Annual Report
2022
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, 2022
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
Trading Symbol(s)
AEL
Name of each exchange on which registered
New York Stock Exchange
Depositary Shares, each representing a 1/1,000th
interest in a share of 5.95% Fixed-Rate Reset Non-
Cumulative Preferred Stock, Series A
Depositary Shares, each representing a 1/1,000th
interest in a share of 6.625% Fixed-Rate Reset Non-
Cumulative Preferred Stock, Series B
AELPRA
New York Stock Exchange
AELPRB
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 x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x
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 x No o
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 x No o
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. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report. x
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant
included in the filing reflect the correction of an error to previously issued financial statements. o
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based
compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes ☐ No x
Aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $3,270,357,970 based on the
closing price of $36.57 per share, the closing price of the common stock on the New York Stock Exchange on June 30, 2022.
Shares of common stock outstanding as of February 22, 2023: 84,780,391
Documents incorporated by reference: Portions of the registrant's subsequent disclosure to be filed within 120 days after December 31, 2022,
are incorporated by reference into Part III of this report.
PART I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
PART III.
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2022
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
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Consolidated Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
The information required by Items 10 through 14 is incorporated by reference from our subsequent
disclosure to be filed with the Commission within 120 days after December 31, 2022.
PART IV.
Item 15.
Item 16.
SIGNATURES
Exhibits and Financial Statement Schedules
Form 10-K Summary
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
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17
17
17
18
20
50
51
51
51
52
52
52
52
55
56
F-1
Table of Contents
Item 1. Business
Introduction
PART I
We are a leader in the development and sale of fixed index and fixed rate annuity products. We were incorporated in the state of Iowa on
December 15, 1995. We issue fixed annuity products through our wholly-owned life insurance subsidiaries, American Equity Investment
Life Insurance Company ("American Equity Life"), American Equity Investment Life Insurance Company of New York ("American Equity
Life 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. 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 and risk
committee charter; (iii) compensation and talent management 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 individuals, typically ages 40 or older, 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 54 million Americans age 65 and older in 2019, representing
approximately 16.5% of the U.S. population, up from 14% in 2015. This group is expected to continue to grow and is expected to be over
20% of the total U.S. population during the next decade. We expect our fixed index and fixed rate annuity products to be 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. We expect our competitive fixed index and fixed rate annuity products to enable us to enjoy favorable growth
in client assets.
According to Secure Retirement Institute, with preliminary data for 4Q2022, total U.S. annuity sales in 2022 were $310.6 billion, up 21.9%
compared to $254.8 billion in 2021. Fixed annuity sales totaled $208.0 billion in 2022, up 61% compared to $129.2 billion in 2021. This
market is directly comparable to the target market for our products. Fixed index annuity sales totaled $79.4 billion in 2022, up 24.6%
compared to $63.7 billion in 2021. Fixed rate deferred annuity sales were $112.1 billion in 2022, up 109.9% compared to $53.4 billion in
2021. Outside of fixed annuities, the other growing part of the U.S. annuity market was the registered index-linked annuity market. Sales in
this market were $40.9 billion in 2022, up 4.6% compared to $39.1 billion in 2021.
Strategy
While the business looks considerably different today than it did when it was started back in 1995, the themes have been consistent. We offer
our customers simple fixed and fixed index annuity products, which we primarily sell through independent insurance agents in the
independent marketing organization (“IMO”) distribution channel. We have consistently been a leader in the IMO market. We will benefit
from two secular trends: the demographic trends of people retiring or getting close to retirement who want to accumulate wealth through
index based investing while protecting their principal and the need of retirees and pre-retirees to have a way to deaccumulate their wealth into
income for life. A traditional brokerage based equity bond portfolio can’t really meet these unique needs, but a fixed index annuity can as
part of holistic financial plan. Finally, there is a scarcity value to what we do: that is originating billions of dollars of annuity funding each
year at scale from the IMO channel, which is generally longer term funding than that achieved through sales in the bank and broker dealer
channel.
We will continue to implement an updated strategy, referred to as AEL 2.0, after having undertaken a thorough review of our business in
2020. AEL 2.0 is designed to capitalize on the scarcity value of our annuity origination and couple it with an “open architecture” investment
management platform for investing the annuity assets. Our approach to investment management is to partner with best in class investment
management firms across a wide array of asset classes and capture part of the asset management value chain economics for our shareholders.
This will enable us to operate at the intersection of both asset management and insurance. Our updated strategy focuses on four key pillars:
Go-to-Market, Investment Management, Capital Structure and Foundational Capabilities.
The Go-to-Market pillar focuses on how we generate long-term client assets, referred to as policyholder funds under management, through
annuity product sales. We consider our marketing capabilities and franchise to be one of our core competitive strengths. The liabilities we
originate can result in stable, long-term attractive funding, which is invested to earn a spread and return over the prudent level of risk capital.
American Equity Life has become one of the leading insurance companies in the IMO distribution channel over our 25-year history and can
tap into a core set of loyal independent producers to originate new annuity product sales. We are focused on growing our loyal producers
with one million dollars or greater of annuity product sales each year and to otherwise build our partnerships with key IMOs. We plan to
increase our share of annuity product sales generated by IMOs and accelerate our expansion into bank, broker dealer and registered
investment advisor distribution through our subsidiary, Eagle Life. Our strategy is to improve sales execution and enhance producer loyalty
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with product solutions, focused marketing campaigns, distribution analytics to enhance both sales productivity and producer engagement and
new client engagement models that complement traditional physical face-to-face interactions. We plan to increase our reinsurable sales,
continue to enhance our flexibility to adjust to market changes quickly, expand our product suite, and grow our ability to sell registered
products. We also see potential long-term opportunities in international markets.
The Investment Management pillar is focused on generating a strong return on assets which, in turn, will generate adequate spread income to
support our liabilities, operations, and profitability. Our investment strategy is to supplement our core fixed income investment portfolio with
opportunistic investments in alpha-producing specialty sub-sectors like middle market credit and sectors with contractually strong cash flows
like real estate and infrastructure, including private equity assets. We execute on this strategy by forming partnerships with certain asset
managers that will provide access to specific asset sectors, resulting in a sustainable supply of quality private investments, in addition to
traditional fixed income securities. The partnerships with asset managers may include us taking an equity interest in the asset manager to
create greater alignment or forming an alternate economic sharing arrangement so we benefit as our partners scale their platforms with third
party assets under management, as we have begun to do.
The Capital Structure pillar is focused on greater use of reinsurance structuring to both optimize asset allocation for our balance sheet and
enable American Equity Life to free up capital and become a capital-light company over time. The use of reinsurance will enable us to
achieve three business outcomes over time: first, free up capital to potentially return to shareholders, second, redeploy capital into higher
yielding alpha generating assets to grow investment income relative to new money yields in a traditional core fixed income portfolio and
third, successfully demonstrating the first two outcomes will allow us to raise third-party capital into reinsurance vehicles ("side-cars") to
provide risk capital to back a portion of our existing liabilities and future sales of annuity products. This will enable us to convert from an
investment spread business with our own capital at risk into a combination spread based and fee based business with externally sourced risk
capital. In combination, these three outcomes are likely to generate sustained, deployable capital for shareholders and significant accretion in
return on equity (“ROE”) over time. We also see potential long-term opportunities in reinsurance support to other insurers and outside the
U.S..
The Foundational Capabilities pillar is focused on upgrading our operating platform to enhance the digital customer experience, create
differentiation through data analytics to support the first three pillars, enhance core technology and align talent. 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 believe high quality service is one of our
strongest competitive advantages and the foundational capabilities pillar will look to continue to enhance our high quality service.
The combination of differentiated investment strategies and increased capital efficiency improves annuity product competitiveness, thereby
enhancing new business growth potential and further strengthening the operating platform. This completes the virtuous cycle of the AEL 2.0
business model, having started with a strong, at scale annuity originator, that is even further strengthened by the power of the investments and
capital structure pillars.
During 2022, we continued to advance our AEL 2.0 strategy as we executed against the four key pillars. Key areas of advancement included
the following:
• In our Investment Management pillar, we originated $5 billion of privately sourced assets at an expected return greater than 6% and
expanded our primary focus from residential real estate in 2021 to a more diversified portfolio in 2022 covering a variety of sectors,
including infrastructure, middle market credit and commercial real estate equity. Across sectors, we will continue to be disciplined and
deliberate, focusing on underlying assets with resilient cash flows where the majority of the return is largely delivered by underlying
operating performance and where there is an advantage for an insurance balance sheet to own the assets. In addition, with fixed income
spreads widening throughout most of the year, we seized this additional optionality to increase exposure in core fixed income while
being more selective in our private asset strategy.
• In our Go-To-Market pillar, we substantially revamped our pricing procedures, affording us optionality to re-price product quickly as
markets change. Historically, we have repriced new products once or twice per year. Due to the changes we have made to improve these
processes, we successfully delivered in excess of 50 product and rate changes during 2022. Our pricing has become more nimble,
targeted and responsive to market changes which is important to generate growing sales while maintaining attractive double-digit
internal rates of return (IRRs) on total sales volumes. We also refreshed our distribution incentive and loyalty programs and continue to
assess ways to further differentiate our service offerings to producers, building on our number one ranking for customer satisfaction for
annuity producers by J.D. Powers and Associates.
• In our Capital Structure pillar, we achieved $9.6 billion of fee generating reinsured balances and generated over $50 million in revenues
in 2022. This included new business ceded during the year of $1.3 billion to Brookfield and $3.8 billion of in-force to AeBe ISA LTD
("AeBe"), which is affiliated with 26North Holdings LP ("26North") effective October 3rd. Additionally, the new reinsurance agreement
with AeBe resulted in a capital release of approximately $260 million to fund the growth in excess capital that supports the continued
migration to privately sourced assets and capital return to shareholders. See Note 8 - Reinsurance and Policy Provisions for more
information.
• In our Foundational Capabilities pillar, we continued to invest in enhancing our foundational capabilities by implementing new
investment accounting and investment management systems. We are also in process of implementing a new general ledger system.
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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,
2022
2021
2020
Deposits
Collected
Deposits
as a % of
Total
Deposits
Collected
Deposits
as a % of
Total
(Dollars in thousands)
Deposits
Collected
Deposits
as a % of
Total
Fixed index annuities
$
3,171,420
95 % $
3,450,547
58 % $
2,337,578
Annual reset fixed rate annuities
Multi-year fixed rate annuities
Single premium immediate annuities
5,709
139,092
18,935
— %
4 %
1 %
6,483
2,452,994
59,816
— %
41 %
1 %
8,225
1,303,133
33,461
$
3,335,156
100 % $
5,969,840
100 % $
3,682,397
64 %
— %
35 %
1 %
100 %
Fixed Index Annuities
Fixed index annuities allow policyholders to earn index credits based on the performance of a particular index without the risk of loss of their
account value. Most of these products allow policyholders to transfer funds once a year among several different crediting strategies,
including one or more index based strategies and a traditional fixed rate strategy. Bonus products represented 63%, 65% and 75% of our net
annuity account values at December 31, 2022, 2021 and 2020, 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.
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 14% and participation rates range from 10% to 180%. In addition, some products have a spread
or "asset fee" generally ranging from 1% to 5.25%, 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, multi-year rate guaranteed products ("MYGAs") and single premium deferred annuities
("SPDAs") . 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 and SPDAs are similar to our annual reset products except that the initial crediting rate on MYGAs is
guaranteed for up to seven years before it may be changed at our discretion while the initial crediting rate on SPDAs is guaranteed for either
three or five years. The minimum guaranteed rate on our annual reset fixed rate deferred annuities ranges from 1.00% to 4.00%, the initial
guaranteed rate on our multi-year rate guaranteed deferred annuities and SPDAs range from 1.40% to 5.25%.
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, experience factors and crediting rate history for particular groups of annuity policies with similar characteristics. As of
December 31, 2022, crediting rates on our outstanding fixed rate deferred annuities generally ranged from 1.0% to 5.25%. The average
crediting rates on our outstanding annual reset and multi-year rate guaranteed fixed rate deferred annuities at December 31, 2022 were 1.61%
and 2.38%, 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.
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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 3 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 9 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)
2022
December 31,
2021
(Dollars in thousands)
2020
11.6
4.6
7.9 %
11.8
5.5
9.1 %
12.4
6.1
9.9 %
$
47,504,615
$
53,191,277
$
54,056,725
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 9.25% 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 1.60% of either the policy's account value or the policy's income 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 the riders 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 - Investments to our audited consolidated financial statements.
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Marketing/Distribution
We market our products through a variable cost distribution network, including independent agents through IMOs, 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. A value
proposition that we emphasize with agents is they have direct access to our senior leadership, giving us an edge 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
IMOs, 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 IMOs 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. We
monitor agent activity and will terminate those who have not produced business for us in recent periods and are unlikely to sell our products
in the future. The IMOs 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. American Equity
Life has relationships with 50 national marketing organizations, through which nearly 28,638 independent agents are under contract. We
generally do not enter into exclusive arrangements with these marketing organizations.
Agents contracted with us through four national marketing organizations accounted for approximately 58% of the annuity deposits and
insurance premiums collected during 2022, 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 2022 were: Florida (8.5%), Texas (8.2%),
California (4.9%), Illinois (4.9%), and Pennsylvania (4.9%).
Eagle Life's fixed index and fixed rate annuities are distributed pursuant to selling agreements with broker/dealers, banks and registered
investment advisors. Eagle Life has 102 broker-dealer/firm selling agreements, through which nearly 12,050 representatives are appointed.
Twenty-six of these agreements are with broker/dealers affiliated with banks. 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 they have contracted with Eagle Life. We
have been 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 no longer market Eagle Life products to new accounts as new account acquisition is 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.
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 2020 - current
March 2020 - August 2020
August 2015 - March 2020
June 2013 - August 2015
October 2011 - June 2013
Fitch Ratings Ltd.
April 2021 - current
April 2020 - April 2021
August 2019 - April 2020
September 2018 - August 2019
May 2013 - September 2018
A-
A-
A-
A-
BBB+
BBB+
A-
A-
A-
BBB+
BBB+
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Stable
Stable
Negative
Stable
Positive
Stable
Stable
Negative
Stable
Positive
Stable
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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 November 2022, A.M. Best maintained its rating outlook on the U.S. life/annuity sector as ‘stable’, reflecting its view of high levels of
capitalization and favorable earnings, strong liquidity profiles, improved risk management practices including product de-risking and regular
stress testing, and pricing discipline. In December 2022, Fitch maintained its rating outlook on the U.S. life insurance sector as 'stable',
reflecting the anticipated benefit from the material uptick in interest rates over the past year, somewhat offset by continued macroeconomic
volatility and an expected mild recession during 2023. In January 2023, S&P affirmed its rating outlook on the U.S. life insurance sector as
'stable', reflecting its expectation that conflicting forces, such as higher interest rates, lower equity markets, and a potential recession, will
likely balance each other out without a significant positive impact on life insurers' credit quality.
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.
Reinsurance
We follow the industry practice of reinsuring a portion of our annuity risks with third party reinsurers. Our reinsurance agreements play a
part in managing our regulatory capital, risk and returns.
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 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 third agreement ceded 80% of certain 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. Effective January 1, 2021, no new business is being ceded to Athene. The business reinsured under any of the Athene agreements 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.
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.
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Effective July 1, 2021 American Equity Life entered into a reinsurance agreement with North End Re (“North End Re reinsurance treaty”), a
wholly owned subsidiary of Brookfield Reinsurance to reinsure certain in-force fixed indexed annuity product liabilities as of the effective
date of the reinsurance agreement, 70% on a modified coinsurance (“modco”) basis and 30% on a coinsurance basis. The liabilities reinsured
on a coinsurance basis are secured by assets held in trusts with American Equity Life as the beneficiary. The liabilities reinsured on a modco
basis are secured by assets held by American Equity Life in a segregated modco account. American Equity Life will receive an annual ceding
commission equal to 49 basis points and the Company will receive an annual asset liability management fee equal to 30 basis points
calculated based on the initial cash surrender value of liabilities ceded. Such fees are fixed and contractually guaranteed for six years with the
additional and final seventh year payment partially contingent on certain performance obligations for both parties.
As part of the North End Re reinsurance treaty, American Equity Life is also ceding 75% of certain fixed index annuities issued after the
effective date of the agreement, 70% on a modco basis and 30% on a coinsurance basis to North End Re. Effective July 1, 2022, the North
End Re reinsurance treaty was amended to include additional fixed index annuity products. As part of this amendment, 75% of an additional
block of in-force fixed indexed annuity product liabilities issued after July 1, 2021 was ceded, 70% on a modco basis and 30% on a
coinsurance basis. On sales subsequent to the effective date of the North End Re reinsurance treaty, American Equity Life will receive an
annual ceding commission equal to 140 basis points and the Company will receive an annual asset liability management fee equal to 30 basis
points calculated based on the initial cash surrender value of liabilities ceded. Such fees are fixed and contractually guaranteed for six years
with the additional and final seventh year payment being contingent on certain performance obligations for both parties.
Although American Equity Life remains liable to policyholders with respect to the policy liabilities ceded to North End Re, should North End
Re fail to meet the obligations it has reinsured the assets in the trusts and modco account 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. The assets in the trusts and modco account
are subject to investment management agreements between American Equity Life and North End Re.
Effective October 1, 2022 American Equity Life entered into a reinsurance agreement with an unaffiliated reinsurer AeBe ISA LTD
(“AeBe”), a Bermuda exempted company affiliated with 26North Holdings LP (“26North”), that is an incorporated segregated account
licensed as a Class E reinsurer. Under the agreement, American Equity Life ceded $4.3 billion of certain in-force fixed indexed and fixed rate
annuity product liabilities and has the option in the future to cede liabilities of certain single premium fixed deferred annuities, or policies as
otherwise agreed to by parties issued after the treaty effective date, at risk adjusted pricing terms that may be acceptable to American Equity
Life at that time. Under the agreement, these liabilities will be ceded 75% on a funds withheld coinsurance basis and 25% on a coinsurance
basis. The liabilities reinsured on a coinsurance basis are secured by assets held in both a statutory and supplemental trust (collectively
referred to as the “trusts”). The liabilities reinsured on a funds withheld basis are secured by a segregated funds withheld account in which
the assets are maintained by American Equity Life. American Equity Life transferred cash and investments with a fair value of $3.0 billion to
the segregated funds withheld account and $1.0 billion to the statutory trust at close of this reinsurance agreement on October 3, 2022. At the
close of the reinsurance agreement, American Equity Life received a closing ceding commission of $70 million. For flow business ceded,
American Equity Life will receive an annual ceding commission over the term of the policy of up to 0.50% of the premium received.
American Equity Life remains liable to policyholders with respect to the policy liabilities ceded to AeBe should AeBe fail to meet the
obligations it has reinsured. The assets in the trusts and funds withheld account 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. The assets in the trusts and funds withheld account
are subject to investment management agreements between American Equity Life and 26North.
Intercompany Reinsurance Agreements
Effective October 1, 2021, American Equity Life entered into a coinsurance agreement with AEL Re Vermont Inc., a wholly-owned captive
reinsurance company, to cede a portion of lifetime income benefit rider payments in excess of policy fund values on a funds withheld basis
("the AEL Re Vermont Agreement"). In connection with the agreement, AEL Re Vermont entered into an excess of loss reinsurance
agreement (the "XOL treaty") with Hannover, to retrocede the lifetime income benefit rider payments in excess of the policy fund values
ceded under the AEL Re Vermont Agreement upon exhaustion of the funds withheld account balance under the AEL Re Vermont Agreement.
AEL Re Vermont is permitted to carry the XOL treaty as an admitted asset on the AEL Re Vermont statutory balance sheet. The XOL treaty
does not satisfy risk transfer and is treated as a financing agreement. The associated charges are recorded as risk charges that are included in
other operating costs and expenses in the consolidated statements of operations.
Effective December 31, 2021, American Equity Life entered into a coinsurance agreement with AEL Re Bermuda, an affiliated Bermuda
reinsurer wholly owned by American Equity Investment Life Holding Company, to reinsure a quota share of fixed index annuities issued
from January 1, 1997 through December 31, 2007 on a funds withheld basis.
The impact of all intercompany reinsurance agreements and related intercompany balances have been eliminated in the preparation of the
accompanying consolidated financial statements.
For more information regarding reinsurance, see Note 8 - Reinsurance and Policy Provisions to our audited consolidated financial statements.
For risks involving reinsurance see "Item 1A. Risk Factors."
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Regulation
General Scope of Insurance 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:
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grant and revoke licenses to transact business;
regulate and supervise trade practices and market conduct;
establish guaranty associations;
license agents;
approve policy forms;
approve premium rates for some lines of business;
establish reserve requirements;
prescribe the form and content of required financial statements and reports;
determine the reasonableness and adequacy of statutory capital and surplus;
perform financial, market conduct and other examinations;
define acceptable accounting principles for statutory reporting;
regulate the type and amount of permitted investments;
establish requirements for reinsurance credit;
prescribe the terms of agreements between or among affiliates;
approve changes in direct or indirect ownership above certain thresholds;
review corporate governance practices; and
limit the amount of dividends and surplus note payments that can be paid without obtaining regulatory approval.
Our life subsidiaries are subject to periodic examinations by state regulatory authorities. In 2020, the Iowa Insurance Division completed
financial examinations of American Equity Life and Eagle Life for the five-year period ending December 31, 2018. There were no
adjustments to American Equity Life's or Eagle Life's statutory financial statements as a result of these examinations. In 2020, the New York
Department of Financial Services completed its financial examination of American Equity Life of New York for the five-year period ending
December 31, 2018. There were no adjustments to American Equity Life of New York's statutory financial statements as a result of this
examination.
State regulators also review matters related to us and our life subsidiaries in connection with requests for regulatory approval of transactions,
including our successful applications for a variety of reinsurance arrangements and from transactions among us and our affiliates for intra-
enterprise services and allocation of tax costs.
We established captive reinsurers in Vermont and in Bermuda in 2021, which required the approval of regulators in those jurisdictions and
initiated our regulation by those authorities. Iowa regulators also approved the related reinsurance arrangements. Bermuda regulations
address matters such as fitness and adequate knowledge and expertise to engage in insurance, and impose solvency, auditing, reporting, and
governance requirements.
Dividends, Distributions, and Transactions Among Affiliates
The payment of dividends or 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 prior year-end. For 2023, up to $369.3 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 $2.0 billion of statutory earned surplus at December 31, 2022.
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, corporate governance, risk management, 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.
Acquisition and Exercise of Control
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
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does not exist in circumstances in which a person owns or controls more than 10% of the voting securities. In 2021, Brookfield Reinsurance
received Iowa and New York regulatory approval to increase its ownership of our common stock, and chose to increase its ownership to 16%.
Risk-Based Capital Requirements
The National Association of Insurance Commissioners ("NAIC") risk-based capital ("RBC") requirements are intended as an early warning
tool for regulators to identify deteriorating or weakly capitalized insurance companies for the purpose of initiating regulatory action. The
RBC formula defines a minimum capital standard which supplements low, fixed minimum capital and surplus requirements previously
implemented on a state-by-state basis. Such requirements are not designed as a ranking mechanism for adequately capitalized companies.
The NAIC's RBC requirements provide for four levels of regulatory attention depending on the ratio of a company's total adjusted capital to
its RBC. Adjusted capital is defined as the total of statutory capital and surplus, adjusted for certain items including the asset valuation
reserve. Calculations using the NAIC formula at December 31, 2022, indicated that American Equity Life's ratio of total adjusted capital to
the highest level at which regulatory action might be initiated was 415%.
Reserves Adequacy
Our life subsidiaries, and our affiliated captive reinsurers, must annually analyze their statutory reserves adequacy. In each case, a qualified
actuary must submit an opinion that states that the statutory reserves make adequate provision, according to accepted actuarial standards of
practice, for the anticipated cash flows required by the contractual obligations and related expenses of the subsidiary. The actuary considers
the adequacy of the statutory reserves in light of the assets held by the insurer with respect to such reserves and related actuarial items, such as
the investment earnings on such assets and the consideration the insurer anticipates receiving and retaining under the related policies and
contracts. We may increase reserves in order to submit such an opinion without qualification. Our subsidiaries that must provide these
opinions did so in 2022 without qualifications.
Investments Regulation
State laws and regulations limit the amount of investments that our U.S. insurance subsidiaries may have in certain asset categories, such as
below investment grade fixed income securities, real estate equity, other equity investments, and derivatives, and require diversification of
investment portfolios. Investments exceeding regulatory limitations may not qualify as reserve assets and may potentially be excluded from
admitted assets for purposes of measuring surplus. The Iowa Insurance Division has proposed changes to Iowa law on admitted assets to
conform Iowa law more closely to NAIC models in some respects. For example, it would change the amount of some assets an insurer could
include as admitted. If the legislature enacts these changes, we would review and reconfigure our investments in light of the new
requirements and the challenges and opportunities they pose.
Derivatives Regulation
We use derivatives, primarily call options, to provide the income needed to fund the annual index credits on our fixed index annuity products.
We may also use derivatives to hedge interest rate, foreign currency and additional equity market exposure. As such, we and our
counterparties are subject to Dodd-Frank Act regulation of collateral posting, clearing, and reporting of over-the-counter derivatives
transactions.
Financial Strength Ratings
Financial strength ratings issued by Nationally Recognized Statistical Rating Organizations ("NRSRO's") 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. While not enforced by law, ratings are based upon factors of concern to agents,
policyholders and intermediaries and strongly influence an insurer's competitiveness. Factors that could negatively influence financial
strength ratings include:
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Sustained reductions in new sales of insurance products;
Unfavorable operational and/or financial trends;
Significant losses and/or ratings deterioration in our investment portfolio;
Changes in equity market levels, interest rates, and market volatility;
Inability to access capital markets to provide reserve relief;
Changes in statutory accounting or reserve requirements applicable to our insurance subsidiaries;
Inability to sustain senior management or other key personnel;
Rapid or excessive growth; and
Ineffective enterprise risk management.
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Long-Duration Targeted Improvements
The Financial Accounting Standards Board ("FASB") has revised aspects of the measurement models and disclosure requirements for long
duration insurance and investment 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 and 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 revised guidance is effective for us on January 1, 2023, the transition date (the remeasurement
date) is January 1, 2021. Early adoption is permitted. See Note 1 - Significant Accounting Policies for further discussion on the impact of this
guidance.
Privacy and Cybersecurity
Various U.S. federal and state government agencies protect the privacy and security of personal information. These laws and rules vary
significantly from jurisdiction to jurisdiction. Insurance and other regulators are also increasingly focused on cybersecurity. The NAIC’s
Insurance Data Security Model Law (the “Cybersecurity Model Law”) established standards for data security and for the investigation of and
notification to insurance commissioners of cybersecurity events involving unauthorized access to, or the misuse of, certain nonpublic
information. The Cybersecurity Model Law imposes regulatory requirements intended to protect the confidentiality, integrity, and availability
of information systems. Recent regulations with a significant impact on our operations include the New York Department of Financial
Services cybersecurity requirements for financial services companies and the California Consumer Privacy Act. The California Consumer
Privacy Act contains protections for individuals, such as notification requirements for data breaches, the right to access personal data and the
right to be forgotten. The SEC has proposed new cybersecurity disclosure rules for public companies. Under the proposed rule, registrants
would have to disclose information about material cybersecurity incidents on a Current Report on Form 8-K within four days of concluding
that the incident is material, and update that disclosure as its analysis and response to the incident progresses. Registrants would also have to
disclose aspects of cybersecurity risk management annually, including governance processes and Board and management responsibilities, and
director cybersecurity expertise.
ERISA
We provide products and services to certain employee benefit plans that are subject to the Employee Retirement Income Security Act
("ERISA") and the Internal Revenue Code of 1986, as amended (the “Code”). ERISA and the Code impose restrictions, including fiduciary
duties to perform solely in the interests of ERISA plan participants and beneficiaries, and to avoid certain prohibited transactions. The
applicable provisions of ERISA and the Code are subject to enforcement by the U.S. Department of Labor (“DOL”), the Internal Revenue
Service (“IRS”) and the Pension Benefit Guaranty Corporation.
The prohibited transaction rules of ERISA and the Code generally restrict the provision of investment advice to ERISA plans and participants
and IRAs if the investment recommendation results in fees paid to an individual advisor, the firm that employs the advisor or their affiliates
that vary according to the investment recommendation chosen, unless an exemption or exception is available. Similarly, without an
exemption or exception, fiduciary advisors are prohibited from receiving compensation from third parties in connection with their advice.
ERISA also affects certain of our in-force insurance policies and annuity contracts, as well as insurance policies and annuity contracts we may
sell in the future.
Heightened standards of conduct as a result of a fiduciary or best interest standard or other similar rules or regulations could increase the
compliance and regulatory burdens on our sales representatives. On February 16, 2021, the DOL's new fiduciary regulation and interpretative
guidance regarding the provision of investment advice in retirement accounts became effective. The DOL's final guidance confirms the
restatement of the definition of "investment advice" that previously applied but broadens the circumstances under which sales representatives
could be considered fiduciaries under ERISA in connection with recommendations to "rollover" assets from a qualified retirement plan to an
individual retirement account. This guidance reverses an earlier DOL interpretation suggesting that "rollover" advice did not constitute
investment advice giving rise to a fiduciary relationship. We have adapted our business practices accordingly, and continue to adapt them as
regulatory requirements evolve.
Broker-Dealer and Securities Product Regulation
One of our subsidiaries is registered with the SEC as a broker-dealer under the Exchange Act and a member of, and subject to regulation by,
FINRA. In addition, we may offer products regulated as securities. In each case, we will be subject to scrutiny from federal and state
securities regulatory authorities and FINRA. Any of these may, from time to time, make inquiries and conduct examinations regarding
compliance with securities and other laws and regulations.
Pandemic and Public Health Related Conditions and Regulation
The outbreak of COVID-19 and related conditions has created significant economic and financial turmoil both in the U.S. and around the
world. Government, regulatory, business, and social reactions to COVID-19 also have significant effects on our business and the conditions
in which we operate. For example, governments have imposed vaccination requirements, lock-downs, travel limitations, school closures, and
other requirements. All of these conditions have disrupted distribution channels through which we sell our products, including independent
agents and their clients. They have, and may continue to, depress economic activity that affects demands for our products. They may also
materially affect our investment portfolio.
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Guaranty Laws
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.
Environmental Laws and Regulations
We are subject to environmental laws and regulations as an owner and operator of real property, which can include liabilities and costs in
connection with any required remediation of such properties. In addition, we hold equity interests in companies that could potentially be
subject to environmental liabilities. We assess real estate we acquire for environmental exposure, but unexpected environmental liabilities
may arise.
Side Car Related Regulation
As we continue to develop and implement third-party capital reinsurance, such as “side cars,” we expect to manage additional related
regulatory requirements in areas such as employment and labor, governance, reinsurance, securities, investment advising, and tax. We expect
the scope of these requirements and our management strategies to be clearer as our planning and execution continue to progress.
Other State and NAIC Regulatory Developments
State insurance regulators and the 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;
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;
sales practices; and
algorithmic underwriting.
In addition, the NAIC is reviewing how insurers’ varieties of affiliate agreements, holding company structures, and forms of public or private
ownership may affect insurers’ financial stability.
Other U.S. Federal Initiatives
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.
The Dodd-Frank Wall Street Reform and Consumer Protection Act the "Dodd-Frank Act") generally provides for enhanced federal
supervision of financial institutions, including insurance companies in certain circumstances, and financial activities that it deems represent a
systemic risk to financial stability or the U.S. economy. A Federal Insurance Office, established under the Dodd-Frank Act, monitors aspects
of the insurance industry and its authority may extend to our business, although it does not have general regulatory authority over insurers.
The U.S. amended its internal revenue code to impose a 15% “corporate alternative minimum tax” based on net income, subject to some
adjustments, beginning in tax year 2023. We continue to evaluate the potential impact of this tax. The federal government has also imposed
a 1% excise tax on certain repurchases of corporate stock, and has issued related interim guidance. We expect the new tax to apply to our
common stock repurchases.
The SEC has proposed new climate-related disclosure rules for public companies. Among other things, the proposed rules would require
registrant disclosure on (1) governance of climate-related risks; (2) climate-related impacts on strategy, business model and outlook; (3)
climate-related risk management; (4) greenhouse gas ("GHG") emissions; and (5) any internal carbon price or climate-related targets and
goals. Large accelerated filers, such as us, would also have to obtain attestation by an independent third party of certain of their GHG
emissions metrics. The proposed rules would also require registrants to include climate-related financial statement metrics (which would
consist of disaggregated climate-related impacts on existing financial statement line items) and related disclosures in a note to audited
financial statements, subject to adequate internal controls and to audit by an independent registered public accounting firm. Depending on the
ultimate rules the SEC adopts, the cost and other impacts of such a rule on us may be significant.
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Federal Income Tax
Generally, U.S. federal tax law permits tax deferral on the inside build-up of investment value of certain retirement savings, including annuity
products, until a contract distribution has occurred. In general, death benefits paid under a life insurance contract are excluded from taxation.
Attractiveness of the Company's products for some individuals may depend on the enacted tax rates and the impact on the value of the
deferral. Congress from time to time may enact other changes to the tax law that could make our products less attractive to consumers,
including legislation that would modify the tax favored treatment of retirement savings, life insurance and annuity products.
Human Capital
Our Team Members
American Equity's growth and innovation strategy relies on our employees’ capabilities and expertise. Our human capital management is
crucial to our delivery on our decades- and often life-long promises to policyholders, and as we continue to transform into an at-scale
origination, spread and capital light fee-based business, and to manage capital to grow as well as produce returns for shareholders. As of
December 31, 2022, American Equity employed approximately 840 full-time team members. All of our employees are located in the United
States, and none were covered by a collective bargaining agreement. American Equity engaged less than 100 temporary or part-time workers.
Engagement
Our culture is the foundation for our efforts to provide the best products and exemplary customer service, as well as to build an engaged and
valued team. We seek to cultivate a culture of growth, innovation, and purposeful teamwork that builds off of our foundation of customer
service, stewardship, product integrity, and financial strength. Our cultural beliefs focus on:
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Performing as One Team to foster a trusting and transparent environment to work toward common objectives.
Inspiring Innovation by leaving our comfort zones daily to advance the company's goals.
Taking Action to seek the best available information and deliver results.
Owning It by taking responsibility for our actions and growing from our experiences.
Breaking Boundaries to engage in respectful conversations that invite diverse perspectives and experiences.
Health and Safety
Our employee benefits programs support our growing workforce's evolving needs. Healthcare options for benefit-eligible employees aim to
maintain affordable team member contribution and proactively promote physical and mental well-being. One measure of the caliber of our
benefits in 2022 was that over 85% of our employees chose coverage through our medical plan, and similarly high levels chose dental and/or
vision coverage. During 2022, the company paid an average of 84% of participating employees' monthly medical premiums. We also offered
out team members a free robust virtual holistic wellness program, in which hundreds took part.
Retirement Benefits
American Equity team members are eligible to participate in our 401(k) plan after thirty days of employment and age 18. We match 100% of
team member contributions to the 401(k) plan up to 3% of the employee’s total eligible compensation and match 50% of employee
contributions up to the next 2% of the employee’s total eligible compensation, subject to the Internal Revenue Code (the “Code”) limitations.
We also align employee and shareholder interests and promote team members' ownership mindset through our long-standing Employee Stock
Ownership Plan (“ESOP”). We make semi-annual discretionary contributions for all employees after a minimum of six months of service, and
their interests vest after two years of service.
Training
At American Equity, we encourage and invest in a wide variety of professional development opportunities and in-role stretch assignments.
Our employees expanded their skills and expertise through thousands of hours of training in our Academy for Excellence and LinkedIn
Learning in 2022. We also engaged employees through a wide variety of internal and external leadership and subject-matter seminars, degree,
and certificate programs.
Community Action
We support and partner with a diverse range of organizations to make a positive difference where our team members live and work. In 2022,
we sponsored the LGBTQ Legacy Leader Awards; Black and Brown Business Summit; Central Iowa DEI Awards Minority Scholarship; and
Women Lead Change. We also took concrete local action by continuing to partner with Pro Iowa to redevelop an EPA superfund site into a
multi-use facility for youth and community sports and recreation, and by offering our team members paid time to volunteer in community-
building efforts.
