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, 2017
. We operate solely in the insurance business.
We primarily market fixed index and fixed rate annuities. Annuity deposits (net of coinsurance) collected in
2017
,
2016
and
2015
, by product type were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Product Type
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
(Dollars in thousands)
|
|
Fixed index annuities
|
|
$
|
3,668,121
|
|
|
$
|
5,035,818
|
|
|
$
|
6,491,981
|
|
|
Annual reset fixed rate annuities
|
|
74,572
|
|
|
63,582
|
|
|
44,715
|
|
|
Multi-year fixed rate annuities
|
|
22,291
|
|
|
256,894
|
|
|
42,709
|
|
|
Single premium immediate annuities (SPIA)
|
|
24,946
|
|
|
35,851
|
|
|
32,752
|
|
|
|
|
$
|
3,789,930
|
|
|
$
|
5,392,145
|
|
|
$
|
6,612,157
|
|
Agents contracted with us through
two
national marketing organizations accounted for more than 10% of annuity deposits we collected during
2017
representing
14%
and
10%
, individually, of the annuity deposits collected. Agents contracted with us through
one
national marketing organization accounted for more than 10% of annuity deposits we collected during
2016
representing
15%
of the annuity deposits collected. Agents contracted with us through
one
national marketing organization accounted for more than 10% of annuity deposits we collected during
2015
representing
22%
of the annuity deposits collected.
Consolidation and Basis of Presentation
The consolidated financial statements include our accounts and our wholly-owned subsidiaries: American Equity Life, American Equity Life of New York, Eagle Life, AERL, L.C., American Equity Capital, Inc., American Equity Investment Properties, L.C., American Equity Advisors, Inc. and American Equity Investment Service Company. All significant intercompany accounts and transactions have been eliminated.
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, valuation of derivatives, including embedded derivatives on index annuity reserves, contingent convertible senior notes, valuation of investments, other than temporary impairment of investments, allowances for loan losses on mortgage loans and valuation allowances on deferred tax assets. A description of each critical estimate is incorporated within the discussion of the related accounting policies which follow. It is reasonably possible that actual experience could differ from the estimates and assumptions utilized.
Investments
Fixed maturity securities (bonds maturing more than one year after issuance) that may be sold prior to maturity are classified as available for sale. Available for sale securities are reported at fair value and unrealized gains and losses, if any, on these securities are included directly in a separate component of stockholders' equity, net of income taxes and certain adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements. Fair values, as reported herein, of fixed maturity and equity securities are based on quoted market prices in active markets when available, or for those fixed maturity securities not actively traded, yield data and other factors relating to instruments or securities with similar characteristics are used. See Note 2 for more information on the determination of fair value. Premiums and discounts are amortized/accrued using methods which result in a constant yield over the securities' expected lives. Amortization/accrual of premiums and discounts on residential and commercial mortgage backed securities incorporate prepayment assumptions to estimate the securities' expected lives. Interest income is recognized as earned.
Fixed maturity securities that we have the positive intent and ability to hold to maturity are classified as held for investment. Such securities may, at times, be called prior to maturity. Held for investment securities are reported at cost adjusted for amortization of premiums and discounts. Changes in the fair value of these securities, except for declines that are other than temporary, are not reflected in our consolidated financial statements.
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The carrying amounts of our impaired investments in fixed maturity and equity securities are adjusted for declines in value that are other than temporary. Other than temporary impairment losses are reported as a component of revenues in the consolidated statements of operations, which presents the amount of noncredit impairment losses for certain fixed maturity securities that is reported in accumulated other comprehensive income (loss). See Note 3 for further discussion of other than temporary impairment losses.
Deterioration in credit quality of the companies or assets backing our investment securities, imbalances in liquidity recurring in the marketplace or declines in real estate values may further affect the fair value of these investment securities and increase the potential that certain unrealized losses will be recognized as other than temporary impairments in the future.
Mortgage loans on real estate are reported at cost, adjusted for amortization of premiums and accrual of discounts. Interest income is recorded when earned; however, interest ceases to accrue for loans on which interest is more than
90
days past due based upon contractual terms and/or when the collection of interest is not considered probable. We evaluate the mortgage loan portfolio for the establishment of a loan loss allowance by specific identification of impaired loans and the measurement of an estimated loss, if any, for each impaired loan identified and an analysis of the mortgage loan portfolio for the need of a general loan allowance for probable losses on all loans. If we determine that the value of any specific mortgage loan is impaired, the carrying amount of the mortgage loan will be reduced to its fair value, based upon the present value of expected future cash flows from the loan discounted at the loan's contractual interest rate, or the fair value of the underlying collateral, less costs to sell. The amount of the general loan allowance, if any, is based upon our evaluation of the probability of collection, historical loss experience, delinquencies, credit concentrations, underwriting standards and national and local economic conditions. The carrying value of impaired loans is reduced by the establishment of an allowance for loan losses, changes to which are recognized as realized gains or losses on investments. Interest income on impaired loans is recorded on a cash basis.
