,835
$
2,023,668
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 $0.6 billion, $1.3 billion and $1.6 billion for the years ended
December 31, 2019, 2018 and 2017, respectively. The decreases in interest credited in 2019 and 2018 were primarily due to decreases in the
amount of annuity liabilities outstanding receiving a fixed rate of interest and decreases in the average rate credited to the annuity liabilities
outstanding receiving a fixed rate of interest. The increase in benefits recognized for lifetime income benefit riders in 2019 was primarily due
to the impact of revisions of assumptions used in determining the liability for lifetime income benefit riders which caused an increase of $315.4
million in the liability in 2019 compared to a decrease of $53.6 million in the liability in 2018. Interest sensitive and index product benefits also
increased in 2019 due to an increase in the number of policies with lifetime income benefit riders in 2019 compared to 2018, which correlates
to the increase in fees discussed in Annuity product charges. The decrease in benefits recognized for lifetime income benefit riders in 2018
was due to the impact of revisions of assumptions used in determining the liability for lifetime income benefit riders which resulted in a $53.6
million decrease in the liability in 2018 compared to a $21.6 million increase in the liability in 2017 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, 2019, 2018 and 2017.
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 76%, 81% and 87% of our
net annuity account values at December 31, 2019, 2018 and 2017, respectively. The increases in amortization from these factors have been
affected by amortization associated with fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity
business and amortization associated with net realized gains (losses) on investments and net OTTI losses recognized in operations. 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
Amortization of deferred sales inducements after gross profit adjustments
$
$
Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
78,398
$
249,627
$
240,562
12,189
(2,002)
(15,283)
(12,143)
(64,219)
269
88,585
$
222,201
$
176,612
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, 2019, 2018 and 2017.
Change in fair value of embedded derivatives includes changes in the fair value of our fixed index annuity embedded derivatives (see Note
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
26
Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
562,302
$
(2,167,628) $
174,154
891,740
778,137
1,454,042
$
(1,389,491) $
745,581
919,735
$
$
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 rates 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 increase in the change in fair value of the fixed index annuity embedded derivatives for 2019 were increases in the
expected index credits on the next policy anniversary dates resulting from increases in the fair value of the call options acquired to fund these
index credits during 2019 as compared to decreases in the expected index credits on the next policy anniversary date resulting from decreases
in the fair value of the call options acquired to fund these index credits during 2018 and decreases in the discount rates for 2019 as compared to
increases in the discount rates for 2018. 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 compared to increases in the expected index credits resulting from an increase
in the fair value of the call options during 2017 and increases in the discount rates for 2018 compared to decreases in the discount rates for 2017.
The discount rates used in estimating our embedded derivative liabilities fluctuate from year to year based on changes in the general level of
interest rates and credit spreads.
Interest expense on notes and loan payable by debt instrument is as follows:
2027 Notes
2021 Notes
Term loan due 2019
Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
25,525
$
25,498
$
—
—
—
—
25,525
$
25,498
$
$
$
13,801
15,024
1,543
30,368
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%. 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 fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity
business and amortization associated with net realized gains (losses) on investments and net OTTI losses recognized in operations. 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
Amortization of deferred policy acquisition costs after gross profit adjustments
$
$
Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
97,736
$
358,736
$
340,191
(7,618)
(2,401)
(14,504)
(16,241)
(84,744)
517
87,717
$
327,991
$
255,964
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 policy acquisition costs
for the years ended December 31, 2019, 2018 and 2017.
27
Other operating costs and expenses increased 19% to $154.2 million in 2019 and increased 16% to $129.3 million in 2018 from $111.7 million
in 2017 and are summarized as follows:
Salary and benefits
Risk charges
Other
Total other operating costs and expenses
Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
82,883
$
71,914
$
38,342
32,928
31,297
26,090
58,043
29,104
24,544
154,153
$
129,301
$
111,691
$
$
Salary and benefits expense increased in 2019 as a result of an increase in salary and benefits of $6.6 million and an increase of $3.3 million
related to expense recognized under our equity and cash incentive compensation programs ("incentive compensation programs"). Salary and
benefits expense increased in 2018 as a result of an increase in salary and benefits of $5.4 and an increase of $6.8 million related to expense
recognized under our incentive compensation programs. The increases in salary and benefits were due to an increased number of employees
related to our continued growth. 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.
The increase in risk charges during 2019 was due to an increase in the amount of excess regulatory reserves ceded to an unaffiliated reinsurer
pursuant to a reinsurance agreement primarily as a result of the replacement of the previous agreement with a new agreement effective April 1,
2019. The impact from increasing the amount of excess regulatory reserves ceded was partially offset by a lower risk charge percentage in the
new agreement. The increase in risk charges during 2018 was due to an increase in the amount of excess regulatory reserves ceded to the
unaffiliated reinsurer. The regulatory reserves ceded at December 31, 2019, 2018 and 2017 were $1,162.0 million, $780.0 million and $737.3
million, respectively.
Other expenses increased in 2019 and 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 2018 increases were offset by decreases in commission expense related to the exit
of the group life business effective January 1, 2018.
Income tax expense decreased in 2019 primarily due a decrease in income before income taxes and decreased in 2018 due to Tax Reform
reducing the statutory federal income tax rate from 35% to 21% effective January 1, 2018 partially offset by an increase in income before income
taxes. The effective income tax rates were 22.0%, 19.0% and 44.8% for 2019, 2018 and 2017, 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 rates for 2019, 2018 and 2017 were impacted by a discrete tax item related to share-based compensation that reduced
income tax expense for 2019, 2018 and 2017 by approximately $1.3 million, $2.7 million and $2.8 million, respectively. Income tax expense
for the year ended December 31, 2019 reflects an increase in income tax expense of approximately $2.5 million related to the reversal of the
impact of capital losses expected to be carried back to periods in which a 35% statutory rate was in effect while income tax expense for the year
ended December 31, 2018 reflects a decrease in income tax expense of $2.5 million as a result of changes in capital losses expected to be carried
back to periods in which a 35% statutory tax rate was in effect. In addition, the effective tax rate for 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 rates excluding the impact of the discrete items and the impact of the expected loss carrybacks were 21.64% and 21.26%, respectively,
for the years ended December 31, 2019 and 2018.
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%.
28
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.
The composition of our investment portfolio is summarized as follows:
December 31,
2019
2018
Carrying
Amount
Percent
Carrying
Amount
Percent
(Dollars in thousands)
161,765
625,020
4,527,671
205,096
32,536,839
1,575,664
5,786,279
6,162,156
51,580,490
3,448,793
1,355,989
492,301
0.3% $
1.1%
7.9%
0.3%
57.2%
2.8%
10.2%
10.8%
90.6%
6.1%
2.4%
0.9%
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%
$
56,877,573
100.0% $
49,427,498
100.0%
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
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,
2019
2018
Carrying
Amount
Percent of Fixed
Maturity Securities
Carrying
Amount
Percent of Fixed
Maturity Securities
(Dollars in thousands)
$
$
30,662,644
19,833,309
50,495,953
821,902
81,407
95,676
85,552
1,084,537
51,580,490
29
59.4% $
38.4%
97.8%
1.6%
0.2%
0.2%
0.2%
2.2%
100.0% $
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%
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
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, 2019
December 31, 2018
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)
$ 27,781,525
$ 30,122,657
$ 30,122,657
58.4% $ 26,588,352
$ 26,921,843
$ 26,921,843
19,278,355
20,316,911
20,316,911
39.4%
17,901,161
17,528,072
17,528,072
1,001,087
114,497
57,952
5,530
977,191
112,534
45,205
5,992
977,191
112,534
45,205
5,992
1.9%
0.2%
0.1%
—%
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
Percentage
of Total
Carrying
Amount
58.6%
38.2%
2.8%
0.3%
—%
0.1%
$ 48,238,946
$ 51,580,490
$ 51,580,490
100.0% $ 46,131,190
$ 45,923,727
$ 45,923,727
100.0%
The amortized cost and fair value of fixed maturity securities at December 31, 2019, 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.
30
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, 2019
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, 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
5
6
42
—
38
20
32
12
65
34
127
652
$
144,678
$
(96) $
374,961
296,812
—
399,043
216,229
397,116
194,815
631,587
227,427
810,505
(4,785)
(8,250)
—
(9,529)
(9,990)
(11,212)
(11,162)
(40,366)
(3,691)
(13,783)
144,582
370,176
288,562
—
389,514
206,239
385,904
183,653
591,221
223,736
796,722
4,306,620
(179,191)
4,127,429
1,033
$
7,999,793
$
(292,055) $
7,707,738
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
The decrease in unrealized losses from December 31, 2018 to 2019 was primarily due to a decrease in interest rates and tightening credit spreads
during the year ended December 31, 2019. The 10-year U.S. Treasury yield rates at December 31, 2019 and 2018 were 1.92% and 2.69%,
respectively. The 30-year U.S. Treasury yields at December 31, 2019 and 2018 were 2.39% and 3.02%, respectively.
31
The following table sets forth the composition by credit quality (NAIC designation) of fixed maturity securities with gross unrealized losses:
NAIC Designation
December 31, 2019
1
2
3
4
5
6
December 31, 2018
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)
$
$
$
3,580,578
3,412,695
613,240
74,027
26,998
200
46.4% $
44.3%
8.0%
1.0%
0.3%
—%
(79,638)
(151,826)
(38,216)
(8,575)
(13,437)
(363)
7,707,738
100.0% $
(292,055)
13,302,253
11,301,715
1,170,941
127,222
19,453
39,131
51.2% $
43.5%
4.5%
0.5%
0.1%
0.2%
(552,455)
(622,053)
(129,441)
(40,927)
(4,383)
(1,828)
$
25,960,715
100.0% $
(1,351,087)
27.3%
52.0%
13.1%
2.9%
4.6%
0.1%
100.0%
40.9%
46.0%
9.6%
3.0%
0.3%
0.2%
100.0%
Our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities (consisting
of 1,033 and 2,715 securities, respectively) have been in a continuous unrealized loss position at December 31, 2019 and 2018, 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.
32
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:
Number of
Securities
Amortized
Cost
Fair Value
(Dollars in thousands)
Gross
Unrealized
Losses
December 31, 2019
Fixed maturity securities, available for sale:
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, 2018
Fixed maturity securities, available for sale:
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
352
$
2,960,557
$
2,911,909
$
46
513
911
11
8
103
122
290,674
4,003,478
7,254,709
32,607
35,080
677,397
745,084
282,347
3,829,474
7,023,730
31,695
33,268
619,045
684,008
(48,648)
(8,327)
(174,004)
(230,979)
(912)
(1,812)
(58,352)
(61,076)
1,033
$
7,999,793
$
7,707,738
$
(292,055)
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)
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:
Number of
Securities
Amortized
Cost
Fair
Value
Gross
Unrealized
Losses
(Dollars in thousands)
December 31, 2019
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, 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
— $
— $
— $
—
—
—
—
1
4
5
5
5
1
—
6
13
—
3
16
22
—
—
—
—
2,640
53,800
56,440
—
—
—
—
1,755
35,541
37,296
$
$
56,440
$
37,296
$
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
$
—
—
—
—
—
(885)
(18,259)
(19,144)
(19,144)
(25,259)
(4,964)
—
(30,223)
(38,009)
—
(18,929)
(56,938)
(87,161)
34
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.
December 31, 2019
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, 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
International Exposure
Available for sale
Amortized
Cost
Fair Value
(Dollars in thousands)
$
5,073
$
$
$
278,165
555,200
1,041,474
775,329
2,655,241
227,427
810,505
4,306,620
7,999,793
31,590
2,596,616
7,196,565
3,247,923
5,083,983
18,156,677
172,427
4,367,221
4,615,477
$
$
5,071
273,869
544,687
1,008,487
727,737
2,559,851
223,736
796,722
4,127,429
7,707,738
30,780
2,534,891
6,907,961
3,056,474
4,684,669
17,214,775
168,302
4,232,395
4,345,243
$
27,311,802
$
25,960,715
We hold fixed maturity securities with international exposure. As of December 31, 2019, 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, 2019
Amortized
Cost
Carrying Amount/
Fair Value
(Dollars in thousands)
Percent
of Total
Carrying
Amount
$
251,310
$
436,537
3,143,830
277,489
1,378,013
1,075,604
5,587,191
279,592
475,082
3,390,000
302,147
1,503,885
1,126,723
5,477,698
$
12,149,974
$
12,555,127
0.5%
0.9%
6.6%
0.6%
2.9%
2.2%
10.6%
24.3%
(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.