Compensation
For more information on our executive compensation programs and how they align with our business strategy and results, see our subsequent
disclosure to be filed within 120 days after December 31, 2022.
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Item 1A. Risk Factors
Any or each of the events described below may (or may continue to) adversely affect our reputation, our regulatory, customer, or other
relationships, our business, our net income and results of operations, our expenses, our profitability, our liquidity or cash flows, our statutory
capital position, our book value and book value per share, our ability to meet our obligations, our credit and financial strength ratings, our
risk-based capital ratios, our financial condition, our cost of capital, or the market price of our common stock. The effects may vary widely
from time to time, product to product, market to market, region to region, or segment to segment. Many of these risks are interrelated and
could occur under similar business and economic conditions, and the occurrence of any of them may cause others to emerge or worsen. Such
combinations could materially increase the severity of the cumulative or separate impact of these risks.
These risk factors are not a complete set of all potential risks that could affect us. You should carefully consider the risk factors together with
other information contained in this Annual Report on Form 10-K, including “Business,” “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the consolidated financial statements and accompanying notes in “Financial Statements and
Supplementary Data,” as well as in other reports and materials we submit to the SEC.
Risks Relating to Our Business and Economic Conditions
1. Our results may differ from our management assumptions, estimates, and models.
Our financial results are based on assumptions and estimates that depend on many factors, none of which are certain. Our actual results may
differ significantly from our expectations. As a result, our decisions on products and pricing, calculation of account balances within our
financial statements, and the amounts of regulatory and rating agency capital we expect to need to hold may be wrong. Our estimates are
based on complex analysis and interpretation of large quantities of data, involve sophisticated judgment and expertise, and are imprecise. We
may change our assumptions and estimates from time to time as a result of engaging more sophisticated methods, obtaining additional
information, or due to discovery of errors. Our expected pricing expenses and benefits are based on assumptions about how long a policy will
remain in force and about mortality and longevity. Our actual experience may differ from our pricing assumptions. We may have to change
our actuarial estimates, accelerate amortization of deferred acquisition expenses, increase our policy benefit reserves, or pay higher benefits
than we projected. For example, persistency lower than our assumptions may require us to accelerate the amortization of expenses we
deferred in connection with the acquisition of the policy.
Certain financial statement balances depend on estimates and assumptions including the calculations of policyholder benefit reserves,
derivatives and embedded derivatives, deferred policy acquisition costs and deferred sales inducements, the fair value of investments and
valuation allowances. The calculations we use to estimate these balances are complex. We make significant assumptions such as expected
index credits, the age when a policyholder may begin to utilize the lifetime income benefit rider, the number of policyholders that may not
utilize the lifetime income benefit rider, expected policyholder behavior including expected lapse rates, discount rates and the expected cost of
annual call options, any of which may change over time and may be inaccurate. We use judgement in making estimates and assumptions, and
our accuracy depends on multiple factors, including market conditions, interest rates, credit conditions, spreads, liquidity, and observable
market data. Our investment returns or cash flows may also differ from our expectations.
In addition, our risk management policies, procedures, and models may be imperfect or may not be sufficiently comprehensive. As a result,
they may not identify or adequately protect us from every risk to which we are exposed.
2. Interest rate and equity market conditions could change.
Interest rate increases or decreases could harm our investment spread, or the difference between yields on our invested assets and our cost of
money, the fair value of our investments and the reported value of stockholders' equity and the unrealized gain or loss position of our
investment portfolio.
Rising interest rates may lead customers to surrender their policies, increasing our net cash outflows, requiring us to sell assets at a
disadvantaged price and accelerating our amortization of deferred policy acquisition costs and deferred sales inducements. Our sales may
decline during such times, or we may increase annuity crediting rates but be unable to generate the investment returns or spreads we desire.
At other times, low interest rates may harm our ability to offer attractive rates and benefits to customers while maintaining profitability; this
may reduce our fixed index annuity sales, as consumers seek potentially higher returns.
A decrease in the equity markets, a decrease in interest rates, or an increase in volatility in either, may require us to increase our reserves
related to benefit guarantees. Our hedge program designed to mitigate these risks may not be entirely effective to offset the changes in the
carrying value of the guarantees due to, among other things, the time lag between changes in their values and corresponding changes in the
hedge positions, high levels of volatility in the equity markets and derivatives markets, extreme swings in interest rates, contract holder
behavior different than expected, a strategic decision to adjust the hedging strategy in reaction to extreme market conditions or inconsistencies
between economic and statutory reserving guidelines and divergence between the performance of the underlying funds and hedging indices.
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3. Our investments may lose value or fail to grow as quickly as we expect due to market, credit, liquidity, concentration, default, and other
risks.
Our investments and their performance, including our derivative financial instruments, are subject to credit defaults, market value volatility
and changes to credit spreads. The impact of these items can be exacerbated by financial and credit market volatility. We may fail to adjust
to market conditions, producing investment portfolio losses. Our portfolio diversification management by asset class, creditor, industry, and
other limitations may be inadequate.
We may have to sell investments that are not publicly traded or that otherwise lack liquidity (such as privately placed fixed maturity
securities, below investment grade securities, investments in mortgage loans and alternative investments) below fair market values and could
incur losses. We may be unable to liquidate positions quickly to meet unexpected policyholder withdrawal obligations.
Our mortgage loans may fail to perform and borrowers may default on their obligations. Declining debt service coverage ratios and
increasing loan to value ratios, poor loan performance, borrower or tenant financial difficulties, catastrophes, and other events may harm
mortgage carrying values, which could lead to investment losses.
Derivatives margin requirements may increase, and we may be required to post collateral. In addition, our costs may increase due to
counterparties' higher capital requirements for derivatives. We may need to liquidate higher yielding assets for cash to cover some or all of
these costs.
4. Our option costs could increase.
Our cost of call options, which we use to manage the index-based risk component of our fixed index annuities, may increase due to higher
equity market volatility, higher interest rates, or other market factors. We may be unable to effectively mitigate this risk by adjusting caps,
participation rates, and asset fees on policy anniversary dates to reflect these increases.
5. We are exposed to counterparty credit risk.
We have counterparty credit risk with other insurance companies through reinsurance, including as that term is defined for U.S. statutory
purposes.
Our efforts to mitigate these risks, such as by securing assets in trusts and requiring the reinsurer to establish a letter of credit or deposit
securities in the trusts for any shortfall, may be inadequate to protect us. Where the annuity deposits we ceded are unsecured, our claims
would be subordinated to those of the reinsurer's policyholders. Should our reinsurers fail to meet their obligations to us, we remain liable for
the ceded policy liabilities. If we were forced to recapture reinsured business, we may have inadequate capital to do so.
We may be unable to use reinsurance to the extent and on the terms we want. As a result, 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.
We also have exposure to many other counterparties, including in the financial services industry. Many of these transactions expose us to
credit risk in the event of default of our counterparty, either with respect to insufficient collateral that cannot be realized or is liquidated at
prices not sufficient to recover the full amount of the related loan or derivative exposure, or in the case of default of unsecured debt
instruments or derivative transactions. Our derivative counterparties may fail to perform. Our efforts to maintain quality and credit exposure
concentration limits may be inadequate to mitigate this risk. Counterparties' failure to deliver on their derivative instrument obligations may
impose costs on us to fund index credits on our fixed index annuities. We may be unable to enforce our counterparties' obligations to post
collateral to secure their obligations to us. Among other things, a downturn in the U.S. or other economies could increase any or all of these
risks.
6. The third parties on whom we rely for services may fail to perform or to comply with legal or regulatory requirements.
The third parties who perform various services for us, including sales agents, marketing organizations, investment managers, side car-related
services, reinsurers, and information technologists, may fail to meet our performance expectations. Our controls to monitor their service
levels and compliance with our rules and legal and regulatory standards may be inadequate.
7. Our competitors have greater resources, a broader array of products, and higher ratings, which may limit our ability to attract and
retain customers or distributors.
We may be unable to compete successfully with larger companies who enjoy larger financial resources, broader and more diversified product
lines, higher ratings, and more widespread agency relationships. Customers may choose fixed index, fixed rate, or variable annuities sold by
other insurance companies, or choose mutual fund products, traditional bank products, and other retirement funding alternatives offered by
asset managers, banks and broker/dealers. Competitors' products may have competitive or other advantages based on design, participation
rates and crediting rates, policy terms and conditions, services provided to distributors and policyholders, ratings by rating agencies,
reputation and distributor compensation.
We may be unable to compete successfully for product distribution sources (such as IMOs, other marketers, agents, broker/dealers, banks and
registered investment advisors) based on innovative and timely products, financial strength, services provided to and the relationships
developed with distributors, or competitive commission structures and timely payments. Our distributors may choose to sell others' products,
and are generally free to do so. Consolidation among IMOs may increase these risks and our costs.
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8. Our information technology and communication systems may fail or suffer a security breach.
We may lose access to or use of our information technology (IT) systems to accurately perform necessary business functions such as issuing
new policies, providing customer support, maintaining existing policies, paying claims, managing our investment portfolios, and producing
financial statements. Our efforts, policies, and processes to avoid or mitigate systems failures, fraud, cyberattacks, processing errors, and
regulatory breaches may fail or prove inadequate.
We may be unable to keep the confidential information within our IT infrastructure secure or maintain adherence to privacy standards or
expectations. Our complex information security controls framework that leverages multiple leading industry control standards, as well as
extensive commercial control technologies we use to maintain the security of those systems, is imperfect and may fail. An attacker who
circumvents our comprehensive information security controls infrastructure could access, view, misappropriate, alter, or delete information
contained within the accessed systems, including personally identifiable policyholder information and proprietary business information.
Our efforts and expenses to maintain and enhance our existing systems to keep pace with changing security requirements, industry standards,
and evolving customer preferences may be insufficient or misguided, impairing our ability to rely on information for product design, product
pricing, and risk management decisions. Our extensive backup and recovery systems and contingency plans may not prevent system
interruptions, failures, or allow us to promptly remediate those that do occur.
In addition, our systems, policies, and procedures for capturing electronic communications related to our business may fail to record and store
all the information regulators require us to, or may fail to do so in the required format.
9. We may suffer a credit or financial strength downgrade.
We may fail to maintain or improve our financial strength or credit ratings, whether due to the results of operations of our subsidiaries or our
financial condition.
A ratings downgrade, or the potential for a ratings downgrade, could cause distributors and sales agents to stop or reduce our product sales in
favor of our competitors, could increase our policy or contract surrenders, and harm our ability to obtain reinsurance or to do so at competitive
prices. A change in risk ratings of assets in our investment portfolio, such as private equity or structured assets, may require us to hold more
capital.
10. We may be unable to raise additional capital to support our business and sustain our growth on favorable terms.
We may need to increase or maintain the statutory capital and surplus of our life insurance subsidiaries, or the capital of our holding company,
through debt, equity, and/or other transactions. We may be unable to do so because of adverse market conditions or high cost of capital, or be
able to do so only on unfavorable terms. As a result, we may have to limit sales of new annuity products. We may also agree to restrictions
on other activities, transactions, or financial arrangements in order to obtain necessary capital.
11. U.S. and global capital markets and economies could deteriorate due to inflation or major public health issues, including the
COVID-19 pandemic, political or social developments, or otherwise.
Economic and capital markets could suffer downturns, uncertainties, or market disruptions. For example, inflation or an economic recession,
and governmental efforts to combat or avoid them, armed conflict in Europe or elsewhere and sanctions intended to address those conflicts or
achieve other ends, COVID-19 and the related pandemic, and government and business efforts in reaction to them, may continue to create
economic and financial turmoil, decreased economic output, unemployment, market dislocations, political uncertainties, stagnated economic
growth, and other effects. These may reduce the performance, and increase the risks, of our investment portfolio. They may also prevent us
from continuing normal business operations, and our measures to mitigate their effects - such as remote working and workplace safety
measures - may be inadequate to limit the strain on our business continuity plans and contain operational risk, such as information technology
and third-party service provider risks.
12. We may fail to authorize and pay dividends on our preferred stock.
We may fail to authorize and pay dividends on our preferred stock. Unpaid dividends would not accrue, and could result in our inability to
pay or declare a dividend on our common stock or repurchase, redeem or otherwise acquire for consideration our common stock. Any such
failure would also prevent us from making certain distributions to common shareholders. They may also give preferred shareholders the right
to elect members of our Board of Directors or other corporate governance rights that could weaken the rights and interests of common
shareholders and other stakeholders.
13. Our subsidiaries may be unable to pay dividends or make other payments to us.
Our future cash flows may be limited, as they depend upon the availability of dividends, surplus note interest payments and other statutorily
permissible payments from our insurance subsidiaries, such as payments under our investment advisory agreements and tax allocation
agreements with our subsidiaries. Without such cash flow, we may be unable to service debt we incur from time to time (including senior
notes, term loans, subordinated debentures issued to a subsidiary trust, and others), pay operating expenses and pay dividends to common and
preferred stockholders.
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14. We may fail at reinsurance, investment management, or third-party capital arrangements.
We may be unable to source, negotiate, obtain timely regulatory approval for, and execute the reinsurance, investment management, or third-
party-capital arrangements for our strategy to succeed. Our reinsurance or investment management counterparties may fail to optimally
perform or to meet their obligations under our agreements with them. As a result, we may not realize our anticipated economic, strategic or
other benefits of any such transaction and may incur unforeseen expenses or liabilities. Any reorganization or consolidation of the legal
entities through which we conduct business may raise similar risks.
15. We may fail to prevent excessive risk-taking.
Our employees, including executives and others who manage sales, investments, products, wholesaling, underwriting, and others, may take
excessive risks. Our compensation programs and practices, and our other controls, may not effectively deter excessive risk-taking or
misconduct.
16. Our policies and procedures may fail to protect us from operational risks.
We may make errors or fail to detect incorrect or incomplete information in any of the large number of transactions we process through our
complex customer application, suitability review, administrative, financial reporting, and accounting systems. Our controls and procedures to
prevent such errors may not be effective. For example, we may fail to escheat property timely and completely, or fail to detect, deter or
mitigate fraud against us or our customers. We may fail to maintain service standards or to operate efficiently or control costs. We may also
suffer internal control deficiencies or disclosure control deficiencies that result in significant deficiencies or material weaknesses. In addition,
we may fail to attract, motivate and retain employees, develop talent, or adequately plan for management succession.
17. We may be unable to protect our intellectual property and may face infringement claims.
We may be unable to prevent third parties from infringing on or misappropriating our intellectual property. We may incur litigation costs to
enforce and protect it or to determine its scope or validity, and we may not be successful. In addition, we may be subject to claims by third
parties for infringement of intellectual property, breach of license usage rights, or misappropriation of trade secrets. We may incur significant
expenses for any such claims. If we are found to have infringed or misappropriated a third-party intellectual property right, we may be
enjoined from providing certain products or services to our customers or from utilizing and benefiting from certain intellectual property.
Alternatively, we could be required to enter into costly licensing arrangements with third parties or implement a costly alternative.
Risks Relating to Legal, Regulatory, Environment, Social, or Governance Matters
18. We may be subject to increased litigation, regulatory examinations, and tax audits.
We may become involved in increased litigation, including class action lawsuits, alleging improper product design, improper sales practices
and similar claims. State regulatory bodies, such as state insurance departments, the SEC and the DOL may investigate our compliance with,
among other things, insurance laws, securities laws and ERISA. In addition, U.S. and state authorities have and may continue to audit our
compliance with tax laws.
19. Laws, regulations, accounting, and benchmarking standards may change.
Any of the myriad of insurance statutes and regulations in the various states and other jurisdictions in which our life insurance subsidiaries
transact business, including those related to insurance holding companies, may change at any time with or without warning. Laws affecting
our investments, such as rules on enforcing mortgage rights and rules affecting investment in rental properties, may change. Accounting
standards such as those issued by the FASB, statutory accounting standards, or others may change, evolve, or be replaced. U.S. federal laws
and rules, such as those related to securities or ERISA, may also change.
We may also be subject to new regulatory requirements as a result of our side car activities or new product offerings, or we may face
increased scrutiny in new regulatory areas as a result of such activity, such as with respect to FINRA or investment advisor rules. Our efforts
to manage such requirements and scrutiny may increase our costs or put us at a competitive disadvantage.
In addition, those with authority or influence may change their interpretation of such laws or accounting standards, or may disagree with our
interpretation of them. We may be unable to adapt to any such changes or disagreements in a timely or effective manner. Tax law changes
may also harm us. For example, should individual income tax rates decrease, some of the income tax advantages of our products would
likewise decrease. Moreover, tax law may change or eliminate any of the income tax advantages of our products. Further, changes to the
basis of U.S. income taxation (e.g., taxation of unearned gains), corporate tax rates, capital gains tax rates, and other changes, may affect us.
As we continue to transition away from using the London Interbank Offered Rate ("LIBOR") as a basis of our floating rate investments, we
may face uncertainties, ambiguities, and negotiations over terms that could affect those investments or our estimates and projections.
20. Iowa or other applicable law, or our corporate governance documents or change-in-control agreements, may delay or deter takeovers
or combinations.
State laws, our certificate of incorporation and by-laws, and agreements into which we have entered concerning changes in control may delay,
deter or prevent a takeover attempt that stockholders might consider favorable.
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21. Climate changes, or responses to it, may affect us.
Climate change may increase the frequency and severity of near- or long-term weather-related disasters, public health incidents, and
pandemics, and their effects may increase over time. Climate change regulation may harm the value of investments we hold or harm our
counterparties, including reinsurers. Our regulators may also increasingly focus their examinations on climate-related risks.
22. Our efforts to meet environmental, social, and governance standards and to enhance our sustainability may not meet expectations.
Our investors or others may evaluate our business practices by continually evolving and unclear environmental, social, and governance
(“ESG”) criteria that may reflect contrasting or conflicting values or agendas. Our practices may also not change in the particulars or at the
rate all parties expect, and may involve management trade-offs. To the extent we establish specific commitments or targets, we may fail to
meet them. We may also face criticism and scrutiny for any efforts we make with respect to ESG, including allegations that such efforts are
inconsistent with duties we owe to shareholders or others.
23. We May Face a Variety of Risks If We Begin Operations Outside the United States.
If we pursue opportunities outside the United States, we may face a wide range of political, legal, operational, economic and other risks,
including but not limited to: nationalization or expropriation of assets; imposition of limits on foreign ownership of local companies; changes
in laws, their application or interpretation; political instability; economic or trade sanctions; sanctions on cross-border exchange listing,
investment or other securities transactions; dividend limitations; price controls; currency exchange controls or other transfer or exchange
restrictions; heightened cybersecurity risks, or labor relations risks.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Not applicable.
Item 3. Legal Proceedings
See Note 14 - Commitments and Contingencies to our audited consolidated financial statements.
Item 4. Mine Safety Disclosures
Not applicable.
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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.
2022
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2021
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$44.49
$42.18
$43.55
$46.76
$32.54
$33.68
$33.79
$39.88
$35.05
$32.65
$33.22
$28.05
$26.21
$29.18
$27.12
$29.46
As of February 16, 2023, to the best of our knowledge, there were approximately 580 shareholders of record of our common stock. In 2022
and 2021, we paid an annual cash dividend of $0.36 and $0.34, 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. 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 13 - Statutory Financial Information and Dividend Restrictions to our audited consolidated financial statements, which
are incorporated by reference in this Item 5.
For disclosure on securities authorized for issuance under equity compensation plans, see our subsequent disclosure to be filed within
120 days after December 31, 2022.
Issuer Purchases of Equity Securities
The following table presents the amount of our share purchase activity for the three months ended December 31, 2022:
Period
October 1, 2022 - October 31, 2022
November 1, 2022 - November 30, 2022
December 1, 2022 - December 31, 2022
Total
Total Number of
Shares Purchased
(shares)
Average Price
Paid Per Share
(dollars)
304,688 $
842,749 $
50,272 $
1,197,709
37.84
36.32
38.91
Total Number of Shares
Purchased as Part of
Publicly Announced
Program (a)
Approximate Dollar
Value of Shares That
May Yet Be
Purchased Under
Program
(shares)
(dollars in thousands)
304,688 $
842,749 $
50,272 $
1,197,709
201,586
570,975
569,018
(a) On October 18, 2020, the Company's Board of Directors approved a $500 million share repurchase program (since fully utilized). On
November 19, 2021, the Company's Board of Directors authorized the repurchase of an additional $500 million of Company common
stock. On November 11, 2022, the Company's Board of Directors authorized the repurchase of an additional $400 million of Company
common stock.
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Common Stock Performance Graph
The graph and table below compare the total return on our common shares with the total return on the S&P Global Ratings (“S&P”) 500 and
S&P 500 Financials indices for the five-year period ended on December 31, 2022. The graph and table show the total return on a hypothetical
$100 investment in our common shares and in each index on December 31, 2017 including the reinvestment of all dividends. The graph and
table below shall not be deemed to be “soliciting material” or to be “filed,” or to be incorporated by reference in future filings with the SEC,
or to be subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically incorporate it by reference into a
document filed under the Securities Act or the Exchange Act.
American Equity Investment Life Holding Co.
S&P 500 Index
S&P 500 Financials Index
12/31/2017
12/31/2018
12/31/2019
12/31/2020
12/31/2021
12/31/2022
100.00
100.00
100.00
91.67
95.62
86.97
99.20
125.72
114.91
92.74
148.85
112.96
131.73
191.58
152.54
155.83
156.88
136.48
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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, 2022 compared with December 31, 2021,
and our consolidated results of operations for the years ended December 31, 2022 and 2021, 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.
For information and analysis relating to our financial condition and consolidated results of operations as of and for the year ended
December 31, 2021, as well as for the year ended December 31, 2021 compared with the year ended December 31, 2020, see Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year
ended December 31, 2021.
Cautionary Statement Regarding Forward-Looking Information
All statements, trend analysis and other information contained in this report and elsewhere (such as in filings by us with the SEC, press
releases, presentations by us or management or oral statements) may contain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
Forward-looking statements give expectations or forecasts of future events and do not relate strictly to historical or current facts. They may
relate to markets for our products, trends in our operations or financial results, strategic alternatives, future operations, strategies, plans,
partnerships, investments, share buybacks and other financial developments. They use words and terms such as anticipate, assume, believe,
can, continue, could, enable, estimate, expect, forecast, foreseeable, goal, improve, intend, likely, may, model, near, objective, opportunity,
outlook, plan, potential, project, probable, remain, risk seek, should, strategy, target, will, would, and other words and terms of similar
meaning or that are otherwise tied to future periods or future performance, in each case in all forms of speech and derivative forms, or similar
words, as well as any projections of future events or results. Forward-looking statements, by their nature, are subject to a variety of
assumptions, risks, and uncertainties that could cause actual results to differ materially from the results projected. Many of these risks and
uncertainties cannot be controlled by the Company. Factors that may cause our actual decisions or results to differ materially from those
contemplated by these forward-looking statements include, among other things:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
results differing from assumptions, estimates, and models.
interest rate condition changes.
investments losses or failures to grow as quickly as expected due to market, credit, liquidity, concentration, default, and other risks.
option costs increases.
counterparty credit risks.
third parties service-provider failures to perform or to comply with legal or regulatory requirements.
poor attraction and retention of customers or distributors due to competitors’ greater resources, broader array of products, and higher
ratings.
information technology and communication systems failures or security breaches.
credit or financial strength downgrades.
inability to raise additional capital to support our business and sustain our growth on favorable terms.
U.S. and global capital market and economic deterioration due to major public health issues, including the COVID-19 pandemic,
political or social developments, or otherwise.
failure to authorize and pay dividends on our preferred stock.
subsidiaries’ inability to pay dividends or make other payments to us.
failure at reinsurance, investment management, or third-party capital arrangements.
failure to prevent excessive risk-taking.
failure of policies and procedures to protect from operational risks.
inability to protect intellectual property, or intellectual property infringement claims.
increased litigation, regulatory examinations, and tax audits.
changes to laws, regulations, accounting, and benchmarking standards.
takeover or combination delays or deterrence by laws, corporate governance documents, or change-in-control agreements.
effects of climate changes, or responses to it.
failure of efforts to meet environmental, social, and governance standards and to enhance sustainability.
For a detailed discussion of these and other factors that might affect our performance, see Item 1A of this report.
Executive Summary
As previously noted, we began to implement an updated strategy, referred to as AEL 2.0, after having undertaken a thorough review of our
business in 2020. During 2022, we continued to make significant progress in the execution of the AEL 2.0 strategy in all four key pillars: Go-
to-Market, Investment Management, Capital Structure and Foundational Capabilities. See Item 1. Business - Strategy for more information
on the AEL 2.0 strategy and progress made during 2022.
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 2022, our sales were $3.3 billion; over the last five years our sales
have ranged from $3.3 billion to $6.0 billion.
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The economic and personal investing environments continue to be conducive to the sale of fixed index and fixed rate annuity products as
retirees and others looked to put their money in instruments that will protect their principal and provide them with consistent cash flow
sources in their retirement years and a paycheck for life. Sales of fixed index and fixed rate annuity products decreased to $3.3 billion in 2022
compared to $6.0 billion in 2021. The decrease in fixed rate annuity sales was driven by the decision to focus on sales of fixed index annuity
products as we believe such products align with the transformation of the Company from a spread based return on equity insurer to more of a
fee-based return on asset insurer. The decrease in fixed index annuity sales was driven by the decision to focus on pricing discipline as
interest rates fluctuated. With our latest pricing refresh in November 2022, we believe we are well positioned competitively to enter 2023 with
strong momentum.
During 2022, we saw interest rates rise after an unprecedented period of low interest rates. In response, we have been actively managing
policyholder crediting rates for new annuities and existing annuities as we focused on improving our pricing processes to become more
nimble, targeted and responsive to market changes. We continue to have flexibility to reduce our crediting rates if necessary and could
decrease our cost of money by approximately 82 basis points if we reduce current rates to guaranteed minimums. We expanded our privately
sourced assets to include a more diversified portfolio in 2022 covering a variety of sectors, including infrastructure, middle market credit and
commercial real estate equity. During 2022, we originated $5 billion of privately sourced assets with expected returns greater than 6%. Total
private assets at year-end were nearly $11 billion, bringing our allocation to 22% of the investment portfolio at year-end.
On October 18, 2020, the Company's Board of Directors approved a $500 million share repurchase program (since fully utilized), and on
November 19, 2021,the Company's Board of Directors authorized the repurchase of an additional $500 million of Company common stock.
The share repurchase program has offset dilution from the issuance of shares to Brookfield, and its purpose remains to institute a regular cash
return program for shareholders. On November 11, 2022, the Company's Board of Directors authorized the repurchase of an additional $400
million of Company common stock. As of December 31, 2022, we have repurchased approximately 23.9 million shares of our common stock
to date at an average price of $34.74 per common share.
We specialize in the sale of individual annuities (primarily fixed and fixed index deferred annuities) through IMOs, agents, banks and broker-
dealers. Fixed and fixed index annuities are an important product for Americans looking to fund their retirement needs as annuities have the
ability to provide retirees a paycheck for life.
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 profitability depends in large part upon:
• the amount of assets under our management,
• investment spreads we earn on our policyholder account balances,
• our ability to manage our investment portfolio to maximize returns and minimize risks such as interest rate changes and defaults or credit
losses,
• our ability to appropriately price for lifetime income benefit riders offered on certain of our fixed rate and fixed index annuity policies,
• our ability to manage interest rates credited to policyholders and costs of the options purchased to fund the annual index credits on our
fixed index annuities,
• our ability to manage the costs of acquiring new business (principally commissions paid to agents and distribution partners and bonuses
credited to policyholders),
• our ability to maintain and continue to generate fee based revenue,
• our ability to manage our operating expenses, and
• income taxes.
Life insurance companies are subject to NAIC RBC requirements and rating agencies utilize a form of RBC to partially determine capital
strength of insurance companies. Our RBC ratio at December 31, 2022 and 2021 was 415% and 400%, respectively.
We intend to manage our capitalization in normal economic conditions at a level that is consistent with rating agency capital at or above the
A-level. It may drift downwards, at times, for reasons including, but not limited to, realized credit losses or temporary increases in required
risk capital for ratings migrations. This level is intended to reflect a level that is consistent with the rating agencies expectations for capital
adequacy ratios at different points in an economic cycle. This implies operating with a peak to trough swing whereby capital is absorbing risk
at the low point of the economic cycle.
On November 28, 2022 S&P affirmed its "A-" financial strength rating on American Equity Life and its "BBB-" long-term issuer credit rating
on American Equity Investment Life Holding Company with an outlook of "stable" on these ratings.
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On September 9, 2022, A.M. Best affirmed its "A-" financial strength rating on American Equity Investment Life Insurance Company and its
subsidiaries, American Equity Investment Life Insurance Company of New York and Eagle Life Insurance Company, its "bbb-" long-term
issuer credit rating of American Equity Investment Life Holding Company, its "bbb-" senior unsecured debt ratings, and its "bb" perpetual,
non-cumulative preferred stock ratings. The outlook for these credit ratings of "stable" was also affirmed by A.M. Best on September 9,
2022.
On December 7, 2022, Fitch affirmed its "A-" financial strength rating on American Equity Investment Life Insurance Company and its life
insurance subsidiaries, its "BBB" issuer default rating on American Equity Investment Life Holding Company and its "BBB-" senior
unsecured debt ratings, and revised its outlook to "stable" from "negative" on its financial strength, issuer default and senior unsecured debt
ratings.
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,
2022
4.34%
1.71%
2.63%
0.03%
0.01%
2021
3.73%
1.55%
2.18%
0.11%
0.07%
2020
4.12%
1.69%
2.43%
0.08%
0.02%
The cost of money for fixed index annuities and average crediting rates for fixed rate annuities are computed based upon policyholder account
balances and do not include the impact of amortization of deferred sales inducements. See Critical Accounting Policies and Estimates—
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 and
Estimates - Policy Liabilities for Fixed Index Annuities and Financial Condition - Derivative Instruments.
Average yield on invested assets increased primarily as a result of strong returns on partnerships and other mark to market assets, the benefit
from higher short-term interest rates, lower average cash balances and the ramp in private assets partly offset by lower prepayment income.
See Net investment income. The aggregate cost of money increased primarily due to increases in options costs and a reduction in the benefit
from over hedging as compared to the prior year. We have the flexibility to reduce our crediting rates if necessary and could decrease our
cost of money by approximately 82 basis points if we reduce current rates to guaranteed minimums.
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Results of Operations for the Three Years Ended December 31, 2022
Annuity deposits by product type collected during 2022, 2021 and 2020, 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,
2022
2021
2020
(Dollars in thousands)
$
2,692,141 $
2,753,479 $
1,992,059
5,329
56,511
18,935
6,133
855,702
59,816
8,128
395,982
33,461
2,772,916
3,675,130
2,429,630
479,279
380
82,581
562,240
3,171,420
5,709
139,092
18,935
3,335,156
968,906
697,068
350
1,597,292
2,294,710
3,450,547
6,483
2,452,994
59,816
5,969,840
424,819
$
2,366,250 $
5,545,021 $
345,519
97
907,151
1,252,767
2,337,578
8,225
1,303,133
33,461
3,682,397
35,667
3,646,730
Annuity deposits before coinsurance ceded decreased 44% during 2022 compared to 2021. Annuity deposits after coinsurance ceded
decreased 57% during 2022 compared to 2021. The decrease in sales in 2022 compared to 2021 was primarily driven by a reduction in sales
of multi-year fixed rate annuity products at both American Equity Life and Eagle Life which is in line with our 2022 sales strategy of
focusing on sales of fixed index annuities.
We began ceding 75% of certain fixed index annuities issued after July 1, 2021 to North End Re which caused the increase in coinsurance
ceded premiums for the year ended December 31, 2022 compared to 2021.
Net income available to common stockholders increased 174% to $1.2 billion in 2022 and decreased 33% to $430.3 million in 2021 from
$637.9 million in 2020. The increase in net income available to common stockholders for the year ended December 31, 2022 was driven
primarily by an increase in net investment income, a decrease in the change in fair value of embedded derivatives and a decrease in interest
sensitive and index product benefits. These changes were partially offset by a decrease in the change in fair value of derivatives and increases
in amortization of deferred sales inducements and deferred policy acquisition costs.
Net income available to common stockholders for the year ended December 31, 2022 was positively impacted by an increase in the aggregate
investment spread as previously noted. Net income, in general, is impacted by the volume of business in force and the investment spread
earned on this business. The average amount of annuity account balances outstanding (net of annuity liabilities ceded under coinsurance
agreements) decreased 4% to $51.6 billion for the year ended December 31, 2022 compared to $53.7 billion in 2021 and increased 1% for the
year ended December 31, 2021 compared to $53.3 billion in 2020. Our investment spread measured in dollars was $1.4 billion, $1.2 billion,
and $1.3 billion for the years ended December 31, 2022, 2021 and 2020, respectively. Investment income for the year ended December 31,
2022 was positively impacted by strong returns on partnerships and other mark to market assets, the benefit from higher short-term interest
rates, lower average cash balances and an increase in allocation to higher yielding privately sourced assets (see Net investment income). The
volume of cash and cash equivalent holdings decreased in the fourth quarter of 2021 and the first quarter of 2022 with the execution of the
reinsurance treaty with North End Re and the investment of cash balances above our target levels.
Net income was also impacted by the change in fair value of derivatives and embedded derivatives, which fluctuates from period to period
based upon changes in fair values of call options purchased to fund the annual index credits for fixed index annuities and changes in interest
rates used to discount the embedded derivative liability. Net income for the year ended December 31, 2022 was positively impacted by
decreases in expected index credits on the next policy anniversary dates resulting from decreases in the fair value of the call options acquired
to fund these index credits and net increases in the discount rates used to estimate the fair value of our embedded derivative liabilities, the
impacts of which were partially offset by decreases in the change in fair value of derivatives and increases in amortization of deferred policy
acquisition costs and deferred sales inducements related to changes in fair value of derivatives and embedded derivatives. 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.
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We periodically update the key assumptions used in the calculation of amortization of deferred policy acquisition costs and deferred sales
inducements retrospectively through an unlocking process when estimates of current or future gross profits/margins (including the impact of
realized investment gains and losses) to be realized from a group of products are revised. In addition, we periodically update 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 available to common stockholders for 2022, 2021 and 2020 includes effects from updates to assumptions as follows:
Year Ended December 31,
2022
2021
2020
(Dollars in thousands)
Increase (decrease) in amortization of deferred sales inducements
$
45,682 $
(45,107) $
Increase (decrease) in amortization of deferred policy acquisition costs
Increase (decrease) in interest sensitive and index product benefits
Decrease in change in fair value of embedded derivatives
Effect on net income available to common stockholders
56,853
(53,042)
(94,770)
35,543
(45,662)
243,658
(122,294)
(24,017)
428,101
646,785
285,825
(2,341,279)
769,611
We review these assumptions quarterly and as a result of these reviews, we made updates to assumptions during each year.
The most significant assumption updates made in 2022 were to investment spread assumptions, including the net investment earned rate and
crediting rate on policies, lapse rate and partial withdrawal assumptions and lifetime income benefit rider utilization assumptions.
We updated our assumption for net investment spread for American Equity Life to remain steady at 2.60% through an eight-year reversion
period. We increased our long-term net investment earned rate assumption by 40 basis points with an assumption of 4.25% in the near term
increasing to 5.00% over the eight-year reversion period, and we increased our long-term crediting/discount rate assumption by 30 basis
points with an assumption of 1.65% in the near term increasing to 2.40% over the eight year reversion period. In addition, we adjusted the
grading of the discount rate assumption in the embedded derivative calculation. These changes resulted in an increase in expected future gross
profits and therefore an increase in the deferred policy acquisition costs and deferred sales inducements balances. These changes also resulted
in a decrease in the liability for lifetime income benefit riders due to a higher discount rate and a decrease in the fair value of the embedded
derivative due to the grading of the crediting rate assumption.