Other invested assets include company owned life insurance, equity securities, real estate, limited partnerships accounted for using the equity method and policy loans. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the end of the reporting period, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Equity securities are classified as available for sale and are reported at fair value. Unrealized gains and losses are included directly in a separate component of stockholders' equity, net of income taxes and certain adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements. Dividends are recognized when declared. Policy loans are stated at current unpaid principal balances.
Real estate owned is reported at cost less accumulated depreciation. Cost is determined at the time ownership is acquired in satisfaction of mortgage loans and is the lower of the carrying value of the mortgage loan or fair value of the real estate less its estimated cost to sell. Buildings and improvements are depreciated using the straight-line method over their estimated useful lives. Impairment losses on real estate owned are recognized when there are indicators of impairment present and the expected future undiscounted cash flows are not sufficient to recover the real estate's carrying value. Any impairment losses are reported as realized losses and are part of net income.
Derivative Instruments
Our derivative instruments include call options used to fund fixed index annuity credits, interest rate swap and caps used to manage interest rate risk associated with the floating rate component on certain of our subordinated debentures, call options to hedge the conversion spread on our convertible senior notes (see Note 9) and certain other derivative instruments embedded in other contracts. All of our derivative instruments are recognized in the balance sheet at fair value and changes in fair value are recognized immediately in operations. See Note 5 for more information on derivative instruments.
Cash and Cash Equivalents
We consider all highly liquid debt instruments purchased with an original maturity of
three
months or less to be cash equivalents.
Book Overdrafts
Under our cash management system, checks issued but not yet presented to banks frequently result in overdraft balances for accounting purposes and are classified as Other liabilities on our consolidated balance sheets. We report the changes in the amount of the overdraft balance as a financing activity in our consolidated statement of cash flows as Change in checks in excess of cash balance.
Deferred Policy Acquisition Costs and Deferred Sales Inducements
To the extent recoverable from future policy revenues and gross profits, certain costs that are incremental or directly related to the successful production of new business are not expensed when incurred but instead are capitalized as deferred policy acquisition costs or deferred sales inducements. Deferred policy acquisition costs and deferred sales inducements are subject to loss recognition testing on a quarterly basis or when an event occurs that may warrant loss recognition. Deferred policy acquisition costs consist primarily of commissions and certain costs of policy issuance. Deferred sales inducements consist of premium and interest bonuses credited to policyholder account balances.
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For annuity products, these capitalized costs are being amortized generally in proportion to expected gross profits from investment spreads, including the cost of hedging the fixed indexed annuity obligations, and, to a lesser extent, from product charges net of expected excess payments for lifetime income benefit riders, and mortality and expense margins. Current and future period gross profits/margins for fixed index annuities also include the impact of amounts recorded for the change in fair value of derivatives and the change in fair value of embedded derivatives. That amortization is adjusted retrospectively through an unlocking process when estimates of current or future gross profits/margins (including the impact of net realized gains on investments and net OTTI losses recognized in operations) to be realized from a group of products are revised. Deferred policy acquisition costs and deferred sales inducements are also adjusted for the change in amortization that would have occurred if available for sale fixed maturity securities and equity 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 within consolidated stockholders' equity, net of applicable taxes. See Note 6 for more information on deferred policy acquisition costs and deferred sales inducements.
Policy Benefit Reserves
Policy benefit reserves for fixed index annuities with returns linked to the performance of a specified market index are equal to the sum of the fair value of the embedded derivatives and the host (or guaranteed) component of the contracts. The host value is established at inception of the contract and accreted over the policy's life at a constant rate of interest. Future policy benefit reserves for fixed index annuities earning a fixed rate of interest and other deferred annuity products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. For the years ended
December 31, 2017
,
2016
and
2015
, interest crediting rates for these products ranged from
1.00%
to
3.30%
.