35
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, 2019
Amortized Cost
Carrying Amount/
Fair Value
$
$
(Dollars in thousands)
14,537
$
11,000
77,826
58,066
25,453
439,933
626,815
$
16,060
10,471
78,275
61,891
25,756
411,234
603,687
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, 2019, 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
Other asset backed securities:
Financials
Industrials
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
4
1
1
—
1
1
13
$
52,654
$
(3,575) $
38,386
563
3,990
—
977
8,364
(5,742)
(363)
560
—
261
(2,420)
49,079
32,644
200
4,550
—
1,238
5,944
0 - 59
0 - 64
0 - 22
0 - 15
7
—
—
—
50
3
—
—
—
13
$
104,934
$
(11,279) $
93,655
36
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, 2019 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 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 the fourth quarter of 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 came under pressure during 2018 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. Most recently the company has experienced improvement in financial metrics due
to a stronger macro environment for food producers. 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 are stressed greater than the average company due to their price
sensitivity and the specific position they hold in the supply chain. We recognized other than temporary impairments on three securities during
the fourth quarter of 2019 with exposure to the offshore drilling industry due to increasing concerns around cash flow shortages creating possible
liquidity challenges as debt maturity approaches. We recognized an other than temporary impairment on one of these issuers during the fourth
quarter of 2018 due to our evaluation of the operating performance and the credit worthiness of the 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.
Other asset backed securities:
Financials: The decline in value of this security relates 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 an
other than temporary impairment on this security during 2018 and 2017.
Industrials: The decline in the value of this security is driven by poor financial performance of the trust and a decline in the value of the assets
backing this security. Following the loss of several major license agreements with major retailers, revenues and cash flows have suffered. While
the performance is down, we have determined the value of the underlying assets currently provide adequate debt service coverage and no other
than temporary impairment is necessary.
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.
In 2019, we recognized OTTI losses of $17.3 million on corporate securities with exposure to the offshore drilling industry as discussed above.
In addition, during 2019 we recognized additional credit losses on residential mortgage backed securities on which we have previously recognized
OTTI, recognized OTTI of $0.5 million related to two commercial mortgage backed securities due to our intent to sell the securities and an OTTI
of $0.6 million on an other asset backed security on which we have previously recognized OTTI.
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.
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.
Several factors led us to believe that full recovery of amortized cost is not expected on the securities for which we recognized credit losses. A
discussion of these factors, our policy and process to identify securities that could potentially have 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, 2019 and 2018, the largest principal amount outstanding for any single mortgage loan was $28.5 million
and $23.8 million, respectively, and the average loan size was $4.4 million and $3.8 million, respectively. In addition, the average loan to value
ratio for the overall portfolio was 54.3% and 53.6% at December 31, 2019 and 2018, 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, 2019, we had
commitments to fund commercial mortgage loans totaling $244.3 million, with interest rates ranging from 3.35% to 5.68%. During 2019 and
2018, 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, 2019, we received $187.6 million in cash for loans
being paid in full compared to $178.2 million for the year ended December 31, 2018. 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, 2019
December 31, 2018
Principal
Outstanding
(Dollars in
thousands)
$
$
2,518,872
789,420
114,862
35,760
3,458,914
Percent of Total
Principal
Outstanding
Principal
Outstanding
(Dollars in
thousands)
Percent of Total
Principal
Outstanding
72.8% $
2,121,785
22.8%
3.3%
1.1%
645,470
127,083
58,126
100.0% $
2,952,464
71.9%
21.8%
4.3%
2.0%
100.0%
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, 2019.
38
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,
2019
2018
(Dollars in thousands)
$
$
1,229
$
—
(229)
1,000
$
1,253
—
(229)
1,024
At December 31, 2019, 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 $61.9 billion at December 31, 2019 compared to $57.6 billion at December 31, 2018,
primarily due to net cash flows from annuity deposits and funds returned to policyholders and interest and index credits credited to policyholders
during 2019. The increase in policy benefit reserves was also due to an increase in the fair value of our fixed index annuity embedded derivatives
during 2019. 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, 2019, approximately 94% of our annuity liabilities were subject to penalty upon surrender, with a weighted average remaining
surrender charge period of 6.7 years and a weighted average surrender charge percentage of 10.8%.
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
$1.5 billion for the year ended December 31, 2019 compared to $1.2 billion for the year ended December 31, 2018 with the increase attributable
to a $693.2 million increase in net annuity deposits after coinsurance, which was partially offset by a $433.4 million (after coinsurance) increase
in funds returned to policyholders. We continue to invest the net proceeds from policyholder transactions and investment activities in high
quality fixed maturity securities and 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 common and preferred stockholders. Our assets consist primarily of the capital stock and surplus notes of our subsidiaries. Accordingly, our
future cash flows depend upon the availability of dividends, surplus note interest payments and other statutorily permissible payments from our
subsidiaries, such as payments under our investment advisory agreements and tax allocation agreement with our subsidiaries. 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 2020.
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 2020, up to $349.0 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 $2.1
billion of statutory earned surplus at December 31, 2019.
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, 2019, 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 372% at December 31, 2019. Under this
agreement, we are also required to maintain a maximum ratio of adjusted debt to total adjusted capital of 0.35.
On November 21, 2019 we issued $400 million of 5.95% fixed-rate reset non-cumulative preferred stock and received net proceeds of $388.9
million. We used a portion of the proceeds to redeem $165 million of our floating rate subordinated debentures in the fourth quarter of 2019 and
the first quarter of 2020 and will have $225 million of net proceeds available for general corporate purposes.
Cash and cash equivalents of the parent holding company at December 31, 2019, were $332.5 million which includes the net proceeds from the
November preferred offering discussed above. 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, 2019. 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, 2019 and 2018 and for the years ended December 31, 2019, 2018 and 2017 is included in Note 12
to our audited consolidated financial statements.
40
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, 2019.
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)
$
55,215,581
$
3,688,477
$
7,819,678
$
8,165,187
$
35,542,239
Notes and loan payable, including interest payments (2)
Subordinated debentures, including interest payments (3)
Operating leases
Mortgage loan funding and other investments
688,271
376,803
13,672
369,993
25,462
9,291
2,427
369,993
50,309
18,581
4,439
—
50,000
18,581
3,698
—
562,500
330,350
3,108
—
Total
$
56,664,320
$
4,095,650
$
7,893,007
$
8,237,466
$
36,438,197
(1) Amounts shown in this table are projected payments through the year 2039 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.
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.
41
The following table presents the fair value of fixed maturity securities, available for sale, by pricing source and hierarchy level as of December 31,
2019 and 2018, respectively:
December 31, 2019
Priced via third party pricing services
Priced via independent broker quotations
Priced via other methods
% of Total
December 31, 2018
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
155,949
$
50,570,910
$
— $
50,726,859
—
—
228,401
625,230
—
—
228,401
625,230
155,949
$
51,424,541
$
— $
51,580,490
0.3%
99.7%
—%
100.0%
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%
$
$
$
$
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, 2019 and 2018.
42
Evaluation of Other Than Temporary Impairments and Allowance for Loan Loss
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.
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.
43
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 sheets 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 including lapse, partial withdrawal and mortality rates. 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 "Change 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.
44
The most sensitive assumptions in determining policy liabilities for fixed index annuities are 1) the rates used to discount the excess projected
contract values, 2) the expected cost of annual call options we will purchase in the future to fund index credits beyond the next policy anniversary
date and 3) our best estimate for future policy decrements specific to lapse rates.
As indicated above, the discount rates used to discount excess projected contract value are based on applicable risk-free interest rates adjusted
for our nonperformance risk related to those liabilities. If the discount rates used to discount the excess projected contract values at December 31,
2019 were to increase by 100 basis points, our reserves for fixed index annuities would decrease by $871.3 million. A decrease by 100 basis
points in the discount rates used to discount the excess projected contract values would increase our reserves for fixed index annuities by $1.0
billion.
As of December 31, 2019, we utilized an estimate of 2.90% for the expected cost of annual call options, which is based on estimated long-term
account value growth and a historical review of our actual options costs. If the expected cost of annual call options we purchase in the future to
fund index credits beyond the next policy anniversary date were to increase by 25 basis points, our reserves for fixed index annuities would
increase by $737.5 million. A decrease of 25 basis points in the expected cost of annual call options would decrease our reserves for fixed index
annuities by $706.9 million.
Our lapse rate assumptions are based on actual experience and our outlook as to future expectations for lapse rates. If lapse rates were to increase
10%, our reserves for fixed index annuities would decrease by $60.5 million. A decrease in lapse rates of 10% would increase our reserves for
fixed index annuities by $63.0 million.
Liability for Lifetime Income Benefit Riders
The liability for lifetime income benefit riders is based on the actual and present value of expected benefit payments 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 investment spreads, 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, expected utilization of lifetime income benefit riders, which includes the ages at which policyholders are expected to
elect to begin to receive lifetime income benefit payments and the percentage of policyholders who elect to receive lifetime income benefit
payments, the type of income benefit payments selected upon election and future assumptions for lapse, partial withdrawal and mortality rates.
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, 2019 in this Item 7 for a discussion and presentation of the actual effects of assumption
revisions.
The most sensitive assumptions in the calculation of the liability for lifetime income benefit riders are 1) the expected cost of annual call options
we will purchase in the future, 2) the percentage of policyholders who elect to receive lifetime income benefit payments, 3) our best estimate
for future policy decrements specific to lapse rates and 4) the net investment earned rate.
We utilize the expected cost of annual call options we will purchase in the future to project policy values and to discount future cash flows. In
addition, it is a key component in the calculation of expected assessments in the projection period. As of December 31, 2019, we utilized an
estimate of 2.90% for the long-term expected cost of annual call options, which is based on estimated long-term account value growth and a
historical review of our actual call options. If the expected cost of annual call options and fixed crediting rates were to increase by 25 basis
points, our liability for lifetime income benefit riders would decrease by $87.9 million. A decrease of 25 basis points in the expected cost of
annual call options and fixed crediting rates would increase our liability for lifetime income benefit riders by $94.6 million.
Our assumptions related to the percentage of policyholders who elect to receive lifetime income benefit payments is based on actual experience
and our outlook as to future expectations for utilization rates. If the percentage of policyholders who elect to receive lifetime income benefit
payments was increased by 10% at December 31, 2019, our liability for lifetime income benefit riders would increase by $55.5 million. A
decrease by 10% in the percentage of policyholders who elect to receive lifetime income benefit payments would decrease our liability for
lifetime income benefit riders by $44.5 million.
Our lapse rate assumptions are based on actual experience and our outlook as to future expectations for lapse rates. If lapse rates were to increase
10%, our liability for lifetime income benefit riders would decrease by $31.9 million. A decrease in lapse rates of 10% would increase our
liability for lifetime income benefit riders by $31.9 million.
The net investment earned rate is a key component in the calculation of expected assessments in the projection period. The net investment earned
rate is based on current yields being earned in our invested assets portfolio, future spot rates, the expected mean reversion period and expected
spread we will earn above the risk-free rate. If the net investment earned rate were to increase 10 basis points, our liability for lifetime income
benefit riders would decrease by $18.7 million. A decrease in the net investment earned rate of 10 basis points would increase our liability for
lifetime income benefit riders by $19.3 million.
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.
45
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.