We updated lapse rate and partial withdrawal assumptions based on actual historical experience. We refreshed lapse tables based on five years
of lapse experience and implemented a 1% lapse floor. For policies with a lifetime income benefit rider that do not charge a fee, we increased
the lapse rates. For policies with a lifetime income benefit rider that has been utilized, we decreased the lapse rates. We expanded our partial
withdrawal assumptions to include scalars in our assumptions during the surrender charge period, shock period, and post-shock period. This
resulted in partial withdrawals extending beyond the surrender charge period. The net impact of the lapse rate and partial withdrawal
assumptions resulted in a decrease in expected future gross profits and a decrease in the deferred policy acquisition costs and deferred sales
inducements balances. The net impact of these changes resulted in an increase in the liability for lifetime income benefit riders due to higher
excess claims and lower gross profits and increased the fair value of the embedded derivative due to lower overall lapses and partial
withdrawals.
We updated our lifetime income benefit rider utilization assumption structure to capture policyholder characteristics at a more granular level.
This resulted in an increase in the number of policies utilizing the benefit and increased the excess claims. The impact of this change resulted
in an increase in the liability for lifetime income benefit riders, an increase in the fair value of the embedded derivative, and an increase in the
deferred policy acquisition costs and deferred sales inducements balances.
The most significant assumption updates made in 2021 were to investment spread assumptions, including the net investment earned rate and
crediting rate on policies, lifetime income benefit rider utilization assumptions, mortality assumptions, and lapse rate assumptions as
discussed below. In addition, we made assumption updates to change the reinsurance expense assumption associated with the refinancing of
statutory redundant reserves effective October 1, 2021.
Due to the continued low interest rate environment, we updated our assumption for investment spread for American Equity Life to 2.25% in
the near term and increasing to 2.50% over an eight-year reversion period and our assumption for crediting/discount rate to 1.55% increasing
to 2.10% over an eight-year reversion period. Prior to these assumption updates, our long-term assumption for aggregate investment spread
was at 2.60% at the end of an eight-year reversion period, with a near term crediting/discount rate of 1.90% increasing to 2.10% over an
eight-year reversion period. The assumption change to decrease aggregate investment spread resulted in lower expected future gross profits
as compared to previous estimates and a decrease in the balances of deferred policy acquisition costs and deferred sales inducements.
We updated lapse rate and mortality assumptions based on historical experience. For certain annuity products without a lifetime income
benefit rider, the lapse rate assumption was increased in more recent cohorts to reflect higher lapses on polices with a market value adjustment
("MVA") feature. For other annuity products with a lifetime income benefit rider, the population was bifurcated based on whether policies
had utilized the rider. For those policies which had utilized the rider, the lapse rate assumption was decreased in later durations. The overall
mortality assumption was lowered to reflect historical experience. The net impact of the updates to the lapse rate and mortality assumptions
resulted in higher expected future gross profits as compared to previous estimates and an increase in the balances of deferred policy
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acquisition costs and deferred sales inducements. The net impact of the updates to lapse rate and mortality assumptions resulted in an
increase in the liability for lifetime income benefit riders due to a greater amount of expected benefit payments in excess of account values.
We updated the lifetime income benefit rider utilization assumption based on historical experience. The ultimate utilization assumption was
lowered for policies with a fee rider and certain policies with a no-fee rider. In addition, the utilization assumption was changed to reflect
seasonality with higher utilization rates during the first quarter of each year. The net impact of the updates to the utilization assumption
resulted in a decrease in the liability for lifetime income benefit riders due to a lower amount of expected benefits payments due to lower
expected utilization. The net impact of the updates to the utilization assumption resulted in higher expected future gross profits as compared
to previous estimates and an increase in the balances of deferred policy acquisition costs and deferred sales inducements.
The most significant assumption update to the calculation of the fair value of the embedded derivative component of our fixed index annuity
policy benefit reserve in 2021 was the change in lapse rate assumptions discussed above. The net impact of the updates to the lapse rate
assumption resulted in a decrease in the embedded derivative component of our fixed index annuity policy benefit reserves as less funds
ultimately qualify for excess benefits.
Non-GAAP operating income available to common stockholders, a non-GAAP financial measure increased 25% to $362.9 million in
2022 and increased 320% to $290.5 million in 2021 from $69.1 million in 2020. The increase in non-GAAP operating income available to
common stockholders for the year ended December 31, 2022 was primarily a result of the impact of assumption updates made during 2022
compared to the impact of assumption updates made during 2021. Non-GAAP operating income available to common stockholders and Non-
GAAP operating income available to common stockholders per common share - assuming dilution, excluding the impact of notable items, for
the year ended December 31, 2022 were $336.4 million and $3.67 per share, respectively. Non-GAAP operating income available to
common stockholders and Non-GAAP operating income available to common stockholders per common share - assuming dilution, excluding
the impact of notable items, for the year ended December 31, 2021 were $368.5 million and $3.90 per share, respectively. Non-GAAP
operating income available to common stockholders, excluding the impact of notable items, for the year ended December 31, 2022 was
negatively impacted by an increase in interest sensitive and index product benefits due to a larger increase in lifetime income benefit rider
reserves and increases in amortization of deferred sales inducements and deferred policy acquisition costs compared to 2021. Non-GAAP
operating income available to common stockholders for the year ended December 31, 2022 was positively impacted by an increase in the
aggregate investment spread as previously noted and an increase in other revenue compared to 2021.
In addition to net income available to common stockholders, we have consistently utilized non-GAAP operating income available to common
stockholders, a non-GAAP financial measure commonly used in the life insurance industry, as an economic measure to evaluate our financial
performance. Non-GAAP operating income available to common stockholders equals net income available to common stockholders adjusted
to eliminate the impact of items that fluctuate from 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 available to
common stockholders eliminate the impact of fair value accounting for our fixed index annuity business and are not economic in nature but
rather impact the timing of reported results. We believe the combined presentation and evaluation of non-GAAP operating income available
to common stockholders together with net income available to common stockholders provides information that may enhance an investor's
understanding of our underlying results and profitability.
Non-GAAP operating income available to common stockholders is not a substitute for net income available to common stockholders
determined in accordance with GAAP. The adjustments made to derive non-GAAP operating income available to common stockholders are
important to understand our overall results from operations and, if evaluated without proper context, non-GAAP operating income available
to common stockholders possesses material limitations. As an example, we could produce a low level of net income available to common
stockholders or a net loss available to common stockholders in a given period, despite strong operating performance, if in that period we
experience significant net realized losses from our investment portfolio. We could also produce a high level of net income available to
common stockholders in a given period, despite poor operating performance, if in that period we generate significant net realized gains from
our investment portfolio. As an example of another limitation of non-GAAP operating income available to common stockholders, it does not
include the decrease in cash flows expected to be collected as a result of credit losses on financial assets. Therefore, our management reviews
net realized investment gains (losses) and analyses of our net investment income, including impacts related to credit losses, in connection with
their review of our investment portfolio. In addition, our management examines net income available to common stockholders as part of their
review of our overall financial results.
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Table of Contents
The adjustments made to net income available to common stockholders to arrive at non-GAAP operating income available to common
stockholders and non-GAAP operating income available to common stockholders, excluding notable items for 2022, 2021 and 2020 are set
forth in the table that follows:
Reconciliation from net income available to common stockholders to non-GAAP operating
income available to common stockholders:
Net income available to common stockholders
Adjustments to arrive at non-GAAP operating income available to common stockholders:
Net realized losses on financial assets, including credit losses
Change in fair value of derivatives and embedded derivatives
Net investment income
Other revenue
Income taxes
Non-GAAP operating income available to common stockholders
Impact of excluding notable items
Year Ended December 31,
2022
2021
2020
(Dollars in thousands)
$
1,177,269 $
430,317 $
637,945
36,428
(1,080,356)
664
5,969
222,966
362,940
(26,572)
10,299
(187,290)
—
—
37,184
290,510
78,036
59,355
(784,005)
—
—
155,808
69,103
310,117
379,220
Non-GAAP operating income available to common stockholders, excluding notable items
$
336,368 $
368,546 $
Per common share - assuming dilution:
Non-GAAP operating income available to common stockholders
Impact of excluding notable items
Non-GAAP operating income available to common stockholders, excluding notable items
Notable items impacting non-GAAP operating income available to common stockholders:
Impact of actuarial assumption updates
Tax benefit related to the CARES Act
Total notable items
$
$
$
$
3.96 $
(0.29)
3.67 $
3.07 $
0.83
3.90 $
0.75
3.36
4.11
(26,572) $
78,036 $
—
—
(26,572) $
78,036 $
340,895
(30,778)
310,117
The amounts disclosed in the reconciliation above are presented net of related adjustments to amortization of deferred sales inducements and
deferred policy acquisition costs and accretion of lifetime income benefit rider reserves where applicable. Notable items reflect the after-tax
impact to non-GAAP operating income available to common stockholders for certain items that do not reflect the company's expected
ongoing operations. Notable items primarily include the impact from actuarial assumption updates. The presentation of notable items is
intended to help investors better understand our results and to evaluate and forecast those results.
Non-GAAP operating income available to common stockholders for 2022, 2021 and 2020 includes effects from updates to assumptions as
follows:
Year Ended December 31,
2022
2021
2020
(Dollars in thousands)
Increase (decrease) in amortization of deferred sales inducements
$
8,670 $
(66,066) $
Increase (decrease) in amortization of deferred policy acquisition costs
Increase (decrease) in interest sensitive and index product benefits
Effect on non-GAAP operating income available to common stockholders
10,520
(53,042)
26,572
(78,183)
243,658
(78,036)
57,467
90,970
285,825
(340,895)
The impact to net income available to common stockholders and non-GAAP operating income available to common stockholders from
assumption updates varies due to the impact of fair value accounting for our fixed index annuity business as non-GAAP operating income
available to common stockholders eliminates the impact of fair value accounting for our fixed index annuity business. While the assumption
updates made during 2022, 2021 and 2020 were consistently applied, the impact to net income available to common stockholders and non-
GAAP operating income available to common stockholders varies due to different amortization rates being applied to gross profit adjustments
included in the valuation.
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Annuity product charges (surrender charges assessed against policy withdrawals and fees deducted from policyholder account balances for
lifetime income benefit riders) decreased 5% to $230.4 million in 2022 and decreased 3% to $242.6 million in 2021 from $251.2 million in
2020. 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
Year Ended December 31,
2022
2021
2020
(Dollars in thousands)
72,699
157,655
230,354
$
$
67,657
174,974
242,631
$
$
72,551
178,676
251,227
1,145,415
$
1,099,098
$
776,305
$
$
$
Average surrender charge collected on withdrawals subject to surrender charges
6.3 %
6.2 %
9.3 %
Fund values on policies subject to LIBR fees
Weighted average per policy LIBR fee
$
19,473,279
$
22,183,623
$
22,986,903
0.81 %
0.79 %
0.78 %
The decrease in annuity product charges during 2022 was attributable to a decrease in fees assessed for lifetime income benefit riders due to a
smaller volume of business in force subject to the fees slightly offset by an increase in the average fees being charged and an increase in
withdrawals subject to surrender charges compared to 2021. The smaller volume of business subject to the fees is primarily due to the
execution of the North End Re reinsurance treaty which was effective on July 1, 2021 and the execution of the AeBe reinsurance treaty which
was effective October 3, 2022. See Interest sensitive and index product benefits below for corresponding expense recognized on lifetime
income benefit riders.
Net investment income increased 13% to $2.3 billion in 2022 and decreased 7% to $2.0 billion in 2021 from $2.2 billion in 2020. The
increase for 2022 compared to 2021 was attributable to an increase in the average yield earned on invested assets during 2022. Average
invested assets excluding derivative instruments (on an amortized cost basis) decreased 3% to $53.2 billion in 2022 and increased 3% to $54.8
billion in 2021 compared to $53.1 billion in 2020.
The average yield earned on average invested assets was 4.34%, 3.73% and 4.12% for 2022, 2021 and 2020, respectively. The increase in
yield earned on average invested assets in 2022 was primarily attributable to strong returns on partnerships and other mark to market assets,
the benefit from higher short-term interest rates, lower average cash balances and the ramp in private assets partly offset by lower prepayment
income.
The expected return on investments purchased during 2022 was 5.01%, net of third-party investment management expenses. Purchases for
2022 included $5.7 billion of fixed maturity securities with an expected return of 4.02% and $5.0 billion of privately sourced assets with an
expected return of 6.14%. The privately sourced assets include investments in infrastructure, middle market credit and commercial real estate
equity. The expected return on investments purchased during 2021 and 2020 was 3.92% and 3.84%, respectively.
Change in fair value of derivatives primarily consists of call options purchased to fund annual index credits on fixed index annuities. The
components of change in fair value of derivatives are as follows:
Call options:
Gain (loss) on option expiration
Change in unrealized gains/losses
Warrants
Interest rate swaps
Interest rate caps
Year Ended December 31,
2022
2021
2020
(Dollars in thousands)
$
(287,328) $
1,368,381 $
(831,440)
264
(19,624)
—
(20,456)
810
—
—
15,042
19,562
—
—
62
$
(1,138,128) $
1,348,735 $
34,666
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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 level of gains on call option expirations, the fair values of those call options
and changes in the fair values of those call options between years. The changes in gain (loss) on option expiration and in unrealized gains/
losses on call options for the year ended December 31, 2022 as compared to 2021 are due to equity market performance in 2022 compared to
2021. A substantial portion of our call options are based upon the S&P 500 Index with the remainder based upon other equity and bond
market indices. The range of index appreciation (after applicable caps, participation rates and asset fees) for options expiring during these
years is as follows:
S&P 500 Index
Point-to-point strategy
Monthly average strategy
Monthly point-to-point strategy
Volatility control index point-to-point strategy
Fixed income (bond index) strategies
Year Ended December 31,
2022
2021
2020
0.0% - 12.5%
0.0% - 8.6%
0.0% - 12.9%
0.0% - 7.3%
0.0% - 6.5%
0.0% - 42.6%
0.0% - 29.4%
0.0% - 21.7%
0.0% - 9.7%
0.0% - 10.0%
0.0% - 17.4%
0.0% - 11.9%
0.0% - 14.0%
0.0% - 9.3%
0.0% - 13.6%
The change in fair value of derivatives is also influenced by the aggregate cost of options purchased. During 2022, the aggregate cost of
options were higher than in 2021 as option costs generally increased during 2022. The aggregate cost of options is also influenced by the
amount of policyholder funds allocated to the various indices and market volatility which affects option pricing. See Critical Accounting
Policies and Estimates - Policy Liabilities for Fixed Index Annuities.
Net realized gains (losses) on investments include gains and losses on the sale of securities and other investments and changes in allowances
for credit losses on our securities and mortgage loans on real estate. Net realized gains (losses) on investments fluctuate from year to year
primarily due to changes in the interest rate and economic environments and the timing of the sale of investments. See Note 3 - Investments
and Note 4 - Mortgage Loans on Real Estate to our audited consolidated financial statements and Financial Condition - Credit Losses for a
detailed presentation of the types of investments that generated the gains (losses) as well as discussion of credit losses on our securities
recognized during the periods presented and Financial Condition - Investments and Note 4 - Mortgage Loans on Real Estate to our audited
consolidated financial statements for discussion of credit losses recognized on mortgage loans on real estate.
Securities sold at losses are generally due to our long-term fundamental concern with the issuers' ability to meet their future financial
obligations or to improve our risk or duration profiles as they pertain to our asset liability management.
Other revenue increased 180% to $43.9 million in 2022 compared to $15.7 million in 2021. The increase for 2022 compared to 2021 was
primarily attributable to the increase in business ceded under the North End Re reinsurance treaty which was effective July 1, 2021. See Note
8 - Reinsurance and Policy Provisions to our audited consolidated financial statements for more information. The components of other
revenue are summarized as follows:
Asset liability management fees
Amortization of deferred gain
Year Ended December 31,
2022
2021
2020
(Dollars in thousands)
12,686 $
31,235
5,470 $
10,200
43,921 $
15,670 $
$
$
—
—
—
Interest sensitive and index product benefits decreased 67% to $889.7 million in 2022 and increased 74% to $2.7 billion in 2021 from $1.5
billion in 2020. 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,
2022
2021
2020
(Dollars in thousands)
305,292 $
1,977,888 $
249,579
334,779
253,725
449,793
747,489
198,745
597,036
889,650 $
2,681,406 $
1,543,270
$
$
28
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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 $0.3 billion, $2.0 billion and $0.8 billion for the
years ended December 31, 2022, 2021 and 2020, respectively. The decrease in interest credited in 2022 was due to a reduction in interest
credited to funds allocated to the fixed option strategy within our fixed index annuities due to a decrease in the average balance allocated to
the fixed option strategy partially offset by an increase in deferred annuity products that receive a fixed rate of interest. The decrease in
benefits recognized for lifetime income benefit riders for 2022 compared to 2021 was due to the impact of assumption updates made during
2022 compared to assumption updates made during 2021 partially offset by the impacts on the calculation of the lifetime income benefit rider
reserve of actual results compared to expected results for items such as lifetime income benefit rider election rates and the level of index
credits. The net impact of updating expected results with actual results led to an increase in the lifetime income benefit rider reserve for the
year ended December 31, 2022. In addition, fund value of policies with lifetime income benefit riders decreased as a result of the North End
Re reinsurance treaty executed during 2021 and the execution of the AeBe reinsurance treaty which was effective October 3, 2022. See Net
income available to common stockholders above for discussion of the changes in the assumptions used in determining reserves for lifetime
income benefit riders for the years ended December 31, 2022 and 2021.
Amortization of deferred sales inducements is based on historical, current and future expected gross profits. The changes in amortization
from period to period are the result of differences in actual gross profits compared to expected or modeled gross profits and changes to the
underlying business. The increases in amortization before and after gross profit adjustments for 2022 compared to 2021 were due to the
impact of assumption updates made during 2022 compared to the impact of assumption updates made during 2021. In addition, amortization
of deferred sales inducements for the year ended December 31, 2022 increased due to increases in actual gross profits for the year ended
December 31, 2022 compared to 2021. Amortization of deferred sales inducements for the year ended December 31, 2022 also increased as
index credits on index policies for the year ended December 31, 2022 were less than index credits on index policies for 2021. Bonus products
represented 63%, 65% and 75% of our net annuity account values at December 31, 2022, 2021 and 2020, respectively. The amount of
amortization is affected by amortization associated with fair value accounting for derivatives and embedded derivatives utilized in our fixed
index annuity business and amortization associated with net realized gains (losses) on investments. Fair value accounting for derivatives and
embedded derivatives utilized in our fixed index annuity business creates differences in the recognition of revenues and expenses from
derivative instruments including the embedded derivative liabilities in our fixed index annuity contracts. The change in fair value of the
embedded derivatives will not correspond to the change in fair value of the derivatives (purchased call options), because the purchased call
options are one-year options while the options valued in the fair value of embedded derivatives cover the expected lives of the contracts
which typically exceed ten years.
Amortization of deferred sales inducements is summarized as follows:
Year Ended December 31,
2022
2021
2020
(Dollars in thousands)
Amortization of deferred sales inducements before gross profit adjustments
$
234,778 $
112,790 $
243,067
Gross profit adjustments:
Fair value accounting for derivatives and embedded derivatives
Net realized losses on investments
177,131
(3,361)
40,899
(997)
Amortization of deferred sales inducements after gross profit adjustments
$
408,548 $
152,692 $
202,660
(7,563)
438,164
See Net income available to common stockholders and Non-GAAP operating income available to common stockholders, a non-GAAP
financial measure above for discussion of the impact of assumption updates on amortization of deferred sales inducements for the years
ended December 31, 2022 and 2021. See Critical Accounting Policies and Estimates - Deferred Policy Acquisition Costs and Deferred Sales
Inducements.
Change in fair value of embedded derivatives includes changes in the fair value of our fixed index annuity embedded derivatives (see Note
6 - Derivative Instruments to our audited consolidated financial statements). The components of change in fair value of embedded derivatives
are as follows:
Year Ended December 31,
2022
2021
2020
(Dollars in thousands)
Fixed index annuities - embedded derivatives
$
(2,561,676) $
(876,803) $
(1,922,085)
Other changes in difference between policy benefit reserves computed using derivative
accounting vs. long-duration contracts accounting
Reinsurance related embedded derivative
648,580
(439,502)
520,863
(2,362)
635,298
—
$
(2,352,598) $
(358,302) $
(1,286,787)
The change in fair value of the fixed index annuity embedded derivatives resulted from (i) changes in the expected index credits on the next
policy anniversary dates, which are related to the change in fair value of the call options acquired to fund those index credits discussed above
in Change in fair value of derivatives; (ii) changes in the expected annual cost of options we will purchase in the future to fund index credits
29
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beyond the next policy anniversary; (iii) changes in the discount rates used in estimating our embedded derivative liabilities; and (iv) the
growth in the host component of the policy liability. The amounts presented as "Other changes in difference between policy benefit reserves
computed using derivative accounting vs. long-duration contracts accounting" represent the total change in the difference between policy
benefit reserves for fixed index annuities computed under the derivative accounting standard and the long-duration contracts accounting
standard at each balance sheet date, less the change in fair value of our fixed index annuities embedded derivative. See Critical Accounting
Policies and Estimates- Policy Liabilities for Fixed Index Annuities.
The primary reasons for the decrease in the change in fair value of the fixed index annuity embedded derivatives during 2022 compared to
2021 were due to decreases in expected index credits on the next policy anniversary dates resulting from decreases in the fair value of the call
options acquired to fund the index credits during 2022 compared to increases in the expected index credits resulting from increases in the fair
value of the call options acquired to fund these index credits during 2021 and larger increases in the net discount rates used in the calculation
during 2022 compared to 2021. The discount rates used in estimating our embedded derivative liabilities fluctuate based on the changes in
the general level of risk free interest rates and our own credit spread.
The reinsurance agreements executed in 2022 with AeBe and 2021 with North End Re to cede certain fixed index annuity product liabilities
on a coinsurance funds withheld and modified coinsurance basis contain embedded derivatives. The fair value of these embedded derivatives
are based on the unrealized gains and losses of the underlying assets held in the funds withheld and modified coinsurance portfolios and the
fair value of the assets decreased during 2022. See Note 6 - Derivative Instruments for discussion on this embedded derivative.
Amortization of deferred policy acquisition costs is based on historical, current and future expected gross profits. The changes in
amortization from period to period are the result of differences in actual gross profits compared to expected or modeled gross profits and
changes to the underlying business. The increases in amortization before and after gross profit adjustments for 2022 compared to 2021 were
due to the impact of assumption updates made during 2022 compared to the impact of assumption updates made during 2021. In addition,
amortization of deferred policy acquisition costs for the year ended December 31, 2022 increased due to increases in actual gross profits for
the year ended December 31, 2022 as compared to 2021. Amortization of deferred policy acquisition costs for the year ended December 31,
2022 also increased as index credits on index policies for the year ended December 31, 2022 were less than index credits on index policies for
2021. The amount of amortization is affected by amortization associated with fair value accounting for derivatives and embedded derivatives
utilized in our fixed index annuity business and amortization associated with net realized gains (losses) on investments. As discussed above,
fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business creates differences in the
recognition of revenues and expenses from derivative instruments including the embedded derivative liabilities in our fixed index annuity
contracts.
Amortization of deferred policy acquisition costs is summarized as follows:
Year Ended December 31,
2022
2021
2020
(Dollars in thousands)
Amortization of deferred policy acquisition costs before gross profit adjustments
$
330,290 $
181,589 $
368,139
Gross profit adjustments:
Fair value accounting for derivatives and embedded derivatives
Net realized losses on investments
290,905
(5,895)
88,576
(1,837)
Amortization of deferred policy acquisition costs after gross profit adjustments
$
615,300 $
268,328 $
293,827
(12,412)
649,554
See Net income available to common stockholders and non-GAAP operating income available to common stockholders, a non-GAAP
financial measure, above for discussion of the impact of assumption updates on amortization of deferred policy acquisition costs for the
years ended December 31, 2022 and 2021. See Critical Accounting Policies and Estimates - Deferred Policy Acquisition Costs and Deferred
Sales Inducements.
Other operating costs and expenses decreased 2% to $239.6 million in 2022 and increased 33% to $243.7 million in 2021 from $183.6
million in 2020 and are summarized as follows:
Salary and benefits
Other
Total other operating costs and expenses
Year Ended December 31,
2022
2021
2020
(Dollars in thousands)
162,061 $
139,155 $
77,555
104,557
239,616 $
243,712 $
$
$
95,815
87,821
183,636
Salary and benefits increased $22.9 million for the year ended December 31, 2022 compared to 2021. The increases in salary and benefits
were primarily due to an increased number of employees related to our continued growth and implementation of AEL 2.0 as well as increases
in the expense recognized under our equity and cash incentive compensation programs ("incentive compensation programs"). The increases in
expenses related to our incentive compensation programs were primarily due to new compensation programs and increases in the expected
payouts due to a larger number of employees participating in the programs.
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Other expenses decreased for the year ended December 31, 2022 compared to 2021. The decrease was primarily related to a decrease in risk
charges expense due to the recapture of an existing reinsurance agreement which was replaced with a new agreement with a lower risk charge.
We expect the level of other operating costs and expenses to be in the $250 million range for 2023 as we continue to execute on the AEL 2.0
strategy.
Income tax expense increased in 2022 primarily due to an increase in income before income taxes. The effective income tax rates were
21.0% and 21.4% for 2022 and 2021, 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 a statutory rate of approximately 21.5% reflecting the absence of
state income taxes for substantially all of the states that the life insurance subsidiaries do business in. The income (loss) for the parent
company and other non-life insurance subsidiaries (the "non-life insurance group") is generally taxed at a statutory tax rate of 28.7%
reflecting the combined federal and state income tax rates. The effective income tax rates resulting from the combination of the income tax
provisions for the life and non-life sources of income (loss) vary from year to year based primarily on the relative size of pretax income from
the two sources.
We did not provide for a valuation allowance 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 the unrealized losses on available for sale fixed
maturity securities 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. To the extent future changes in facts and circumstances impact our intent and ability to hold these assets to recovery, this
could impact the realization of the deferred tax asset.
Financial Condition
Investments
Our investment strategy is to maximize current income and total investment return through active management while maintaining a
responsible asset allocation strategy containing high credit quality investments and providing adequate liquidity to meet our cash obligations
to policyholders and others. Our investment strategy is also reflective of insurance statutes, which regulate the type of investments that our
life subsidiaries are permitted to make and which limit the amount of funds that may be used for any one type of investment.
As previously noted, as part of our AEL 2.0 investment pillar, we have increased our allocation to private assets in part by partnering with
proven asset managers in our focus expansion sectors of commercial real estate, residential real estate including mortgages and single family
rental homes, infrastructure debt and equity, middle market lending and lending to revenue, technology and software sector companies.
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The composition of our investment portfolio is summarized as follows:
December 31,
2022
2021
Carrying
Amount
Percent
Carrying
Amount
Percent
(Dollars in thousands)
Fixed maturity securities:
U.S. Government and agencies
States, municipalities and territories
Foreign corporate securities and foreign governments
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Total fixed maturity securities
Mortgage loans on real estate
Real estate investments
Limited partnerships and limited liability companies
Derivative instruments
Other investments
Coinsurance investments (1)
$
169,071
0.4 % $
1,078,746
3,822,943
616,938
20,201,774
1,366,927
3,447,075
5,155,254
34,779,982
6,778,977
1,056,063
1,266,779
431,727
829,900
45,143,428
6,181,870
$
51,325,298
8.5 %
1.4 %
3,758,761
375,097
44.8 %
32,631,189
3.0 %
7.6 %
11.4 %
77.1 %
15.0 %
2.3 %
2.8 %
1.0 %
1.8 %
1,125,049
4,682,900
5,146,567
48,798,309
5,650,480
337,939
520,120
1,277,480
690,344
1.9 %
6.5 %
0.6 %
57.0 %
2.0 %
8.2 %
9.0 %
85.2 %
9.9 %
0.6 %
0.9 %
2.2 %
1.2 %
100.0 %
57,274,672
100.0 %
3,101,832
$
60,376,504
(1)
Investments held by American Equity Life in a segregated account to support liabilities reinsured under both coinsurance with funds
withheld and modified coinsurance reinsurance agreements.
Fixed Maturity Securities
Our fixed maturity security portfolio is managed to minimize risks such as interest rate changes and defaults or credit losses while earning a
sufficient and stable return on our investments. The largest portion of our fixed maturity securities are in investment grade (typically NAIC
designation 1 or 2) publicly traded or privately placed corporate securities.
A summary of our fixed maturity securities by NRSRO ratings is as follows:
Rating Agency Rating
Amortized
Cost
2022
Carrying
Amount
December 31,
Percent of
Fixed Maturity
Securities
Amortized
Cost
(Dollars in thousands)
2021
Carrying
Amount
Percent of
Fixed Maturity
Securities
Aaa/Aa/A
Baa
Total investment grade
Ba
B
Caa
Ca and lower
Total below investment grade
Coinsurance investments (1)
$
24,462,459 $
21,723,282
62.5 % $
24,943,232 $
27,496,506
14,228,490
38,690,949
554,605
94,185
20,020
40,664
709,474
39,400,423
5,465,596
12,434,302
34,157,584
485,166
79,058
18,540
39,634
622,398
34,779,982
5,024,635
35.7 %
98.2 %
1.4 %
0.2 %
0.1 %
0.1 %
1.8 %
18,443,171
43,386,403
899,253
104,443
38,484
61,352
1,103,532
100.0 %
44,489,935
2,509,248
20,147,369
47,643,875
930,321
117,989
39,354
66,770
1,154,434
48,798,309
2,507,634
$
44,866,019 $
39,804,617
$
46,999,183 $
51,305,943
56.4 %
41.3 %
97.7 %
1.9 %
0.2 %
0.1 %
0.1 %
2.3 %
100.0 %
(1)
Investments held by American Equity Life in a segregated account to support liabilities reinsured under both coinsurance with funds
withheld and modified coinsurance reinsurance agreements.
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The NAIC's Securities Valuation Office ("SVO") is responsible for the day-to-day credit quality assessment of securities owned by state
regulated insurance companies. The purpose of such assessment and valuation is for determining regulatory capital requirements and
regulatory reporting. Insurance companies report ownership to the SVO when such securities are eligible for regulatory filings. The SVO
conducts credit analysis on these securities for the purpose of assigning a NAIC designation and/or unit price. Typically, if a security has
been rated by an NRSRO, the SVO utilizes that rating and assigns a NAIC designation based upon the following system:
NAIC Designation
1
NRSRO Equivalent Rating
Aaa/Aa/A
2
3
4
5
6
Baa
Ba
B
Caa
Ca and lower
The NAIC introduced 20 NAIC designation modifiers that are applied to each NAIC designation to determine a security's NAIC designation
category. New risk-based capital charges for each of the 20 designated categories for reporting were effective beginning December 31, 2021.
For most of the bonds held in our portfolio the NAIC designation matches the NRSRO equivalent rating. However, for certain loan-backed
and structured securities, as defined by the NAIC, the NAIC rating is not always equivalent to the NRSRO rating presented in the previous
table. The NAIC has adopted revised rating methodologies for certain loan-backed and structured securities comprised of non-agency
residential mortgage backed securities ("RMBS") and commercial mortgage backed securities ("CMBS"). The NAIC’s objective with the
revised rating methodologies for these structured securities is to increase the accuracy in assessing expected losses and use the improved
assessment to determine a more appropriate capital requirement for such structured securities. The revised methodologies reduce regulatory
reliance on rating agencies and allow for greater regulatory input into the assumptions used to estimate expected losses from structured
securities.
The use of this process by the SVO may result in certain non-agency RMBS and CMBS being assigned an NAIC designation that is different
than the equivalent NRSRO rating. The NAIC designations for non-agency RMBS and CMBS are based on security level expected losses as
modeled by an independent third party (engaged by the NAIC) and the statutory carrying value of the security, including any purchase
discounts or impairment charges previously recognized. Evaluation of non-agency RMBS and CMBS held by insurers using the NAIC rating
methodologies is performed on an annual basis.
Our fixed maturity security portfolio is managed to minimize risks such as defaults or impairments while earning a sufficient and stable return
on our investments. Our strategy with respect to our fixed maturity securities portfolio has been to invest primarily in investment grade
securities. Investment grade is NAIC 1 and 2 securities and Baa3/BBB- and better securities on the NRSRO scale. We expect this strategy to
meet the objective of minimizing risk while also managing asset capital charges on a regulatory capital basis.
A summary of our fixed maturity securities by NAIC designation is as follows:
December 31, 2022
December 31, 2021
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)
$ 24,466,961 $ 21,752,775 $ 21,752,775
62.5 % $ 25,378,938 $ 28,006,835 $ 28,006,835
14,185,506
12,398,001
12,398,001
35.7 % 18,028,077
19,667,529
19,667,529
562,190
109,409
61,721
14,636
490,198
490,198
1.4 %
909,173
91,495
36,738
10,775
91,495
36,738
10,775
0.3 %
133,070
0.1 %
— %
16,496
24,181
941,071
147,160
15,357
20,357
941,071
147,160
15,357
20,357
Percentage
of Total
Carrying
Amount
57.4 %
40.3 %
2.0 %
0.3 %
— %
— %
39,400,423
34,779,982
34,779,982
100.0 % 44,489,935
48,798,309
48,798,309
100.0 %
Coinsurance
investments (1)
5,465,596
5,024,635
5,024,635
2,509,248
2,507,634
2,507,634
$ 44,866,019 $ 39,804,617 $ 39,804,617
$ 46,999,183 $ 51,305,943 $ 51,305,943
(1)
Investments held by American Equity Life in a segregated account to support liabilities reinsured under both coinsurance with funds
withheld and modified coinsurance reinsurance agreements.
The amortized cost and fair value of fixed maturity securities at December 31, 2022, by contractual maturity are presented in Note 3 -
Investments to our audited consolidated financial statements in this Form 10-K, which is incorporated by reference in this Item 7.
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Unrealized Losses
The amortized cost and fair value of fixed maturity securities that were in an unrealized loss position were as follows:
Number of
Securities
Amortized
Cost
Unrealized
Losses, Net of
Allowance
(Dollars in thousands)
Allowance for
Credit Losses
Fair Value
December 31, 2022
Fixed maturity securities, available for sale:
U.S. Government and agencies
States, municipalities and territories
Foreign corporate securities and foreign governments
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Coinsurance investments (1)
December 31, 2021
Fixed maturity securities, available for sale:
U.S. Government and agencies
States, municipalities and territories
Foreign corporate securities and foreign governments
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Coinsurance investments (1)
27 $
165,746 $
(4,637) $
— $
161,109
514
43
3,265,080
590,944
(574,814)
(74,151)
2,103
21,393,656
(3,224,609)
219
339
567
3,812
698
1,235,672
3,750,331
4,579,149
34,980,578
3,085,834
(126,368)
(391,966)
(382,563)
(4,779,108)
(504,739)
—
—
(3,214)
(133)
—
—
2,690,266
516,793
18,165,833
1,109,171
3,358,365
4,196,586
(3,347)
30,198,123
—
2,581,095
4,510 $
38,066,412 $
(5,283,847) $
(3,347) $
32,779,218
8 $
761,102 $
(124) $
— $
42
3
176
74
89
577
969
458
173,106
34,673
1,433,317
280,044
795,405
3,118,385
6,596,032
1,327,173
(2,485)
(801)
(26,035)
(2,093)
(16,553)
(50,018)
(98,109)
(14,261)
(2,776)
—
—
(70)
—
—
(2,846)
—
760,978
167,845
33,872
1,407,282
277,881
778,852
3,068,367
6,495,077
1,312,912
1,427 $
7,923,205 $
(112,370) $
(2,846) $
7,807,989
(1)
Investments held by American Equity Life in a segregated account to support liabilities reinsured under both coinsurance with funds
withheld and modified coinsurance reinsurance agreements.
The unrealized losses at December 31, 2022 are principally related to the timing of the purchases of certain securities, which carry less yield
than those available at December 31, 2022. Approximately 98% and 83% of the unrealized losses on fixed maturity securities shown in the
above table for December 31, 2022 and 2021, respectively, are on securities that are rated investment grade, defined as being the highest two
NAIC designations.