The liability for lifetime income benefit riders is based on estimates of the value of benefit payments expected to be paid in excess of projected policy values recognizing the excess over the expected lives of the underlying policies based on actual and expected assessments including spreads and product charges and fees. The inputs used in the calculation of the liability for lifetime income benefit riders include actual policy values, actual income account values, actual payout factors, actual roll-up rates and our best estimate assumptions for future policy growth, future policy decrements, the ages at which policyholders are expected to elect to begin to receive lifetime income benefit payments, the percentage of policyholders who elect to receive lifetime income benefit payments and the type of income benefit payments selected upon election. See Note 6 for more information on lifetime income benefit rider reserves.
Policy benefit reserves are not reduced for amounts ceded under coinsurance agreements which are reported as coinsurance deposits on our consolidated balance sheets. See Note 7 for more information on reinsurance.
Deferred Income Taxes
Deferred income tax assets or liabilities are computed based on the temporary differences between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. The effect on deferred income tax assets and liabilities resulting from a change in the enacted marginal tax rate is recognized in income in the period that includes the enactment date. Deferred income tax expenses or benefits are based on the changes in the asset or liability from period to period. Deferred income tax assets are subject to ongoing evaluation of whether such assets will more likely than not be realized. The realization of deferred income tax assets primarily depends on generating future taxable income during the periods in which temporary differences become deductible. Deferred income tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. In making such a determination, all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations, is considered. The realization of deferred income tax assets related to unrealized losses on available for sale fixed maturity securities is also based upon our intent and ability to hold those securities for a period of time sufficient to allow for a recovery in fair value and not realize the unrealized loss.
Recognition of Premium Revenues and Costs
Revenues for annuity products include surrender and living income benefit rider charges assessed against policyholder account balances during the period. Interest sensitive and index product benefits related to annuity products include interest credited or index credits to policyholder account balances pursuant to accounting by insurance companies for certain long-duration contracts. The change in fair value of the embedded derivatives for fixed index annuities equals the change in the difference between policy benefit reserves for fixed index annuities computed under the derivative accounting standard and the long-duration contracts accounting standard at each balance sheet date.
Considerations from immediate annuities and supplemental contract annuities with life contingencies are recognized as revenue when the policy is issued.
All insurance-related revenues, including the change in the fair value of derivatives for call options related to the business ceded under coinsurance agreements (see Note 7), benefits, losses and expenses are reported net of reinsurance ceded.
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Comprehensive Income (Loss)
Other comprehensive income (loss) includes all changes in stockholders' equity during a period except those resulting from investments by and distributions to stockholders. Other comprehensive income (loss) excludes net realized investment gains (losses) included in net income which merely represents transfers from unrealized to realized gains and losses.
Adopted Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board ("FASB") issued an accounting standards update ("ASU") related to the accounting for share-based payment transactions. The aspects of accounting guidance affected by this ASU are income taxes, classification of awards as either equity or liabilities, and classification on the statement of cash flows. We adopted this ASU on January 1, 2017. The adoption of this ASU resulted in an income tax benefit of
$2.8 million
being recognized in operations during the year ended
December 31, 2017
due to the requirement under this standard to recognize excess tax benefits related to share-based payment awards in income tax expense.
New Accounting Pronouncements
In May 2014, the FASB issued an ASU related to revenue arising from contracts with customers. This ASU, which replaces most current revenue recognition guidance, including industry specific guidance, prescribes that an entity should recognize revenue to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU will be effective for us on January 1, 2018 and may be adopted using either a full retrospective or a modified retrospective approach. This ASU will not have any immediate impact on our consolidated financial statements as revenues related to our insurance and investment contracts are excluded from its scope.
In January 2016, the FASB issued an ASU that, among other aspects of recognition, measurement, presentation and disclosure of financial instruments, primarily requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Additionally, it changes the accounting for financial liabilities measured at fair value under the fair value option and eliminates some disclosures regarding fair value of financial assets and liabilities measured at amortized cost. This ASU will be effective for us on January 1, 2018. This ASU will not have any immediate impact on our consolidated financial statements or related financial statement disclosures.
In February 2016, the FASB issued an ASU that will require recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU affects accounting and disclosure more dramatically for lessees as accounting for lessors is mainly unchanged. This ASU will be effective for us on January 1, 2019, with early adoption permitted. We are in the process of evaluating the impact this guidance may have on our consolidated financial statements.