For annuity products, these costs are being amortized in proportion to actual and expected gross profits. Actual and expected gross profits include
the the excess of net investment income earned over the interest credited or the cost of providing index credits to the policyholders, or the
"investment spread"; and to a lesser extent, product charges and fees net of expected excess payments for lifetime income benefit riders and
certain policy expenses. Actual and expected gross profits 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 actual and expected gross profits (including the impact of net realized gains (losses) on investments and
net OTTI losses recognized in operations) to be realized from a group of products are revised. Our estimates of future gross profits 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, 2019 in this Item 7 for a discussion and presentation
of the actual effects of unlocking.
The most sensitive assumptions used to calculate amortization of deferred policy acquisition costs and deferred sales inducements are 1) the net
investment earned rate, 2) our best estimate for future policy decrements specific to lapse rates and 3) the expected cost of annual call options
we will purchase in the future.
The net investment earned rate is a key component in the calculation of estimated gross profits. The net investment earned rate is based on current
yields being earned in our invested assets portfolio, future spot rates, the expected mean reversion period and expected spread we will earn above
the risk-free rate. If the net investment earned rate were to increase 10 basis points, our combined balance for deferred policy acquisition costs
and deferred sales inducements at December 31, 2019 would increase by $83.9 million. A decrease in the net investment earned rate of 10 basis
points would decrease our combined balance for deferred policy acquisition costs and deferred sales inducements at December 31, 2019 by
$86.7 million.
Our lapse rate assumptions are based on actual experience and our outlook as to future expectations for lapse rates. If lapse rates were to increase
10%, our combined balance of deferred policy acquisition costs and deferred sales inducements would decrease by $86.3 million. A decrease
in lapse rates of 10% would increase our combined balance of deferred policy acquisition costs and deferred sales inducements by $89.0 million.
We utilize the expected cost of annual call options we will purchase in the future to project policy values and to discount future cash flows. In
addition, it is a key component in the calculation of expected gross profits in the projection period. As of December 31, 2019, we utilized an
estimate of 2.90% for the expected long-term cost of annual call options, which is based on estimated long-term account value growth and a
historical review of our actual call options. If the expected cost of annual call options and fixed crediting rates were to increase by 25 basis
points, our combined balance of deferred policy acquisition costs and deferred sales inducements would increase by $44.6 million. A decrease
of 25 basis points in the expected cost of annual call options and fixed crediting rates would decrease our combined balance of deferred policy
acquisition costs and deferred sales inducements by $81.1 million.
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.
46
New Accounting Pronouncements
See Note 1 to our audited consolidated financial statements in this Form 10-K beginning on page F-11, 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, including lifetime income
benefit riders, to encourage persistency.
We seek to maximize the total return on our fixed maturity securities 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 and the fair value of our investments. 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).
Substantially all of our annuity products have surrender and withdrawal penalty provisions designed to encourage persistency and to help ensure
targeted spreads are earned. In addition, 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 which we believe improves the persistency of such annuity products. 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% (24 basis points) from levels at December 31, 2019, we estimate that the fair value of our fixed maturity
securities would decrease by approximately $877.4 million. 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 $398.4
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 $8.8 billion as of December 31, 2019. During the years ended December 31, 2019 and 2018, we received $1.5 billion and $0.9 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, 2019,
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, 2019, approximately 18% 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.
47
Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
Proceeds received at expiration of options related to such credits
$
605,005
$
1,307,755
$
Annual index credits to policyholders on their anniversaries
587,818
1,285,555
1,623,346
1,594,722
On the anniversary dates of the index policies, we purchase new one-year 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 fixed 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.
Item 8. Consolidated Financial Statements and Supplementary Data
The audited consolidated financial statements are included as a part of this report on Form 10-K on pages F-1 through F-55.
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, 2019 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.
During the quarter ended September 30, 2019, we implemented an enhanced actuarial valuation system that is used in the calculations of deferred
policy acquisition costs, deferred sales inducements and policy liabilities for fixed index and fixed rate annuities. During implementation, we
followed a development process that required significant planning, design and testing to ensure an ongoing effective control environment. In
connection with the implementation, we evaluated and, where appropriate, made changes to the affected internal controls to maintain and enhance,
through increased automation and further integration of related actuarial processes, the effectiveness of internal control over financial reporting.
(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, 2019
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, 2019.
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, 2019. 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, 2019, 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, 2019 which has not been previously reported.
48
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 4, 2020 to be filed with the Commission pursuant to Regulation 14A within 120 days after December 31, 2019.
PART III
Item 15. Exhibits and Financial Statement Schedules
PART IV
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
3.7
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
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)
Articles of Amendment to Articles of Incorporation (Incorporated by reference to Exhibit 3.2 to Form 8-A12B filed on November 20, 2019,
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)
49
Exhibit No.
Description
4.15
4.16
4.17
4.18
4.19
4.20
4.21
4.22
4.23
4.24
4.25
4.26
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
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)
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)
Deposit Agreement, dated November 21, 2019, among American Equity Investment Life Holding Company, Computershare Inc. and
Computershare Trust Company, N.A., jointly, as depositary, Computershare Inc., as registrar and transfer agent, and the holders from time to
time of the depositary receipts (Incorporated by reference to Exhibit 4.1 to Form 8-K filed on November 21, 2019)
Form of Depository Receipt (included in Exhibit 4.25)
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 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 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)
10.18 *
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)
50
Exhibit No.
Description
10.19 *
10.20 *
10.21 *
10.22 *
10.23 *
10.24 *
10.25 *
10.26 *
10.27 *
10.28 *
10.29 *
10.30 *
10.31 *
10.32 *
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)
Form of Performance Restricted Stock Unit Award Agreement (Incorporated by reference to Exhibit 10.2 to Form 8-K filed on June 8, 2016)
Form of First Amendment to Employee Stock Option Agreement between American Equity Investment Life Holding Company 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 10.4 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)
Form of Restricted Stock Unit Award Agreement (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the period ended March 31, 2019
filed on May 8, 2019)
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, 2019 filed on May 8, 2019)
Form of Restricted Stock Award Agreement (Incorporated by reference to Exhibit 10.3 to Form 10-Q for the period ended March 31, 2019 filed
on May 8, 2019)
Second Amendment to American Equity Investment Life Holding Company 2016 Employee Incentive Plan (Incorporated by reference to Exhibit
10.4 to Form 10-Q for the period ended March 31, 2019 filed on May 8, 2019)
10.33 *
Form of Employee Stock Option Agreement
21.2
23.1
31.1
31.2
32.1
32.2
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.
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 25th day of February 2020.
SIGNATURES
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
By:
/s/ JOHN M. MATOVINA
John M. Matovina,
Chief Executive Officer
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/ ANANT BHALLA
Anant Bhalla
/s/ JOYCE A. CHAPMAN
Joyce A. Chapman
/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 and Chief Executive Officer
(Principal Executive Officer)
February 25, 2020
Chief Financial Officer and Treasurer
(Principal Financial Officer)
February 25, 2020
Vice President and Chief Accounting Officer
(Principal Accounting Officer)
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
52
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
YEARS ENDED DECEMBER 31, 2019, 2018 and 2017
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 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
F-2
F-5
F-6
F-7
F-8
F-9
F-11
F-16
F-21
F-28
F-33
F-35
F-36
F-38
F-40
F-41
F-41
F-44
F-45
F-46
F-47
F-48
F-49
F-53
F-54
F-55
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, 2019 and 2018, 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, 2019, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended
December 31, 2019, 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, 2019 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.
F-2
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that
were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the
consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical
audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating
the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Assessment of the valuation of deferred policy acquisition costs and deferred sales inducements and the liability for lifetime income
benefit riders
As discussed in Notes 1 and 6 to the consolidated financial statements, the Company’s fixed index and fixed rate annuity contracts
deferred policy acquisition costs (DAC) and deferred sales inducements (DSI) are amortized in proportion to actual and expected gross
profits, which is primarily derived from investment spreads. The liability for LIBR is based on the actual and present value of expected
benefit payments 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, which are primarily derived from investment spreads, product
charges and fees. The DAC, DSI, and liability for LIBR balances were $2.9 billion, $2.0 billion, and $1.3 billion, respectively, at
December 31, 2019.
We identified the assessment of the valuation of DAC and DSI and the liability for LIBR as a critical audit matter. Due to significant
measurement uncertainty associated with the valuation of DAC and DSI and the liability for LIBR, there was subjective auditor
judgment, and knowledge and experience in the insurance industry required to evaluate certain best estimate assumptions (assumptions)
used to calculate estimated future gross profits, assessments, and benefit payments expected to be paid in excess of projected policy
values, including:
•
•
•
•
future yields on invested assets;
future cost of money, which includes the expected policy crediting rates on fixed rate annuities and for fixed index annuities
1) the expected hedging expenses incurred to fund the policies annual index credits and 2) the expected policy crediting rates
on amounts allocated to the fixed rate strategy;
future policyholder decrements, including lapse and mortality rates; and
future policyholder behavior related to LIBR utilization.
The primary procedures we performed to address this critical audit matter included the following. We tested, with the involvement of
actuarial professionals, when appropriate, certain internal controls over the Company’s assumption setting process, including controls
related to the determination of assumptions. In addition, we involved actuarial professionals with specialized skills and knowledge
who assisted in:
•
•
•
•
comparing estimated gross profits and assessments for the current year developed from the application of the Company’s
assumptions to actual gross profits and assessments during the current year;
comparing the assumptions used by the Company to actual and historical invested asset yields, cost of money, and internal
and industry policyholder experience;
developing an independent estimate of gross profits, assessments, and excess benefits for selected policies based on the
assumptions used by the Company and comparing them to the Company’s estimates; and
evaluating period over period trends in the valuation of DAC and DSI and the liability for LIBR in relation to the assumptions
used by the Company.
Assessment of the measurement of fair value for embedded derivatives in fixed index annuity contracts
As discussed in Notes 1 and 2 to the consolidated financial statements, the Company has established policies and procedures for
determining the fair value of embedded derivatives in fixed index annuity contracts with crediting strategies linked to market indices.
As of December 31, 2019, the recorded balance of the embedded derivatives in fixed index annuity contracts, net of coinsurance ceded,
was $9.6 billion, which was classified as Level 3 in the fair value hierarchy. The Company estimates the fair value of the embedded
derivative component of fixed index annuity policy benefit reserves by projecting policy contract values and minimum guaranteed
contract values over the expected lives of the contracts and discounting the excess of the projected contract value amounts at the
applicable risk free interest rates adjusted for nonperformance risk related to those liabilities.
F-3
We identified the assessment of the measurement of fair value for embedded derivatives in fixed index annuity contracts as a critical
audit matter. Due to significant measurement uncertainty associated with the fair value of embedded derivatives in fixed index annuity
contracts, there was subjective auditor judgment, and knowledge and experience in the insurance industry required to evaluate certain
best estimate assumptions (assumptions) used to estimate the fair value, including: 1) the expected cost of annual call options the
Company will purchase in the future to fund index credits beyond the next policy anniversary, and 2) future policyholder decrements,
including lapse rates.
The primary procedures we performed to address this critical audit matter included the following. We tested, with the involvement of
actuarial professionals, when appropriate, certain internal controls over the Company’s assumption setting process, including controls
related to the determination of assumptions. In addition, we involved actuarial professionals with specialized skills and knowledge
who assisted in:
•
•
comparing the assumptions used by the Company to actual and historical cost of annual call options and internal and industry
policyholder experience; and
developing an independent estimate of the fair value of the embedded derivatives for selected policies based on the
assumptions used by the Company and comparing the estimate to the Company’s estimate.
/s/ KPMG LLP
We have served as the Company’s auditor since 2005.