The increase in unrealized losses from December 31, 2021 to December 31, 2022 was primarily related to an increase in treasury yields
during the twelve months ended December 31, 2022. The 10-year U.S. Treasury yields at December 31, 2022 and December 31, 2021 were
3.88% and 1.52%, respectively. The 30-year U.S. Treasury yields at December 31, 2022 and December 31, 2021 were 3.97% and 1.90%,
respectively.
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The following table sets forth the composition by credit quality (NAIC designation) of fixed maturity securities with gross unrealized losses:
NAIC Designation
December 31, 2022
1
2
3
4
5
6
Coinsurance investments (2)
December 31, 2021
1
2
3
4
5
6
Coinsurance investments (2)
Carrying Value of
Securities with
Gross Unrealized
Losses
Percent of
Total
Gross
Unrealized
Losses (1)
Percent of
Total
(Dollars in thousands)
$
$
$
$
18,396,691
11,207,008
465,867
89,686
29,075
9,796
30,198,123
2,581,095
32,779,218
3,825,403
2,233,761
376,933
33,229
9,506
16,244
6,495,076
1,312,912
7,807,988
60.9 % $
37.1 %
1.6 %
0.3 %
0.1 %
— %
100.0 %
$
58.9 % $
34.4 %
5.8 %
0.5 %
0.1 %
0.3 %
100.0 %
$
(2,836,027)
(1,825,520)
(72,976)
(17,922)
(25,037)
(1,626)
(4,779,108)
(504,739)
(5,283,847)
(33,823)
(47,154)
(13,723)
(1,083)
(1,140)
(1,186)
(98,109)
(14,261)
(112,370)
59.4 %
38.2 %
1.5 %
0.4 %
0.5 %
— %
100.0 %
34.4 %
48.1 %
14.0 %
1.1 %
1.2 %
1.2 %
100.0 %
(1) Gross unrealized losses have been adjusted to reflect the allowance for credit loss of $3.3 million and $2.8 million as of December 31,
2022 and 2021, respectively.
(2)
Investments held by American Equity Life in a segregated account to support liabilities reinsured under both coinsurance with funds
withheld and modified coinsurance reinsurance agreements.
Our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have
been in a continuous unrealized loss position at December 31, 2022 and 2021, along with a description of the factors causing the unrealized
losses is presented in Note 3 - Investments to our audited consolidated financial statements in this Form 10-K, which is incorporated by
reference in this Item 7.
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The amortized cost and fair value of fixed maturity securities in an unrealized loss position and the number of months in a continuous
unrealized loss position (fixed maturity securities that carry an NRSRO rating of BBB/Baa or higher are considered investment grade) were as
follows:
Number of
Securities
Amortized
Cost, Net of
Allowance (1)
Gross
Unrealized
Losses, Net of
Allowance (1)
Fair Value
(Dollars in thousands)
December 31, 2022
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
Coinsurance investments (2)
December 31, 2021
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
Coinsurance investments (2)
984 $
6,296,895 $
5,968,793 $
(328,102)
2,308
427
3,719
12
34
47
93
3,812
698
24,207,057
3,761,294
34,265,246
51,711
319,964
340,310
711,985
34,977,231
3,085,834
20,481,666
3,153,240
29,603,699
47,494
265,726
281,204
594,424
30,198,123
2,581,095
(3,725,391)
(608,054)
(4,661,547)
(4,217)
(54,238)
(59,106)
(117,561)
(4,779,108)
(504,739)
4,510 $
38,063,065 $
32,779,218 $
(5,283,847)
567 $
4,255,321 $
4,223,368 $
39
281
887
11
7
64
82
969
458
132,110
1,752,779
6,140,210
43,745
28,544
380,686
452,975
6,593,185
1,327,173
130,156
1,705,640
6,059,164
42,994
25,706
367,213
435,913
6,495,077
1,312,912
(31,953)
(1,954)
(47,139)
(81,046)
(751)
(2,838)
(13,473)
(17,062)
(98,108)
(14,261)
1,427 $
7,920,358 $
7,807,989 $
(112,369)
(1) Amortized cost and gross unrealized losses have been adjusted to reflect the allowance for credit loss of $3.3 million and $2.8 million as
of December 31, 2022 and 2021, respectively.
(2)
Investments held by American Equity Life in a segregated account to support liabilities reinsured under both coinsurance with funds
withheld and modified coinsurance reinsurance agreements.
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The amortized cost and fair value of fixed maturity securities (excluding U.S. Government and agencies) segregated by investment grade
(NRSRO rating of BBB/Baa or higher) and below investment grade that had unrealized losses greater than 20%, when comparing fair value to
amortized cost, and the number of months in a continuous unrealized loss position were as follows:
December 31, 2022
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
Coinsurance investments (2)
December 31, 2021
Investment grade:
Less than six months
Six months or more and less than twelve months
Twelve months or greater
Total investment grade
Below investment grade:
Less than six months
Six months or more and less than twelve months
Twelve months or greater
Total below investment grade
Coinsurance investments (2)
Number of
Securities
Amortized
Cost, Net of
Allowance (1)
Fair
Value
Gross
Unrealized
Losses, Net of
Allowance (1)
(Dollars in thousands)
333 $
3,955,378 $
3,062,075 $
(893,303)
299
1
633
8
7
—
15
648
423
4,496,559
40,351
8,492,288
61,481
111,990
—
173,471
8,665,759
1,250,509
3,146,868
26,854
6,235,797
47,057
71,271
—
118,328
6,354,125
859,395
(1,349,691)
(13,497)
(2,256,491)
(14,424)
(40,719)
—
(55,143)
(2,311,634)
(391,114)
1,071 $
9,916,268 $
7,213,520 $
(2,702,748)
— $
— $
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
— $
— $
—
—
—
—
—
—
—
—
—
—
—
(1) Amortized cost and gross unrealized losses have been adjusted to reflect the allowance for credit loss of $3.3 million and $2.8 million as
of December 31, 2022 and 2021, respectively.
(2)
Investments held by American Equity Life in a segregated account to support liabilities reinsured under both coinsurance with funds
withheld and modified coinsurance reinsurance agreements.
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The amortized cost and fair value of fixed maturity securities, by contractual maturity, that were in an unrealized loss position are shown
below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties. All of our mortgage and other asset backed securities provide for periodic payments throughout their
lives, and are shown below as a separate line.
December 31, 2022
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
Coinsurance investments (1)
December 31, 2021
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
Coinsurance investments (1)
Available for sale
Amortized
Cost
Fair Value
(Dollars in thousands)
$
567,599 $
3,591,040
4,844,271
7,443,657
8,968,858
25,415,425
1,235,672
3,750,331
4,579,149
34,980,577
3,085,834
$
$
38,066,411 $
762,035 $
49,668
476,811
443,909
669,775
2,402,198
280,044
795,405
3,118,385
6,596,032
1,327,173
$
7,923,205 $
563,298
3,377,197
4,280,762
6,377,081
6,935,663
21,534,001
1,109,171
3,358,365
4,196,586
30,198,123
2,581,095
32,779,218
761,590
46,687
467,284
435,589
658,827
2,369,977
277,881
778,852
3,068,367
6,495,077
1,312,912
7,807,989
(1)
Investments held by American Equity Life in a segregated account to support liabilities reinsured under both coinsurance with funds
withheld and modified coinsurance reinsurance agreements.
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International Exposure
We hold fixed maturity securities with international exposure. As of December 31, 2022, 14.7% of the carrying value of our fixed maturity
securities was comprised of corporate debt securities of issuers based outside of the United States and debt securities of foreign governments.
Our fixed maturity securities with international exposure are primarily denominated in U.S. dollars. Our investment professionals analyze
each holding for credit risk by economic and other factors of each country and industry. The following table presents our international
exposure in our fixed maturity portfolio by country or region:
Europe
Asia/Pacific
Latin America
Non-U.S. North America
Australia & New Zealand
Other
Coinsurance investments (1)
December 31, 2022
Amortized
Cost
Carrying Amount/
Fair Value
(Dollars in thousands)
$
2,285,608 $
1,994,351
383,900
313,097
1,178,177
927,819
795,657
5,884,258
1,036,513
$
6,920,771 $
324,205
272,291
1,045,695
815,440
696,191
5,148,173
909,094
6,057,267
Percent
of Total
Carrying
Amount
5.7 %
0.9 %
0.8 %
3.0 %
2.3 %
2.0 %
14.7 %
(1)
Investments held by American Equity Life in a segregated account to support liabilities reinsured under both coinsurance with funds
withheld and modified coinsurance reinsurance agreements.
All of the securities presented in the table above are investment grade (NAIC designation of either 1 or 2), except for the following:
Europe
Asia/Pacific
Latin America
Non-U.S. North America
Australia & New Zealand
Other
Coinsurance investments (1)
December 31, 2022
Amortized Cost
Carrying Amount/
Fair Value
(Dollars in thousands)
$
96,525 $
62
45,570
23,209
219
91,588
257,173
32,889
$
290,062 $
82,618
52
37,194
19,911
182
62,509
202,466
20,123
222,589
(1)
Investments held by American Equity Life in a segregated account to support liabilities reinsured under both coinsurance with funds
withheld and modified coinsurance reinsurance agreements.
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Watch List
At each balance sheet date, we identify invested assets which have characteristics (i.e., significant unrealized losses compared to amortized
cost and industry trends) creating uncertainty as to our future assessment of credit losses. As part of this assessment, we review not only a
change in current price relative to amortized cost but the issuer's current credit rating and the probability of full recovery of principal based
upon the issuer's financial strength. For corporate issuers, we evaluate the financial stability and quality of asset coverage for the securities
relative to the term to maturity for the issues we own. For structured securities, we evaluate changes in factors such as collateral performance,
default rates, loss severity and expected cash flows. At December 31, 2022, the amortized cost and fair value of securities on the watch list
(all fixed maturity securities) are as follows:
General Description
States, municipalities and territories
Corporate securities - Public securities
Corporate securities - Private placement securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Collateralized loan obligations
Number of
Securities
Amortized
Cost
Allowance for
Credit Losses
Amortized
Cost, Net of
Allowance
Net Unrealized
Losses,
Net of Allowance
Fair
Value
$
20,657 $
— $
20,657 $
(3,344) $
(Dollars in thousands)
20,860
10,646
25,095
41,899
2,314
103,907
—
(3,214)
(133)
—
—
—
20,860
7,432
24,962
41,899
2,314
(1,050)
—
(2,954)
(2,752)
—
103,907
(21,239)
17,313
19,810
7,432
22,008
39,147
2,314
82,668
$
225,378 $
(3,347) $
222,031 $
(31,339) $
190,692
1
6
1
22
8
1
16
55
We expect to recover the unrealized losses, net of allowances, as we did not have the intent to sell and it was not more likely than not that we
would be required to sell these securities prior to recovery of the amortized cost basis, net of allowances. Our analysis of these securities and
their credit performance at December 31, 2022 is as follows:
States municipalities and territories: The decline in value of this security is primarily due to the security being recently restructured as part of
bankruptcy proceedings and uncertainty around the impact of the restructure.
Corporate securities: The corporate securities included on the watch list primarily include a security in the utilities industry that is under
financial stress due to the impact of power outages and a security in the retail market which is in an unrealized loss position and for which we
have the intent to sell as part of our risk reduction effort.
Structured securities: The structured securities included on the watch list have generally experienced higher levels of stress due to the impact
COVID-19 had on the economy. In addition, certain securities are included on the watch list as they are in an unrealized loss position and we
have the intent to sell as part of our risk reduction effort.
Credit Losses
We have a policy and process to identify securities in our investment portfolio for which we recognize credit loss. See Critical Accounting
Policies and Estimates—Evaluation of Allowance for Credit Losses on Available for Sale Fixed Maturity Securities and Mortgage Loan
Portfolios and Note 3 - Investments to our audited consolidated financial statements in this Form 10-K, which is incorporated by reference in
this Item 7.
During 2022, we recognized $15.0 million of credit losses which includes $10.0 million of credit losses on structured securities primarily due
to our intent to sell such securities and $7.1 million of credit losses on corporate securities due to a $3.3 million credit loss on a security and
$3.8 million of credit losses on securities due to our intent to sell such securities which were partially offset by a $2.1 million reduction in
credit losses primarily due to revised financial outlook on securities related to senior living facilities in the Southeastern region of the United
States driven in part by a restructuring of its debt facilities.
During 2021, we recognized credit losses of $6.2 million related to our fixed maturity securities which consisted of $6.9 million of credit
losses on commercial mortgage backed securities due to our intent to sell the securities, partially offset by net recoveries on corporate
securities, municipal securities and residential mortgage backed securities.
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Mortgage Loans on Real Estate
Our financing receivables consist of three mortgage loan portfolio segments: commercial mortgage loans, agricultural mortgage loans and
residential mortgage loans. Our commercial mortgage loan portfolio consists of loans with an outstanding principal balance of $3.6 billion as
of December 31, 2022 and 2021. This portfolio consists of mortgage loans collateralized by the related properties and is diversified as to
property type, location and loan size. Our mortgage lending policies establish limits on the amount that can be loaned to one borrower and
other criteria to attempt to reduce the risk of default. Our agricultural mortgage loan portfolio consists of loans with an outstanding principal
balance of $567.6 million and $408.1 million as of December 31, 2022 and 2021, respectively. These loans are collateralized by agricultural
land and are diversified as to location within the United States. Our residential mortgage loan portfolio consists of loans with an outstanding
principal balance of $2.8 billion and $1.7 billion as of December 31, 2022 and 2021, respectively. These loans are collateralized by the
related properties and are diversified as to location within the United States. Mortgage loans on real estate are generally reported at cost
adjusted for amortization of premiums and accrual of discounts, computed using the interest method and net of valuation allowances.
At December 31, 2022 and 2021, the largest principal amount outstanding for any single commercial mortgage loan was $83.3 million and
$81.5 million, respectively, and the average loan size was $5.8 million and $5.3 million, respectively. In addition, the average loan-to-value
ratio for commercial and agricultural mortgage loans combined was 51.4% and 52.3% at December 31, 2022 and 2021, respectively, based
upon the underwriting and appraisal at the time the loan was made. This loan-to-value ratio is indicative of our conservative underwriting
policies and practices for originating mortgage loans and may not be indicative of collateral values at the current reporting date. Our current
practice is to only obtain market value appraisals of the underlying collateral at the inception of the loan unless we identify indicators of
impairment in our ongoing analysis of the portfolio, in which case, we either calculate a value of the collateral using a capitalization method
or obtain a third party appraisal of the underlying collateral. The commercial mortgage loan portfolio is summarized by geographic region
and property type in Note 4 - Mortgage Loans on Real Estate 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 mortgage loans up to 90 days in advance. At December 31, 2022, we had commitments
to fund commercial mortgage loans totaling $112.8 million, with interest rates ranging from 6.9% to 8.2%. During 2022 and 2021, the
commercial mortgage loan industry has been very competitive due to relatively attractive returns that can be realized on mortgage loans. For
the year ended December 31, 2022, we received $403.6 million in cash for loans being paid in full compared to $350.6 million for the year
ended December 31, 2021. Some of the loans being paid off have either reached their maturity or are nearing maturity. At December 31,
2022, we had commitments to fund agricultural mortgage loans totaling $18.5 million with interest rates ranging from 6.4% to 6.7%, and had
commitments to fund residential mortgage loans totaling $288.8 million with interest rates ranging from 7.00% to 12.0%.
See Note 4 - Mortgage Loans on Real Estate to our audited consolidated financial statements, incorporated by reference, for a presentation of
our valuation allowance, foreclosure activity and troubled debt restructure analysis. We have a process by which we evaluate the credit
quality of each of our mortgage loans. This process utilizes each loan's loan-to-value and debt service coverage ratios as primary metrics.
See Note 4 - Mortgage Loans on Real Estate to our audited consolidated financial statements, incorporated by reference, for a summary of our
portfolio by loan-to-value and debt service coverage ratios.
We closely monitor loan performance for our commercial, agricultural and residential mortgage loan portfolios. Commercial, agricultural and
residential loans are considered nonperforming when they are 90 days or more past due. Aging of financing receivables is summarized in the
following table:
As of December 31, 2022:
Commercial mortgage loans
Agricultural mortgage loans
Residential mortgage loans
Total mortgage loans
As of December 31, 2021:
Commercial mortgage loans
Agricultural mortgage loans
Residential mortgage loans
Total mortgage loans
Current
30-59 days
past due
60-89 days
past due
Over 90 days
past due
Total
$
3,554,558 $
562,828
2,751,261
(Dollars in thousands)
— $
—
— $
—
62,450
16,924
— $
3,554,558
3,135
34,843
565,963
2,865,478
$
6,868,647 $
62,450 $
16,924 $
37,978 $
6,985,999
$
3,628,502 $
406,999
1,631,999
— $
—
34,447
— $
— $
3,628,502
—
3,030
—
7,045
406,999
1,676,521
$
5,667,500 $
34,447 $
3,030 $
7,045 $
5,712,022
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Private Assets
The following table is a breakout of our private asset investments as of December 31, 2022 and 2021.
Private Asset Class
Real estate loans
Commercial
Residential
Agricultural
Total real estate loans
Private credit
Middle market
Specialty finance
Infrastructure debt
Total private credit
Equity
Residential real estate
Commercial real estate
Infrastructure
Core private equity
Total equity
Total private assets
December 31, 2022
December 31, 2021
Amount
Percent
Amount
Percent
(Dollars in thousands)
$
$
3,385
3,002
566
6,953
1,493
443
555
2,491
961
117
91
364
1,533
10,977
6.8 % $
6.0 %
1.2 %
14.0 %
3.0 %
0.9 %
1.1 %
5.0 %
1.9 %
0.2 %
0.2 %
0.7 %
3.0 %
3,591
1,772
407
5,770
1,062
—
508
1,570
344
5
73
253
675
22.0 % $
8,015
6.6 %
3.2 %
0.8 %
10.6 %
2.0 %
— %
0.9 %
2.9 %
0.6 %
— %
0.1 %
0.5 %
1.2 %
14.7 %
The investment balances within the table above include fixed maturity securities and mortgage loans at amortized cost and real estate and
other investments at carrying values as reflected in the consolidated balance sheets.
Derivative Instruments
Our derivative instruments consist of call options purchased to provide the income needed to fund the annual index credits on our fixed index
annuity products and interest rate swaps used to hedge against changes in fair value due to changes in interest rates. The fair value of the call
options is based upon the amount of cash that would be required to settle the call options obtained from the counterparties adjusted for the
nonperformance risk of the counterparty. The nonperformance risk for each counterparty is based upon its credit default swap rate. We have
no performance obligations related to the call options. The fair value of the pay fixed/receive float interest rate swaps are determined using
internal valuation models that generate discounted expected future cash flows by constructing a projected Secure Overnight Financing Rate
(SOFR) curve over the term of the swap.
Our interest rate swaps qualify for hedge accounting and our call options do not qualify for hedge accounting. Any change in the fair value of
the derivatives is recognized immediately in the consolidated statements of operations. A presentation of our derivative instruments along
with a discussion of the business strategy involved with our derivatives for both our derivatives designated as hedging instruments and our
derivatives not designated as hedging instruments is included in Note 6 - Derivative Instruments to our 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 decreased to $61.1 billion at December 31, 2022 compared to $65.5 billion at December 31, 2021.
The decrease in policy benefit reserves is due to additional in-force policy reserves being ceded to third party reinsurers during 2022 as well
as funds returned to policyholders being in excess of net deposits and interest and index credits credited to policyholders during 2022.
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 10 - Notes and Loan Payable 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.
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See Note 11 - Subordinated Debentures 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, 2022, approximately 90% or $43.0 billion of our annuity liabilities were subject to penalty upon surrender, with a
weighted average remaining surrender charge period of 4.6 years and a weighted average surrender charge percentage of 7.9%.
Our insurance subsidiaries generally have adequate cash flows from annuity deposits and investment income to meet their policyholder and
other obligations. Net cash flows from annuity deposits and funds returned to policyholders as surrenders, withdrawals and death claims were
$(1.9) billion for the year ended December 31, 2022 compared to $1.3 billion for the year ended December 31, 2021 with the decrease
attributable to a $3.1 billion decrease in net annuity deposits after coinsurance and a $66.9 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, mortgage loans, and other high quality private assets. We have a highly liquid investment portfolio that can be used
to meet policyholder and other obligations as needed. In addition, we intend to hold approximately 1% to 3% of our investment portfolio in
cash and cash equivalents. Scheduled principal repayments, calls and tenders of available for sale fixed maturity securities and net investment
income were $2.8 billion and $2.3 billion, respectively, during the year ended December 31, 2022.
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, term loan and subordinated debentures issued to a subsidiary trust), pay operating expenses and
pay dividends to common and preferred stockholders. Our assets consist primarily of the capital stock and surplus notes of our subsidiaries.
Accordingly, our future cash flows depend upon the availability of dividends, surplus note interest payments and other statutorily permissible
payments from our subsidiaries, such as payments under our investment advisory agreements and tax allocation agreement with our
subsidiaries. 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 2023.
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 2023, up to $369.3 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 $2.0 billion of statutory earned surplus at December 31, 2022.
The maximum distribution permitted by law or contract is not necessarily indicative of an insurer's actual ability to pay such distributions,
which may be constrained by business and regulatory considerations, such as the impact of such distributions on surplus, which could affect
the insurer's ratings or competitive position, the amount of premiums that can be written and the ability to pay future dividends or make other
distributions. Further, state insurance laws and regulations require that the statutory surplus of our life subsidiaries following any dividend or
distribution must be reasonable in relation to their outstanding liabilities and adequate for their financial needs. Along with solvency
regulations, the primary driver in determining the amount of capital used for dividends is the level of capital needed to maintain desired
financial strength ratings from rating agencies. Both regulators and rating agencies could become more conservative in their methodology
and criteria, including increasing capital requirements for our insurance subsidiaries which, in turn, could negatively affect the cash available
to us from insurance subsidiaries. As of December 31, 2022, we estimate American Equity Life has sufficient statutory capital and surplus,
combined with capital available to the holding company, to maintain its insurer financial strength 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.
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On November 30, 2020 we issued 9,106,042 common shares to Brookfield at a value of $37.00 per share for net proceeds of $333.6 million.
On January 7, 2022, we issued an additional 6,775,000 shares to Brookfield at a value of $37.33 per share for net proceeds of $252.9 million.
From the 2020 inception of the share repurchase program through December 31, 2022, we have repurchased approximately 23.9 million
shares of our common stock at an average price of $34.74 per common share, including 14.8 million shares repurchased during the year ended
December 31, 2022. As of December 31, 2022, we had $569 million remaining under our share repurchase program.
Cash and cash equivalents of the parent holding company at December 31, 2022, were $531.3 million. We also have the ability to issue
equity, debt or other types of securities through one or more methods of distribution. The terms of any offering would be established at the
time of the offering, subject to market conditions. On February 15, 2022, we established a new five-year credit agreement for $300 million in
unsecured delayed draw term loan commitments. On July 6, 2022, we borrowed $300 million under this agreement which matures on
February 15, 2027.
In January 2022, American Equity Life became a member of the Federal Home Loan Bank of Des Moines ("FHLB") which provides access
to collateralized borrowings and other FHLB products. We may also issue funding agreements to the FHLB. Both the collateralized
borrowings and funding agreements require us to pledge qualified assets as collateral. Obligations arising from funding agreements, which
totaled $300.0 million as of December 31, 2022 are used in investment spread activities.
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 (loss) for our life subsidiaries as of December 31, 2022 and 2021 and for the years ended December 31, 2022, 2021 and 2020 is
included in Note 13 - Statutory Financial Information and Dividend Restrictions to our audited consolidated financial statements.
In the normal course of business, we enter into financing transactions, lease agreements, or other commitments. These commitments may
obligate us to certain cash flows during future periods. The following table summarizes such obligations as of December 31, 2022.
Payments Due by Period
Total
Less Than
1 year
1–3 Years
4–5 Years
(Dollars in thousands)
After
5 Years
Annuity and single premium universal life products (1)
$
63,211,336 $
4,022,156 $
15,083,920 $
7,398,151 $
36,707,109
Notes and loan payable, including interest payments (2)
Subordinated debentures, including interest payments (3)
Operating leases
1,028,981
215,825
28,503
50,714
4,850
3,792
Mortgage loan funding and other investments
2,390,862
2,390,862
154,288
823,979
9,700
8,097
—
9,700
5,601
—
—
191,575
11,013
—
Total
$
66,875,507 $
6,472,374 $
15,256,005 $
8,237,431 $
36,909,697
(1) Amounts shown in this table are projected payments through the year 2073 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.
Critical Accounting Policies & Estimates
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 and estimates that are complex and require significant judgment. The
following summary of our critical accounting policies and estimates 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, deferred sales inducements and policy benefit
reserves. 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.
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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 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 instruments recorded at fair value in the consolidated balance sheets as follows:
Level 1 - Quoted prices are available in active markets for identical financial instruments as of the reporting date. We do not adjust
the quoted price for these financial instruments, even in situations where we hold a large position and a sale could
reasonably impact the quoted price.
Level 2 - Quoted prices in active markets for similar financial instruments, quoted prices for identical or similar financial instruments
in markets that are not active; and models and other valuation methodologies using inputs other than quoted prices that are
observable.
Level 3 - Models and other valuation methodologies using significant inputs that are unobservable for financial instruments and
include situations where there is little, if any, market activity for the financial instrument. The inputs into the determination
of fair value require significant management judgment or estimation. Financial instruments that are included in Level 3 are
securities for which no market activity or data exists and for which we used discounted expected future cash flows with our
own assumptions about what a market participant would use in determining fair value.
The following table presents the fair value of fixed maturity securities, available for sale, by pricing source and hierarchy level as of
December 31, 2022 and 2021, respectively:
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(Dollars in thousands)
Total
December 31, 2022
Priced via third party pricing services
Priced via independent broker quotations
Priced via other methods
% of Total
Coinsurance investments (1)
December 31, 2021
Priced via third party pricing services
Priced via independent broker quotations
Priced via other methods
% of Total
Coinsurance investments (1)
$
$
$
$
$
$
26,184
$
30,061,381
$
—
—
—
$
30,087,565
—
4,034,863
657,554
4,692,417
—
—
26,184
$
34,096,244
$
657,554
$
34,779,982
0.1 %
—
98.0 %
1.9 %
100.0 %
4,836,923
187,712
5,024,635
26,184
$
38,933,167
$
845,266
$
39,804,617
32,742
$
46,930,830
$
—
—
—
2,005,747
32,742
$
48,936,577
$
0.1 %
99.9 %
32,695
65,437
2,303,929
$
51,240,506
$
—
—
—
—
— %
—
—
$
46,963,572
—
2,005,747
$
48,969,319
100.0 %
2,336,624
$
51,305,943
(1)
Investments held by American Equity Life in a segregated account to support liabilities reinsured under both coinsurance with funds
withheld and modified coinsurance reinsurance agreements.
Management's assessment of all available data when determining fair value of our investments is necessary to appropriately apply fair value
accounting.
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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. 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, 2022
and 2021.
Evaluation of Allowance for Credit Losses on Available for Sale Fixed Maturity Securities and Mortgage Loan Portfolios
The process to identify available for sale fixed maturity securities that could potentially require an allowance for credit loss involves
significant judgment and estimates by management. We review and analyze all fixed maturity securities 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 fixed maturity security 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 fixed maturity securities for credit loss is a quantitative and qualitative process, which
is subject to risks and uncertainties.
We have a policy and process to identify fixed maturity securities that could potentially have a credit loss. 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 extent to which fair value is 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 an allowance for credit loss should be established for fixed maturity securities by assessing all facts and circumstances
surrounding each security. Where the decline in fair value of fixed maturity 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 securities to have credit loss because we do not intend to sell these securities and it is not more likely than not we will be
required to sell these securities before a recovery of amortized cost, which may be maturity.
If we intend to sell a fixed maturity security or if it is more likely than not that we will be required to sell a security before recovery of its
amortized cost basis, credit loss has occurred and the difference between amortized cost and fair value will be recognized as a loss in
operations.
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If we do not intend to sell and it is not more likely than not we will be required to sell the fixed maturity security but also do not expect to
recover the entire amortized cost basis of the security, a credit 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 recognized credit loss is limited to the unrealized loss on the security.
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 credit loss.
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, 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.
For fixed maturity 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, a credit loss may be recognized in operations. Unrealized losses
may be recognized in future periods in operations should we later conclude that the decline in fair value below amortized cost represents a
credit loss 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 establish a valuation allowance to provide for the risk of credit losses inherent in our mortgage loan portfolios. The valuation allowance
is maintained at a level believed adequate by management to absorb estimated expected credit losses.
The valuation allowances for each of our mortgage loan portfolios are estimated by deriving probability of default and recovery rate
assumptions based on the characteristics of the loans in each portfolio, historical economic data and loss information, and current and
forecasted economic conditions. Key loan characteristics impacting the estimate for our commercial mortgage loan portfolio include the
current state of the borrower’s credit quality, which considers factors such as loan-to-value (“LTV”) and debt service coverage (“DSC”)
ratios, loan performance, underlying collateral type, delinquency status, time to maturity, and original credit scores. Key loan characteristics
impacting the estimate for our agricultural and residential mortgage loan portfolios include the current state of the borrowers' credit quality,
delinquency status, time to maturity and original credit scores.
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.
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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.
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, 2022 were to increase by 100 basis points, our reserves for fixed index annuities would decrease by $336.2 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 $386.4 million.
As of December 31, 2022, we utilized an estimate of 2.40% 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 $334.2 million. A decrease of 25 basis points in the expected cost of annual call options would decrease our reserves for
fixed index annuities by $298.1 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 $4.2 million. A decrease in lapse rates of 10% would increase our
reserves for fixed index annuities by $3.3million.
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 updates 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, 2022 in this Item 7 for a discussion and
presentation of the 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, 2022, we utilized an
estimate of 2.40% 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 the cost of our actual call options. If the expected cost of annual call options and fixed crediting rates were to increase by
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25 basis points, our liability for lifetime income benefit riders would decrease by $128.8 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 $111.7 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 ultimate floor assumption on the percentage of policyholders
who elect to receive lifetime income benefit payments was increased by 30% at December 31, 2022, our liability for lifetime income benefit
riders would increase by $205.2 million. A decrease by 30% in the ultimate floor assumption on the percentage of policyholders who elect to
receive lifetime income benefit payments would decrease our liability for lifetime income benefit riders by $260.6 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 $6.2 million. A decrease in lapse rates of 10% would increase
our liability for lifetime income benefit riders by $2.3 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 expectations for earned yields and the expected
mean reversion period. If the net investment earned rate were to increase 10 basis points, our liability for lifetime income benefit riders would
decrease by $23.5 million. A decrease in the net investment earned rate of 10 basis points would increase our liability for lifetime income
benefit riders by $24.1 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.
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 credit losses recognized in operations) to be realized from a group of products are updated. 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, 2022 in
this Item 7 for a discussion and presentation of the effects of assumption revisions.
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 expectations for earned yields and the expected mean reversion period. 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, 2022 would increase by $99.7 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, 2022 by $101.6 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 $75.8 million. A
decrease in lapse rates of 10% would increase our combined balance of deferred policy acquisition costs and deferred sales inducements by
$77.0 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, 2022, we utilized an
estimate of 2.40% 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 the cost 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 decrease by $104.4 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 $98.9 million.
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Table of Contents
Deferred Income Taxes
We account for income taxes using the liability method. This method provides for the tax effects of transactions reported in the audited
consolidated financial statements for both taxes currently due and deferred. Deferred income taxes reflect the impact of temporary differences
between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. A
temporary difference is a transaction, or amount of a transaction, that is recognized currently for financial reporting purposes but will not be
recognized for tax purposes until a future tax period, or is recognized currently for tax purposes but will not be recognized for financial
reporting purposes until a future reporting period. Deferred income taxes are measured by applying enacted tax rates for the years in which
the temporary differences are expected to be recovered or settled to the amount of each temporary difference.
The realization of deferred income tax assets is primarily based upon management's estimates of future taxable income. Valuation allowances
are established when management estimates, based on available information, that it is more likely than not that deferred income tax assets will
not be realized. Significant judgment is required in determining whether valuation allowances should be established, as well as the amount of
such allowances. When making such determination, consideration is given to, among other things, the following:
•
•
•
•
future taxable income of the necessary character exclusive of reversing temporary differences and carryforwards;
future reversals of existing taxable temporary differences;
taxable capital income in prior carryback years; and
tax planning strategies.
Actual realization of deferred income tax assets and liabilities may materially differ from these estimates as a result of changes in tax laws as
well as unanticipated future transactions impacting related income tax balances.
The realization of deferred income tax assets related to unrealized losses on our available for sale fixed maturity securities is also based upon
our intent to hold these securities for a period of time sufficient to allow for a recovery in fair value and not realize the unrealized loss.
New Accounting Pronouncements
See Note 1 - Significant Accounting Policies to our audited consolidated financial statements in this Form 10-K beginning on page F-12,
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% (40 basis points) from levels at December 31, 2022, we estimate that the fair value of our fixed maturity
securities would decrease by approximately $1.1 billion. The impact on stockholders' equity of such decrease (net of income taxes and certain
adjustments for changes in amortization of deferred policy acquisition costs, deferred sales inducements and policy benefit reserves) would be
a decrease of $422.8 million in accumulated other comprehensive income and a decrease in stockholders' equity. The models used to estimate
50
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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 a credit loss) 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 are callable at the option of the issuer, excluding securities with a make-whole provision,
was $2.1 billion as of December 31, 2022. During the years ended December 31, 2022 and 2021, we received $0.9 billion and $2.3 billion,
respectively, in net redemption proceeds related to the exercise of such call provisions. 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. In addition, we have $6.0 billion of floating rate investments
as of December 31, 2022. The majority of these investments are based on the 3 month LIBOR rate and are reset quarterly. We have a plan to
transition these investments away from LIBOR in 2023. 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, 2022,
approximately 91% 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, 2022, approximately 14% 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 under or over-hedging as a result of policyholder behavior being different than our expectations.
Year Ended December 31,
2022
2021
2020
(Dollars in thousands)
Proceeds received at expiration of options related to such credits
$
312,133 $
2,019,477 $
Annual index credits to policyholders on their anniversaries
305,292
1,977,888
758,604
747,489
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 fixed 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-59.
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, 2022 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.
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(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, 2022
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, 2022.
The Company's independent registered public accounting firm, Ernst & Young 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, 2022. 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, 2022, that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
The information required by Part III is incorporated by reference from our subsequent disclosure to be filed within 120 days after
December 31, 2022.
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.
Exhibit Index
Note Regarding Reliance on Statements in Our Contracts and Other Exhibits: We include agreements and other exhibits to this Annual Report
on Form 10-K to provide information regarding their terms and not to provide any other factual or disclosure information about us, our
subsidiaries or affiliates, or the other parties to the agreements, or for any other purpose. The agreements and other exhibits contain
representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made
solely for the benefit of the other parties to the applicable agreement or other arrangement and (i) should not in all instances be treated as
categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; (ii)
have in many cases been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable
agreement, which disclosures are not necessarily reflected in the agreement; (iii) may apply standards of materiality in a way that is different
from what may be viewed as material to investors; and (iv) were made only as of the date of the applicable agreement or other exhibit, or such
other date or dates as may be specified in the document and are subject to more recent developments. Accordingly, these representations and
warranties may not describe the actual state of affairs as of the date they were made or at any other time.
Exhibit No.
3.1
Description
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)
3.2
3.3
3.4
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)
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Exhibit No.
3.5
Description
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)
3.6
3.7
3.8
3.9
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
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 *
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)
Articles of Amendment to Articles of Incorporation (Incorporated by reference to Exhibit 3.7 to Form 8-A12B filed on June 16, 2020, File
No. 001-31911)
Fourth Amended and Restated Bylaws, redlined for amendments effective November 17, 2022 (Incorporated by reference to Exhibit 3.1 to
Form 8-K filed on November 23, 2022)
Fourth Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2 to Form 8-K filed on November 23, 2022)
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)
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).