In June 2016, the FASB issued an ASU that significantly changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model that requires these assets be presented at the net amount expected to be collected. In addition, credit losses on available for sale debt securities should be recorded through an allowance account. This ASU will be effective for us on January 1, 2020, with early adoption permitted. While we are still in the process of evaluating the full impact this guidance will have on our consolidated financial statements, we believe the new impairment model will lead to earlier recognition of credit losses for our commercial mortgage loans.
In August 2016, the FASB issued an ASU that clarifies how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows. This ASU will be effective for us on January 1, 2018 and requires a retrospective transition method. We expect the immediate impact to our consolidated financial statements to be insignificant and limited to reclassification of certain cash flows from investing activities to operating activities within our consolidated statements of cash flows.
In March 2017, the FASB issued an ASU that applies to certain callable debt securities where the amortized cost basis is at a premium to the price repayable by the issuer at the earliest call date. Under this guidance, the premium will be amortized to the first call date. This ASU will be effective for us on January 1, 2019, with early adoption permitted. We are in the process of evaluating the impact this guidance may have on our consolidated financial statements.
In February 2018, the FASB issued an ASU that allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 ("Tax Reform"). This ASU will be effective for us on January 1, 2019, with early adoption permitted. We plan to early adopt this ASU during the first quarter of 2018 and expect to reclassify
$128 million
between accumulated other comprehensive income and retained earnings within our consolidated balance sheet.
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,
|
|
|
2017
|
|
2016
|
|
|
Carrying
Amount
|
|
Fair Value
|
|
Carrying
Amount
|
|
Fair Value
|
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
Available for sale
|
$
|
45,372,989
|
|
|
$
|
45,372,989
|
|
|
$
|
41,060,494
|
|
|
$
|
41,060,494
|
|
|
Held for investment
|
77,041
|
|
|
76,460
|
|
|
76,825
|
|
|
68,766
|
|
|
Mortgage loans on real estate
|
2,665,531
|
|
|
2,670,037
|
|
|
2,480,956
|
|
|
2,522,035
|
|
|
Derivative instruments
|
1,568,380
|
|
|
1,568,380
|
|
|
830,519
|
|
|
830,519
|
|
|
Other investments
|
616,764
|
|
|
605,894
|
|
|
308,774
|
|
|
300,918
|
|
|
Cash and cash equivalents
|
1,434,045
|
|
|
1,434,045
|
|
|
791,266
|
|
|
791,266
|
|
|
Coinsurance deposits
|
4,858,289
|
|
|
4,347,990
|
|
|
4,639,492
|
|
|
4,150,792
|
|
|
Interest rate caps
|
415
|
|
|
415
|
|
|
1,082
|
|
|
1,082
|
|
|
Counterparty collateral
|
186,108
|
|
|
186,108
|
|
|
145,693
|
|
|
145,693
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Policy benefit reserves
|
55,786,011
|
|
|
46,344,931
|
|
|
51,280,331
|
|
|
43,104,183
|
|
|
Single premium immediate annuity (SPIA) benefit reserves
|
282,563
|
|
|
292,153
|
|
|
297,724
|
|
|
308,028
|
|
|
Notes and loan payable
|
494,093
|
|
|
521,800
|
|
|
493,755
|
|
|
519,440
|
|
|
Subordinated debentures
|
242,565
|
|
|
244,117
|
|
|
241,853
|
|
|
225,106
|
|
|
Interest rate swap
|
789
|
|
|
789
|
|
|
2,113
|
|
|
2,113
|
|
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.
|
Transfers of securities among the levels occur at times and depend on the type of inputs used to determine fair value of each security. There were no transfers between levels during any period presented.