Des Moines, Iowa
February 25, 2020
F-4
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
December 31,
2019
2018
$
51,580,490
$
45,923,727
3,448,793
1,355,989
492,301
2,943,091
205,149
355,531
56,877,573
49,427,498
$
$
2,293,392
5,115,013
472,826
2,923,454
1,966,723
—
—
47,571
344,396
4,954,068
468,729
3,535,838
2,516,721
291,169
26,537
60,608
69,696,552
$
61,625,564
61,893,945
$
57,606,009
256,105
495,116
157,265
—
177,897
429
270,858
494,591
242,982
109,298
—
—
2,145,676
65,126,433
502,725
59,226,463
16
—
91,107
1,212,311
1,497,921
1,768,764
4,570,119
90,369
811,186
(52,432)
1,549,978
2,399,101
$
69,696,552
$
61,625,564
Assets
Investments:
Fixed maturity securities, available for sale, at fair value (amortized cost: 2019 - $48,238,946; 2018 -
$46,131,190)
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 payable
Subordinated debentures
Amounts due under repurchase agreements
Deferred income taxes
Income taxes payable
Other liabilities
Total liabilities
Stockholders' equity:
Preferred stock; par value $1 per share; 2,000,000 shares authorized; issued and outstanding:
2019 - 16,000 shares ($400,000 aggregate liquidation preference); 2018 - no shares
Common stock; par value $1 per share; 200,000,000 shares authorized; issued and outstanding:
2019 - 91,107,555 shares (excluding 1,344,193 treasury shares);
2018 - 90,369,229 shares (excluding 1,535,960 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-5
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
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 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,
2019
2018
2017
$
23,534
$
26,480
$
240,035
2,307,635
906,906
224,488
2,147,812
(777,848)
34,228
200,494
1,991,997
1,677,871
6,962
(37,178)
10,509
(18,511)
(215)
(18,726)
(2,001)
(35,005)
(1,651)
(36,656)
—
3,464,345
1,547,098
35,418
1,287,576
88,585
39,530
1,610,835
222,201
1,454,042
(1,389,491)
25,525
15,764
87,717
154,153
3,148,780
315,565
69,475
246,090
2.70
2.68
91,139
91,782
$
$
$
$
$
$
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
F-6
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
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,
2019
2018
2017
$
246,090
$
458,016
$
174,645
1,954,044
(1,129,213)
103
8,323
1,962,470
(412,117)
1,550,353
775
(16,606)
(1,145,044)
240,459
(904,585)
$
1,796,443
$
(446,569) $
556,384
915
4,496
561,795
(177,162)
384,633
559,278
(1) Net of related adjustments to amortization of deferred sales inducements and deferred policy acquisition costs.
See accompanying notes to consolidated financial statements.
F-7
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
Balance at December 31, 2016
$
— $
88,001
$
770,344
$
339,966
$
1,093,284
$
2,291,595
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Total
Stockholders'
Equity
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)
Balance at December 31, 2018
Net income for the year
Other comprehensive income
Issuance of preferred stock
Share-based compensation
Issuance of 738,326 shares of common stock
under compensation plans
Dividends on common stock ($0.30 per share)
Balance at December 31, 2019
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
16
—
—
—
16
—
—
—
1,330
—
89,331
—
—
—
—
1,038
—
90,369
—
—
—
—
738
—
—
—
6,464
14,638
—
791,446
—
—
—
11,097
8,643
—
811,186
—
—
388,877
11,295
953
—
—
174,645
384,633
—
—
—
—
—
—
(23,148)
174,645
384,633
6,464
15,968
(23,148)
724,599
1,244,781
2,850,157
—
458,016
(904,585)
—
127,554
(127,554)
—
—
—
—
—
(25,265)
(52,432)
1,549,978
—
246,090
1,550,353
—
—
—
—
—
—
—
—
(27,304)
458,016
(904,585)
—
11,097
9,681
(25,265)
2,399,101
246,090
1,550,353
388,893
11,295
1,691
(27,304)
$
91,107
$
1,212,311
$
1,497,921
$
1,768,764
$
4,570,119
See accompanying notes to consolidated financial statements.
F-8
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
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 collateral held for securities lending
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
Year Ended December 31,
2019
2018
2017
$
246,090
$
458,016
$
174,645
1,610,835
2,023,668
1,287,576
88,585
(240,035)
1,454,042
(3,546)
(422,516)
87,717
4,068
25,846
2,001
11,764
(906,201)
2,753
56,947
11,295
(4,097)
26,966
(5,607)
(21,971)
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)
1,190,656
(1,296,629)
495,101
(28,607)
(7,425)
3,351,402
—
(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)
1,923,847
3,266,821
294,356
657,885
472,549
3,870,415
298,100
1,446,948
358,372
1,911,991
351,255
1,697,948
9,117
(5,509,314)
(6,852,481)
(5,026,640)
(799,037)
(823,077)
(611,047)
(4,022)
(575,367)
(864,717)
(85,318)
(4,283)
(535,249)
(691,428)
(305,575)
(4,809)
(3,054,886)
(2,408,331)
(2,593,390)
F-9
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
Financing activities
Receipts credited to annuity policyholder account balances
$
4,951,211
$
4,381,150
$
4,152,264
Year Ended December 31,
2019
2018
2017
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
Repayment of subordinated debentures
Net proceeds from (repayments of) amounts due under repurchase agreements
Proceeds from issuance of common stock, net
Proceeds from issuance of preferred stock, net
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
See accompanying notes to consolidated financial statements.
91,238
(23,838)
(6,597)
(3,584,960)
(3,159,700)
(2,809,486)
—
—
—
—
(88,160)
(109,298)
1,691
388,893
29,169
(27,304)
1,652,480
1,948,996
344,396
—
—
—
—
—
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)
1,312,322
642,779
791,266
$
2,293,392
$
344,396
$
1,434,045
$
42,879
$
39,575
$
28,413
181,202
55,445
142,627
177,941
179,465
216,172
F-10
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2019. We operate solely in the insurance business.
We market fixed index and fixed rate annuities. Annuity deposits (net of coinsurance) collected in 2019, 2018 and 2017, 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,
2019
2018
2017
(Dollars in thousands)
$
$
4,603,490
$
3,898,366
$
3,668,121
10,665
47,016
12,002
46,744
22,818
23,813
74,572
22,291
24,946
4,673,173
$
3,991,741
$
3,789,930
Agents contracted with us through two national marketing organizations accounted for more than 10% of annuity deposits we collected during
2019 representing 24% 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 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.
Consolidation and Basis of Presentation
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.
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 fair value of embedded derivatives in fixed index annuity
contracts, 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 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.
F-11
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
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. 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, limited partnerships accounted for using the equity method, short-
term debt securities with maturities of greater than three months but less than twelve months when purchased 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.
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.
Securities Lending
Beginning in 2019, the Company participates in a securities lending program whereby we loan certain securities to other institutions, through a
lending agent, for short periods of time. The Company has the right to approve any institution with whom the lending agent transacts on its
behalf. Borrowers post cash collateral in an amount equal to or greater than 102% of the market value of the loaned securities. The lending
agent retains the collateral and invests it in short-term liquid assets on behalf of the Company. The market value of the loaned securities is
monitored on a daily basis with additional collateral obtained or refunded as the market value of the loaned securities fluctuates. The lending
agent indemnifies the Company against losses resulting from the failure of a counterparty to return securities pledged where collateral is insufficient
to cover the loss. As of December 31, 2019, the fair value of loaned securities was $477.5 million and is included in Fixed maturity securities,
available for sale, at fair value in the consolidated balance sheets. As of December 31, 2019, collateral retained by the lending agent and invested
in liquid assets on our behalf was $495.1 million and is recorded in Cash and cash equivalents in the consolidated balance sheets. As of December
31, 2019, liabilities to return collateral of $495.1 million are included in Other liabilities in the consolidated balance sheets.
F-12
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred Policy Acquisition Costs and Deferred Sales Inducements
For annuity products, these costs are being amortized in proportion to actual and expected gross profits. Actual and expected gross profits include
the the excess of net investment income earned over the interest credited or the cost of providing index credits to the policyholders, or the
"investment spread"; and to a lesser extent, product charges and fees net of expected excess payments for lifetime income benefit riders and
certain policy expenses. Actual and expected gross profits 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 actual and expected gross profits (including the impact of net realized gains (losses) 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, 2019, 2018 and 2017, interest crediting rates for these products ranged
from 1.00% to 2.80%.
The liability for lifetime income benefit riders is based on the actual and present value of expected benefit payments 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 investment spreads, 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, expected utilization of lifetime income benefit riders, which includes the ages at which policyholders are expected to
elect to begin to receive lifetime income benefit payments and the percentage of policyholders who elect to receive lifetime income benefit
payments, the type of income benefit payments selected upon election and future assumptions for lapse, partial withdrawal and mortality rates.
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.
F-13
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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 replaced most revenue recognition guidance existing at the time, 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 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 eliminated 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 February 2016, the FASB issued an ASU that requires 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 and disclosure
for lessors is mainly unchanged. We adopted this ASU on January 1, 2019. The adoption of this ASU resulted in the recognition of a lease asset
and lease liability of $6.0 million, respectively, on our consolidated balance sheet at December 31, 2019.
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 is amortized to the first call date. We adopted this ASU
on January 1, 2019. The adoption of this ASU did not have a material impact on our consolidated financial statements.
In February 2018, the FASB issued an ASU that allowed 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 at December 31, 2018.
In June 2018, the FASB issued an ASU that expanded the scope of Accounting Standards Codification 718, Compensation-Stock Compensation,
to include share-based payment transactions for acquiring goods and services to nonemployees and eliminated the existing accounting model
for nonemployee share-based payment awards. We adopted this ASU on January 1, 2019. While this ASU results in an earlier measurement
date for our nonemployee restricted stock units that have not vested as of January 1, 2019, there was no impact to our consolidated financial
statements upon adoption.
New Accounting Pronouncements
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. Our implementation procedures to date relative to this standard
include, but are not limited to, identifying financial assets within the scope of this guidance, developing a current expected credit loss model for
our commercial mortgage loans and reinsurance recoverable balances and refining internal processes and controls for financial assets impacted
by this guidance. Based on our analyses to date, we estimate that our retained earnings as of January 1, 2020 will decrease by approximately
$5 million to $10 million on a pretax basis due to an increase in our mortgage loan allowance as a result of earlier recognition of credit losses
related to our commercial mortgage loans. In addition, we estimate our retained earnings will decrease by $1 million to $3 million on a pretax
basis due to recognition of expected lifetime credit losses related to our reinsurance recoverable/coinsurance deposits balances.
F-14
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
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 actual and estimated gross profits and enhancing disclosure requirements. While this ASU is
effective for us on January 1, 2022, the transition date (the remeasurement date) is January 1, 2020. 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.
F-15
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
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:
December 31,
2019
2018
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
(Dollars in thousands)
Assets
Fixed maturity securities, available for sale
$
51,580,490
$
51,580,490
$
45,923,727
$
45,923,727
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
3,448,793
1,355,989
492,301
2,293,392
5,115,013
6
—
—
3,536,446
1,355,989
492,301
2,293,392
4,635,926
6
—
—
2,943,091
2,920,612
205,149
355,531
344,396
205,149
348,970
344,396
4,954,068
4,553,790
597
354
33,101
597
354
33,101
61,540,992
51,800,247
57,249,510
49,180,143
255,698
495,116
157,265
—
263,773
541,520
168,357
—
270,406
494,591
242,982
109,298
279,077
489,985
215,514
109,298
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-16
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our assets and liabilities which are measured at fair value on a recurring basis as of December 31, 2019 and 2018 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, 2019
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
Derivative instruments
Cash and cash equivalents
Interest rate caps
Liabilities
Fixed index annuities - embedded derivatives
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
Derivative instruments
Cash and cash equivalents
Interest rate caps
Interest rate swap
Counterparty collateral
Liabilities
Fixed index annuities - embedded derivatives
$
161,765
$
155,945
$
5,820
$
—
—
—
4
—
—
—
—
2,293,392
—
625,020
4,527,671
205,096
32,536,835
1,575,664
5,786,279
6,162,156
1,355,989
—
6
2,449,341
$
52,780,536
$
625,020
4,527,671
205,096
32,536,839
1,575,664
5,786,279
6,162,156
1,355,989
2,293,392
6
55,229,877
9,624,395
$
$
— $
— $
9,624,395
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
205,149
—
597
354
33,101
350,303
$
46,157,021
$
— $
— $
8,165,405
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
$
1,138,529
4,126,267
230,274
28,371,514
1,202,159
5,379,003
5,464,329
205,149
344,396
597
354
33,101
$
$
46,507,324
8,165,405
$
$
F-17
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
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.