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., collectively, 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 4.7)
Deposit Agreement, dated as of June 17, 2020, among the Company, Computershare Inc. and Computershare Trust Company, N.A.,
collectively as Depositary, the other parties thereto and the holders from time to time of depositary receipts issued thereunder (Incorporated
by reference to Exhibit 4.1 to Form 8-K filed on June 17, 2020)
Form of Depository Receipt (included in Exhibit 4.9)
Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 (Incorporated by reference to Exhibit
4.11 to Form 10-K for the year ended December 31, 2021 filed on March 1, 2022)
Subordinated 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 4.2 to Amendment No. 1 to Form S-3 filed on April 22,
2004)
Form of Certificate for the common stock of American Equity Investment Life Holding Company, par value $1 per share (Incorporated by
reference to Exhibit 4.11 to Pre-Effective Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-108794), filed on
November 12, 2003)
Form of Change in Control Agreement between American Equity Investment Life Holding Company and each of Anant Bhalla, Ronald J.
Grensteiner, and Jeffrey D. Lorenzen (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on December 14, 2012)
American Equity Investment Life Holding Company 2016 Employee Incentive Plan (Incorporated by reference to the Appendix A to the
Company's proxy statement on Form DEF 14A filed on April 18, 2016)
First Amendment to American Equity Investment Life Holding Company 2016 Employee Incentive Plan (Incorporated by reference to
Exhibit 99.2 to Form S-8 filed on September 8, 2016)
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)
Form of Employee Stock Option Agreement (Incorporated by reference to Exhibit 10.33 to Form 10-K for the year ended December 31, 2019
filed on February 25, 2020)
Offer Letter dated January 2, 2020 by and between American Equity Investment Life Holding Company and Anant Bhalla (Incorporated by
reference to Exhibit 10.1 to Form 8-K filed on January 9, 2020)
American Equity Investment Life Holding Company Amended and Restated Equity Incentive Plan (Incorporated by reference to the
Appendix A to the Company's proxy statement on Form DEF 14A filed on April 24, 2020)
Form of Director 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 4, 2020)
Form of Restricted Stock Unit Award Agreement (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the period ended June 30, 2020
filed on August 10, 2020)
Form of Performance Restricted Stock Unit Award Agreement (Incorporated by reference to Exhibit 10.2 to Form 10-Q for the period ended
June 30, 2020 filed on August 10, 2020)
Form of Employee Stock Option Agreement (Incorporated by reference to Exhibit 10.3 to Form 10-Q for the period ended June 30, 2020
filed on August 10, 2020)
Investment Agreement, dated as of October 17, 2020, by and among American Equity Investment Life Holding Company, Brookfield Asset
Management Inc. and Burgundy Acquisitions I Ltd. (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on October 19, 2020)
Form of Employee Stock Option Agreement with Respect to Common Stock of American Equity Investment Life Holding Company
(Incorporated by reference to Exhibit 10.2 to Form 8-K filed on November 25, 2020)
53
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Exhibit No.
10.14 *
10.15 *
10.16 *
10.17 *
10.18 *
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 *
10.33 *
10.34 *
10.35
10.36 *
10.37 *
Description
American Equity Investment Life Holding Company Amended and Restated Short-Term Incentive Plan (Incorporated by reference to Exhibit
10.32 to Form 10-K for the year ended December 31, 2020 filed on March 1, 2021)
First Amendment to American Equity Investment Life Holding Company Amended and Restated Short-Term Incentive Plan (Incorporated by
reference to Exhibit 10.33 to Form 10-K for the year ended December 31, 2020 filed on March 1, 2021)
First Amendment to American Equity Investment Life Holding Company Amended and Restated Equity Incentive Plan (Incorporated by
reference to Exhibit 10.34 to Form 10-K for the year ended December 31, 2020 filed on March 1, 2021)
Form of Change in Control Agreement between American Equity Investment Life Holding Company and James L. Hamalainen and Axel
Andre (Incorporated by reference to Exhibit 10.35 to Form 10-K for the year ended December 31, 2020 filed on March 1, 2021)
Form of Employee Stock Option Agreement (Incorporated by reference to Exhibit 10.36 to Form 10-K for the year ended December 31, 2020
filed on March 1, 2021)
Assignment Agreement, Consent and Waiver in Anticipation of Regulatory Form A Filing dated February 28, 2021 by and among Brookfield
Asset Management, Inc., Burgundy Acquisitions I Ltd., Brookfield Asset Management Reinsurance Partners Ltd., North End Re (Cayman)
SPC and American Equity Investment Life Holding Company (Incorporated by reference to Exhibit 10.37 to Form 10-K for the year ended
December 31, 2020 filed on March 1, 2021)
Form of Employee Restricted Stock Unit Award Agreement - Performance Based Award, effective April 2021 (Incorporated by reference to
Exhibit 10.2 to Form 10-Q for the period ended March 31, 2021 filed on May 10, 2021)
Amendment to Investment Agreement, dated June 10, 2021, by and among American Equity Investment Life Holding Company, Brookfield
Asset Management, Inc., Brookfield Asset Management Reinsurance Partners Ltd. and North End Re (Cayman) SPC (Incorporated by
reference to Exhibit 10.1 to Form 8-K filed on June 10, 2021)
Offer Letter Agreement dated August 25, 2021 between American Equity Investment Life Insurance Company and Axel Andre (Incorporated
by reference to Exhibit 10.1 to Form 10-Q for the period ended September 30, 2021 filed on November 9, 2021)
American Equity Transition Benefit Plan, dated as of August 6, 2021 (Incorporated by reference to Exhibit 10.3 to Form 10-Q for the period
ended September 30, 2021 filed on November 9, 2021)
Form of Separation Agreement under American Equity Transition Benefit Plan, effective August 6, 2021 (Incorporated by reference to
Exhibit 10.4 to Form 10-Q for the period ended September 30, 2021 filed on November 9, 2021)
Offer Letter Agreement dated November 3, 2021 between American Equity Investment Life Insurance Company and Dewayne Lummus
(Incorporated by reference to Exhibit 10.33 to Form 10-K for the period ended December 31, 2021 filed on March 1, 2022)
Form of 2022-2024 Performance-Based Employee Restricted Stock Unit Award Agreement under the American Equity Investment Life
Holding Company Amended and Restated Equity Incentive Plan (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the period
ended March 31, 2022 filed on May 9, 2022)
Form of 2022 Time-Based Employee Restricted Stock Unit Award Agreement (Two- or Three-Year Cliff) under the American Equity
Investment Life Holding Company Amended and Restated Equity Incentive Plan (Incorporated by reference to Exhibit 10.2 to Form 10-Q for
the period ended March 31, 2022 filed on May 9, 2022)
Form of 2022 Time-Based Employee Restricted Stock Unit Award Agreement (Two-Year Ratable) under the American Equity Investment
Life Holding Company Amended and Restated Equity Incentive Plan (Incorporated by reference to Exhibit 10.3 to Form 10-Q for the period
ended March 31, 2022 filed on May 9, 2022)
Second Amendment to the American Equity Investment Life Holding Company Amended and Restated Short-Term Incentive Plan, effective
January 1, 2022 (Incorporated by reference to Exhibit 10.4 to Form 10-Q for the period ended March 31, 2022 filed on May 9, 2022)
Deferred Long-Term Incentive Cash Plan, effective January 1, 2022 (Incorporated by reference to Exhibit 10.5 to Form 10-Q for the period
ended March 31, 2022 filed on May 9, 2022)
Offer Letter dated June 29, 2022, between American Equity Investment Life Insurance Company and Ronald J. Grensteiner (Incorporated by
reference to Exhibit 10.1 to Form 10-Q for the period ended June 30, 2022 filed on August 9, 2022)
American Equity Life Employee Indemnification Plan, dated as of September 8, 2022 (Incorporated by reference to Exhibit 10.1 to Form 10-
Q for the period ended September 30, 2022 filed on November 8, 2022)
Form of 2022 Time-Based Employee Restricted Stock Unit Award Agreement (Three-Year Ratable) under the American Equity Investment
Life Holding Company Amended and Restated Equity Incentive Plan (Incorporated by reference to Exhibit 10.2 to Form 10-Q for the period
ended September 30, 2022 filed on November 8, 2022)
Offer Letter effective August 2, 2022 between American Equity Investment Life Insurance Company and Nicholas Volpe (Incorporated by
reference to Exhibit 10.3 to Form 10-Q for the period ended September 30, 2022 filed on November 8, 2022)
Credit Agreement, dated as of February 15, 2022, among American Equity Investment Life Holding Company, the lenders party thereto and
Citizens Bank, N.A., as administrative agent for the lenders (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on February 17,
2022)
Separation Agreement between American Equity Investment Life Holding Company and American Equity Investment Life Insurance
Company and Phyllis Zanghi executed December 31, 2022
Employee Strategic Incentive Restricted Stock Unit Award Agreement between American Equity Investment Life Holding Company and
Anant Bhalla, dated November 29, 2022
10.38 *
First Amendment to American Equity Transition Benefit Plan, effective October 1, 2022
21.2
23.1
23.2
31.1
31.2
32.1
32.2
Subsidiaries of American Equity Investment Life Holding Company
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
Consent of KPMG LLP, 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
54
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Exhibit No.
101
104
Description
The following materials from American Equity Investment Life Holding Company's Annual Report on Form 10-K for the year ended
December 31, 2022 formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the
Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements
of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, (vi) the Notes to Consolidated Financial Statements,
(vii) Schedule I - Summary of Investments - Other Than Investments in Related Parties, (viii) Schedule II — Condensed Financial
Information of Registrant, (ix) Schedule III - Supplementary Insurance Information and (x) Schedule IV — Reinsurance.
The cover page from American Equity Investment Life Holding Company's Annual Report on Form 10-K for the year ended December 31,
2022 formatted in iXBRL and contained in Exhibit 101.
*
Denotes management contract or compensatory plan.
Item 16. Form 10-K Summary
None.
55
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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 28th day of February 2023.
SIGNATURES
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
By:
/s/ ANANT BHALLA
Anant Bhalla,
Chief Executive Officer & President
Pursuant to the requirements of the Securities Exchange Act of 1934, this registration statement has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature
/s/ ANANT BHALLA
Anant Bhalla
/s/ AXEL ANDRE
Axel Andre
/s/ DEWAYNE LUMMUS
Dewayne Lummus
/s/ DAVID S. MULCAHY
David S. Mulcahy
/s/ JOYCE A. CHAPMAN
Joyce A. Chapman
/s/ BRENDA J. CUSHING
Brenda J. Cushing
/s/ DOUGLAS T. HEALY
Douglas T. Healy
/s/ ROBERT L. HOWE
Robert L. Howe
/s/ WILLIAM R. KUNKEL
William R. Kunkel
/s/ ALAN D. MATULA
Alan D. Matula
/s/ GERARD D. NEUGENT
Gerard D. Neugent
Title (Capacity)
Chief Executive Officer, President and Director
(Principal Executive Officer)
Date
February 28, 2023
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
February 28, 2023
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer)
February 28, 2023
Non-Executive Chairman and Director
February 28, 2023
February 28, 2023
February 28, 2023
February 28, 2023
February 28, 2023
February 28, 2023
February 28, 2023
February 28, 2023
Director
Director
Director
Director
Director
Director
Director
56
Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
YEARS ENDED DECEMBER 31, 2022, 2021 and 2020
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Reports of Independent Registered Public Accounting Firm
(Ernst & Young LLP, Des Moines, Iowa, Auditor Firm ID: 42; KPMG LLP, Des Moines, Iowa, Auditor Firm ID: 185)
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. Variable Interest Entities
Note 6. Derivative Instruments
Note 7. Deferred Policy Acquisition Costs, Deferred Sales Inducements and Liability for Lifetime Income Benefit Riders
Note 8. Reinsurance and Policy Provisions
Note 9. Income Taxes
Note 10. Notes and Loan Payable
Note 11. Subordinated Debentures
Note 12. Retirement and Share-based Compensation Plans
Note 13. Statutory Financial Information and Dividend Restrictions
Note 14. Commitments and Contingencies
Note 15. Earnings Per Common Share and Stockholders' Equity
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
F-2
F-3
F-6
F-7
F-8
F-9
F-10
F-12
F-17
F-24
F-30
F-35
F-37
F-40
F-42
F-45
F-47
F-47
F-48
F-50
F-50
F-51
F-53
F-54
F-58
F-59
F-1
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
American Equity Investment Life Holding Company
Opinion on Internal Control over Financial Reporting
We have audited American Equity Investment Life Holding Company and subsidiaries’ internal control over financial reporting as of
December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, American Equity Investment Life
Holding Company and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated balance sheet of the Company, as of December 31, 2022 and 2021, the related consolidated statements of operations,
comprehensive income (loss), changes in stockholders' equity and cash flows for the year ended December 31, 2022, and the related notes and
financial statement schedules I to IV, and our report dated February 28, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible 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 internal control over financial reporting based on our
audit. We are a public accounting firm registered with the 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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.
/s/ Ernst & Young LLP
Des Moines, Iowa
February 28, 2023
F-2
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
American Equity Investment Life Holding Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of American Equity Investment Life Holding Company and subsidiaries (the
Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), changes in
stockholders' equity and cash flows for each of the two years in the period ended December 31, 2022, and the related notes and financial
statement schedules I to IV (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its
operations and its cash flows for each of the two years in the period December 31, 2022, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated
February 28, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the 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 audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our
audits included performing procedures to assess the risks of material misstatement of the 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 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 financial statements. We believe that our audits provide a reasonable
basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the 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
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.
Description of the
Matter
Deferred Policy Acquisition Costs (DAC), Deferred Sales Inducements (DSI) and liability for Lifetime Income
Benefit Rider (LIBR)
At December 31, 2022 DAC, DSI, and LIBR balances were $3.6 billion, $2.6 billion, and $2.3 billion, respectively.
As discussed in Note 1 to the consolidated financial statements, DAC and DSI are amortized over the lives of the
policies in relation to the emergence of actual gross profits (AGPs) and estimated gross profits (EGPs). The LIBR
is based on the actual and present value of expected benefit payments to be paid in excess of projected policy
values, and the excess is recognized over the expected lives of the underlying policies based on the actual and
present value of expected assessments. The expected assessments are calculated using the same assumptions used
to determine DAC and DSI EGPs, including investment spreads, product charges, and fees. There is significant
uncertainty inherent in calculating EGPs and expected assessments, as the calculation is sensitive to management’s
best estimate of assumptions such as investment earned rate, the expected cost of annual call options, lapse, partial
withdrawal, mortality, LIBR reset and LIBR utilization. Management’s assumptions are adjusted, also known as
unlocking, based on actual policyholder behavior and market experience and projecting for expected trends. The
unlocking results in amortization being recalculated using the new assumptions for estimated gross profits, resulting
either in additional or less cumulative amortization expense. Additionally, the LIBR is adjusted in a similar manner
to unlocking of DAC and DSI to reflect the changes in management’s assumptions.
Auditing the valuation of the Company’s DAC, DSI and LIBR was complex because of the highly judgmental
nature of the methods and determination of the assumptions applied to determine the EGPs and expected
assessments. The high degree of judgment was primarily due to the sensitivity of the EGPs and expected
assessments to the methods and assumptions applied which have a significant effect on the valuation of DAC, DSI,
and LIBR.
F-3
How We Addressed
the Matter in Our
Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s
controls over management’s process for the development of the significant assumptions used in calculating the DAC
and DSI EGPs, and assessments used in the valuation of LIBR. These controls included, among others, the review
and approval process management has in place for the development of the significant assumptions described above.
To evaluate the judgment used by management in determining the EGPs and expected assessments, among other
procedures, we involved actuarial specialists and evaluated the methodology applied by management in determining
the EGPs and expected assessments with those used in prior periods and the industry. To evaluate the significant
assumptions used by management, we compared policyholder behavior assumptions that we identified as being
higher risk to prior actual experience, observable market data or management’s estimates of prospective changes in
these assumptions. We tested management’s recalculation of EGPs and performed independent recalculations of
LIBR for a sample of policies, which we compared to the actuarial model used by management.
Fixed Index Annuity Embedded Derivative Liability
Description of the
Matter
As of December 31, 2022, the fair value of the Company’s fixed index annuity embedded derivative liability totaled
$35.1 billion, net of coinsurance ceded. The Company’s fixed index annuity contracts contain crediting features,
where amounts credited to the contract’s account value are linked to the performance of certain market indices. The
index crediting feature is accounted for as an embedded derivative liability and reported at fair value as discussed in
Notes 1 and 2 to the consolidated financial statements. Management reviews the assumptions used to determine the
fair value of the embedded derivative on a quarterly basis.
Auditing the valuation of the Company’s fixed index annuity embedded derivative was complex because of the
highly judgmental nature of the determination of the assumptions required to determine the fair value of the
embedded derivative. In particular, the fair value was sensitive to the significant assumptions used to determine
future policy growth including lapse, partial withdrawal, mortality, LIBR reset, LIBR utilization, and the expected
cost of annual call options.
How We Addressed
the Matter in Our
Audit
We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s
controls over management’s process for the development of the significant assumptions used in measuring the fair
value of the embedded derivative for fixed index annuities. These controls included, among others, the review and
approval process management has in place for the development of the significant assumptions.
To evaluate the judgment used by management in determining the assumptions used in measuring the fair value of
the fixed index annuity embedded derivative, among other procedures, we involved actuarial specialists and
evaluated the methodology applied by management in determining the fair value with those used in the prior period
and in the industry. To evaluate the significant assumptions used by management in the methodology applied, we
compared policyholder behavior assumptions to prior actual experience and management’s estimate of prospective
changes in the assumptions. In addition, we compared the expected cost of annual call options to actual and
historical cost of annual call options. We performed an independent recalculation of the embedded derivative for a
sample of policies for comparison with the actuarial model used by management.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2020.
Des Moines, Iowa
February 28, 2023
F-4
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
American Equity Investment Life Holding Company:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash
flows of American Equity Investment Life Holding Company and subsidiaries (the Company) for the year ended December 31, 2020, and the
related notes (and financial statement schedules II to IV) (collectively, the consolidated financial statements). In our opinion, the consolidated
financial statements present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31,
2020, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these consolidated financial statements 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or
fraud. Our audit 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 audit 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.
We believe that our audit provide a reasonable basis for our opinion.
/s/ KPMG LLP
We served as the Company’s auditor from 2005 to 2020.
Des Moines, Iowa
March 1, 2021
F-5
Table of Contents
Assets
Investments:
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
Fixed maturity securities, available for sale, at fair value (amortized cost of $44,866,019 as of 2022 and
$46,999,183 as of 2021; allowance for credit losses of $3,347 as of 2022 and $2,846 as of 2021)
Mortgage loans on real estate (net of allowance for credit losses of $36,972 as of 2022 and $24,024 as of
2021)
Real estate investments related to consolidated variable interest entities
Limited partnerships and limited liability companies (2022 and 2021 include $684,834 and $168,711 related
to consolidated variable interest entities)
Derivative instruments
Other investments
Total investments
Cash and cash equivalents (2022 and 2021 include $27,235 and $23,763 related to consolidated variable interest
entities)
Coinsurance deposits (net of allowance for credit losses of $8,737 as of 2022 and $2,264 as of 2021)
Accrued investment income (2022 and 2021 include $3,444 and $3 related to consolidated variable interest
entities)
Deferred policy acquisition costs
Deferred sales inducements
Deferred income taxes
Income taxes recoverable
Other assets (2022 and 2021 include $10,690 and $1,524 related to consolidated variable interest entities)
December 31,
2022
2021
$
39,804,617 $
51,305,943
6,949,027
1,056,063
1,266,779
431,727
1,817,085
5,687,998
337,939
520,120
1,277,480
1,247,024
51,325,298
60,376,504
1,919,669
13,208,399
497,851
3,562,075
2,593,350
220,873
55,498
543,128
4,508,982
8,850,608
445,097
2,222,769
1,546,073
—
166,586
232,490
Total assets
$
73,926,141 $
78,349,109
Liabilities and Stockholders' Equity
Liabilities:
Policy benefit reserves
Other policy funds and contract claims
Notes and loan payable
Subordinated debentures
Deferred income taxes
Funds withheld for reinsurance liabilities
Other liabilities (2022 and 2021 include $78,644 and $20,168 related to consolidated variable interest entities)
Total liabilities
Stockholders' equity:
Preferred stock, Series A; par value $1 per share; $400,000 aggregate liquidation preference; 20,000 shares
authorized; issued and outstanding: 2022 and 2021 - 16,000 shares
Preferred stock, Series B; par value $1 per share; $300,000 aggregate liquidation preference; 12,000 shares
authorized; issued and outstanding: 2022 and 2021 - 12,000 shares
Common stock; par value $1 per share; 200,000,000 shares authorized; issued and outstanding:
2022 - 84,810,255 shares (excluding 24,590,353 treasury shares);
2021 - 92,513,517 shares (excluding 9,936,715 treasury shares)
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Total stockholders' equity attributable to American Equity Investment Life Holding Company
Noncontrolling interests
Total stockholders' equity
Total liabilities and stockholders' equity
See accompanying notes to consolidated financial statements.
F-6
$
61,118,134 $
65,477,778
512,790
792,073
78,753
—
6,577,426
1,656,509
70,735,685
16
12
84,810
1,325,316
(2,155,055)
3,914,124
3,169,223
21,233
3,190,456
226,844
496,250
78,421
541,972
3,124,740
2,079,977
72,025,982
16
12
92,514
1,614,374
1,848,789
2,767,422
6,323,127
—
6,323,127
$
73,926,141 $
78,349,109
Table of Contents
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 losses on investments
Other revenue
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
Less: Net income available to noncontrolling interests
Net income available to American Equity Investment Life Holding Company stockholders
Less: Preferred stock dividends
Net income available to American Equity Investment Life Holding Company common
stockholders
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,
2022
2021
2020
$
19,739 $
58,202 $
230,354
2,307,463
(1,138,128)
(47,848)
43,921
—
242,631
2,037,475
1,348,735
(13,242)
15,670
—
39,382
251,227
2,182,078
34,666
(80,680)
—
(2,024)
1,415,501
3,689,471
2,424,649
31,099
889,650
408,548
67,983
2,681,406
152,692
49,742
1,543,270
438,164
(2,352,598)
(358,302)
(1,286,787)
32,098
5,331
615,300
239,616
25,581
5,324
268,328
243,712
25,552
5,557
649,554
183,636
(130,956)
3,086,724
1,608,688
1,546,457
325,155
1,221,302
358
1,220,944
43,675
602,747
128,755
473,992
—
473,992
43,675
815,961
144,501
671,460
—
671,460
33,515
1,177,269 $
430,317 $
637,945
13.00 $
12.86 $
4.58 $
4.55 $
6.93
6.90
$
$
$
90,558
91,538
93,860
94,491
92,055
92,392
F-7
Table of Contents
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)
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,
2022
2021
2020
$
1,221,302 $
473,992 $
671,460
(5,064,286)
(7,516)
(5,071,802)
1,067,958
(4,003,844)
(441,008)
(4,044)
(445,052)
90,284
(354,768)
1,058,289
16,690
1,074,979
(225,746)
849,233
$
(2,782,542) $
119,224 $
1,520,693
(1) Net of related adjustments to amortization of deferred sales inducements, deferred policy acquisition costs and policy benefit reserves.
See accompanying notes to consolidated financial statements.
F-8
Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Noncontrolling
Interest
Total
Stockholders'
Equity
Balance at December 31, 2019
$
16 $
91,107 $ 1,212,311 $
1,354,324 $ 1,768,764 $
— $
4,426,522
Net income for the year
Other comprehensive income
Issuance of preferred stock
Share-based compensation
Issuance of common stock
Treasury stock acquired, common
Cumulative effect of change in
accounting principle
Dividends on preferred stock
Dividends on common stock ($0.32 per
share)
Balance at December 31, 2020
Net income for the year
Other comprehensive loss
Share-based compensation
Issuance of common stock
Treasury stock acquired, common
Dividends on preferred stock
Dividends on common stock ($0.34 per
share)
Balance at December 31, 2021
Net income for the year
Other comprehensive loss
Share-based compensation
Issuance of common stock
Treasury stock acquired, common
Dividends on preferred stock
Dividends on common stock ($0.36 per
share)
Contributions from noncontrolling
interests
—
—
12
—
—
—
—
—
—
28
—
—
—
—
—
—
—
28
—
—
—
—
—
—
—
—
—
—
—
—
10,053
(5,439)
—
—
—
—
290,248
10,215
328,008
(159,655)
—
—
—
95,721
—
1,681,127
—
—
—
460
—
—
24,601
4,394
(3,667)
(95,748)
—
—
—
—
92,514
1,614,374
1,848,789
—
—
—
7,112
—
—
15,827
246,866
(14,816)
(551,751)
—
—
—
—
—
—
—
(4,003,844)
—
—
—
—
—
—
—
671,460
849,233
—
—
—
—
—
—
—
—
—
—
—
(9,295)
(33,515)
—
2,203,557
(28,859)
2,368,555
—
473,992
(354,768)
—
—
—
—
—
—
—
—
—
(43,675)
(31,450)
2,767,422
1,220,944
—
—
—
—
(43,675)
(30,567)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
358
—
—
—
—
—
—
671,460
849,233
290,260
10,215
338,061
(165,094)
(9,295)
(33,515)
(28,859)
6,348,988
473,992
(354,768)
24,601
4,854
(99,415)
(43,675)
(31,450)
6,323,127
1,221,302
(4,003,844)
15,827
253,978
(566,567)
(43,675)
(30,567)
—
20,875
20,875
Balance at December 31, 2022
$
28 $
84,810 $ 1,325,316 $
(2,155,055) $ 3,914,124 $
21,233 $
3,190,456
See accompanying notes to consolidated financial statements.
F-9
Table of Contents
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
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 funds withheld from reinsurers
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
Real estate investments acquired
Derivative instruments
Other investments
Purchases of property, furniture and equipment
Net cash provided by (used in) investing activities
Year Ended December 31,
2022
2021
2020
$
1,221,302 $
473,992 $
671,460
2,681,406
1,543,270
1,138,127
(1,348,704)
889,650
408,548
(230,354)
(2,352,598)
(26,973)
(198,623)
615,300
14,185
2,640
—
47,848
4,090
304,946
15,827
(52,754)
111,088
(30,973)
279,936
(851,971)
—
931,600
24,987
(221,647)
2,044,181
9,691,210
1,916,328
584,055
739,027
(8,894,629)
(3,092,385)
(724,484)
(790,229)
152,692
(242,631)
(358,302)
40,090
(307,857)
268,328
5,527
19,861
—
13,242
12,409
128,423
24,601
(47,015)
(165,724)
(4,464)
(19,809)
17,423
—
3,124,740
(221,726)
(13,338)
4,490,736
862,666
2,260,959
368,837
(9,206,733)
(2,386,712)
(335,767)
(748,061)
438,164
(251,227)
(1,286,787)
8,694
(255,154)
649,554
5,199
57,437
2,024
80,680
(34,668)
1,968
141,071
10,215
74,744
(1,291)
(849)
(21,865)
(72,413)
(495,039)
—
38,995
804
8,291,316
378,812
860,520
4,324
(2,429,114)
(1,121,756)
—
(730,333)
(105,925)
(13,240)
4,233,164
1,304,986
(1,842,843)
(1,512,123)
(40,961)
(18,109)
(2,454,911)
(6,224,307)
5,134,604
F-10
Table of Contents
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
$
3,316,221 $
5,910,024 $
3,648,936
Year Ended December 31,
2022
2021
2020
Coinsurance deposits
Return of annuity policyholder account balances
Repayment of loan payable
Proceeds from issuance of loan payable
Repayment of subordinated debentures
Proceeds from issuance of common stock, net
Acquisition of treasury stock
Proceeds from issuance of preferred stock, net
Change in checks in excess of cash balance
Dividends paid on common stock
Dividends paid on preferred stock
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 expense
Income taxes
Income tax refunds received
Non-cash operating activity:
Deferral of sales inducements
See accompanying notes to consolidated financial statements.
(186,637)
(5,257,487)
(3,187,332)
(5,145,193)
430,644
(4,040,054)
(3,750)
300,000
—
253,978
(566,567)
—
39,901
(30,567)
(43,675)
—
—
—
4,854
(99,415)
—
(3,210)
(31,450)
(43,675)
(2,178,583)
(2,589,313)
4,508,982
(2,595,397)
(4,586,540)
9,095,522
—
—
(81,450)
338,061
(165,094)
290,260
3,611
(28,859)
(33,515)
362,540
6,802,130
2,293,392
$
1,919,669 $
4,508,982 $
9,095,522
$
36,289 $
30,000 $
4,873
98,644
165,537
—
31,427
4,842
—
107,691
95,160
93,610
F-11
Table of Contents
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, 2022. We operate solely in the insurance business.
We market fixed index and fixed rate annuities. Annuity deposits (net of coinsurance) collected in 2022, 2021 and 2020, 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,
2022
2021
2020
(Dollars in thousands)
$
2,202,688 $
3,026,211 $
2,309,580
5,535
139,092
18,935
6,000
2,452,994
59,816
7,846
1,295,843
33,461
$
2,366,250 $
5,545,021 $
3,646,730
Agents contracted with us through four national marketing organizations accounted for more than 10% of annuity deposits we collected
during 2022 representing 22%, 16%, 10%, and 10% 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 2021 representing 14% and 11%,
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 2020 representing 17% 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., AE Capital, LLC., American Equity Investment Properties, L.C., High Trestle Investment
Management, LLC., AEL RE Vermont, Inc., AEL Re Bermuda, Ltd, NC Securities Holdco, LLC, AEL Financial Services, LLC, and North
Wolf Bay Holdings, LLC. All significant intercompany accounts and transactions have been eliminated.
In addition, our consolidated financial statements include variable interest entities ("VIE"s) in which we are the primary beneficiary. We have
relationships with various special purpose entities and other legal entities that must be evaluated to determine if the entities meet the criteria
of a VIE. This assessment is performed by reviewing contractual, ownership and other rights and requires use of judgment. First, we
determine if we hold a variable interest in an entity by assessing if we have the right to receive expected losses and expected residual returns
of the entity. If we hold a variable interest, then the entity is assessed to determine if it is a VIE. An entity is a VIE if the equity at risk is not
sufficient to support its activities, if the equity holders lack a controlling financial interest or if the entity is structured with non-substantive
voting rights. In addition to the previous criteria, if the entity is a limited partnership or similar entity, it is a VIE if the limited partners do not
have the power to direct the entity’s most significant activities through substantive kick-out rights or participating rights. A VIE is evaluated
to determine the primary beneficiary. The primary beneficiary of a VIE is the enterprise with (1) the power to direct the activities of a VIE
that most significantly impact the entity's economic performance and (2) the obligation to absorb losses of the entity or the right to receive
benefits from the entity that could potentially be significant to the VIE. When we are the primary beneficiary, we are required to consolidate
the entity in our financial statements. We reassess our involvement with VIEs on a quarterly basis. For further information about VIEs, refer
to Note 5 – Variable Interest Entities.
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, valuation of real estate, allowances for credit losses on available-for-sale
fixed maturity securities, 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.
F-12
Table of Contents
Investments
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, deferred sales inducements and policy benefit reserves. 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 - Fair Value of Financial Instruments 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.
Available-for-sale fixed maturity securities are subject to an allowance for credit loss and changes in the allowance are reported in net income
as a component of net realized losses on investments. See Note 3 - Investments for further discussion of the allowance for credit losses on
available-for-sale fixed maturity securities.
Mortgage loans on real estate are reported at cost adjusted for amortization of premiums and accrual of discounts and net of valuation
allowances. 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. Interest income on impaired loans is
recorded on a cash basis. Any changes in the loan valuation allowances are reported in net realized losses on investments. See Note 4 -
Mortgage Loans on Real Estate for further discussion of the valuation allowance on the mortgage loan portfolios.
Beginning in 2021, we held residential real estate investments through consolidation of an investment company VIE. As this is an investment
company VIE, the residential real estate investments are reported at fair value and the change in fair value on these investments is reported in
net income as a component of net investment income. Fair values of residential real estate investments are initially based on the cost to
purchase the properties and subsequently based on a discounted cash flow methodology. See Note 2 – Fair Values of Financial Instruments
for more information on the determination of fair value. The residential real estate investments are leased to renters through operating lease
arrangements. Rental income is recognized on a straight-line basis over the term of the respective leases.
Beginning in 2022, we held a commercial real estate investment in the ultra-luxury hospitality sector through consolidation of a VIE that is
not an investment company. The commercial real estate investment is held at depreciated cost and was initially held at the cost to purchase
the property.
Our limited partnerships and limited liability companies are accounted for either using the equity method of accounting, NAV as a practical
expedient, or fair value. For our equity method investments, we record our share of earnings and losses of the limited partnership or limited
liability company as a component of net investment income. Our consolidated limited partnerships are measured using NAV as a practical
expedient, as the investments do not have a readily determinable fair value and the investments are in an investment company within scope of
Topic 946. Our consolidated real estate limited liability companies are fair valued on a recurring basis using the methods described in Note 2
– Fair Values of Financial Instruments. For all of our limited partnerships and limited liability company investments, recognition of income
is reported on a quarter lag due to the availability of the related financial statements of the limited partnerships and limited liability
companies.
Other invested assets include company owned life insurance, equity securities, short-term debt securities with maturities of greater than three
months but less than twelve months when purchased, and short-term loans and collateral loans with maturities less than one year. 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.
Realized gains and losses on sales of investments are determined on the basis of specific identification based on the trade date.
Federal Home Loan Bank
During the first quarter of 2022, American Equity Life became a member of the Federal Home Loan Bank (“FHLB”) which provides access
to collateralized borrowings and other FHLB products. We may also issue funding agreements to the FHLB. Both the collateralized
borrowings and funding agreements require us to pledge qualified assets as collateral. Obligations arising from funding agreements are used
in investment spread activities and reported in Other policy funds and contract claims on the Consolidated Balance Sheets. See Note 14 -
Commitments and Contingencies for more information on the funding agreements issued. Entering into FHLB membership, borrowings and
funding agreements requires the ownership of FHLB stock and the pledge of assets as collateral. See Note 2 - Fair Value of Financial
Instruments and Note 14 - Commitments and Contingencies for more information on the common stock purchased and assets pledged as
collateral.
F-13
Table of Contents
Derivative Instruments
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our derivative instruments include call options used to fund fixed index annuity credits and interest rate swaps which were designated as fair
value hedges. Our call option derivative instruments are recognized in the balance sheet at fair value and changes in fair value are recognized
immediately in operations.
A fair value hedge is a hedge of the exposure to changes in the fair value of a recognized asset or liability, or of an unrecognized firm
commitment, that are attributable to a particular risk. The accounting for a fair value hedge is determined at hedge inception. Hedge
accounting can be applied if, at inception, and throughout the hedging period, the changes in the fair value of the derivative are highly
effective at offsetting the changes in fair value of the hedged asset, liability or unrecognized firm commitment that are attributable to the risk
being hedged. When hedge accounting is applied, the change in fair value of the hedged asset, liability or unrecognized firm commitment
attributable to the hedged risk are reported in the same line item in the Consolidated Statements of Operations as the changes in fair value of
the derivative instrument. For fair value hedges of fixed maturity securities, the change in fair value attributable to the risk being hedged is
recognized in the Change in fair value of derivatives line item of the Consolidated Statements of Operations. For any change in fair value of
our interest rate swaps that are excluded from hedge effectiveness, we have elected to recognize the change immediately in earnings rather
than amortizing over the life of the hedge.
At hedge inception, we formally document our risk management objective and strategy for entering into hedging relationships for any fair
value hedge. We also quantitatively test for hedge effectiveness using statistical regression analysis on both a prospective and retrospective
basis. The results of the testing determine whether we have a highly effective hedging relationship and can apply hedge accounting.
Prior to the redemption of our floating rate subordinated debentures in 2020, our derivative instruments also included an interest rate swap
and interest rate caps which were used to manage interest rate risk associated with the floating rate component on certain of our subordinated
debentures. These interest rate swaps and interest rate caps were recognized in the balance sheet at fair value and changes in fair value were
recognized immediately in operations.