Fixed maturity securities
The fair values of fixed maturity 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:
•
•
•
•
•
•
•
•
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, 2019 and 2018.
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
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 are determined using a variety of valuation techniques, including discounted cash flow analysis,
valuation multiples analysis for comparable investments and appraisal values. 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-18
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash and cash equivalents
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.
Interest rate swap and caps
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, 2019 and 2018, we utilized an estimate of 2.90% and 3.10%, respectively, 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-19
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
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. 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, 2019
December 31, 2018
December 31, 2019
December 31, 2018
Average Lapse Rates
Average Partial Withdrawal Rates
1 - 5
6 - 10
11 - 15
16 - 20
20+
0.90%
1.29%
3.31%
8.52%
7.10%
2.05%
7.28%
11.35%
11.90%
11.57%
3.33%
3.84%
4.12%
4.18%
4.12%
3.33%
3.33%
3.35%
3.22%
3.22%
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. We review assumptions quarterly and as a result of this review we lowered lapse
rate assumptions in 2019 as our experience indicates lapse rates have been lower than previously estimated.
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, 2019 and 2018:
Fixed index annuities - embedded derivatives
Beginning balance
Premiums less benefits
Change in fair value, net
Ending balance
Year Ended December 31,
2019
2018
(Dollars in thousands)
$
$
8,165,405
$
896,688
562,302
8,790,427
1,542,606
(2,167,628)
9,624,395
$
8,165,405
The fair value of our fixed index annuities embedded derivatives is net of coinsurance ceded of $644.6 million and $538.8 million as of
December 31, 2019 and 2018, 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 rates reflect our nonperformance risk. If the discount rates used to discount the excess projected contract
values at December 31, 2019, were to increase by 100 basis points, the fair value of the embedded derivatives would decrease by $871.3 million
recorded through operations as a decrease in the change in fair value of embedded derivatives and there would be a corresponding decrease of
$350.5 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 rates
used to discount the excess projected contract values would increase the fair value of the embedded derivatives by $1.0 billion recorded through
operations as an increase in the change in fair value of embedded derivatives and there would be a corresponding increase of $434.2 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.
We review these assumptions quarterly and as a result of these reviews, we made updates to assumptions in 2019, 2018 and 2017. In addition,
we implemented an enhanced actuarial valuation system during 2019, and as a result, our 2019 assumption updates include model refinements
resulting from the implementation.
F-20
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The most significant revisions to the calculation of the fair value of the embedded derivative component of our fixed index annuity policy benefit
reserves in 2019 were to decrease lapse rate assumptions. We have credible lapse and utilization data based upon a comprehensive experience
study spanning over 10 years on our products with lifetime income benefit riders and have experienced lapse rates that are lower than previously
estimated. The impact of the lapse rate assumption changes was partially offset by a decrease in the option budget from 3.10% to 2.90% as a
result of a revised estimate of the cost of options over the 20 year mean reversion period.
The most significant revisions to the calculation of the fair value of embedded derivative component of our fixed index annuity policy benefit
reserves in 2018 were to decrease lapse rate assumptions.
3. Investments
At December 31, 2019 and 2018, 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, 2019
Fixed maturity securities, available for sale:
United States Government full faith and credit
$
161,492
$
369
$
(96) $
601,672
4,147,343
186,993
28,133
388,578
18,103
29,822,172
2,796,926
1,477,738
5,591,167
6,250,369
101,617
208,895
90,978
(4,785)
(8,250)
—
(82,259)
(3,691)
(13,783)
(179,191)
161,765
625,020
4,527,671
205,096
32,536,839
1,575,664
5,786,279
6,162,156
$
48,238,946
$
3,633,599
$
(292,055) $
51,580,490
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, 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
F-21
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The amortized cost and fair value of fixed maturity securities at December 31, 2019, 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.
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)
$
290,310
$
5,831,134
10,199,288
10,519,078
8,079,862
34,919,672
1,477,738
5,591,167
6,250,369
294,212
6,061,370
10,829,871
11,812,300
9,058,638
38,056,391
1,575,664
5,786,279
6,162,156
$
48,238,946
$
51,580,490
Net unrealized gains (losses) on available for sale fixed maturity securities reported as a separate component of stockholders' equity were
comprised of the following:
December 31,
2019
2018
(Dollars in thousands)
Net unrealized gains (losses) on available for sale fixed maturity securities
$
3,341,544
$
(207,463)
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)
(1,473,966)
22,534
(392,191)
Net unrealized gains (losses) reported as accumulated other comprehensive income (loss)
$
1,497,921
$
112,571
22,534
19,926
(52,432)
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 98% and 97% of our fixed maturity portfolio rated investment
grade at December 31, 2019 and 2018, 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,
2019
2018
Amortized
Cost
Fair
Value
Amortized
Cost
(Dollars in thousands)
Fair
Value
$
27,781,525
$
30,122,657
$
26,588,352
$
26,921,843
19,278,355
20,316,911
17,901,161
17,528,072
1,001,087
114,497
57,952
5,530
977,191
112,534
45,205
5,992
1,396,650
173,987
23,836
47,204
1,269,242
137,991
19,453
47,126
$
48,238,946
$
51,580,490
$
46,131,190
$
45,923,727
F-22
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 1,033 and 2,715 securities, respectively) have been in a continuous unrealized loss position, at December 31,
2019 and 2018:
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, 2019
Fixed maturity securities, available for sale:
United States Government full faith and credit
$
144,582
$
(96) $
— $
— $
144,582
$
United States Government sponsored agencies
United States municipalities, states and territories
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
168,732
285,481
267,521
161,633
334,635
54,289
275,135
212,404
602,394
752,413
(1,229)
(8,173)
(4,785)
(6,039)
(7,730)
(1,751)
(6,135)
(2,686)
(9,366)
201,444
3,081
121,993
44,606
51,269
129,364
316,086
11,332
194,328
(3,556)
(77)
(4,744)
(3,951)
(3,482)
(9,411)
(34,231)
(1,005)
(4,417)
370,176
288,562
389,514
206,239
385,904
183,653
591,221
223,736
796,722
(96)
(4,785)
(8,250)
(9,529)
(9,990)
(11,212)
(11,162)
(40,366)
(3,691)
(13,783)
(11,709)
3,375,016
(167,482)
4,127,429
(179,191)
$
3,259,219
$
(59,699) $
4,448,519
$
(232,356) $
7,707,738
$
(292,055)
December 31, 2018
Fixed maturity securities, available for sale:
United States Government full faith and credit
$
543
$
(3) $
7,785
$
(319) $
8,328
$
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
(322)
(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)
The unrealized losses at December 31, 2019 are principally related to timing of the purchases of these securities, which carry less yield than
those available at December 31, 2019. Approximately 79% and 87% of the unrealized losses on fixed maturity securities shown in the above
table for December 31, 2019 and 2018, respectively, are on securities that are rated investment grade, defined as being the highest two NAIC
designations.
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, 2019 and 2018.
F-23
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Changes in net unrealized gains/losses on investments for the years ended December 31, 2019, 2018 and 2017 are as follows:
Fixed maturity securities held for investment carried at amortized cost
Investments carried at fair value:
Fixed maturity securities, available for sale
Equity securities
Adjustment for effect on other balance sheet accounts:
Deferred policy acquisition costs and deferred sales inducements
Deferred income tax asset/liability
Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
— $
581
$
7,478
3,549,007
$
(2,463,693) $
1,149,691
—
—
(479)
3,549,007
(2,463,693)
1,149,212
$
$
(1,586,537)
(412,117)
(1,998,654)
1,318,649
240,459
1,559,108
(587,417)
(177,162)
(764,579)
384,633
Change in net unrealized gains/losses on investments carried at fair value
$
1,550,353
$
(904,585) $
Components of net investment income are as follows:
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,
2019
2018
2017
(Dollars in thousands)
$
2,171,768
$
2,027,599
$
1,876,542
4,083
145,344
5,164
3,119
2,329,478
(21,843)
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)
$
2,307,635
$
2,147,812
$
1,991,997
Proceeds from sales of available for sale fixed maturity securities for the years ended December 31, 2019, 2018 and 2017 were $1.0 billion, $2.5
billion and $0.7 billion, respectively. Scheduled principal repayments, calls and tenders for available for sale fixed maturity securities for the
years ended December 31, 2019, 2018 and 2017 were $2.3 billion, $1.4 billion and $1.2 billion, respectively.
F-24
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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:
Available for sale fixed maturity securities:
Gross realized gains
Gross realized losses
Equity securities:
Gross realized gains
Other investments:
Gross realized gains
Gross realized losses
Gain 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,
2019
2018
2017
(Dollars in thousands)
$
21,449
$
12,245
$
(6,397)
15,052
—
7,296
(14,446)
—
(7,150)
(940)
—
—
(940)
(47,974)
(35,729)
—
—
—
—
—
(3,165)
1,592
124
(1,449)
18,254
(9,058)
9,196
348
—
—
56
56
278
631
—
909
Losses on available for sale fixed maturity securities in 2019, 2018 and 2017 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:
$
6,962
$
(37,178) $
10,509
December 31,
2019
2018
(Dollars in thousands)
Fixed maturity securities, available for sale
$
5,792
$
6,717
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.
•
F-25
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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.
F-26
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes other than temporary impairments by asset type:
Number
of Securities
Total
OTTI Losses
Portion of OTTI
Losses
Recognized from
Other
Comprehensive
Income
(Dollars in thousands)
Net OTTI
Losses
Recognized
in Operations
Year ended December 31, 2019
Fixed maturity securities, available for sale:
Corporate securities:
Energy
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
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
$
$
$
3
3
2
1
9
1
8
4
5
1
1
2
1
2
3
5
2
(17,273) $
— $
(17,273)
(101)
(488)
(649)
(215)
—
—
(316)
(488)
(649)
(18,511) $
(215) $
(18,726)
(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) $
(2,485)
(1,858)
(287)
(4,630)
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:
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
F-27
Year Ended December 31,
2019
2018
(Dollars in thousands)
$
$
(175,398)
$
(18,271)
(455)
24,422
(157,066)
(35,005)
(1,651)
18,324
(169,702)
$
(175,398)
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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,
2019 and 2018:
December 31, 2019
Fixed maturity securities, available for sale:
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
December 31, 2018
Fixed maturity securities, available for sale:
Corporate securities
Residential mortgage backed securities
Commercial 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
$
$
$
$
50,755
$
(3,700) $
9,268
$
183,948
12,776
977
(145,446)
172,577
—
—
(401)
261
248,456
$
(149,146) $
181,705
$
69,580
$
(3,700) $
6,195
$
245,691
35,244
1,692
(167,846)
199,191
—
—
—
326
352,207
$
(171,546) $
205,712
$
56,323
211,079
12,375
1,238
281,015
72,075
277,036
35,244
2,018
386,373
At December 31, 2019 and 2018, fixed maturity securities and short-term investments with an amortized cost of $51.6 billion and $49.2 billion,
respectively, were on deposit with state agencies to meet regulatory requirements. There are no restrictions on these assets.
At December 31, 2019 and 2018, 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 $244.3 million at December 31,
2019.
Principal outstanding
Loan loss allowance
Deferred prepayment fees
Carrying value
December 31,
2019
2018
(Dollars in thousands)
$
$
3,458,914
$
2,952,464
(9,179)
(942)
(8,239)
(1,134)
3,448,793
$
2,943,091
F-28
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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:
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,
2019
2018
Principal
Percent
Principal
Percent
(Dollars in thousands)
$
$
$
645,991
284,597
389,892
9,152
655,518
751,199
302,534
420,031
18.7% $
8.2%
11.3%
0.3%
19.0%
21.7%
8.7%
12.1%
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%
3,458,914
100.0% $
2,952,464
100.0%
250,287
29,990
1,225,670
896,558
858,679
51,303
146,427
7.3% $
0.9%
35.4%
25.9%
24.8%
1.5%
4.2%
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%
$
3,458,914
100.0% $
2,952,464
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-29
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
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,
2019
2018
2017
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
$
$
(229)
$
(8,010)
$
(1,418) $
(6,100)
$
(1,327)
$
(7,100)
—
—
—
—
—
(940)
852
1,592
(1,255)
—
—
(1,910)
—
631
(722)
(229)
$
(8,950)
$
(229) $
(8,010)
$
(1,418)
$
—
—
1,000
(6,100)
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,
2019
2018
2017
(Dollars in thousands)
$
$
1,229
3,457,685
3,458,914
$
$
1,253
2,951,211
2,952,464
$
$
5,445
2,668,870
2,674,315
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, 2019, 2018 and 2017.
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,
2019
2018
(Dollars in thousands)
$
$
3,458,914
$
2,952,464
—
—
—
—
3,458,914
$
2,952,464
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 are 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 allow 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-30
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
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, 2019 and 2018, respectively.
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, 2019
December 31, 2018
$
$
— $
— $
— $
— $
— $
— $
— $
3,458,914
— $
2,952,464
$
$
— $
3,458,914
— $
2,952,464
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, 2019
Mortgage loans with an allowance
Mortgage loans with no related allowance
December 31, 2018
Mortgage loans with an allowance
Mortgage loans with no related allowance
Recorded
Investment
Unpaid Principal
Balance
Related
Allowance
(Dollars in thousands)
$
$
$
$
1,000
—
1,000
1,024
—
1,024
$
$
$
$
1,229
—
1,229
1,253
—
1,253
$
$
$
$
(229)
—
(229)
(229)
—
(229)
F-31
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2019
Mortgage loans with an allowance
Mortgage loans with no related allowance
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
Average Recorded
Investment
Interest Income
Recognized
(Dollars in thousands)
$
$
$
$
$
$
1,012
—
1,012
1,042
—
1,042
4,464
1,513
5,977
$
$
$
$
$
$
69
—
69
74
—
74
221
91
312
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:
•
•
•
•
•
•
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:
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, 2019 and 2018, respectively.
F-32
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
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:
Assets
Derivative instruments
Call options
Other assets
Interest rate caps
Interest rate swap
Liabilities
Policy benefit reserves - annuity products
Fixed index annuities - embedded derivatives, net
December 31,
2019
2018
(Dollars in thousands)
$
$
$
1,355,989
$
205,149
6
—
597
354
1,355,995
$
206,100
9,624,395
$
8,165,405
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
Other changes in difference between policy benefit reserves computed using
derivative accounting vs. long-duration contracts accounting
$
$
$
$
Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
908,556
$
(778,899) $
1,678,283
(1,059)
(591)
906,906
562,302
891,740
$
$
869
182
255
(667)
(777,848) $
1,677,871
(2,167,628) $
174,154
1,454,042
$
(1,389,491) $
778,137
745,581
919,735
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-33
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
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 non-exchange traded 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:
Counterparty
Bank of America
Barclays
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
December 31,
2019
2018
A+
A
A+
A+
A+
A+
A+
AA-
A
A
A+
Aa2
A2
Aa2
Aa3
A1
Aa2
A1
A2
A1
A2
Aa2
$
2,680,543
$
80,692
$
6,518,808
$
(Dollars in thousands)
5,753,868
4,110,525
4,075,544
4,526,414
4,703,234
1,886,995
2,565,202
3,280,286
2,051,229
4,221,408
191,948
217,536
154,917
109,046
116,659
151,651
41,253
101,511
139,101
74,910
163,520
5,193
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
6,704
27,032
29,313
27,239
12,887
17,564
1,561
14,011
21,681
12,047
33,398
1,712
$
40,047,196
$
1,355,989
$
39,420,777
$
205,149
As of December 31, 2019 and 2018, we held $1.3 billion and $0.2 billion, respectively, of cash and cash equivalents and other investments 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 $25.2 million and $16.1 million at December 31, 2019 and 2018, 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.
Effective December 13, 2019 we terminated the interest rate swap in conjunction with our redemption of certain of our subordinated debentures.
Details regarding the interest rate swap are as follows:
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
December 31,
2019
2018
F-34
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Details regarding the interest rate caps are as follows:
December 31,
2019
2018
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)
3
1
2
6
$
$
302
91
204
597
$
$
The interest rate caps cap our interest rates until July 2021.
6. Deferred Policy Acquisition Costs, Deferred Sales Inducements and Liability for Lifetime Income Benefit Riders
Policy acquisition costs 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
Sales inducements deferred and amortized are as follows:
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,
2019
2018
2017
(Dollars in thousands)
$
3,535,838
$
2,714,523
$
2,905,377
419,165
3,351
(280,699)
192,982
(947,183)
384,432
3,790
(358,563)
30,572
761,084
$
2,923,454
$
3,535,838
$
401,124
5,517
(304,162)
48,198
(341,531)
2,714,523
December 31,
2019
2018
2017
(Dollars in thousands)
$
2,516,721
$
2,001,892
$
177,941
179,465
(193,292)
104,707
(639,354)
(243,666)
21,465
557,565
$
1,966,723
$
2,516,721
$
2,208,218
216,172
(210,886)
34,274
(245,886)
2,001,892
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,
2019
2018
2017
(Dollars in thousands)
808,167
$
704,441
$
179,901
315,383
—
157,333
(53,607)
—
1,303,451
$
808,167
$
$
$
533,391
149,442
21,608
—
704,441
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 (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.
We review these assumptions quarterly and as a result of these reviews, we made updates to assumptions in 2019, 2018 and 2017. In addition,
we implemented an enhanced actuarial valuation system during 2019, and as a result, our 2019 assumption updates include model refinements
resulting from the implementation.
The most significant assumption changes from the 2019 review were to lapse and utilization assumptions. We have credible lapse and utilization
data based upon a comprehensive experience study spanning over 10 years on our products with lifetime income benefit riders and have
experienced lapse rates that are lower than previously estimated.
Lower lapse assumptions result in an expectation that more policies will remain in force than previously anticipated which results in a greater
amount of benefit payments in excess of account value and the need for a greater liability for lifetime income benefit riders. The decrease in
lapse rate assumptions also results in policies being in force for a longer period of time and an increase in expected gross profits as compared
to previous estimates. The higher level of expected future gross profits results in an increase in the balances of deferred policy acquisition costs
and deferred sales inducements.
Our experience study also indicated that the ultimate utilization of certain lifetime income benefit riders is expected to be less than our prior
assumptions and the timing of utilization of lifetime income benefit riders is later than in our prior assumptions. We reduced our ultimate
utilization assumptions for fee riders from 75% to 60% and for no-fee riders from 37.5% to 30%, for policies issued in 2014 and prior years.
The net effect of the utilization assumption revisions resulted in a decrease in the liability for lifetime income benefit riders and partially offset
the increase in the liability for lifetime income benefit riders from the change in lapse assumptions.
In addition, we revised our assumptions regarding future crediting rates on policies. We are assuming a 3.80% U.S. Treasury rate with a 20 year
mean reversion period. Our assumption for aggregate spread is 2.60% which translates to an ultimate discount rate of 2.90%. While the aggregate
spread of 2.60% did not change from prior estimates, our estimates of the profitability of individual issue year cohorts has changed with the use
of an aggregate portfolio yield across all issue year cohorts. This assumption revision resulted in a change in the allocation of profitability by
issue year cohort, which caused a reduction in the deferred policy acquisition costs and deferred sales inducements assets and partially offset
the increase in the deferred policy acquisition costs and deferred sales inducements assets from the change in lapse 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 had 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 2018 and 2017 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.
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 $481.9 million and
$560.8 million at December 31, 2019 and 2018, 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 $10.7 million and $2.2 million at December 31,
2019 and 2018, 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.
F-36
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 certain of Eagle Life's fixed index annuities issued from January 1, 2017
through December 31, 2018, 20% of certain of Eagle Life's fixed index annuities issued on or after January 1, 2019 and 80% of certain of
American Equity Life's fixed index annuities issued from August 1, 2016 through December 31, 2016. The business reinsured under this
agreement may not be recaptured. Coinsurance deposits (aggregate policy benefit reserves transferred to Athene under these agreements) were
$4.6 billion and $4.4 billion at December 31, 2019 and 2018, 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 secured by assets
held in trusts and American Equity Life is 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 $100.2 million and $16.2 million at December 31, 2019 and 2018,
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.
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,
2019
2018
2017
(Dollars in thousands)
$
$
$
$
$
$
$
$
$
7,792
97,195
104,987
132,127
109,002
18,778
7,074
$
(41,487)
(34,413) $
165,485
$
(92,649)
20,415
259,907
$
93,251
$
6,458
94,382
100,840
177,332
35,561
19,877
232,770
(290,040) $
(413,222) $
381,276
389,384
91,236
$
(23,838) $
(387,280)
380,683
(6,597)
We have 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 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 April 1, 2019 (the "2019 Hannover Agreement").
The 2019 Hanover Agreement is a coinsurance funds withheld reinsurance agreement for statutory purposes covering 80% of lifetime income
benefit rider payments in excess of policy fund values and waived surrender charges related to penalty free withdrawals on certain business. We
may recapture the risks reinsured under this agreement without penalty as of the end of the accounting period in which every reinsured policy
in the issue year cohort reaches its 12th anniversary date. We can elect to recapture the business by issue year cohort any time prior to the 12th
anniversary date however we are subject to paying a make-whole payment to Hannover in the event of an early recapture. The agreement also
makes it punitive to us if we do not recapture the business on or before the 12th anniversary of each issue year cohort.
The 2019 Hannover Agreement replaced a yearly renewable term reinsurance transaction we had with Hannover, which was effective July 1,
2013 and was subsequently amended effective October 1, 2016 (the "2013 Hannover Agreement"). The 2013 Hannover Agreement was also
treated as reinsurance under statutory accounting practices and as a financing arrangement for GAAP. The 2013 Hannover Agreement covered
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.
F-37
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The reserve credit recorded on a statutory basis by American Equity Life was $1.2 billion and $780.0 million at December 31, 2019 and 2018,
respectively. We pay a quarterly risk charge based on the pretax statutory benefit as of the end of each calendar quarter. Risk charges attributable
to our agreements with Hannover were $37.8 million, $30.8 million, and $28.5 million during 2019, 2018 and 2017, respectively.
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:
Year Ended December 31,
2019
2018
2017
(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:
$
12,528
$
120,289
$
56,947
69,475
(12,563)
107,726
Change in net unrealized investment losses
412,117
(240,459)
Total income tax expense (benefit) included in consolidated financial statements
$
481,592
$
(132,733) $
188,356
(46,730)
141,626
177,162
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 years ended December 31, 2019 and 2018, and 35% for the year ended December 31, 2017 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,
2019
2018
2017
(Dollars in thousands)
315,565
66,269
$
$
565,742
118,806
$
$
$
$
5,111
(4,385)
—
—
2,480
5,777
(4,223)
—
(7,448)
(5,186)
$
69,475
$
107,726
$
316,271
110,695
1,961
(4,288)
35,932
—
(2,674)
141,626
22.0%
19.0%
44.8%
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.