See Note 6 - Derivative Instruments for more information on derivative instruments.
Cash and Cash Equivalents
We consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
Book Overdrafts
Under our cash management system, checks issued but not yet presented to banks frequently result in overdraft balances for accounting
purposes and are classified as Other liabilities on our consolidated balance sheets. We report the changes in the amount of the overdraft
balance as a financing activity in our consolidated statement of cash flows as Change in checks in excess of cash balance.
Deferred Policy Acquisition Costs and Deferred Sales Inducements
For annuity products, these costs are being amortized in proportion to actual and expected gross profits. Actual and expected gross profits
include 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) 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 7 - Deferred
Policy Acquisition Costs, Deferred Sales Inducements and Liability for Lifetime Income Benefit Riders 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, 2022, 2021 and 2020, interest crediting rates for these
products ranged from 1.45% to 2.65%.
F-14
Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 7 - Deferred Policy Acquisition Costs, Deferred Sales Inducements and Liability for Lifetime
Income Benefit Riders 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 8 - Reinsurance and Policy Provisions 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.
See Note 9 - Income Taxes for more information on deferred income taxes.
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 8 - Reinsurance and Policy Provisions), benefits, losses and expenses are reported net of reinsurance ceded.
Revenue and fees associated with reinsurance agreements (see Note 8 - Reinsurance and Policy Provisions) are recognized in Other revenue
when earned over the life of the reinsured policies or when service is performed.
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 represents transfers from unrealized to realized gains and losses.
Reclassifications
Certain amounts in the prior years' consolidated financial statements and related footnotes thereto have been reclassified to conform with the
current year presentation.
F-15
Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued an accounting standards update ("ASU") that significantly changed
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 are recorded through an allowance account subsequent to the adoption of this ASU. We adopted this ASU
on January 1, 2020. The adoption of this ASU resulted in an increase in our mortgage loan allowance for credit losses of $8.6 million and the
recognition of an allowance for credit losses on our reinsurance recoverable/coinsurance deposits balances of $3.2 million on the date of
adoption. Retained earnings was decreased by $9.3 million, which reflects the net of tax impact of the increase in the mortgage loan
allowance for credit losses and the recognition of an allowance for credit losses on our reinsurance recoverable/coinsurance deposits balances
on the date of adoption.
New Accounting Pronouncements
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 with the change in fair value recognized in net income excluding the change in fair value related to our own-credit risk
which is recognized in AOCI and simplifying the method used to amortize deferred policy acquisition costs and deferred sales inducements to
a constant level 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 January 1, 2023, the transition date (the remeasurement date) is January 1, 2021.
We will adopt the guidance on a modified retrospective basis related to the future policy benefit and deferred acquisition costs. The guidance
for market risk benefits will be applied retrospectively.
While we continue to evaluate the impact of adopting this standard, we expect the adoption to have a material impact to our financial
condition, results of operations, statements of cash flows, and disclosures. The estimated impact to stockholders' equity at January 1, 2021 is
an increase between $1.5 billion and $2.0 billion, with most of this impact reflected in accumulated other comprehensive income ("AOCI").
The impact to retained earnings is expected to be less than $100.0 million.
The most significant drivers of the transition adjustment include changes related to MRBs including the impacts of our own-credit risk
adjustment and removal of the deferred acquisition cost, deferred sales inducement, and policy benefit reserve balances recorded in AOCI
related to changes in unrealized appreciation (depreciation) on available for sale fixed maturity securities.
We have created a governance framework and implementation plan for the adoption of this standard. We have designed internal controls
related to the new processes created as part of implementing the updated standard, and we will continue to execute the controls through the
implementation and first reporting date.
F-16
Table of Contents
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,
2022
2021
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
(Dollars in thousands)
Assets
Fixed maturity securities, available for sale
$
39,804,617 $
39,804,617 $
51,305,943 $
51,305,943
Mortgage loans on real estate
Real estate investments
Limited partnerships and limited liability companies
Derivative instruments
Other investments
Cash and cash equivalents
Coinsurance deposits
Liabilities
Policy benefit reserves
Single premium immediate annuity (SPIA) benefit reserves
Other policy funds - FHLB
Notes and loan payable
Subordinated debentures
6,949,027
1,056,063
684,835
431,727
1,817,085
1,919,669
13,208,399
6,502,463
1,056,063
684,835
431,727
1,817,085
1,919,669
12,000,116
60,743,370
55,572,896
212,119
300,000
792,073
78,753
221,130
300,000
774,220
87,293
5,687,998
337,939
168,711
1,277,480
1,247,024
4,508,982
8,850,608
65,076,041
226,207
—
496,250
78,421
5,867,227
337,939
168,711
1,277,480
1,247,024
4,508,982
7,938,292
56,375,076
235,891
—
569,485
93,721
Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market
participants at the measurement date. The objective of a fair value measurement is to determine that price for each financial instrument at
each measurement date. We meet this objective using various methods of valuation that include market, income and cost approaches.
We categorize our financial instruments into three levels of fair value hierarchy based on the priority of inputs used in determining fair value.
The hierarchy defines the highest priority inputs (Level 1) as quoted prices in active markets for identical assets or liabilities. The lowest
priority inputs (Level 3) are our own assumptions about what a market participant would use in determining fair value such as estimated
future cash flows. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such
cases, a financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value
measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and
considers factors specific to the financial instrument. We categorize financial assets and liabilities recorded at fair value in the consolidated
balance sheets as follows:
Level 1 – Quoted prices are available in active markets for identical financial instruments as of the reporting date. We do not adjust
the quoted price for these financial instruments, even in situations where we hold a large position and a sale could
reasonably impact the quoted price.
Level 2 – Quoted prices in active markets for similar financial instruments, quoted prices for identical or similar financial instruments
in markets that are not active; and models and other valuation methodologies using inputs other than quoted prices that are
observable.
Level 3 – Models and other valuation methodologies using significant inputs that are unobservable for financial instruments and
include situations where there is little, if any, market activity for the financial instrument. The inputs into the determination
of fair value require significant management judgment or estimation. Financial instruments that are included in Level 3 are
securities for which no market activity or data exists and for which we used discounted expected future cash flows with our
own assumptions about what a market participant would use in determining fair value.
NAV –
Our consolidated limited partnership funds are typically measured using NAV as a practical expedient in determining fair
value and are not classified in the fair value hierarchy. Our carrying value reflects our pro rata ownership percentage as
indicated by NAV in the investment fund financial statements and is recorded on a quarter lag due to the timing of when
financial statements are available.
Transfers of securities among the levels occur at times and depend on the type of inputs used to determine fair value of each security.
F-17
Table of Contents
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, 2022 and 2021 are presented below based
on the fair value hierarchy levels:
December 31, 2022
Assets
Fixed maturity securities, available for sale:
U.S. Government and agencies
States, municipalities and territories
Foreign corporate securities and foreign governments
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Other investments
Real estate investments
Limited partnerships and limited liability companies
Derivative instruments
Cash and cash equivalents
Liabilities
Funds withheld liability - embedded derivative
Fixed index annuities - embedded derivatives
December 31, 2021
Assets
Fixed maturity securities, available for sale:
U.S. Government and agencies
States, municipalities and territories
Foreign corporate securities and foreign governments
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Other investments
Real estate investments
Limited partnerships and limited liability companies
Derivative instruments
Cash and cash equivalents
Liabilities
Funds withheld liability - embedded derivative
Fixed index annuities - embedded derivatives
Total
Fair Value
NAV
Quoted
Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(Dollars in thousands)
$
169,071 $
— $
26,184 $
142,887 $
3,822,982
676,852
24,161,921
1,377,611
3,687,478
5,908,702
1,013,297
940,559
684,835
431,727
1,919,669
—
—
—
—
—
—
—
—
620,626
—
—
—
—
—
—
—
—
398,280
—
—
—
1,919,669
3,822,982
676,852
23,759,573
1,377,611
3,687,478
5,465,784
615,017
—
—
431,727
—
—
—
—
402,348
—
—
442,918
—
940,559
64,209
—
—
$
$
$
44,794,704 $
620,626 $
2,344,133 $
39,979,911 $
1,850,034
(441,864) $
4,820,845
4,378,981 $
— $
—
— $
— $
—
— $
— $
(441,864)
—
4,820,845
— $
4,378,981
$
1,078,746 $
— $
32,737 $
1,046,009 $
3,927,201
402,545
34,660,234
1,125,049
4,840,311
5,271,857
12,226
337,939
168,711
1,277,480
4,508,982
—
—
—
—
—
—
—
—
168,711
—
—
—
—
3,927,201
402,545
32,700
34,627,534
—
—
—
—
—
—
—
4,508,982
1,125,049
4,840,311
5,271,857
5,877
—
—
1,277,480
—
—
—
—
—
—
—
—
6,349
337,939
—
—
—
$
$
$
57,611,281 $
168,711 $
4,574,419 $
52,523,863 $
344,288
(2,362) $
7,964,961
7,962,599 $
— $
—
— $
— $
—
— $
(2,362) $
—
—
7,964,961
(2,362) $
7,964,961
F-18
Table of Contents
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, 2022
and 2021.
Fixed maturity security valuations that include at least one significant unobservable input are reflected in Level 3 in the fair value hierarchy
and can include fixed maturity securities across all asset classes. Quantitative information about the significant unobservable inputs used are
provided below for fixed maturity securities that were either valued internally or were valued by a third party and the inputs were reasonably
available. The fair value of corporate securities that utilized at least one significant unobservable input was $84.7 million and $0 million as of
December 31, 2022 and 2021, respectively. A discounted cash flow methodology was utilized in the valuation, which included an
unobservable liquidity premium of 20 basis points being incorporated along with other observable market data. The fair value of other asset
backed securities that utilized at least one significant unobservable input was $296.8 million and $0 million as of December 31, 2022 and
2021, respectively. A discounted cash flow methodology was utilized in the valuation, which included unobservable discount rates and
weighted average lives being incorporated along with other observable market data. At December 31, 2022, the discount rates used in the fair
value calculations ranged from 4.04% to 28.58% with a weighted average rate of 4.36%. At December 31, 2022, the weighted average lives
used in the fair value calculations ranged from 8.79 years to 12.48 years with a weighted average of 9.29 years.
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.
F-19
Table of Contents
Real estate investments
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair values of residential real estate investments held through consolidation of investment company VIEs are initially calculated based on
the cost to purchase the properties and subsequently calculated based on a discounted cash flow methodology. Under the discounted cash
flow method, net operating income is forecasted assuming a 10-year hold period commencing as of the valuation date. An additional year is
forecasted in order to determine the residual sale price at the end of the hold period, using a residual (terminal) capitalization rate. The
significant inputs into the fair value calculation under the discounted cash flow method include the residual capitalization rate and discount
rate. These inputs are unobservable market data; therefore, fair value of residential real estate investments falls into Level 3 in the fair value
hierarchy. At December 31, 2022, the residual capitalization rates used in the fair value calculations ranged from 4.75% to 6.50% with an
average rate of 5.44%. At December 31, 2022, the discount rates used in the fair value calculations ranged from 6.00% to 8.00% with an
average rate of 6.91%. At December 31, 2021, the residual capitalization rates used in the fair value calculations ranged from 5.00% to
6.25% with an average rate of 5.72%. At December 31, 2021, the discount rates used in the fair value calculations ranged from 6.25% to
7.50% with an average rate of 6.97%.
In Q4 2022, we purchased one real estate investment through consolidation of a VIE that is not measured at fair value on a recurring basis.
Due to the proximity of the purchase date to year end, the cost to purchase the property approximates fair value.
Limited partnerships and limited liability companies
Two of our consolidated variable interest entities, which are fair valued on a recurring basis, invest in limited liability companies that invest in
operating entities which hold multifamily real estate properties. The fair value of our variable interest entities was $64.2 million as of
December 31, 2022 and falls within Level 3 of the fair value hierarchy. The fair value of the limited liability companies was obtained from a
third party and is based on the fair value of the underlying real estate held by the various operating entities. The real estate is initially
calculated based on the cost to purchase the properties and subsequently calculated based on a discounted cash flow methodology. At
December 31, 2022, the residual capitalization rates used in the fair value calculations of the underlying real estate ranged from 4.25% to
4.75% with a weighted average rate of 4.46%. The discount rates used in the fair value calculations of the underlying real estate ranged from
5.75% to 6.00% with a weighted average rate of 5.86%. The fair value of this investment falls within Level 3 of the fair value hierarchy.
Each of our consolidated limited partnership funds, which are measured using NAV as a practical expedient, are closed-end funds that invest
in infrastructure credit assets and tech-centric middle-market loans, respectively. Redemptions are not allowed until the funds’ termination
dates and liquidations begin. At December 31, 2022, our unfunded commitments for our consolidated limited partnership funds are $926.3
million.
Derivative instruments
The fair values of our 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.
The fair values of our pay fixed/receive float interest rate swaps are determined using internal valuation models that generate discounted
expected future cash flows by constructing a projected Secured Overnight Financing Rate (SOFR) curve over the term of the swap.
Other investments
Equity securities and short-term debt securities with maturities of greater than three months but less than twelve months when purchased are
the only financial instruments included in other investments that are measured at fair value on a recurring basis. The fair value for these
investments are determined using the same methods discussed above for fixed maturity securities. Financial instruments included in other
investments that are not measured at fair value on a recurring basis are FHLB common stock, short-term loans, collateral loans and company
owned life insurance ("COLI"). FHLB common stock is carried at cost which approximates fair value. FHLB common stock was $22.0
million as of December 31, 2022 and falls within Level 2 of the fair value hierarchy. Due to the short-term nature of the investments, the fair
value of a portion of our short-term loans approximates the carrying value. The fair value of short-term loans was $316.4 million and $320.0
million as of December 31, 2022 and December 31, 2021, respectively. Our short-term loans fall within Level 2 of the fair value hierarchy.
For our collateral loans, we have concluded the fair value approximates carrying value and falls within Level 2 of the fair value hierarchy.
The fair value of collateral loans was $64.6 million and $0 million as of December 31, 2022 and December 31, 2021, respectively. The fair
value of our COLI approximates the cash surrender value of the policies and falls within Level 2 of the fair value hierarchy. The fair value of
COLI was $397.7 million and $384.3 million as of December 31, 2022 and December 31, 2021, respectively.
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.
F-20
Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
Other policy funds - FHLB
The fair values of the Company's funding agreements with the FHLB are estimated using discounted cash flow calculations based on interest
rates currently being offered for similar agreements with similar maturities.
Notes and loan payable
The fair value of our senior unsecured notes is based upon quoted market price. The carrying value of the term loan approximates fair value
as the interest rate is reset on a quarterly basis utilizing SOFR adjusted for a credit spread. Both of these are categorized as Level 2 within the
fair value hierarchy and 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..
Funds withheld liability - embedded derivative
We estimate the fair value of the embedded derivative based on the fair value of the assets supporting the funds withheld payable under
modified coinsurance and funds withheld coinsurance reinsurance agreements. The fair value of the embedded derivative is classified as
Level 3 based on valuation methods used for the assets held supporting the reinsurance agreements.
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, 2022 and 2021, we utilized an estimate of 2.40% and 2.10%, respectively, 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 option
costs.
F-21
Table of Contents
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 updated 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, 2022
December 31, 2021
December 31, 2022
December 31, 2021
Average Lapse Rates
Average Partial Withdrawal Rates
1 - 5
6 - 10
11 - 15
16 - 20
20+
2.17%
3.28%
3.63%
8.55%
4.90%
3.04%
2.84%
4.47%
8.93%
4.93%
1.86%
1.97%
1.86%
2.96%
1.81%
2.19%
2.26%
2.14%
1.33%
—%
Lapse rates are generally expected to increase as surrender charge percentages decrease for policies without a lifetime income benefit rider.
Lapse expectations reflect a significant increase in the year in which the surrender charge period on a contract ends.
The following table provides a reconciliation of the beginning and ending balances for our Level 3 assets and liabilities, which are measured
at fair value on a recurring basis using significant unobservable inputs for the years ended December 31, 2022 and 2021:
Fixed maturity securities, available for sale - Corporate securities
Beginning balance
Purchases
Transfers in
Transfers out
Total realized/unrealized gains (losses):
Included in net income
Included in other comprehensive income (loss)
Ending balance
Fixed maturity securities, available for sale - Other asset backed securities
Beginning balance
Purchases
Transfers in
Transfers out
Total realized/unrealized gains (losses):
Included in net income
Included in other comprehensive income (loss)
Ending balance
Other investments
Beginning balance
Transfers in
Transfers out
Total realized/unrealized gains (losses):
Included in net income
Included in other comprehensive income (loss)
Ending balance
F-22
Year Ended
December 31,
2022
2021
$
— $
2,233
391,702
—
—
8,413
402,348 $
— $
296,800
153,669
—
—
(7,551)
442,918 $
6,349 $
—
(3,867)
(2,482)
—
— $
$
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
6,349
—
—
—
6,349
Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Real estate investments
Beginning balance
Purchases and sales, net
Change in fair value
Ending balance
Limited partnerships and limited liability companies
Beginning balance
Purchases and sales, net
Change in fair value
Ending balance
Funds withheld liability - embedded derivative
Beginning balance
Transfers in
Change in fair value
Ending balance
Fixed index annuities - embedded derivatives
Beginning balance
Premiums less benefits
Change in fair value, net
Reserve release related to in-force ceded reinsurance
Ending balance
Year Ended
December 31,
2022
2021
337,939 $
602,298
322
940,559 $
—
335,767
2,172
337,939
— $
57,574
6,635
64,209 $
— $
(441,864)
—
(441,864) $
—
—
—
—
—
—
—
—
7,964,961 $
(125,940)
(2,561,676)
(456,500)
7,938,281
1,424,372
(876,803)
(520,889)
$
$
$
$
$
$
$
$
4,820,845 $
7,964,961
Transfers into Level 3 during the years ended December 31, 2022 and 2021 were the result of changes in observable pricing information for
certain fixed maturity securities.
The fair value of our fixed index annuities embedded derivatives is net of coinsurance ceded of $1,173.4 million and $1,245.0 million as of
December 31, 2022 and 2021, respectively. Change in fair value, net for each period in our embedded derivatives is included in Change in
fair value of embedded derivatives in the Consolidated Statements of Operations.
Certain derivatives embedded in our fixed index annuity contracts are our most significant financial instrument measured at fair value that are
categorized as Level 3 in the fair value hierarchy. The contractual obligations for future annual index credits within our fixed index annuity
contracts are treated as a "series of embedded derivatives" over the expected life of the applicable contracts. We estimate the fair value of
these embedded derivatives at each valuation date by the method described above under fixed index annuities - embedded derivatives. The
projections of minimum guaranteed contract values include the same best estimate assumptions for policy decrements as were used to project
policy contract values.
The most sensitive assumption in determining policy liabilities for fixed index annuities is the rates used to discount the excess projected
contract values. As indicated above, the discount rate reflects our nonperformance risk. If the discount rates used to discount the excess
projected contract values at December 31, 2022, were to increase by 100 basis points, the fair value of the embedded derivatives would
decrease by $336.2 million recorded through operations as a decrease in the change in fair value of embedded derivatives and there would be
a corresponding decrease of $124.3 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 $386.4 million recorded through operations as an increase in the change in fair value of embedded derivatives and there would
be a corresponding increase of $147.0 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 2022, 2021 and 2020.
The most significant assumption update to the calculation of the fair value of the embedded derivative component of our fixed index annuity
policy benefit reserves in 2022 was the change in the discount rate. The discount rate assumption was increased, and the period over which
the discount rate assumption grades to an ultimate assumption was adjusted. This resulted in a decrease in the fair value of the embedded
derivative.
F-23
Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The most significant assumption update to the calculation of the fair value of the embedded derivative component of our fixed index annuity
benefit policy reserves in 2021 was changes in lapse rate assumptions. For certain annuity products without a lifetime income benefit rider,
the lapse rate assumption was increased in more recent cohorts to reflect higher lapses on policies with a market value adjustment ("MVA")
feature. For other annuity products with a lifetime income benefit rider, the population was bifurcated based on whether policies had utilized
the rider. For those policies which had utilized the rider, the lapse rate assumption was decreased in later durations. The net impact of the
updates to the lapse rate assumption resulted in a decrease in the embedded derivative component of our fixed index annuity policy benefit
reserves as less funds ultimately qualify for excess benefits.
The most significant assumption update to the calculation of the fair value of the embedded derivative component of our fixed index annuity
policy benefit reserves in 2020 was a decrease in the crediting rate/option budget to 2.10% from 2.90% as a result of a revised estimate of the
cost of options. This assumption change resulted in a decrease in the fair value of the embedded derivative component of our fixed index
annuity policy benefit reserves due to a reduction in the projected policy contract values over the expected lives of the contracts. During
2020, we revised the derivation of the discount rate used in calculating the fair value of embedded derivatives which increased the discount
rate and resulted in a decrease in the change in fair value of embedded derivatives. The net impact of the updates to lapse and partial
withdrawal assumptions resulted in an increase in the embedded derivative component of our fixed index annuity policy benefit reserves as
more funds ultimately qualify for excess benefits.
3. Investments
At December 31, 2022 and 2021, the amortized cost and fair value of fixed maturity securities were as follows:
December 31, 2022
Fixed maturity securities, available for sale:
U.S. Government and agencies
States, municipalities and territories
Foreign corporate securities and foreign governments
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
December 31, 2021
Fixed maturity securities, available for sale:
U.S. Government and agencies
States, municipalities and territories
Foreign corporate securities and foreign governments
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Amortized
Cost (1)
Gross
Unrealized
Gains
Gross
Unrealized
Losses (2)
Allowance for
Credit Losses
Fair Value
(Dollars in thousands)
$
173,638 $
70 $
(4,637) $
— $
169,071
4,356,251
748,770
27,706,440
1,492,242
4,098,755
6,289,923
41,565
11,661
146,065
11,870
493
14,068
(574,834)
(83,579)
(3,687,370)
(126,368)
(411,770)
(395,289)
—
—
(3,214)
(133)
—
—
3,822,982
676,852
24,161,921
1,377,611
3,687,478
5,908,702
$
44,866,019 $
225,792 $
(5,283,847) $
(3,347) $
39,804,617
$
1,046,029 $
32,841 $
(124) $
— $
1,078,746
3,495,563
380,646
437,456
22,742
31,084,629
3,614,047
1,056,778
4,708,878
5,226,660
70,434
149,152
95,304
(3,042)
(843)
(38,442)
(2,093)
(17,719)
(50,107)
(2,776)
—
—
(70)
—
—
3,927,201
402,545
34,660,234
1,125,049
4,840,311
5,271,857
$
46,999,183 $
4,421,976 $
(112,370) $
(2,846) $
51,305,943
(1) Amortized cost excludes accrued interest receivable of $425.4 million and $400.7 million as of December 31, 2022 and 2021,
respectively.
(2) Gross unrealized losses are net of allowance for credit losses.
F-24
Table of Contents
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, 2022, 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)
$
1,184,147 $
5,641,072
6,254,569
9,853,998
10,051,313
32,985,099
1,492,242
4,098,755
6,289,923
1,180,124
5,406,059
5,672,730
8,817,815
7,754,098
28,830,826
1,377,611
3,687,478
5,908,702
$
44,866,019 $
39,804,617
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,
2022
2021
(Dollars in thousands)
Net unrealized gains (losses) on available for sale fixed maturity securities
$
(5,065,422) $
4,309,606
Adjustments for assumed changes in amortization of deferred policy acquisition costs, deferred sales inducements
and policy benefit reserves
Deferred income tax valuation allowance reversal
Deferred income tax expense
2,309,357
(1,993,869)
22,534
578,476
22,534
(489,482)
Net unrealized gains (losses) reported as accumulated other comprehensive income (loss)
$
(2,155,055) $
1,848,789
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% of our fixed maturity portfolio rated
investment grade at both December 31, 2022 and 2021, 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
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
December 31,
2022
2021
1
2
3
4
5
6
(Dollars in thousands)
$
27,061,903 $
24,211,086 $
26,157,531 $
28,785,839
17,023,157
14,944,131
19,758,594
21,396,020
595,193
109,409
61,721
14,636
510,392
91,495
36,738
10,775
909,311
133,070
16,496
24,181
941,210
147,160
15,357
20,357
$
44,866,019 $
39,804,617 $
46,999,183 $
51,305,943
F-25
Table of Contents
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 4,510 and 1,427 securities, respectively) have been in a continuous unrealized loss position, at
December 31, 2022 and 2021:
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Losses (1)
Fair Value
Unrealized
Losses (1)
Fair Value
Unrealized
Losses (1)
(Dollars in thousands)
December 31, 2022
Fixed maturity securities, available for sale:
U.S. Government and agencies
$
160,201 $
(4,512) $
908 $
(125) $
161,109 $
(4,637)
States, municipalities and territories
2,595,122
(537,313)
Foreign corporate securities and foreign governments
522,826
(76,957)
95,184
21,816
(37,521)
2,690,306
(574,834)
(6,622)
544,642
(83,579)
Corporate securities
18,784,181
(3,218,323)
1,411,177
(469,047)
20,195,358
(3,687,370)
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
992,783
2,941,293
2,561,390
(101,100)
(302,513)
116,388
651,923
(25,268)
1,109,171
(109,257)
3,593,216
(162,821)
1,924,026
(232,468)
4,485,416
(126,368)
(411,770)
(395,289)
$ 28,557,796 $ (4,403,539) $ 4,221,422 $
(880,308) $ 32,779,218 $ (5,283,847)
December 31, 2021
Fixed maturity securities, available for sale:
U.S. Government and agencies
$
760,977 $
(124) $
— $
— $
760,977 $
States, municipalities and territories
Foreign corporate securities and foreign governments
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
168,942
42,861
(2,468)
(843)
2,375,603
(30,070)
250,964
784,464
(1,408)
(5,500)
15,711
—
116,819
26,917
142,224
(3,350)
—
184,653
42,861
(8,372)
2,492,422
(755)
(12,219)
277,881
926,688
Other asset backed securities
1,351,324
(11,345)
1,771,182
(38,762)
3,122,506
(124)
(5,818)
(843)
(38,442)
(2,163)
(17,719)
(50,107)
$ 5,735,135 $
(51,758) $ 2,072,853 $
(63,458) $ 7,807,988 $
(115,216)
(1) Unrealized losses have not been reduced to reflect the allowance for credit losses of $3.3 million and $2.8 million as of December 31,
2022 and 2021, respectively.
The unrealized losses at December 31, 2022 are principally related to the timing of the purchases of certain securities, which carry less yield
than those available at December 31, 2022. Approximately 98% and 85% of the unrealized losses on fixed maturity securities shown in the
above table for December 31, 2022 and 2021, respectively, are on securities that are rated investment grade, defined as being the highest two
NAIC designations.
We expect to recover our amortized cost on all securities except for those securities on which we recognized an allowance for credit loss. In
addition, 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 write down these
investments to fair value through the consolidated statements of operations.
Changes in net unrealized gains/losses on investments for the years ended December 31, 2022, 2021 and 2020 are as follows:
Year Ended December 31,
2022
2021
2020
(Dollars in thousands)
Fixed maturity securities available for sale carried at fair value
$
(9,375,028) $
(987,434) $
1,955,496
Adjustment for effect on other balance sheet accounts:
Deferred policy acquisition costs, deferred sales inducements and policy benefit reserves
Deferred income tax asset/liability
4,303,226
1,067,958
5,371,184
542,382
90,284
632,666
(880,517)
(225,746)
(1,106,263)
Change in net unrealized gains/losses on investments carried at fair value
$
(4,003,844) $
(354,768) $
849,233
F-26
Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Components of net investment income are as follows:
Fixed maturity securities
Real estate investments
Mortgage loans on real estate
Cash and cash equivalents
Limited partnerships and limited liability companies
Other investments
Less: investment expenses
Net investment income
Year Ended December 31,
2022
2021
2020
(Dollars in thousands)
$
1,849,915 $
1,772,675 $
2,035,762
40,243
301,118
24,985
188,131
49,537
14,138
215,138
3,385
67,157
29,399
2,453,929
(146,466)
2,101,892
(64,417)
—
170,749
4,871
(12,204)
15,372
2,214,550
(32,472)
$
2,307,463 $
2,037,475 $
2,182,078
Proceeds from sales of available for sale fixed maturity securities for the years ended December 31, 2022, 2021 and 2020 were $7.8 billion,
$0.8 billion and $5.4 billion, respectively. Scheduled principal repayments, calls and tenders for available for sale fixed maturity securities
for the years ended December 31, 2022, 2021 and 2020 were $2.8 billion, $3.7 billion and $2.9 billion, respectively.
Net realized losses on investments for the years ended December 31, 2022, 2021 and 2020 are as follows:
Year Ended December 31,
2022
2021
2020
(Dollars in thousands)
Fixed maturity securities, available for sale:
Gross realized gains
Gross realized losses
Net credit loss (provision) release
Mortgage loans on real estate:
Decrease (increase) in allowance for credit losses
Recovery of specific allowance
Gain (loss) on sale of mortgage loans
$
139,819 $
10,167 $
(153,712)
(15,536)
(29,429)
(15,126)
1,677
(4,970)
(18,419)
(19,140)
(6,241)
(15,214)
7,005
—
(5,033)
1,972
Total net realized losses
$
(47,848) $
(13,242) $
305,170
(276,847)
(94,560)
(66,237)
(15,447)
712
292
(14,443)
(80,680)
Realized losses on available for sale fixed maturity securities in 2022, 2021 and 2020 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. In addition, certain realized gains and losses on available for sale fixed maturity securities in 2020 were realized as a
result of efforts to de-risk the portfolio. Realized gains and losses on sales are determined on the basis of specific identification of
investments based on the trade date.
The following table summarizes the carrying value of our investments that have been non-income producing for 12 consecutive months:
Fixed maturity securities, available for sale
Mortgage loans on real estate
December 31,
2022
2021
(Dollars in thousands)
$
$
10,708 $
1,483
12,191 $
4,118
—
4,118
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 credit loss is a
quantitative and qualitative process, which is subject to risks and uncertainties.
F-27
Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We have a policy and process to identify securities that could potentially have credit loss. 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 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 an allowance for credit loss should be established for debt securities by assessing pertinent 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 have credit loss 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, credit loss 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, a credit loss would be recognized in operations for 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 recognized credit loss is limited to the total unrealized loss on the security (i.e., the fair value floor).
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 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 credit loss.
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, 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.
We do not measure a credit loss allowance on accrued interest receivable as we write off any accrued interest receivable balance to net
investment income in a timely manner when we have concerns regarding collectability.
Amounts on available for sale fixed maturities that are deemed to be uncollectible are written off and removed from the allowance for credit
loss. A write-off may also occur if we intend to sell a security or when it is more likely than not we will be required to sell the security before
the recovery of its amortized cost.
F-28
Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table provides a rollforward of the allowance for credit loss:
Year Ended December 31, 2022
States,
Municipalities
and
Territories
Corporate
Securities
Residential
Mortgage
Backed
Securities
(Dollars in thousands)
Beginning balance
$
2,776 $
— $
70 $
Additions for credit losses not previously recorded
Change in allowance on securities with previous allowance
Reduction for securities with credit losses due to intent to sell
Reduction for securities sold during the period
Write-offs charged against the allowance
Recoveries of amounts previously written off
—
(2,776)
—
—
—
—
3,825
(611)
—
—
—
—
1,070
(579)
—
(428)
—
—
Total
2,846
4,895
(3,966)
—
(428)
—
—
Ending balance
$
— $
3,214 $
133 $
3,347
Year Ended December 31, 2021
States,
Municipalities
and
Territories
Corporate
Securities
Residential
Mortgage
Backed
Securities
(Dollars in thousands)
Beginning balance
$
2,844 $
60,193 $
1,734 $
Additions for credit losses not previously recorded
Change in allowance on securities with previous allowance
Reduction for securities with credit losses due to intent to sell
Reduction for securities sold during the period
Write-offs charged against the allowance
Recoveries of amounts previously written off
—
(68)
—
—
—
—
705
443
(209)
(50,758)
(10,032)
(342)
Ending balance
$
2,776 $
— $
407
(857)
—
—
—
(1,214)
70 $
Total
64,771
1,112
(482)
(209)
(50,758)
(10,032)
(1,556)
2,846
At December 31, 2022 and 2021, cash and invested assets of $51.0 billion and $49.3 billion, respectively, were on deposit with state agencies
to meet regulatory requirements including deposits for the benefit of all policyholders. There are no restrictions on these assets.
At December 31, 2022 and 2021, we had no investment in any person or its affiliates, other than U.S. Government and its agencies, that
exceeded 10% of stockholders' equity.
F-29
Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Mortgage Loans on Real Estate
Our financing receivables consist of the following three portfolio segments: commercial mortgage loans, agricultural mortgage loans and
residential mortgage loans. Our mortgage loan portfolios are summarized in the following table. There were commitments outstanding of
$420.2 million at December 31, 2022.
Commercial mortgage loans:
Principal outstanding
Deferred fees and costs, net
Amortized cost
Valuation allowance
Commercial mortgage loans, carrying value
Agricultural mortgage loans:
Principal outstanding
Deferred fees and costs, net
Amortized cost
Valuation allowance
Agricultural mortgage loans, carrying value
Residential mortgage loans:
Principal outstanding
Deferred fees and costs, net
Unamortized discounts and premiums, net
Amortized cost
Valuation allowance
Residential mortgage loans, carrying value
Mortgage loans, carrying value
December 31,
2022
2021
(Dollars in thousands)
$
3,560,903 $
3,633,131
(6,345)
3,554,558
(22,428)
3,532,130
567,630
(1,667)
565,963
(1,021)
564,942
(4,629)
3,628,502
(17,926)
3,610,576
408,135
(1,136)
406,999
(519)
406,480
2,807,652
1,652,910
1,909
55,917
2,865,478
(13,523)
2,851,955
$
6,949,027 $
1,468
22,143
1,676,521
(5,579)
1,670,942
5,687,998
F-30
Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our commercial mortgage loan portfolio consists of loans collateralized by the related properties and diversified as to property type, location
and loan size. Our 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 commercial 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
Hotel
Mixed Use/Other
December 31,
2022
2021
Principal
Percent
Principal
Percent
(Dollars in thousands)
$
$
$
502,659
280,993
416,307
73,631
858,812
934,007
205,568
288,926
14.1 % $
7.9 %
11.7 %
2.1 %
24.1 %
26.2 %
5.8 %
8.1 %
614,406
293,494
452,818
60,172
863,879
785,679
235,864
326,819
16.9 %
8.1 %
12.5 %
1.6 %
23.8 %
21.6 %
6.5 %
9.0 %
3,560,903
100.0 % $
3,633,131
100.0 %
378,713
10,265
896,351
866,623
912,984
285,271
210,696
10.6 % $
0.3 %
25.2 %
24.3 %
25.6 %
8.0 %
6.0 %
315,374
10,827
1,016,101
924,779
864,580
283,500
217,970
8.7 %
0.3 %
28.0 %
25.4 %
23.8 %
7.8 %
6.0 %
$
3,560,903
100.0 % $
3,633,131
100.0 %
Our agricultural mortgage loan portfolio consists of loans with an outstanding principal balance of $567.6 million and $408.1 million as of
December 31, 2022 and 2021, respectively. These loans are collateralized by agricultural land and are diversified as to location within the
United States. Our residential mortgage loan portfolio consists of loans with an outstanding principal balance of $2.8 billion and $1.7 billion
as of December 31, 2022 and 2021, respectively. These loans are collateralized by the related properties and diversified as to location within
the United States.
Mortgage loans on real estate are generally reported at cost adjusted for amortization of premiums and accrual of discounts, computed using
the interest method and net of valuation allowances. Interest income is accrued on the principal amount of the loan based on the loan's
contractual interest rate. Interest income is included in Net investment income on our Consolidated Statements of Operations. Accrued
interest receivable, which was $58.2 million and $37.0 million as of December 31, 2022 and 2021, respectively, is included in Accrued
investment income on our consolidated balance sheets.