F-38
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2019 and 2018, are as follows:
Deferred income tax assets:
Policy benefit reserves
Other than temporary impairments
Net unrealized losses on available for sale fixed maturity securities
Derivative instruments
Amounts due reinsurer
Other policyholder funds
Deferred compensation
Share-based compensation
Net operating loss carryforwards
Other
Gross deferred tax assets
Deferred income tax liabilities:
Deferred policy acquisition costs and deferred sales inducements
Net unrealized gains on available for sale fixed maturity securities
Derivative instruments
Policy benefit reserves
Investment income items
Amounts due reinsurer
Other
Gross deferred tax liabilities
Net deferred income tax asset (liability)
December 31,
2019
2018
(Dollars in thousands)
$
1,733,672
$
1,538,371
15,166
—
—
8,784
4,359
3,705
2,775
37,509
14,677
9,804
19,928
141,075
—
3,368
3,334
3,169
2,286
9,439
1,820,647
1,730,774
(1,303,385)
(1,214,998)
(392,189)
(109,287)
(147,924)
(42,105)
—
(3,654)
(1,998,544)
$
(177,897) $
—
—
(172,578)
(37,795)
(12,620)
(1,614)
(1,439,605)
291,169
Included in 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 and do not believe it would be necessary to
liquidate these securities at a loss. 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, 2019 and 2018.
There were no material income tax contingencies requiring recognition in our consolidated financial statements as of December 31, 2019. We
are no longer subject to income tax examinations by tax authorities for years 2015 and prior.
At December 31, 2019, we have an estimated $178.6 million net operating loss carryforward for federal income tax purposes, which does not
expire.
F-39
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Notes and Loan Payable and Amounts Due Under Repurchase Agreements
Notes payable includes the following:
Senior notes due 2027
Principal
Unamortized debt issue costs
Unamortized discount
December 31,
2019
2018
(Dollars in thousands)
$
$
500,000
$
(4,607)
(277)
495,116
$
500,000
(5,102)
(307)
494,591
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. 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 were 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,
2019 and 2018. As of December 31, 2019, $984.6 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). 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 $33.0 million, $51.8 million and $40.0 million for the
years ended December 31, 2019, 2018 and 2017, respectively. The maximum amount borrowed during 2019, 2018 and 2017 was $243.6 million,
$544.1 million and $274.5 million, respectively. The weighted average interest rate on amounts due under repurchase agreements was 2.99%,
1.90% and 0.84% for the years ended December 31, 2019, 2018 and 2017, respectively.
F-40
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2019 and 2018:
December 31,
2019
2018
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)
$
77,822
$
77,551
5%
27,840
12,372
—
—
—
—
—
41,238
159,272
(2,007)
$
157,265
$
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 15, 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
247,161
(4,179)
242,982
*—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.
We redeemed subordinated debentures issued to the following trusts during December 2019: American Equity Capital Trust VII, American
Equity Capital Trust VIII, American Equity Capital Trust IX, American Equity Capital Trust X and American Equity Capital Trust XI. In addition,
we redeemed subordinated debentures issued to American Equity Capital Trust IV and American Equity Capital Trust XII during January 2020
and subordinated debentures issued to American Equity Capital Trust III during February 2020.
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 $19,000 in 2019, $18,500 in 2018 and $18,000 in 2017) 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 $1.8 million, $1.7 million and $1.4
million for the years ended December 31, 2019, 2018 and 2017, respectively.
F-41
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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,
2019
2018
2017
$
$
(Dollars in thousands)
2,547
$
2,194
$
6,559
922
5,434
966
10,028
$
8,594
$
1,474
2,155
812
4,441
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.
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, 2019, we had 1,712,924
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 2019, 2018 and 2017, we granted 152,678, 105,617 and 84,476 restricted stock units
under this plan, respectively. For the 2019, 2018 and 2017 grants, vesting is tied to threshold, target and maximum performance goals for the
three year periods ending December 31, 2021, 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. 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 2019 and 2018, we granted 72,696 and 85,500, respectively, time-based restricted stock units under the 2016 Employee Incentive Plan
to certain employees. The 2019 grant will vest on the date three years following the grant date provided the participant remains employed with
us. The 2018 grant generally vested 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. Shares will vest early upon an employee reaching 65 years of age with 10 years of service 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.
During 2018 and 2017, we issued 36,270 and 39,826, 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.
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 2019, 2018 and 2017, we issued
32,000, 28,600 and 33,000 shares of common stock, respectively, all of which are restricted stock, and which vest on 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, 2019,
we had 22,900 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, 2019, we had 711,001 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.
F-42
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In January 2017, American Equity Life's agents were granted 363,624 restricted stock units based on their production during 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 2020, agents vested in 58,617 restricted stock units granted in January 2017 based on their
continued service as an independent agent and their 2019 individual sales of our products, and for which we recorded commission expense
(capitalized as deferred policy acquisition costs) of $1.4 million in 2019.
In January 2016, American Equity Life's agents were granted 650,683 restricted stock units based on their production during 2015. 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. In January 2020, agents vested in 89,382 restricted stock units granted in January 2016 based on their
continued service as an independent agent and their 2019 individual sales of our products, and for which we recorded commission expense
(capitalized as deferred policy acquisition costs) of $2.2 million in 2019.
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 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. In January 2020, agents vested in 2,943 restricted stock units
granted in January 2015 based on their continued service as an independent agent and their 2019 individual sales of our products, and for which
we recorded commission expense (capitalized as deferred policy acquisition costs) of $0.1 million in 2019. 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 2000 Director Stock Option Plan, 2009 Employee Incentive Plan and 2011 Director Stock Option Plan authorized grants of options to
officers, directors and employees for an aggregate of up to 2,975,000 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, 2019, 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 recognized commission expense and an increase to additional
paid-in capital as share-based compensation equal to the fair value of the options as they were earned.
F-43
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Changes in the number of stock options granted to employees and agents outstanding during the years ended December 31, 2019, 2018 and 2017
are as follows:
Outstanding at January 1, 2017
Granted
Canceled
Exercised
Outstanding at December 31, 2017
Granted
Canceled
Exercised
Outstanding at December 31, 2018
Granted
Canceled
Exercised
Outstanding at December 31, 2019
Number of
Shares
Weighted-Average
Exercise Price
per Share
Total
Exercise
Price
(Dollars in thousands, except per share data)
2,918,946
$
16.06
$
—
(57,200)
(881,481)
1,980,265
—
(40,850)
(717,550)
1,221,865
—
(22,600)
(370,352)
828,913
—
13.66
15.90
16.20
—
18.87
13.99
17.41
—
18.14
11.76
19.91
$
46,885
—
(781)
(14,020)
32,084
—
(771)
(10,040)
21,273
—
(410)
(4,357)
16,506
The following table summarizes information about stock options outstanding at December 31, 2019:
Range of Exercise Prices
$9.27 - $11.35
$12.04 - $24.79
$9.27 - $24.79
Stock Options Outstanding and Vested
Number of
Awards
Remaining
Life (yrs)
147,500
681,413
828,913
Weighted-Average
Exercise Price
Per Share
$
1.19
0.94
0.98
9.74
22.12
19.91
The aggregate intrinsic value for stock options outstanding and vested awards was $8.3 million at December 31, 2019. For the years ended
December 31, 2019, 2018 and 2017, the total intrinsic value of options exercised by officers, directors and employees was $3.4 million,
$3.0 million and $1.5 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, 2019, 2018 and 2017 was $4.4 million, $10.0 million and $14.0 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 December 31, 2019 and 2018, these individuals have earned, and we have reserved
for future issuance, 335,875 and 364,000 shares of common stock, respectively, pursuant to these arrangements. No equity-based deferred
compensation arrangements were in effect during 2019, 2018 or 2017.
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 $1.3 million and $1.5 million at December 31, 2019 and 2018, respectively. The Officer Rabbi Trust held 30,532
shares and 32,597 shares of our common stock at December 31, 2019 and 2018, 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
$
143,309
$
210,049
$
375,900
F-44
Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Statutory capital and surplus for our primary life insurance subsidiary was as follows:
American Equity Life
December 31,
2019
2018
(Dollars in thousands)
$
3,490,196
$
3,251,881
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, 2019, American
Equity Life's use of prescribed statutory accounting practices resulted in lower statutory capital and surplus of $411.7 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, 2018,
American Equity Life's use of the same prescribed statutory accounting practice resulted in higher statutory capital and surplus of $232.4 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,
2019
2018
(Dollars in thousands)
$
3,824,457
$
3,542,339
1,028,662
372%
983,169
360%
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 $349.0 million as of December 31, 2019.
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, 2019,
2018 and 2017 totaled $3.3 million, $3.2 million and $2.9 million, respectively. At December 31, 2019, the aggregate future minimum lease
payments are $13.7 million. The following represents payments due by period for operating lease obligations as of December 31, 2019 (dollars
in thousands):
Year Ending December 31:
2020
2021
2022
2023
2024
2025 and thereafter
$
2,427
2,354
2,085
1,866
1,832
3,108
We are occasionally involved in litigation, both as a defendant and as a plaintiff. In addition, state and federal regulatory bodies, such as state
insurance departments, the SEC and the DOL, regularly make inquiries and conduct examinations or investigations concerning our compliance
with, among other things, insurance laws, securities laws and the Employee Retirement Income Security Act of 1974, as amended.
F-45
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2019 to limited partnerships of $43.7
million and to fixed maturity securities of $82.0 million.
14. Earnings Per Share and Stockholders' Equity
Earnings Per Share
The following table sets forth the computation of earnings per common share and earnings per common share - assuming dilution:
Year Ended December 31,
2019
2018
2017
(Dollars in thousands, except per share data)
Numerator:
Net income - numerator for earnings per common share
$
246,090
$
458,016
$
174,645
Denominator:
Weighted average common shares outstanding
Effect of dilutive securities:
Stock options and deferred compensation agreements
Restricted stock and restricted stock units
91,139,453
90,347,915
88,982,442
304,196
338,593
709,433
365,237
945,612
382,954
Denominator for earnings per common share - assuming dilution
91,782,242
91,422,585
90,311,008
Earnings per common share
Earnings per common share - assuming dilution
$
$
2.70
2.68
$
$
5.07
5.01
$
$
1.96
1.93
There were no options to purchase shares of our common stock outstanding excluded from the computation of diluted earnings per share during
the years ended December 31, 2019, 2018 and 2017, as the exercise price of all options outstanding was less than the average market price of
our common shares for those periods.
Stockholders' Equity
On November 21, 2019 we issued 16,000 shares of 5.95% Fixed-Rate Reset Non-Cumulative Preferred Stock, Series A (the "preferred stock")
with a $1.00 par value per share and a liquidation preference of $25,000 per share, for aggregate net proceeds of $388.9 million. We used a
portion of the proceeds to redeem certain subordinated debentures. See Note 10 for more information on the redemption of our subordinated
debentures.
Dividends on the preferred stock are payable on a non-cumulative basis only when, as and if declared, quarterly in arrears on the first day of
March, June, September and December of each year, commencing March 1, 2020. We did not declare or pay any dividends on the preferred
stock during 2019. The preferred stock ranks senior to our common stock with respect to dividends, to the extent declared, and in liquidation,
to the extent of the liquidation preference. The preferred stock is not subject to any mandatory redemption, sinking fund, retirement fund,
purchase fund or similar provisions.
F-46
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Quarterly Financial Information (Unaudited)
Unaudited quarterly results of operations are summarized below.
2019
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
Loss on extinguishment of debt
Total revenues
Net income (loss)
Earnings (loss) per common share
Earnings (loss) 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
Quarter Ended
March 31,
June 30,
September 30,
December 31,
(Dollars in thousands, except per share data)
$
58,376
$
64,826
$
68,799
$
558,438
384,469
(563)
—
—
1,000,720
(30,010)
(0.33)
(0.33)
570,568
76,045
(3,832)
(1,213)
—
706,394
18,590
0.20
0.20
590,412
(20,042)
4,328
(101)
—
643,396
37,360
0.41
0.41
$
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
71,568
588,217
466,434
7,029
(17,412)
(2,001)
1,113,835
220,150
2.41
2.40
64,824
554,355
(1,054,281)
3,097
(18,980)
(450,985)
53,823
0.59
0.59
Earnings (loss) 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 (loss) 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:
2019
2018
Quarter Ended
March 31,
June 30,
September 30,
December 31,
(Dollars in thousands)
$
118,491
$
78,397
$
196,396
$
(100,305)
(61,794)
(23,593)
427
28,298
F-47
Schedule I—Summary of Investments—
Other Than Investments in Related Parties
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
December 31, 2019
Column A
Column B
Column C
Column D
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
$
161,492
$
161,765
$
601,672
4,147,343
186,993
625,020
4,527,671
205,096
161,765
625,020
4,527,671
205,096
29,822,172
32,536,839
32,536,839
1,477,738
5,591,167
6,250,369
48,238,946
3,448,793
412,163
492,301
1,575,664
5,786,279
6,162,156
1,575,664
5,786,279
6,162,156
51,580,490
51,580,490
3,536,446
1,355,989
3,448,793
1,355,989
492,301
$
52,592,203
$
56,877,573
(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.
F-48
Schedule II—Condensed Financial Information of Registrant
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
Condensed Balance Sheets
(Dollars in thousands)
Assets
Cash and cash equivalents
Equity securities of subsidiary trusts
Receivable from subsidiaries
Deferred income taxes
Other assets
Investment in and advances to subsidiaries
Total assets
Liabilities and Stockholders' Equity
Liabilities:
Notes payable
Subordinated debentures payable to subsidiary trusts
Federal income tax payable
Other liabilities
Total liabilities
Stockholders' equity:
Preferred stock
Common stock
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
December 31,
2019
2018
$
332,526
$
68,876
4,785
1,210
5,818
3,067
7,437
1,170
7,905
2,751
347,406
4,891,431
88,139
3,066,039
$
5,238,837
$
3,154,178
$
495,116
$
157,265
9,274
7,063
668,718
16
91,107
1,212,311
1,497,921
1,768,764
4,570,119
494,591
242,982
8,892
8,612
755,077
—
90,369
811,186
(52,432)
1,549,978
2,399,101
$
5,238,837
$
3,154,178
See accompanying note to condensed financial statements.
See accompanying Report of Independent Registered Public Accounting Firm.
F-49
Schedule II—Condensed Financial Information of Registrant (Continued)
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
Condensed Statements of Operations
(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,
2019
2018
2017
$
1,755
$
469
—
107,945
4,080
(1,650)
(2,001)
$
773
461
10,393
92,335
4,080
1,051
—
110,598
109,093
25,525
15,764
28,357
69,646
40,952
11,586
29,366
25,498
15,491
18,579
59,568
49,525
2,603
46,922
216,724
411,094
$
246,090
$
458,016
$
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
165,572
174,645
See accompanying note to condensed financial statements.
See accompanying Report of Independent Registered Public Accounting Firm.
F-50
Schedule II—Condensed Financial Information of Registrant (Continued)
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
Condensed Statements of Cash Flows
(Dollars in thousands)
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
Repayment of equity securities
Contribution to subsidiary
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
Repayment of subordinated debentures
Proceeds from issuance of common stock, net
Proceeds from issuance of preferred stock, net
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
Year Ended December 31,
2019
2018
2017
$
246,090
$
458,016
$
174,645
1,136
(8)
(216,724)
945
2,001
270
2,923
2,087
(40)
382
(1,229)
(1,846)
35,987
916
(8)
(411,094)
(1,325)
—
254
1,626
40
(1,004)
9,951
(229)
4,860
62,003
$
2,660
$
— $
(50,000)
(117)
(47,457)
—
(29)
(29)
$
— $
— $
—
—
—
(88,160)
1,691
388,893
(27,304)
275,120
263,650
68,876
332,526
$
—
—
—
—
9,681
—
(25,265)
(15,584)
46,390
22,486
68,876
$
$
$
1,610
(7)
(165,572)
(657)
18,817
236
951
1,583
16
(4,673)
158
(12,427)
14,680
—
—
(45)
(45)
(5,817)
(413,252)
(100,000)
499,650
—
14,028
—
(23,152)
(28,543)
(13,908)
36,394
22,486
25,000
$
25,000
$
16,891
13,593
40,537
14,573
See accompanying note to condensed financial statements.
See accompanying Report of Independent Registered Public Accounting Firm.
F-51
Schedule II—Condensed Financial Information of Registrant (Continued)
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
Note to Condensed Financial Statements
December 31, 2019
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.
F-52
Schedule III—Supplementary Insurance Information
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
Column A
As of December 31, 2019:
Life insurance
As of December 31, 2018:
Life insurance
As of December 31, 2017:
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)
$
$
$
2,923,454
3,535,838
2,714,523
$
$
$
61,893,945
57,606,009
56,142,673
$
$
$
— $
256,105
— $
270,858
— $
282,884
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, 2019:
Life insurance
For the year ended December 31, 2018:
Life insurance
For the year ended December 31, 2017:
Life insurance
$
$
$
263,569
250,968
234,722
$
$
$
2,307,635
2,147,812
1,991,997
$
$
$
2,865,621
483,075
3,163,234
$
$
$
87,717
327,991
255,964
$
$
$
195,442
170,290
156,183
See accompanying Report of Independent Registered Public Accounting Firm.
F-53
Schedule IV—Reinsurance
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)
Year ended December 31, 2019
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, 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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
56,451
247,827
23,395
271,222
64,544
231,562
26,319
257,881
1,942,129
206,952
33,938
$
$
$
$
$
$
$
$
6,722
7,792
145
7,937
7,832
7,074
189
7,263
9,378
6,458
215
240,890
$
6,673
$
52,653
$
102,382
51.43%
— $
240,035
—
1.21%
0.11%
—
1.32%
0.14%
110,370
48.62%
— $
224,488
23,534
263,569
26,480
250,968
284
284
53,658
$
$
350
350
57,965
$
$
1,990,716
2.91%
— $
200,494
505
505
$
34,228
234,722
—
1.48%
0.22%
See accompanying Report of Independent Registered Public Accounting Firm.
F-54
Schedule V—Valuation and Qualifying Accounts
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
Year ended December 31, 2019
Valuation allowance on mortgage loans
Year ended December 31, 2018
Valuation allowance on mortgage loans
Year ended December 31, 2017
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)
(8,239) $
(940) $
— $
— $
(9,179)
(7,518) $
(3,165) $
— $
2,444
$
(8,239)
(8,427) $
278
$
— $
631
$
(7,518)
See accompanying Report of Independent Registered Public Accounting Firm.
F-55
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 Properties, L.C.
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.
Exhibit 21.2
State of
Incorporation
Iowa
New York
Iowa
Iowa
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Iowa
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
American Equity Investment Life Holding Company:
We consent to the incorporation by reference in the registration statements (No. 333-233544, 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 25, 2020, with respect to the consolidated balance sheets of American Equity Investment Life Holding
Company and subsidiaries as of December 31, 2019 and 2018, 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, 2019, and the related notes
and financial statement schedules I to V, and the effectiveness of internal control over financial reporting as of December 31, 2019, which report
appears in the December 31, 2019 annual report on Form 10 K of American Equity Investment Life Holding Company.
/s/ KPMG LLP
Des Moines, Iowa
February 25, 2020
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
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 25, 2020
By:
/s/ JOHN M. MATOVINA
John M. Matovina, Chief Executive Officer
(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
Exhibit 31.2
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 25, 2020
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 32.1
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, 2019 as filed with the Securities and Exchange Commission on or about the date hereof (the "Report"), I, John M.
Matovina, Chief Executive Officer 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 25, 2020
By:
/s/ JOHN M. MATOVINA
John M. Matovina, Chief Executive Officer
(Principal Executive 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, 2019 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 25, 2020
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.)
(This page has been left blank intentionally.)
LETTER FROM THE CHAIRMAN1 For a reconciliation of net income to non-GAAP operating income, please see page 4. Net income return on average equity was 9.6%.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. Some key highlights include:• 4% increase in policyholder funds under management.• Record non-GAAP operating income1 of $548 million or $5.97 per diluted share.• Non-GAAP operating return on equity1 of 21.4%.• Investment impairment losses of 0.4% of average equity after the effects of deferred acquisition costs and income taxes.• Issued $400 million of perpetual preferred stock.• Paid annual cash dividend of $0.30 per share.The increase in policyholder funds under management was fueled by a 17% increase in net sales. We had strong sales momentum heading into the year following the 2018 introduction of two products for distribution by American Equity Life’s independent agents. However, as investment yields declined over the course of the year, we reduced rates and product terms and ended the year in a less competitive position. We plan to launch new products in 2020 and also expect Eagle Life to begin receiving sales from a very large independent broker-dealer.Non-GAAP operating income1 included a significant benefit from unlocking of actuarial assumptions. However, year over year results excluding the impact of unlocking were up more than 20% with the increase largely attributable to an increase in our investment spread. Investment spread benefited from active rate management and declining option costs and trendable spread JOHN M. MATOVINAChairman of the Boardincreased each quarter of 2019 with fourth quarter 2019 trendable spread 15 basis points higher than the fourth quarter 2018.The perpetual preferred stock issuance improved our balance sheet strength. We redeemed $165 million of subordinated debentures with a portion of the net proceeds and have almost $225 million available for general corporate purposes. Since American Equity’s beginning, excellent customer service has been our difference maker. We were very pleased to rank 4th for customer satisfaction in the J.D. Power 2019 U.S. Life Insurance Study. American Equity Life’s customer satisfaction index score outpaced the annuity industry average as well as all other leading fixed index annuity carriers. This is the first year the annuity provider category was included in J.D. Power’s “Overall Customer Satisfaction Index Ranking” for the U.S. Life Insurance Study. On March 1, 2020, my tenure as Chief Executive Officer came to a close. It has been an honor to serve as American Equity’s CEO and the hiring of Anant Bhalla as my successor places our company in good hands for the future. We are a stronger and better company today than a year ago and expect to enjoy continuing success under Anant’s leadership in the years ahead.On behalf of the board of directors, our management team, and our 600 employees, thank you for your ownership in American Equity.Shareholder InformationTo 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, CFAVICE PRESIDENT – INVESTOR RELATIONS6000 Westown ParkwayWest Des Moines, IA 50266(515) 273-3763 • Fax (515) 221-0744Email: sschwartz@american-equity.comSTOCK LISTINGAmerican Equity is listed on the New York Stock Exchange under the Ticker symbol AEL.WEBSITEAmerican 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 MEETINGJune 4, 2020, 1:30 p.m.AEL HeadquartersCORPORATE HEADQUARTERSAmerican Equity InvestmentLife Holding Company®6000 Westown ParkwayWest Des Moines, IA 50266(515) 221-0002 • www.american-equity.com STOCK TRANSFER AND REGISTRARComputershare Trust Company, N.A.P.O. Box 43078Providence, RI 02940-3078(877) 282-1169 • www.computershare.com INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMKPMG LLP2500 Ruan CenterDes Moines, IA 50309American Equity Investment Life Holding Company® Board of DirectorsJOHN M. MATOVINAChairman of the BoardAmerican Equity Investment Life Holding Co.ANANT BHALLAChief Executive Officer & PresidentAmerican Equity Investment Life Holding Co.JOYCE A. CHAPMANRetired ExecutiveWest BankBRENDA J. CUSHINGRetired ExecutiveAthene HoldingJAMES M. GERLACHRetired ExecutiveAmerican Equity Investment Life Holding Co.ROBERT L. HOWERetired Deputy Commissioner andChief Examiner, State of IowaWILLIAM R. KUNKELGeneral CounselArchdiocese of ChicagoALAN D. MATULAChief Information OfficerWeber-Stephen Products LLCDAVID S. MULCAHYChairman of the BoardMonarch Materials Group, Inc.GERARD D. NEUGENTCo-Chairman of the BoardKnapp Properties, L.C.DEBRA J. RICHARDSONRetired ExecutiveAmerican Equity Investment Life Holding Co.A.J. STRICKLAND, IIIProfessorUniversity of Alabama School of Business23063_Cover.indd 23063_Cover.indd 24/3/20 1:08 PM4/3/20 1:08 PM 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.
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