Loan Valuation Allowance
We establish a valuation allowance to provide for the risk of credit losses inherent in our mortgage loan portfolios. The valuation allowance
is maintained at a level believed adequate by management to absorb estimated expected credit losses. The valuation allowance is based on
amortized cost, which excludes accrued interest receivable. We do not measure a credit loss allowance on accrued interest receivable as we
write off any uncollectible accrued interest receivable balances to net investment income in a timely manner. We did not charge off any
uncollectible accrued interest receivable on our commercial, agricultural or residential mortgage loan portfolios for the years ended
December 31, 2022 or 2021, respectively.
The valuation allowances for each of our mortgage loan portfolios are estimated by deriving probability of default and recovery rate
assumptions based on the characteristics of the loans in each portfolio, historical economic data and loss information, and current and
forecasted economic conditions. Key loan characteristics impacting the estimate for our commercial mortgage loan portfolio include the
current state of the borrower’s credit quality, which considers factors such as loan-to-value (“LTV”) and debt service coverage (“DSC”)
ratios, loan performance, underlying collateral type, delinquency status, time to maturity, and original credit scores. Key loan characteristics
impacting the estimate for our agricultural and residential mortgage loan portfolios include the current state of the borrowers' credit quality,
delinquency status, time to maturity and original credit scores.
F-31
Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table represents a rollforward of the valuation allowance on our mortgage loan portfolios:
Beginning allowance balance
Charge-offs
Recoveries
Change in provision for credit losses
Ending allowance balance
Beginning allowance balance
Charge-offs
Recoveries
Change in provision for credit losses
Ending allowance balance
Commercial
Agricultural
Residential
Total
Year Ended December 31, 2022
(Dollars in thousands)
(17,926) $
(519) $
(5,579) $
(24,024)
501
1,677
(6,680)
—
—
(502)
—
—
(7,944)
(22,428) $
(1,021) $
(13,523) $
501
1,677
(15,126)
(36,972)
Commercial
Agricultural
Residential
Total
Year Ended December 31, 2021
(Dollars in thousands)
(25,529) $
(2,130) $
(3,370) $
(31,029)
—
—
7,603
(17,926) $
—
—
1,611
(519) $
—
—
(2,209)
(5,579) $
—
—
7,005
(24,024)
$
$
$
$
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 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
Real estate investments and the 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. There is no real estate in which ownership of the property was taken to satisfy
an outstanding loan held in Real estate investments as of December 31, 2022 or December 31, 2021. 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).
Credit Quality Indicators
We evaluate the credit quality of our commercial and agricultural mortgage loans by analyzing LTV and DSC ratios and loan performance.
We evaluate the credit quality of our residential mortgage loans by analyzing loan performance.
LTV and DSC ratios for our commercial mortgage loans are originally calculated at the time of loan origination and are updated annually for
each loan using information such as rent rolls, assessment of lease maturity dates and property operating statements, which are reviewed in
the context of current leasing and in place rents compared to market leasing and market rents. A DSC ratio of less than 1.0 indicates that a
property's operations do not generate sufficient income to cover debt payments. An LTV ratio in excess of 100% indicates the unpaid loan
amount exceeds the value of the underlying collateral. All of our commercial mortgage loans that have a debt service coverage ratio of less
than 1.0 are performing under the original contractual loan terms at December 31, 2022 and 2021.
F-32
Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The amortized cost of our commercial mortgage loan portfolio by LTV and DSC ratios based on the most recent information collected was as
follows at December 31, 2022 and 2021 (by year of origination):
As of December 31, 2022:
Debt Service Coverage Ratio:
2022
2021
2020
2019
2018
Prior
Total
Amortized
Cost
Average
LTV
Amortized
Cost
Average
LTV
Amortized
Cost
Average
LTV
Amortized
Cost
Average
LTV
Amortized
Cost
Average
LTV
Amortized
Cost
Average
LTV
Amortized
Cost
Average
LTV
(Dollars in thousands)
Greater than or equal to 1.5
$ 249,328
63 % $ 257,746
61 % $ 421,391
57 % $ 429,596
58 % $ 325,117
53 % $ 813,319
44 % $ 2,496,497
53 %
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
Total
As of December 31, 2021:
Debt Service Coverage Ratio:
6,488
70 %
123,038
55 %
46,804
58 %
115,977
66 %
67,642
67 %
145,703
60 %
505,652
62 %
170,059
52 %
211,684
43 %
18,144
79 %
39,396
73 %
10,348
76 %
58,021
47 %
507,652
—
— %
—
— %
—
— %
6,107
64 %
13,025
70 %
25,625
65 %
44,757
$ 425,875
59 % $ 592,468
53 % $ 486,339
58 % $ 591,076
61 % $ 416,132
57 % $ 1,042,668
47 % $ 3,554,558
51 %
66 %
54 %
2021
2020
2019
2018
2017
Prior
Total
Amortized
Cost
Average
LTV
Amortized
Cost
Average
LTV
Amortized
Cost
Average
LTV
Amortized
Cost
Average
LTV
Amortized
Cost
Average
LTV
Amortized
Cost
Average
LTV
Amortized
Cost
Average
LTV
(Dollars in thousands)
Greater than or equal to 1.5
$ 260,623
64 % $ 454,828
60 % $ 464,059
61 % $ 344,170
58 % $ 246,854
52 % $ 758,494
45 % $ 2,529,028
55 %
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
Total
12,836
67 %
58,960
66 %
128,301
70 %
89,293
66 %
135,818
66 %
129,833
57 %
555,041
65 %
318,636
45 %
17,762
82 %
69,684
72 %
11,937
75 %
6,343
60 %
42,125
58 %
466,487
—
— %
3,289
61 %
26,147
63 %
14,051
76 %
13,385
73 %
21,074
54 %
77,946
$ 592,095
54 % $ 534,839
61 % $ 688,191
64 % $ 459,451
60 % $ 402,400
58 % $ 951,526
47 % $ 3,628,502
53 %
65 %
56 %
LTV and DSC ratios for our agricultural mortgage loans are calculated at the time of loan origination and are evaluated annually for each loan
using land value averages. A DSC ratio of less than 1.0 indicates that a property's operations do not generate sufficient income to cover debt
payments. An LTV ratio in excess of 100% indicates the unpaid loan amount exceeds the value of the underlying collateral. All of our
agricultural mortgage loans that have a debt service coverage ratio of less than 1.0 are performing under the original contractual loan terms at
December 31, 2022 and 2021.
The amortized cost of our agricultural mortgage loan portfolio by LTV and DSC ratios based on the most recent information collected was as
follows at December 31, 2022 and 2021 (by year of origination):
As of December 31, 2022:
Debt Service Coverage Ratio:
2022
2021
2020
2019
2018
Prior
Total
Amortized
Cost
Average
LTV
Amortized
Cost
Average
LTV
Amortized
Cost
Average
LTV
Amortized
Cost
Average
LTV
Amortized
Cost
Average
LTV
Amortized
Cost
Average
LTV
Amortized
Cost
Average
LTV
(Dollars in thousands)
Greater than or equal to 1.5
$
85,367
47 % $
84,186
46 % $
97,143
41 % $
107,856
54 %
67,630
52 %
61,103
32 %
3,124
56 %
8,825
38 %
—
— %
—
— %
3,125
7,975
25 %
35 %
5,629
41 %
34,000
31 %
$ 196,347
51 % $ 160,641
48 % $ 169,346
37 % $
5,629
41 % $
34,000
31 % $
—
—
—
— % $
— %
— %
—
—
—
— % $
— %
— %
—
—
—
—
—
— % $ 266,696
45 %
— %
236,589
48 %
— %
15,074
— %
47,604
— % $ 565,963
39 %
33 %
45 %
2021
2020
2019
2018
2017
Prior
Total
Amortized
Cost
Average
LTV
Amortized
Cost
Average
LTV
Amortized
Cost
Average
LTV
Amortized
Cost
Average
LTV
Amortized
Cost
Average
LTV
Amortized
Cost
Average
LTV
Amortized
Cost
Average
LTV
(Dollars in thousands)
Greater than or equal to 1.5
$
62,548
54 % $
80,919
56 % $
11,645
49 % $
25,000
11 % $
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
Total
95,738
55 %
102,958
43 %
3,335
22 %
7,478
44 %
—
— %
4,092
8,552
36 %
4,734
50 %
59 %
—
— %
—
—
—
— %
— %
— %
$ 165,764
54 % $ 196,521
49 % $
19,714
45 % $
25,000
11 % $
—
—
—
—
—
— % $
— %
— %
— %
— % $
—
—
—
—
—
— % $ 180,112
49 %
— %
202,031
48 %
— %
16,304
— %
8,552
— % $ 406,999
44 %
59 %
48 %
F-33
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
Total
As of December 31, 2021:
Debt Service Coverage Ratio:
Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We closely monitor loan performance for our commercial, agricultural and residential mortgage loan portfolios. Aging of financing
receivables is summarized in the following table (by year of origination):
As of December 31, 2022:
Commercial mortgage loans
Current
30 - 59 days past due
60 - 89 days past due
Over 90 days past due
2022
2021
2020
2019
2018
Prior
Total
(Dollars in thousands)
$
425,875 $
592,468 $
486,339 $
591,076 $
416,132 $ 1,042,668 $ 3,554,558
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total commercial mortgage loans
$
425,875 $
592,468 $
486,339 $
591,076 $
416,132 $ 1,042,668 $ 3,554,558
Agricultural mortgage loans
Current
30 - 59 days past due
60 - 89 days past due
Over 90 days past due
$
196,347 $
160,641 $
166,211 $
5,629 $
34,000 $
— $
562,828
—
—
—
—
—
—
—
—
3,135
—
—
—
—
—
—
—
—
—
—
—
3,135
Total agricultural mortgage loans
$
196,347 $
160,641 $
169,346 $
5,629 $
34,000 $
— $
565,963
Residential mortgage loans
Current
30 - 59 days past due
60 - 89 days past due
Over 90 days past due
$ 1,915,169 $
595,363 $
211,119 $
27,483 $
1,710 $
417 $ 2,751,261
39,179
6,668
9,702
8,238
7,165
14,068
13,073
3,034
6,515
1,960
57
1,762
—
—
2,796
—
—
—
62,450
16,924
34,843
Total residential mortgage loans
$ 1,970,718 $
624,834 $
233,741 $
31,262 $
4,506 $
417 $ 2,865,478
As of December 31, 2021:
Commercial mortgage loans
Current
30 - 59 days past due
60 - 89 days past due
Over 90 days past due
2021
2020
2019
2018
2017
Prior
Total
(Dollars in thousands)
$
592,095 $
534,839 $
688,191 $
459,451 $
402,400 $
951,526 $ 3,628,502
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total commercial mortgage loans
$
592,095 $
534,839 $
688,191 $
459,451 $
402,400 $
951,526 $ 3,628,502
Agricultural mortgage loans
Current
30 - 59 days past due
60 - 89 days past due
Over 90 days past due
$
165,764 $
196,521 $
19,714 $
25,000 $
— $
— $
406,999
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total agricultural mortgage loans
$
165,764 $
196,521 $
19,714 $
25,000 $
— $
— $
406,999
Residential mortgage loans
Current
30 - 59 days past due
60 - 89 days past due
Over 90 days past due
$ 1,092,438 $
454,532 $
67,380 $
16,898 $
751 $
— $ 1,631,999
10,284
1,838
679
12,363
1,090
5,459
11,373
102
907
427
—
—
—
—
—
—
—
—
34,447
3,030
7,045
Total residential mortgage loans
$ 1,105,239 $
473,444 $
79,762 $
17,325 $
751 $
— $ 1,676,521
F-34
Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Commercial, agricultural and residential mortgage loans are considered nonperforming when they become 90 days or more past due. When
loans become nonperforming, we place them on non-accrual status and discontinue recognizing interest income. If payments are received on
a nonperforming loan, interest income is recognized to the extent it would have been recognized if normal principal and interest would have
been received timely. If payments are received to bring a nonperforming loan back to less than 90 days past due, we will resume accruing
interest income on that loan. There were 59 loans in non-accrual status at December 31, 2022 and 13 loans in non-accrual status at
December 31, 2021. During the years ended December 31, 2022 and 2021, we recognized interest income of $670 thousand and
$36 thousand, respectively, on loans which were in non-accrual status at the respective period end. During the year ended December 31, 2020
we recognized no interest income on loans which were in non-accrual status at the respective period end.
Troubled Debt Restructuring
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 that we determined to be a TDR at December 31, 2022 and 2021, respectively.
5. Variable Interest Entities
We have relationships with various types of entities which may be VIEs. Certain VIEs are consolidated in our financial results. See Note 1 -
Significant Accounting Policies for further details on our consolidation accounting policies.
Consolidated Variable Interest Entities
We are invested in four investment company real estate limited partnerships which own various limited liability companies that invest in
residential real estate properties and one real estate limited liability company that invests in a commercial real estate property. These entities
are VIE's as the legal entities equity investors have insufficient equity at risk and lack of power to direct the activities that most significantly
impact the economic performance. We determined we are the primary beneficiary as a result of our power to control the entities through our
significant ownership. Due to the nature of the investment company real estate investments, the investments balance will fluctuate based on
changes in the fair value of the properties as well as when purchases and sales of properties are made. The investment balance in the
commercial real estate property is held at depreciated cost, and is expected to decrease over time.
We are invested in two limited liability companies that invest in operating entities which hold multifamily real estate properties. The entity is
a VIE and we have determined we are the primary beneficiary as a result of our power to control the entity through our significant ownership.
The investment balance, which represents an equity interest in the limited liability company, fluctuates based on changes in the fair value of
the properties and the performance of the operating entities.
We are invested in two limited partnership feeder funds which each invest in a separate limited partnership fund. One fund holds
infrastructure credit assets and the other holds tech-centric middle-market loans. In both cases, the feeder fund limited partnerships are VIEs,
and we determined we are the primary beneficiary as a result of our significant ownership of the limited partnerships and our obligation to
absorb losses or receive benefits from the VIEs. We have consolidated the assets and liabilities of the limited partnerships, which primarily
consist of equity interests in limited partnerships.
F-35
Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The carrying amounts of our consolidated VIE assets, which can only be used to settle obligations of the consolidated VIEs, and liabilities of
consolidated VIEs for which creditors do not have recourse were as follows:
Real estate investments
Real estate limited liability companies
Limited partnership funds
Unconsolidated Variable Interest Entities
December 31,
2022
2021
Total
Assets
Total
Liabilities
Total
Assets
(Dollars in thousands)
Total
Liabilities
$
1,095,267 $
78,244 $
363,229 $
20,168
66,258
620,741
287
113
—
168,711
—
—
$
1,782,266 $
78,644 $
531,940 $
20,168
We provided debt funding to various special purpose vehicles, which are used to acquire and hold various types of loans or receivables.
These legal entities are deemed VIEs because there is insufficient equity at risk. We have determined we are not the primary beneficiary as
we do not control the activities that most significantly impact the economic performance of the VIEs. Our investments in these VIEs are
reported in Fixed maturity securities, available for sale in the Consolidated Balance Sheets.
In 2021, we provided funding to a limited partnership which purchased a residential business purpose loan originator. The limited partnership
was deemed a VIE based on insufficient equity at risk, however, we are not the primary beneficiary due to our lack of control of the limited
partnership. In Q4 2022, as a result of equity capital raised from third party investors, the debt funding was repaid to us. We have reassessed
the VIE conclusion and concluded the limited partnership no longer meets the definition of a variable interest entity. The unconsolidated VIE
disclosures are no longer applicable. The investment will be accounted for as an equity method investment and still be reported in Limited
partnerships and limited liability companies in the Consolidated Balance Sheets.
The carrying value and maximum loss exposure for our unconsolidated VIEs were as follows:
Fixed maturity securities, available for sale
$
1,178,110 $
1,178,110 $
459,681 $
Other investments
—
—
345,000
459,681
345,000
December 31,
2022
2021
Asset
Carrying Value
Maximum
Exposure to Loss
Asset
Carrying Value
Maximum
Exposure to Loss
(Dollars in thousands)
F-36
Table of Contents
6. Derivative Instruments
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We use derivative instruments to manage risks. We have derivatives that are designated as hedging instruments and others that are not
designated as hedging instruments. Any change in the fair value of the derivatives is recognized immediately in the Consolidated Statements
of Operations.
The notional and fair values of our derivative instruments, including derivative instruments embedded in fixed index annuity contracts,
presented in the Consolidated Balance Sheets are as follows:
Derivatives designated as hedging instruments
Assets
Derivative instruments
Interest rate swaps
Derivatives not designated as hedging instruments
Assets
Derivative instruments
Call options
Warrants
Liabilities
Policy benefit reserves - annuity products
Fixed index annuities - embedded derivatives, net
Funds withheld for reinsurance liabilities
Reinsurance related embedded derivative
Derivatives Designated as Hedging Instruments
December 31, 2022
December 31, 2021
Notional
Fair Value
Notional
Fair Value
(Dollars in thousands)
$
408,369 $
32,769 $
— $
—
$
$
38,927,534 $
397,789 $
40,091,353 $
1,276,574
2,020
1,169
2,020
906
38,929,554 $
398,958 $
40,093,373 $
1,277,480
$
$
4,820,845
(441,864)
4,378,981
$
$
7,964,961
(2,362)
7,962,599
We use interest rate swaps that are designated and accounted for as fair value hedges to protect a portfolio of fixed-rate fixed maturity
securities against changes in fair value due to changes in interest rates. Our interest rate swap contracts allow us to pay a fixed rate and
receive a floating rate utilizing the Secured Overnight Financing Rate at specified intervals based on a notional amount. Interest rate swaps
are carried at fair value and presented as Derivative instruments on the Consolidated Balance Sheets.
For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the portion of the derivative instrument
included in the assessment of hedge effectiveness and the offsetting gain or loss on the hedged item attributable to the hedged risk are
recognized in the same line item in the Consolidated Statements of Operations. The change in unrealized gain or loss attributable to interest
rate changes on the fixed maturity securities that are designated as part of the hedge are reclassified out of Accumulated other comprehensive
income (loss) into Change in fair value of derivatives in the Consolidated Statements of Operations. The remaining change in unrealized gain
or loss on the hedged item not associated with the risk being hedged is recognized as a component of Other comprehensive income.
The following represents the amortized cost and cumulative fair value hedging adjustments included in the hedged assets:
Line Item in the Consolidated Balance Sheets in Which
Hedged Item is Included
Amortized Cost
of Hedged Item
Cumulative Amount of Fair Value Basis
Adjustment Gain (Loss)
(Dollars in thousands)
December 31, 2022
December 31, 2021
December 31, 2022
December 31, 2021
Fixed maturities, available for sale:
Current hedging relationships
Discontinued hedging relationships
$
389,060 $
1,594,736
— $
—
(39,128) $
(94,681)
—
—
F-37
Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following represents a summary of the gains (losses) related to the derivatives and hedged items that qualify for fair value hedge
accounting:
(Dollars in thousands)
Derivative
Hedged Item
Net
Amount
Excluded:
Recognized in
Income
Immediately
For the year ended December 31, 2022
Interest rate swaps
For the year ended December 31, 2021
Interest rate swaps
For the year ended December 31, 2020
Interest rate swaps
Derivatives Not Designated as Hedging Instruments
$
$
$
215,587 $
(249,168) $
(33,581) $
13,957
— $
— $
— $
— $
— $
— $
—
—
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.
The changes in fair value of derivatives not designated as hedging instruments included in the Consolidated Statements of Operations are as
follows:
Change in fair value of derivatives:
Call options
Warrants
Interest rate swaps
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
Reinsurance related embedded derivative
2022
Year Ended
December 31,
2021
(Dollars in thousands)
2020
$
(1,118,768) $
1,347,925 $
34,604
264
13,957
—
810
—
—
—
—
62
(1,104,547) $
1,348,735 $
34,666
(2,561,676) $
(876,803) $
(1,922,085)
$
$
648,580
(439,502)
520,863
(2,362)
635,298
—
$
(2,352,598) $
(358,302) $
(1,286,787)
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 - Fair Values of
Financial Instruments.
F-38
Table of Contents
Derivative Exposure
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We attempt to mitigate potential risk of loss due to the nonperformance of the counterparties through a regular monitoring process which
evaluates the program's effectiveness. We do not purchase derivative instruments that would require payment or collateral to another
institution and our derivative instruments 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 derivative instruments from multiple counterparties and
evaluate the creditworthiness of all counterparties prior to purchase of the contracts. All non-exchange traded derivative instruments 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. Both our call options and interest
rate swaps fall under the same credit support agreements with each counterparty 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 and interest rate swaps 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
Truist
Wells Fargo
Exchange traded
Credit Rating
(S&P)
Credit Rating
(Moody's)
Notional
Amount
Fair Value
Notional
Amount
Fair Value
December 31,
2022
2021
A+
A
A+
A+
A-
A+
A+
AA-
A
A
A+
Aa2
A1
Aa2
Aa3
A3
Aa2
Aa3
A2
A1
A2
Aa2
$
3,574,125 $
26,080 $
3,556,256 $
(Dollars in thousands)
3,686,896
2,707,734
3,748,162
2,086,470
6,501,103
2,957,389
4,378,132
2,099,081
1,960,787
5,436,824
199,200
39,657
34,218
29,873
20,691
69,006
38,470
58,026
17,157
32,885
61,840
2,655
4,213,658
3,956,329
3,190,833
3,716,868
4,482,832
2,223,743
3,567,972
2,548,072
2,547,808
5,820,381
266,601
99,229
157,865
141,540
115,860
113,295
105,899
47,950
100,472
86,494
94,924
206,403
6,643
$
39,335,903 $
430,558 $
40,091,353 $
1,276,574
As of December 31, 2022 and 2021, we held $0.4 billion and $1.3 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 the counterparties failed completely to
perform according to the terms of the contracts to $3.3 million and $8.5 million at December 31, 2022 and 2021, 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 cede certain fixed index annuity product liabilities to third party reinsurers on a modified coinsurance basis which results in an embedded
derivative. The obligation to pay the total return on the assets supporting liabilities associated with this reinsurance agreement represents a
total return swap. The fair value of the total return swap is based on the unrealized gains and losses of the underlying assets held in the
modified coinsurance portfolio. The reinsurance related embedded derivative is reported in Funds withheld for reinsurance liabilities on the
Consolidated Balance Sheets and the change in the fair value of the embedded derivative is reported in Change in fair value of embedded
derivatives on the Consolidated Statements of Operations. See Note 8 – Reinsurance and Policy Provisions for further discussion on these
reinsurance agreements.
F-39
Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. 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
Write-off related to in-force ceded reinsurance
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,
2022
2021
2020
(Dollars in thousands)
$
2,222,769 $
2,225,199 $
3,033,649
194,856
3,767
(558,447)
(56,853)
1,944,039
(188,056)
303,192
4,665
(313,990)
45,662
299,478
(341,437)
251,428
3,725
(2,769)
(646,785)
(414,049)
—
$
3,562,075 $
2,222,769 $
2,225,199
December 31,
2022
2021
2020
(Dollars in thousands)
$
1,546,073 $
1,448,375 $
2,042,060
107,691
95,160
93,610
(362,866)
(45,682)
1,348,134
(197,799)
45,107
155,230
(10,063)
(428,101)
(249,131)
$
2,593,350 $
1,546,073 $
1,448,375
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
Effect of net unrealized gains/losses
Reduction related to in-force ceded reinsurance
Claim payments
Balance at end of year
December 31,
2022
2021
2020
(Dollars in thousands)
$
2,794,629 $
2,485,123 $
1,670,750
387,821
(53,042)
(996,876)
(403,406)
—
206,180
243,658
(101,848)
(38,484)
—
311,211
285,825
217,337
—
—
$
1,729,126 $
2,794,629 $
2,485,123
We periodically update the key assumptions used in the calculation of amortization of deferred policy acquisition costs and deferred sales
inducements retrospectively through an unlocking process when estimates of current or future gross profits/margins (including the impact of
realized investment gains and losses) to be realized from a group of products are revised. In addition, we periodically update the assumptions
used in determining the liability for lifetime income benefit riders.
We review these assumptions quarterly and as a result of these reviews, we made updates to assumptions in 2022, 2021 and 2020.
During 2022 and 2021, American Equity Life entered into reinsurance agreements which ceded in-force fixed index annuity product
liabilities. As a result, there was a write-off of deferred acquisition costs and a reduction of the liability for lifetime income benefit riders
associated with the blocks of in-force liabilities ceded under the agreements. See Note 8 - Reinsurance and Policy Provisions for further
discussion of these reinsurance agreements.
F-40
Table of Contents
2022 Assumption Updates
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The most significant assumption updates made in 2022 were to investment spread assumptions, including the net investment earned rate and
crediting rate on policies, lapse rate and partial withdrawal assumptions, and lifetime income benefit rider utilization assumptions.
We updated our assumption for investment spread for American Equity Life to remain steady at 2.60% through an eight-year reversion
period. We increased our long-term net investment earned rate assumption by 40 basis points with an assumption of 4.25% in the near term
increasing to 5.00% over the eight-year reversion period, and we increased our long-term crediting/discount rate assumption by 30 basis
points with an assumption of 1.65% in the near term increasing to 2.40% over the eight-year reversion period. In addition, we adjusted the
grading of the discount rate assumption in the embedded derivative calculation. This change results in an increase in expected future gross
profits and therefore a slight increase in the deferred policy acquisition costs and deferred sales inducements balances. This also results in a
decrease in the liability for lifetime income benefit riders due to a higher discount rate.
We updated lapse rate and partial withdrawal assumptions based on actual historical experience. We refreshed lapse tables based on 5 years
of lapse experience and implemented a 1% lapse floor. For policies with a lifetime income benefit rider that does not charge a fee, we
increased the lapse rates. For policies with a lifetime income benefit rider that has been utilized, we decreased the lapse rates. We expanded
our partial withdrawal assumptions to include scalars in our assumptions during the surrender charge period, shock period, and post-shock
period. This resulted in partial withdrawals extending beyond the surrender charge period. The net impact of the lapse rate and partial
withdrawal assumptions resulted in a decrease in expected future gross profits and a decrease in the deferred policy acquisition costs and
deferred sales inducements balances. The net impact of these changes resulted in an increase in the liability for lifetime income benefit riders
due to higher excess claims and lower gross profits.
We updated our lifetime income benefit rider utilization assumption structure to capture policyholder characteristics at a more granular level.
This resulted in an increase in the number of policies utilizing and increased the excess claims. The impact of this change results in an
increase in the liability for lifetime income benefit riders and an increase in the deferred policy acquisition costs and deferred sales
inducements balances.
2021 Assumption Updates
The most significant assumption updates made in 2021 were to investment spread assumptions, including the net investment earned rate and
crediting rate on policies, lifetime income benefit rider utilization assumptions, mortality assumptions, and lapse rate assumptions as
discussed below.
Due to the continued low interest rate environment, we updated our assumption for investment spread for American Equity Life to 2.25% in
the near term and increasing to 2.50% over an eight-year reversion period and our assumption for crediting/discount rate to 1.55% increasing
to 2.10% over an eight-year reversion period. Prior to these assumption updates, our long-term assumption for aggregate investment spread
was at 2.60% at then end of an eight-year reversion period, with a near term crediting/discount rate of 1.60% increasing to 2.10% over an
eight-year reversion period. The assumption change to decrease aggregate investment spread resulted in lower expected future gross profits
as compared to previous estimates and a decrease in the balances of deferred policy acquisition costs and deferred sales inducements.
We updated lapse rate and mortality assumptions based on historical experience. For certain annuity products without a lifetime income
benefit rider, the lapse rate assumption was increased in more recent cohorts to reflect higher lapses on polices with a market value adjustment
("MVA") feature. For other annuity products with a lifetime income benefit rider, the population was bifurcated based on whether policies
had utilized the rider. For those policies which had utilized the rider, the lapse rate assumption was decreased in later durations. The overall
mortality assumption was lowered to reflect historical experience. The net impact of the updates to the lapse rate and mortality assumptions
resulted in higher expected future gross profits as compared to previous estimates and an increase in the balances of deferred policy
acquisition costs and deferred sales inducements. The net impact of the updates to lapse rate and mortality assumptions resulted in an
increase in the liability for lifetime income benefit riders due to a greater amount of expected benefit payments in excess of account values.
We updated the lifetime income benefit rider utilization assumption based on historical experience. The ultimate utilization assumption was
lowered for policies with a fee rider and certain policies with a no-fee rider. In addition, the utilization assumption was changed to reflect
seasonality with higher utilization rates during the first quarter of each year. The net impact of the updates to the utilization assumption
resulted in a decrease in the liability for lifetime income benefit riders due to a lower amount of expected benefits payments due to lower
expected utilization. The net impact of the updates to the utilization assumption resulted in higher expected future gross profits as compared
to previous estimates and an increase in the balances of deferred policy acquisition costs and deferred sales inducements.
2020 Assumption Updates
The most significant assumption updates made in 2020 were to investment spread assumptions, including the net investment earned rate and
crediting rates on policies, as well as updates to lapse rate and partial withdrawal assumptions.
Due to the economic and low interest rate environments, we updated our assumption for aggregate investment spread to 2.40% in the near-
term increasing to 2.60% over an eight-year reversion period and our assumption for crediting/discount rate to 1.60% increasing to 2.10%
over an eight-year reversion period. Prior to these assumption updates, our long-term assumption for aggregate investment spread was steady
F-41
Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
at 2.60%, with a near term crediting/discount rate of 1.90% increasing to 2.90% over a 20 year reversion period. The assumption update to
decrease aggregate investment spread resulted in lower expected future gross profits as compared to previous estimates and a decrease in the
balances of deferred policy acquisition costs and deferred sales inducements. The decrease in the crediting rate, which is used as the discount
rate in the calculation of the liability for lifetime income benefit riders, resulted in an increase in the liability for lifetime income benefit
riders.
We updated lapse rate and partial withdrawal assumptions based on actual historical experience. For certain annuity products without a
lifetime income benefit rider, lapse rate and partial withdrawal assumptions were increased while for certain annuity products with a lifetime
income benefit rider, lapse rate and partial withdrawal assumptions were decreased. The net impact of the updates to lapse rate and partial
withdrawal assumptions resulted in lower expected future gross profits as compared to previous estimates and a decrease in the balances of
deferred policy acquisition costs and deferred sales inducements. The net impact of the updates to lapse rate and partial withdrawal
assumptions resulted in an increase in the liability for lifetime income benefit riders due to a greater amount of expected benefit payments in
excess of account values.
8. 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 $323.7 million
and $381.4 million at December 31, 2022 and 2021, 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. The balance due from or due to EquiTrust under these
agreements was a $0.8 million receivable and $7.8 million payable at December 31, 2022 and 2021, respectively, and represents the fair value
of call options held by us to fund index credits related to the ceded business net of cash due to or from EquiTrust related to monthly
settlements of policy activity and other expenses.
We have three coinsurance agreements with Athene Life Re Ltd. ("Athene"), an unauthorized life reinsurer domiciled in Bermuda. One
agreement ceded 20% of certain of American Equity Life's fixed index annuities issued from January 1, 2009 through March 31, 2010. The
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 third
agreement ceded 80% of certain of American Equity Life's and Eagle Life's multi-year rate guaranteed annuities issued on or after January 1,
2014 through December 31, 2020, 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 through December 31, 2020 and 80% of certain of American Equity Life's fixed index annuities issued from August
1, 2016 through December 31, 2016. Effective January 1, 2021, no new business is being ceded to Athene. The business reinsured under any
of the Athene agreements may not be recaptured. Coinsurance deposits (aggregate policy benefit reserves transferred to Athene under these
agreements) were $3.1 billion and $3.7 billion at December 31, 2022 and 2021, 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. The balance due under these
agreements to Athene was $16.9 million and $74.8 million at December 31, 2022 and 2021, 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.
Effective July 1, 2021 American Equity Life entered into a reinsurance agreement with North End Re (North End Re reinsurance treaty), a
wholly-owned subsidiary of Brookfield Asset Management Reinsurance Partners Ltd. (“Brookfield Reinsurance” or “Brookfield”) to reinsure
approximately $4.3 billion of in-force fixed indexed annuity product liabilities as of the effective date of the reinsurance agreement, 70% on a
modified coinsurance (“modco”) basis and 30% on a coinsurance basis. The liabilities reinsured on a coinsurance basis are secured by assets
held in both a statutory and supplemental trust (collectively referred to as the “trusts”). The liabilities reinsured on a modco basis are secured
by a segregated modco account in which the assets are maintained by American Equity Life. American Equity Life transferred cash of $2.6
billion to the segregated modco account and $1.1 billion to the statutory trust at close of this reinsurance agreement on October 8, 2021.
American Equity Life will receive an annual ceding commission equal to 49 basis points and the Company will receive an annual asset
liability management fee equal to 30 basis points calculated based on the initial cash surrender value of liabilities ceded. Such fees are fixed
and contractually guaranteed for six years with the additional and final seventh year payment partially contingent on certain performance
obligations for both parties. The initial net present value of the ceding commission related to the in-force business was $114.1 million.
F-42
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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As part of the North End Re reinsurance treaty, American Equity Life is also ceding 75% of certain fixed index annuities issued after the
effective date of the agreement, 70% on a modco basis and 30% on a coinsurance basis to North End Re. Effective July 1, 2022, the North
End Re reinsurance treaty was amended to include additional fixed index annuity products. As part of this amendment, 75% of an additional
block of in-force fixed indexed annuity product liabilities issued after July 1, 2021 was ceded, 70% on a modco basis and 30% on a
coinsurance basis. On sales subsequent to the effective date of the North End Re reinsurance treaty, American Equity Life will receive an
annual ceding commission equal to 140 basis points and the Company will receive an annual asset liability management fee equal to 30 basis
points calculated based on the initial cash surrender value of liabilities ceded. Such fees are fixed and contractually guaranteed for six years
with the additional and final seventh year payment being contingent on certain performance obligations for both parties. The initial net
present value of the ceding commission related to the flow business ceded in 2022 and 2021 was $67.7 million and $27.1 million,
respectively. The asset liability management fee recognized in Other revenue in 2022 and 2021 was $12.7 million and $5.5 million,
respectively.
In addition, American Equity Life will receive certain acquisition cost reimbursements and an on-going annual expense reimbursement on
each policy subject to the reinsurance agreement for the entirety of the policy duration. Acquisition cost reimbursements will reduce policy
acquisition costs deferred.
As a result of the North End Re reinsurance treaty, there is a deferred gain of $481.2 million and $321.7 million which is recorded in Other
liabilities as of December 31, 2022 and 2021, respectively. This deferred gain represents the unamortized portion of the cost of reinsurance
related to the in-force business and new business which will be amortized over the life of the underlying reinsured policies. The deferred gain
consists primarily of the difference between liabilities ceded and assets transferred as part of the reinsurance agreement and the present value
of the ceding commissions previously noted offset by a reduction in deferred policy acquisition costs associated with the the in-force business
ceded. The amortization of the deferred gain recognized in Other revenue in 2022 and 2021 was $28.4 million and $10.2 million,
respectively.
American Equity Life remains liable to policyholders with respect to the policy liabilities ceded to North End Re should North End Re fail to
meet the obligations it has reinsured.
The assets in the trusts and modco account 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. The assets in the trusts and modco account are subject to investment management
agreements between American Equity Life and North End Re. The assets in the modco account earned net investment income of $95.4
million and $11.4 million during 2022 and 2021, respectively, which are reflected within the Net investment income line in the Consolidated
Statements of Operations and presented net of amounts earned for the benefit of the reinsurer.
As of December 31, 2022 and 2021, coinsurance deposits (aggregate policy benefits reserves transferred to North End Re under these
agreements) were $5.7 billion and $4.6 billion, respectively. The balance due under these agreements to North End Re was $124.2 million
and $127.9 million which is recorded in Other liabilities at December 31, 2022 and 2021, respectively.
Separate from the reinsurance transaction, Brookfield Reinsurance, has an approximate 18.7% interest in the Company's outstanding common
stock as of December 31, 2022. See Note 15 - Earnings Per Common Share and Stockholders' Equity for further discussion of Brookfield's
ownership.
Effective October 1, 2022 American Equity Life entered into a reinsurance agreement with an unaffiliated reinsurer AeBe ISA LTD
(“AeBe”), a Bermuda exempted company affiliated with 26North Holdings LP (“26North”), that is an incorporated segregated account
licensed as a Class E reinsurer. Under the agreement, American Equity Life ceded $4.3 billion of certain in-force fixed indexed and fixed rate
annuity product liabilities as of October 3, 2022, the effective date of the reinsurance agreement, 75% on a funds withheld coinsurance basis
and 25% on a coinsurance basis. The liabilities reinsured on a coinsurance basis are secured by assets held in both a statutory and
supplemental trust (collectively referred to as the “trusts”). The liabilities reinsured on a funds withheld basis are secured by a segregated
funds withheld account in which the assets are maintained by American Equity Life. American Equity Life transferred cash and investments
with a fair value of $3.0 billion to the segregated funds withheld account and $1.0 billion to the statutory trust at close of this reinsurance
agreement on October 3, 2022. At the close of the reinsurance agreement, American Equity Life received a closing ceding commission of
$70.0 million. American Equity Life will also receive certain acquisition cost reimbursements and an on-going annual expense
reimbursement on each policy subject to the reinsurance agreement for the entirety of the policy duration.
As a result of the AeBe reinsurance treaty, there is a deferred gain of $126.3 million which is recorded in Other liabilities as of December 31,
2022. This deferred gain represents the unamortized portion of the cost of reinsurance related to the in-force business which will be
amortized over the life of the underlying reinsured policies. The deferred gain consists primarily of the difference between liabilities ceded
and assets transferred as part of the reinsurance agreement and the closing ceding commission previously noted offset by a reduction in
deferred policy acquisition costs associated with the in-force business ceded. The amortization of the deferred gain recognized in Other
revenue in 2022 was $2.8 million.
American Equity Life remains liable to policyholders with respect to the policy liabilities ceded to AeBe should AeBe fail to meet the
obligations it has reinsured.
F-43
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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The assets in the trusts and funds withheld account 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. The assets in the trusts and funds withheld account are subject to investment
management agreements between American Equity Life and 26North. The assets in the funds withheld account earned net investment income
of $42.3 million during 2022, which is reflected within the Net investment income line in the Consolidated Statements of Operations and
presented net of amounts earned for the benefit of the reinsurer.
As of December 31, 2022, coinsurance deposits (aggregate policy benefits reserves transferred to AeBe under these agreements) were $4.2
billion. The balance due under these agreements to AeBe was $38.0 million which is recorded in Other liabilities at December 31, 2022.
American Equity Life has the option to cede liabilities of certain single premium fixed deferred annuities, or policies as otherwise agreed to
by parties issued after the treaty effective date, at risk adjusted pricing terms that may be acceptable to American Equity Life at that time. For
flow business ceded, American Equity Life will receive an annual ceding commission over the term of the policy of up to 0.50% of the
premium received.
Amounts ceded to EquiTrust, Athene, North End Re and AeBe 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
Year Ended December 31,
2022
2021
2020
(Dollars in thousands)
$
$
$
$
$
$
49,093 $
20,351 $
(184,388)
140,641
(135,295) $
160,992 $
103,542 $
303,035 $
81,907
18,318
(76,915)
16,440
203,767 $
242,560 $
(982,176) $
(424,819) $
1,029,667
984,260
47,491 $
559,441 $
7,021
43,080
50,101
152,485
4,352
17,663
174,500
(35,667)
466,311
430,644
We calculate estimated losses on reinsurance recoverable balances by determining an expected loss ratio. The expected loss ratio is based on
industry historical loss experience and expected recovery timing adjusted for certain current and forecasted environmental factors
management believes to be relevant. Estimated losses related to our reinsurance recoverable balances were $8.7 million and $2.3 million as
of December 31, 2022 and 2021, respectively.
We monitor concentration of reinsurance risk with third party reinsurers and monitor concentration as well as financial strength ratings of our
reinsurers.
Financing Arrangements
Effective April 1, 2019, we entered into a reinsurance agreement with Hannover Life Reassurance Company of America ("Hannover"), which
was treated as reinsurance under statutory accounting practices and as a financing arrangement under GAAP. The statutory surplus benefit
under this agreement was eliminated under GAAP and the associated charges were recorded as risk charges and included in Other operating
costs and expenses in the Consolidated Statements of Operations. The 2019 Hannover Agreement was 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 paid a quarterly risk charge based on the pretax statutory benefit as of the end of each calendar quarter. Risk charges attributable to our
2019 agreement with Hannover were $33.1 million and $44.7 million during 2021 and 2020, respectively. Effective October 1, 2021, we
recaptured the 2019 Hannover agreement.
F-44
Table of Contents
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Intercompany Reinsurance Agreements
Effective October 1, 2021, American Equity Life entered into a reinsurance agreement with AEL Re Vermont, a wholly-owned captive
reinsurance company, to cede a portion of lifetime income benefit rider payments in excess of policy fund values on a funds withheld basis
("The AEL Re Vermont Agreement"). In connection with the agreement, AEL Re Vermont entered into an excess of loss ("XOL")
reinsurance agreement with Hannover to retrocede the lifetime income benefit rider payments in excess of the policy fund values ceded under
the AEL Re Vermont Agreement after the funds withheld account balance is exhausted. AEL Re Vermont is permitted to carry the XOL
treaty as an admitted asset on the AEL Re Vermont statutory balance sheet. The effects of this agreement are not accounted for as reinsurance
as it does not satisfy the risk transfer requirements for GAAP. AEL Re Vermont incurred risk charges of $11.7 million and $2.8 million
during the years ended December 31, 2022 and 2021, respectively, in relation to this XOL agreement with Hannover. The risk charges are
included in Other operating costs and expenses in the Consolidated Statements of Operations.
Effective December 31, 2021, American Equity Life executed a coinsurance agreement with AEL Re Bermuda, an affiliated Bermuda
reinsurer, wholly-owned by American Equity Investment Life Holding Company, to reinsure a quota share of fixed index annuities issued
from January 1, 1997 through December 31, 2007. The treaty is maintained on a funds withheld basis.
All intercompany balances have been eliminated in the preparation of the accompanying financial statements.
9. 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,
2022
2021
2020
(Dollars in thousands)
Consolidated statements of operations:
Current income taxes
Deferred income taxes
Total income tax expense included in consolidated statements of operations
$
20,209 $
332 $
304,946
325,155
128,423
128,755
Stockholders' equity:
Expense (benefit) relating to:
Adoption of expected credit loss model
Change in net unrealized investment losses
—
(1,067,791)
—
(90,284)
Total income tax expense included in consolidated financial statements
$
(742,636) $
38,471 $
3,430
141,071
144,501
(2,543)
225,746
367,704
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, 2022, 2021, and 2020 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
Tax rate differential on net operating loss carryback
Other
Income tax expense
Effective tax rate
Year Ended December 31,
2022
2021
2020
(Dollars in thousands)
$
$
1,546,457
324,756
$
$
602,747
126,577
$
$
2,564
(4,065)
—
1,900
5,239
(4,715)
—
1,654
$
325,155
$
128,755
$
815,961
171,352
5,749
(4,602)
(30,041)
2,043
144,501
21.0 %
21.4 %
17.7 %
The effective tax rate for the year ended December 31, 2020 was positively impacted by $30.0 million related to the provision of the CARES
ACT which allowed net operating losses for 2018 through 2020 to be carried back to previous tax years in which a 35% statutory tax rate was
in effect.
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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, 2022 and 2021, are as follows:
Deferred income tax assets:
Policy benefit reserves
Credit losses/impairments
Net unrealized losses on available for sale fixed maturity securities
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
Other
Gross deferred tax liabilities
Net deferred income tax asset (liability)
December 31,
2022
2021
(Dollars in thousands)
$
— $
10,531
578,476
1,047,159
358
3,866
422
50,913
71,682
524,412
15,275
—
745,839
3,332
3,434
5,171
87,314
1,140
1,763,407
1,385,917
(655,164)
(1,170,859)
—
(145,785)
(566,100)
(155,864)
(19,621)
(1,542,534)
$
220,873 $
(489,290)
(107,717)
(98,616)
(56,285)
(5,124)
(1,927,891)
(541,974)
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. We have the intent and ability to hold these securities to maturity or recovery of value, whichever is sooner.
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, 2022 and 2021.
There were no material income tax contingencies requiring recognition in our consolidated financial statements as of December 31, 2022.
Our tax returns are subject to audit by various federal, state and local tax authorities. The Company's income tax returns are subject to
examination by the IRS and state tax authorities, generally for three years after they are due or filed, whichever is later. Tax years ended
before December 31, 2019 are no longer open to examination by the IRS.
At December 31, 2022 and 2021, we had federal net operating losses of $170.5 million and $419.5 million, respectively, primarily related to a
reinsurance transaction that occurred in 2021. The federal net operating losses are carried forward indefinitely. Additionally, at
December 31, 2022 and 2021, we had $45.7 million and $0 million, respectively, of capital loss carryforwards for federal income tax
purposes that can be carried forward for five years.
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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Notes and Loan Payable
Notes and loan payable includes the following:
Senior notes due 2027
Principal
Unamortized debt issue costs
Unamortized discount
Term loan due 2027
Principal
Principal paydown
Unamortized debt issue costs
December 31,
2022
2021
(Dollars in thousands)
$
500,000 $
(2,960)
(178)
300,000
(3,750)
(1,039)
500,000
(3,537)
(213)
—
—
—
$
792,073 $
496,250
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.
On February 15, 2022, we entered into a five-year, $300 million unsecured delayed draw term loan credit agreement. On July 6, 2022, we
borrowed $300 million under this agreement. We will pay a floating rate of interest on the term loan utilizing SOFR adjusted for a credit
spread. The term loan matures on February 15, 2027 and is amortizing at 2.5% annually for the first three years and 5.0% for the last two
years.
On September 30, 2016, we entered into a credit agreement with six banks that provided for a $150 million unsecured revolving line of credit
that terminated 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.
11. Subordinated Debentures
Our wholly-owned subsidiary trust (which is not consolidated) has issued fixed rate and floating rate trust preferred securities and has used
the proceeds from these offerings to purchase subordinated debentures from us. We also issued subordinated debentures to the trust in
exchange for all of the common securities of the trust. The sole assets of the trust 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 trust. 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.
Following is a summary of subordinated debt obligations to the trusts at December 31, 2022 and 2021:
December 31,
2022
2021
Interest Rate
Due Date
(Dollars in thousands)
American Equity Capital Trust II
$
78,753 $
78,421
5%
June 1, 2047
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 a majority 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.
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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. 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 $20,500 in 2022, $19,500 in 2021 and $19,500 in 2020) 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 $3.3 million,
$2.7 million and $2.4 million for the years ended December 31, 2022, 2021 and 2020, respectively.
The following table summarizes compensation expense recognized for employees and directors as a result of share-based compensation:
ESOP
Employee Incentive Plans
Director Equity Plans
ESOP
Year Ended December 31,
2022
2021
2020
$
$
(Dollars in thousands)
4,152 $
3,377 $
14,454
1,053
22,886
1,262
19,659 $
27,525 $
2,908
7,855
1,056
11,819
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.
Employee Incentive Plans
During 2020, the 2016 Employee Incentive Plan ("2016 Plan") was amended and renamed the American Equity Investment Life Holding
Company Amended and Restated Equity Incentive Plan ("Amended Plan"). The Amended Plan increased the number of shares of Common
stock reserved for issuance by 3,000,000 shares to 5,500,000 shares of our Common stock which may be issued in the form of grants of
options, stock appreciation rights, restricted stock awards and restricted stock units. In addition, the Amended Plan allows for awards to be
granted to members of the Board of Directors of the Company.
At December 31, 2022, we had 776,516 shares of common stock available for future grant under the Amended Plan.
We have a long-term performance incentive plan under which certain members of our management team are granted performance-based
restricted stock units pursuant to the Amended Plan or the 2016 Plan. During 2022, 2021 and 2020, we granted 229,880, 186,091 and
217,781 restricted stock units under these plans, respectively. For the 2022 and 2021 grants, vesting is tied to threshold, target and maximum
performance goals for the three year periods ending December 31, 2024 and December 31, 2023, 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 200% of
the restricted stock units will vest if we meet maximum performance goals. For the 2020 grant, vesting is tied to threshold, target and
maximum performance goals for the three year period ending December 31, 2022. 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 2022, 2021 and 2020 we granted 159,494, 199,597 and 133,429, respectively, time-based restricted stock units to employees under the
Amended Plan or the 2016 Plan. These grants vest one to 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 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 2022, 2021 and 2020, we granted 0, 391,553 and 105,809, respectively, options to employees under the Amended Plan or the 2016
Plan at an exercise price equal to the fair market value of our common stock on the date of grant. These options vest over a period of one to
five years and expire 10 years after the grant date. Compensation expense is recognized over the vesting period.
During 2022, a strategic incentive award was approved under the Amended Plan in which the Chief Executive Officer has the opportunity to
earn the value of up to 1.2 million shares of AEL common stock based upon attainment of specified significant sustained increases in AEL's
common stock price on or before December 31, 2027. The award has four tranches with a share value objective for each tranche based on
AEL's 30-day volume weighted average common stock price. Fifty percent of each tranche is paid in shares of AEL common stock, subject
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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
to a stay requirement up to 2 years, and fifty percent of each tranche is paid in cash upon attainment of the share value objective. The portion
of the award payable in shares is accounted for as an equity award, and the portion of the award payable in cash is accounted for as a liability
award. The fair value of both the equity award and liability award were calculated using a Monte Carlo simulation. Compensation expense is
recognized over a service period which is the longer of the stay requirement, where applicable, or a derived service period calculated using a
Monte Carlo simulation. There was $4.2 million of compensation expense recognized for the year ended December 31, 2022 for this award.
During 2021 and 2020, we granted 855,052 and 709,958 performance-based options ("Performance Options") to employees under the
Amended Plan at an exercise price equal to the fair market value of our common stock on the date of grant. These Performance Options vest
based upon the timing of meeting the market condition of a 30-day volume weighted average common stock price of $37.00 per common
share. Fifty percent of the Performance Options granted vest upon the later of: (i) the market condition noted above being met; and (ii) the
one year anniversary of the Grant Date. The remaining fifty percent of the Performance Options granted vest on the one year anniversary of
the vesting of the initial fifty percent of the Performance Options. The market condition for these performance options was met on January 4,
2022. Compensation expense for the Performance Options is recognized over the requisite service period.
Director Equity Plans
During 2022, 2021 and 2020, we issued 32,409, 39,273 and 51,450 shares of common stock under the Amended Plan to our Directors, 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.
Changes in the number of stock options granted to employees outstanding during the years ended December 31, 2022, 2021 and 2020 are as
follows:
Outstanding at January 1, 2020
Granted
Canceled
Exercised
Outstanding at December 31, 2020
Granted
Canceled
Exercised
Outstanding at December 31, 2021
Granted
Canceled
Exercised
Outstanding at December 31, 2022
Number of
Shares
Weighted-Average
Exercise Price
per Share
Total
Exercise
Price
(Dollars in thousands, except per share data)
828,913 $
19.91 $
815,767
(31,200)
(355,563)
1,257,917
1,246,605
(146,803)
(295,000)
2,062,719
—
(102,143)
(173,782)
1,786,794
26.70
21.50
16.98
25.10
29.15
25.44
22.88
27.84
—
27.49
24.59
28.18 $
16,506
21,778
(670)
(6,038)
31,576
36,336
(3,735)
(6,749)
57,428
—
(2,808)
(4,273)
50,347
The following table summarizes information about stock options outstanding at December 31, 2022:
Range of Exercise Prices
$21.89 - $26.72
$27.05 - $32.58
$21.89 - $32.58
Stock Options Outstanding
Stock Options Vested
Number of
Awards
Remaining
Life (yrs)
Weighted-Average
Exercise Price
Per Share
Number of
Awards
Remaining
Life (yrs)
Weighted-Average
Exercise Price
Per Share
375,820
1,410,974
1,786,794
$
7.83
8.10
8.05
26.07
28.74
28.18
126,224
606,322
732,546
8.01
$
8.09
8.08
26.72
28.71
28.37
The aggregate intrinsic value for stock options outstanding and vested awards was $31.2 million and $12.6 million, respectively, at
December 31, 2022. For the years ended December 31, 2022, 2021 and 2020, the total intrinsic value of options exercised by officers,
directors and employees was $3.7 million, $1.2 million and $2.2 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, 2022, 2021 and 2020 was $4.3 million, $6.7 million and $6.0 million,
respectively.
During 2022, a new incentive plan was approved under which certain members of management are awarded an initial cash grant that can
accumulate additional value based on the performance of certain private asset investments during the vesting period. The cash grant cliff
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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
vests after three years. Plan participants must remain employed during the three-year vesting period to earn the award. The award may
continue to grow in value subsequent to the three-year vesting period, assuming the plan participant remains employed by the Company. Plan
participants can elect either a lump sum cash payout or annual cash installments over time (up to 15 years). There was $6.7 million of
compensation expense recognized for the year ended December 31, 2022 for these awards.
13. 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 (loss) for our primary life insurance subsidiary as determined in accordance with statutory accounting practices was as follows:
American Equity Life
$
151,857 $
(863,818) $
(34,467)
Statutory capital and surplus for our primary life insurance subsidiary was as follows:
Year Ended December 31,
2022
2021
2020
(Dollars in thousands)
American Equity Life
December 31,
2022
2021
(Dollars in thousands)
$
3,692,602 $
4,078,532
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,
2022, American Equity Life's use of prescribed statutory accounting practices resulted in higher statutory capital and surplus of $83.0 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, 2021, American Equity Life's use of the same prescribed statutory accounting practice resulted in lower statutory capital and
surplus of $210.2 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.
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 $369.3 million as of
December 31, 2022.
The Parent Company relies on its subsidiaries for cash flow, which has primarily been in the form of investment management fees and
dividends. 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.
14. Commitments and Contingencies
We lease our office spaces and certain equipment under various operating leases. Rent expense for the years ended December 31, 2022, 2021
and 2020 totaled $5.2 million, $3.8 million and $4.2 million, respectively. At December 31, 2022, the aggregate future minimum lease
payments are $28.5 million. The following represents payments due by period for operating lease obligations as of December 31, 2022
(dollars in thousands):
Year Ending December 31:
2023
2024
2025
2026
2027
2028 and thereafter
$
3,792
4,112
3,985
3,587
2,014
11,013
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 Securities and Exchange Commission ("SEC") and the Department of Labor, regularly make inquiries and conduct
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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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, 2022 to limited partnerships of
$1.7 billion and to fixed maturity securities of $237.4 million.
Through our FHLB membership, we have issued funding agreements to the FHLB in exchange for cash advances. As of December 31, 2022,
we had $300.0 million of FHLB funding agreements outstanding. We are required to provide collateral in excess of the funding agreement
amounts outstanding. The fixed maturity security investments pledged for collateral had a fair value of $1.2 billion at December 31, 2022.
15. Earnings Per Common Share and Stockholders' Equity
Earnings Per Common Share
The following table sets forth the computation of earnings per common share and earnings per common share - assuming dilution:
Numerator:
Net income available to common stockholders - numerator for earnings per common
share
Denominator:
Weighted average common shares outstanding
Effect of dilutive securities:
Stock options and deferred compensation agreements
Restricted stock and restricted stock units
Year Ended December 31,
2022
2021
2020
(Dollars in thousands, except per share data)
$
1,177,269 $
430,317 $
637,945
90,558,121
93,860,378
92,055,035
523,248
456,759
271,422
359,359
93,014
244,447
Denominator for earnings per common share - assuming dilution
91,538,128
94,491,159
92,392,496
Earnings per common share
Earnings per common share - assuming dilution
$
$
13.00 $
12.86 $
4.58 $
4.55 $
6.93
6.90
There were no options to purchase shares of our common stock outstanding excluded from the computation of diluted earnings per common
share during the years ended December 31, 2022, 2021 and 2020, 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 June 10, 2020, we issued 12,000 shares of 6.625% Fixed-Rate Reset Non-Cumulative Preferred Stock, Series B ("Series B") with a $1.00
par value per share and a liquidation preference of $25,000 per share, for aggregate net proceeds of $290.3 million.
On November 21, 2019 we issued 16,000 shares of 5.95% Fixed-Rate Reset Non-Cumulative Preferred Stock, Series A ("Series A") 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.
Dividends on the Series A and Series B 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 on March 1, 2020 for Series A and on December
1, 2020 for Series B. For the year ended December 31, 2022, 2021, and 2020, we paid dividends totaling $23.8 million, $23.8 million, and
$24.5 million, respectively, for Series A preferred stock and $19.9 million, $19.9 million, and $9.0 million, respectively, for Series B
preferred stock. The Series A and Series B preferred stock rank senior to our common stock with respect to dividends, to the extent declared,
and in liquidation, to the extent of the liquidation preference. The Series A and Series B preferred stock are not subject to any mandatory
redemption, sinking fund, retirement fund, purchase fund or similar provisions.
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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Brookfield Asset Management Equity Investment
On October 18, 2020, we announced an agreement with Brookfield Asset Management, Inc. and its affiliated entities (collectively,
"Brookfield") under which Brookfield would acquire up to a 19.9% ownership interest of common stock in the Company. The equity
investment by Brookfield took place in two stages: an initial purchase of a 9.9% equity interest at $37.00 per share which closed on
November 30, 2020 with Brookfield purchasing 9,106,042 shares, and a second purchase of an additional 6,775,000 shares which were issued
to Brookfield at $37.33 per share in January of 2022, resulting in total ownership of approximately 16%. Brookfield also received the right to
nominate one candidate for the Company’s Board of Directors following the initial equity investment.
Share Repurchase Program
As part of a share repurchase program, the Company's Board of Directors approved the repurchase of Company common stock of $500
million on October 18, 2020, an additional $500 million on November 19, 2021, and an additional $400 million on November 11, 2022. The
share repurchase program has offset dilution from the issuance of shares to Brookfield, and its purpose remains to institute a regular cash
return program for shareholders.
From the 2020 inception of the share repurchase program through December 31, 2022, we have repurchased approximately 23.9 million
shares of our common stock at an average price of $34.74 per common share, including 14.8 million shares repurchased during the year ended
December 31, 2022. As of December 31, 2022, we had $569 million remaining under our share repurchase program.
Treasury Stock
As of December 31, 2022, we held 24,590,353 shares of treasury stock with a carrying value of $823.1 million. As of December 31, 2021, we
held 9,936,715 shares of treasury stock with a carrying value of $260.6 million.
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Table of Contents
Schedule I—Summary of Investments—
Other Than Investments in Related Parties
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
December 31, 2022
Column A
Column B
Column C
Column D
Type of Investment
Fixed maturity securities:
Available for sale:
U.S. Government and agencies
States, municipalities and territories
Foreign corporate securities and foreign governments
Corporate securities
Residential mortgage backed securities
Commercial mortgage backed securities
Other asset backed securities
Total fixed maturity securities
Mortgage loans on real estate
Real estate investments
Derivative instruments
Limited partnerships and limited liability companies
Other investments
Total investments
Amortized
Cost (1)
Fair
Value
(Dollars in thousands)
Amount at
which shown
in the balance
sheet
$
173,638 $
169,071 $
169,071
4,356,251
748,770
3,822,982
676,852
3,822,982
676,852
27,706,440
24,161,921
24,161,921
1,492,242
4,098,755
6,289,923
1,377,611
3,687,478
5,908,702
1,377,611
3,687,478
5,908,702
44,866,019
39,804,617
39,804,617
6,502,463
1,056,063
431,727
6,949,027
1,053,569
425,097
1,266,779
1,818,144
6,949,027
1,056,063
431,727
1,266,779
1,817,085
$
56,378,635
$
51,325,298
(1) On the basis of cost adjusted for repayments and amortization of premiums and accrual of discounts for fixed maturity securities and
short-term investments, unpaid principal balance less allowance for credit losses for mortgage loans, original cost reduced by
impairments and/or depreciation for real estate investments, amortized cost for derivative instruments and original cost adjusted for
equity in earnings and distributions for limited partnerships and limited liability companies.
See accompanying Report of Independent Registered Public Accounting Firm.
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Table of Contents
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
Notes receivable from subsidiaries
Federal income tax recoverable, including amount from subsidiaries
Other assets
Investment in and advances to subsidiaries
Total assets
Liabilities and Stockholders' Equity
Liabilities:
Notes and loan payable
Subordinated debentures payable to subsidiary trusts
Deferred income taxes
Other liabilities
Total liabilities
Stockholders' equity:
Preferred stock, Series A
Preferred stock, Series B
Common stock
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Total stockholders' equity attributable to American Equity Investment Life Holding Company
December 31,
2022
2021
$
531,347 $
362,245
2,360
8,868
85,654
267,076
33,990
929,295
2,353
2,783
165,000
217,174
20,134
769,689
3,437,579
6,387,912
$
4,366,874 $
7,157,601
$
792,073 $
78,753
268,639
58,186
1,197,651
16
12
84,810
1,325,316
(2,155,055)
3,914,124
3,169,223
496,250
78,421
223,304
36,499
834,474
16
12
92,514
1,614,374
1,848,789
2,767,422
6,323,127
Total liabilities and stockholders' equity
$
4,366,874 $
7,157,601
See accompanying note to condensed financial statements.
See accompanying Report of Independent Registered Public Accounting Firm.
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Table of Contents
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 subsidiaries
Investment advisory fees
Surplus note interest from subsidiary
Change in fair value of derivatives
Loss on extinguishment of debt
Other revenue
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 (benefit)
Income before equity in undistributed income of subsidiaries
Equity in undistributed income of subsidiaries
Net income available to American Equity Investment Life Holding Company stockholders
Less: Preferred stock dividends
Year Ended December 31,
2022
2021
2020
$
6,733 $
155
325,000
110,094
4,080
—
—
19,153
465,215
32,098
5,331
114,792
152,221
312,994
(1,067)
314,061
906,883
1,220,944
43,675
114 $
159
250,000
126,643
4,080
—
—
8,511
389,507
25,581
5,324
72,435
103,340
286,167
11,565
274,602
199,390
473,992
43,675
1,115
167
—
114,228
4,080
62
(2,024)
346
117,974
25,552
5,557
46,686
77,795
40,179
13,142
27,037
644,423
671,460
33,515
Net income available to American Equity Investment Life Holding Company common
stockholders
$
1,177,269 $
430,317 $
637,945
See accompanying note to condensed financial statements.
See accompanying Report of Independent Registered Public Accounting Firm.
F-55
Table of Contents
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 available to American Equity Investment Life Holding Company stockholders
$
1,220,944 $
473,992 $
671,460
Adjustments to reconcile net income to net cash provided by operating activities:
Year Ended December 31,
2022
2021
2020
Provision for depreciation and amortization
Accrual of discount on equity security
Equity in undistributed income of subsidiaries
Non cash dividend from 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
Change in notes receivable from subsidiaries
Repayment of equity securities
Contribution to subsidiaries
Purchases of property, plant and equipment
Net cash used in investing activities
Financing activities
Financing fees incurred and deferred
Repayment of loan payable
Proceeds from issuance of loan payable
Repayment of subordinated debentures
Proceeds from issuance of common stock
Acquisition of treasury stock
Proceeds from issuance of preferred stock, net
Dividends paid on common stock
Dividends paid on preferred stock
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
4,925
(7)
(906,883)
—
—
—
332
6,023
45,335
(6,085)
(49,902)
(16,363)
21,687
320,006
79,346
—
(137,002)
(1,432)
(59,088)
(1,235)
(3,750)
300,000
—
253,978
(566,567)
—
(30,567)
(43,675)
(91,816)
169,102
362,245
1,232
(10)
(199,390)
(80,000)
—
—
309
10,235
222,714
(365)
(222,569)
(5,054)
21,819
222,913
(165,000)
—
—
(12,642)
(177,642)
—
—
—
—
4,844
(99,415)
—
(31,450)
(43,675)
(169,696)
(124,425)
486,670
$
531,347 $
362,245 $
1,138
(3)
(644,423)
—
(62)
2,024
289
3,303
6,408
(1,208)
(3,879)
(320)
7,617
42,344
—
2,445
(210,000)
(48)
(207,603)
—
—
—
(81,450)
338,061
(165,094)
290,260
(28,859)
(33,515)
319,403
154,144
332,526
486,670
$
31,288 $
25,000 $
5,000
5,000
25,000
6,181
See accompanying note to condensed financial statements.
See accompanying Report of Independent Registered Public Accounting Firm.
F-56
Table of Contents
Schedule II—Condensed Financial Information of Registrant (Continued)
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
Note to Condensed Financial Statements
December 31, 2022
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 Note 10- Notes and Loan Payable and Note 11 - Subordinated Debentures 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-57
Table of Contents
Column A
As of December 31, 2022:
Life insurance
As of December 31, 2021:
Life insurance
As of December 31, 2020:
Life insurance
Schedule III—Supplementary Insurance Information
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
Column B
Column C
Column D
Column E
Deferred policy
acquisition
costs
Future policy
benefits,
losses, claims
and loss
expenses
Unearned
premiums
Other policy
claims and
benefits
payable
(Dollars in thousands)
$
$
$
3,562,075 $
61,118,134 $
— $
512,790
2,222,769 $
65,477,778 $
— $
226,844
2,225,199 $
62,352,882 $
— $
240,904
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, 2022:
Life insurance
For the year ended December 31, 2021:
Life insurance
For the year ended December 31, 2020:
Life insurance
$
$
$
250,093 $
2,307,463 $
(1,023,301) $
615,300 $
277,045
300,833 $
2,037,475 $
2,543,779 $
268,328 $
274,617
290,609 $
2,182,078 $
744,389 $
649,554 $
214,745
See accompanying Report of Independent Registered Public Accounting Firm.
F-58
Table of Contents
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, 2022
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, 2021
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, 2020
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
$
$
$
$
$
$
$
$
$
44,003 $
4,761 $
43,607 $
82,849
52.63 %
279,447 $
49,093 $
— $
230,354
—
19,660
91
299,107 $
49,184 $
170
170 $
19,739
250,093
0.86 %
0.07 %
48,943 $
5,131 $
46,119 $
89,931
51.28 %
262,982 $
20,351 $
— $
242,631
—
58,150
117
321,132 $
20,468 $
169
169 $
58,202
300,833
0.29 %
0.06 %
52,234 $
5,925 $
49,577 $
95,886
51.70 %
258,248 $
7,021 $
— $
251,227
—
39,323
139
297,571 $
7,160 $
198
198 $
39,382
290,609
0.50 %
0.07 %
See accompanying Report of Independent Registered Public Accounting Firm.
F-59
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
AEL Re Vermont Inc.
AEL Re Bermuda Ltd.
Noninsurance Subsidiaries:
AE Capital, LLC
AEL Financial Services, LLC
AERL, L.C.
American Equity Investment Properties, L.C.
American Equity Capital Trust II
BH JV (Berm FW) Multifamily Investors, LLC
BH JV Multifamily Investors, LLC
High Trestle Investment Management, LLC
M-A LPI Holdings, LLC
M-LPI Resort Holdings, LLC
M-LPI Resort Owner, LLC
NC Securities Holdco, LLC
North Wolf Bay Holdings, LLC
PBH Stonecastle, LLC
Residential Investment Trust
Residential Investment Trust - Berm FW
Residential Investment Trust II
Residential Investment Trust III
Residential Investment Trust III - Berm FW
Residential Investment Trust III-E
Residential Investment Trust III - Verm FW
Residential Investment Trust IV
Residential Investment Trust IV - Berm FW
Residential Investment Trust V
Stonecastle Apartments Holdings, LLC
Vantage at Westover Owner, LLC
Vantage at Westover Parent, LLC
Exhibit 21.2
State of
Organization
Iowa
New York
Iowa
Vermont
Bermuda
Iowa
North Carolina
Iowa
Iowa
Delaware
Delaware
Delaware
Iowa
Delaware
Delaware
Delaware
North Carolina
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following registration statements:
(1) Registration Statement (Form S-3 No.333-268611) of American Equity Investment Life Holding Company
(2) Registration Statement (Form S-3 No. 333-267065) of American Equity Investment Life Holding Company
(3) Registration Statement (Form S-3 No. 333-233544) of American Equity Investment Life Holding Company
(4) Registration Statement (Form S-8 No. 333-238940) pertaining to the American Equity Investment Life Holding Company Amended
and Restated Equity Incentive Plan
(5) Registration Statement (Form S-8 No. 333-214885) pertaining to the American Equity Investment Life Holding Company 2013
Director Equity and Incentive Plan
(6) Registration Statement (Form S-8 No. 333-213545) pertaining to the American Equity Investment Life Holding Company 2016
Employee Incentive Plan
(7) Registration Statement (Form S-8 No. 333-175355) pertaining to the American Equity Investment Life Holding Company 2011
Director Stock Option Plan
(8) Registration Statement (Form S-8 No. 333-167755) pertaining to the American Equity Investment Life Holding Company 2009
Employee Incentive Plan, and
(9) Registration Statement (Form S-8 No. 333-127001) pertaining to the 1996 Stock Option Plan, 2000 Employee Stock Option Plan,
2000 Director Stock Option Plan, 1997 Management Subscription Rights Plan, and Restated and Amended Stock Option and
Warrant Agreement with David J. Noble of American Equity Investment Life Holding Company
of our reports dated February 28, 2023, with respect to the consolidated financial statements and schedules of American Equity Investment
Life Holding Company and subsidiaries and the effectiveness of internal control over financial reporting of American Equity Investment Life
Holding Company and subsidiaries included in this Annual Report (Form 10-K) of American Equity Investment Life Holding Company for
the year ended December 31, 2022.
/s/ Ernst & Young LLP
Des Moines, Iowa
February 28, 2023
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the registration statements (No. 333-268611, No. 333-267065, and No. 333-233544 ) on Form
S-3 and the registration statements (No. 333-238940, No. 333-214885, No. 333-213545, No. 333-175355, No. 333-167755, and No.
333-127001) on Form S-8 of our report dated March 1, 2021, with respect to the consolidated financial statements and financial statement
schedules II to IV of American Equity Investment Life Holding Company.
Exhibit 23.2
/s/ KPMG LLP
Des Moines, Iowa
February 28, 2023
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, Anant Bhalla, 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(s) 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 28, 2023
By:
/s/ Anant Bhalla
Anant Bhalla
Chief Executive Officer and President
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Axel Andre, 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(s) 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 28, 2023
By:
/s/ Axel Andre
Axel Andre
Chief Financial Officer and Executive Vice President
(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, 2022 as filed with the Securities and Exchange Commission on or about the date hereof (the "Report"), I,
Anant Bhalla, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of
the Sarbanes-Oxley Act of 2002, that:
1.
2.
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: February 28, 2023
By:
/s/ Anant Bhalla
Anant Bhalla
Chief Executive Officer and President
(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, 2022 as filed with the Securities and Exchange Commission on or about the date hereof (the "Report"), I,
Axel Andre, Chief Financial Officer and Executive Vice President of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant
to § 906 of the Sarbanes-Oxley Act of 2002, that:
1.
2.
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: February 28, 2023
By:
/s/ Axel Andre
Axel Andre
Chief Financial Officer and Executive Vice President
(Principal Financial Officer)
At American Equity Investment Life Holding Company, our policyholders work with
over 40,000 independent agents and advisors affiliated with independent marketing
organizations (IMOs), banks and broker-dealers through our wholly-owned operating
subsidiaries. Advisors and agents choose one of our leading annuity products best suited
for their client’s personal needs to create financial dignity in retirement. To deliver on
its promises to policyholders, American Equity has re-framed its investments focus –
building a stronger emphasis on insurance liability driven asset allocation and specializing
in alternate, private asset management while partnering with world renowned, public fixed
income asset managers. American Equity is headquartered in West Des Moines, Iowa with
additional offices in Charlotte, NC, and New York, NY. For more information, please visit
www.american-equity.com.
American Equity Investment Life Holding Company®
6000 Westown Parkway
West Des Moines, Iowa 50266
515-221-0002 | 888-221-1234
www.american-equity.com
00AR-AEAR
©2023 American Equity Investment Life Holding Company®. All Rights Reserved.