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, 2017
and
2016
are presented below based on the fair value hierarchy levels:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Fair Value
|
|
Quoted
Prices
in Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
(Dollars in thousands)
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
United States Government full faith and credit
|
$
|
11,876
|
|
|
$
|
5,640
|
|
|
$
|
6,236
|
|
|
$
|
—
|
|
|
United States Government sponsored agencies
|
1,305,017
|
|
|
—
|
|
|
1,305,017
|
|
|
—
|
|
|
United States municipalities, states and territories
|
4,166,812
|
|
|
—
|
|
|
4,166,812
|
|
|
—
|
|
|
Foreign government obligations
|
239,360
|
|
|
—
|
|
|
239,360
|
|
|
—
|
|
|
Corporate securities
|
29,878,971
|
|
|
5
|
|
|
29,878,966
|
|
|
—
|
|
|
Residential mortgage backed securities
|
1,105,567
|
|
|
—
|
|
|
1,105,567
|
|
|
—
|
|
|
Commercial mortgage backed securities
|
5,544,850
|
|
|
—
|
|
|
5,544,850
|
|
|
—
|
|
|
Other asset backed securities
|
3,120,536
|
|
|
—
|
|
|
3,120,536
|
|
|
—
|
|
|
Other investments: equity securities, available for sale
|
292,429
|
|
|
285,000
|
|
|
7,429
|
|
|
—
|
|
|
Derivative instruments
|
1,568,380
|
|
|
—
|
|
|
1,568,380
|
|
|
—
|
|
|
Cash and cash equivalents
|
1,434,045
|
|
|
1,434,045
|
|
|
—
|
|
|
—
|
|
|
Interest rate caps
|
415
|
|
|
—
|
|
|
415
|
|
|
—
|
|
|
Counterparty collateral
|
186,108
|
|
|
—
|
|
|
186,108
|
|
|
—
|
|
|
|
$
|
48,854,366
|
|
|
$
|
1,724,690
|
|
|
$
|
47,129,676
|
|
|
$
|
—
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Interest rate swap
|
$
|
789
|
|
|
$
|
—
|
|
|
$
|
789
|
|
|
$
|
—
|
|
|
Fixed index annuities - embedded derivatives, net
|
8,790,427
|
|
|
—
|
|
|
—
|
|
|
8,790,427
|
|
|
|
$
|
8,791,216
|
|
|
$
|
—
|
|
|
$
|
789
|
|
|
$
|
8,790,427
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
United States Government full faith and credit
|
$
|
11,805
|
|
|
$
|
5,381
|
|
|
$
|
6,424
|
|
|
$
|
—
|
|
|
United States Government sponsored agencies
|
1,344,787
|
|
|
—
|
|
|
1,344,787
|
|
|
—
|
|
|
United States municipalities, states and territories
|
3,926,950
|
|
|
—
|
|
|
3,926,950
|
|
|
—
|
|
|
Foreign government obligations
|
236,341
|
|
|
—
|
|
|
236,341
|
|
|
—
|
|
|
Corporate securities
|
27,114,418
|
|
|
6
|
|
|
27,114,412
|
|
|
—
|
|
|
Residential mortgage backed securities
|
1,254,835
|
|
|
—
|
|
|
1,254,835
|
|
|
—
|
|
|
Commercial mortgage backed securities
|
5,365,235
|
|
|
—
|
|
|
5,365,235
|
|
|
—
|
|
|
Other asset backed securities
|
1,806,123
|
|
|
—
|
|
|
1,806,123
|
|
|
—
|
|
|
Other investments: equity securities, available for sale
|
8,000
|
|
|
—
|
|
|
8,000
|
|
|
—
|
|
|
Derivative instruments
|
830,519
|
|
|
—
|
|
|
830,519
|
|
|
—
|
|
|
Cash and cash equivalents
|
791,266
|
|
|
791,266
|
|
|
—
|
|
|
—
|
|
|
Interest rate caps
|
1,082
|
|
|
—
|
|
|
1,082
|
|
|
—
|
|
|
Counterparty collateral
|
145,693
|
|
|
—
|
|
|
145,693
|
|
|
—
|
|
|
|
$
|
42,837,054
|
|
|
$
|
796,653
|
|
|
$
|
42,040,401
|
|
|
$
|
—
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Interest rate swap
|
$
|
2,113
|
|
|
$
|
—
|
|
|
$
|
2,113
|
|
|
$
|
—
|
|
|
Fixed index annuities - embedded derivatives
|
6,563,288
|
|
|
—
|
|
|
—
|
|
|
6,563,288
|
|
|
|
$
|
6,565,401
|
|
|
$
|
—
|
|
|
$
|
2,113
|
|
|
$
|
6,563,288
|
|
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 and equity securities
The fair values of fixed maturity securities and equity securities in an active and orderly market are determined by utilizing independent pricing services. The independent pricing services incorporate a variety of observable market data in their valuation techniques, including:
|
|
|
|
•
|
reported trading prices,
|
|
|
|
|
•
|
relative credit information, and
|
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, 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, 2017
and
2016
.
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 current competitive market interest rates currently being offered for similar loans. The fair values of impaired mortgage loans on real estate that we have considered to be collateral dependent are based on the fair value of the real estate collateral (based on appraised values) less estimated costs to sell. The inputs utilized to determine fair value of all mortgage loans are unobservable market data (competitive market interest rates); therefore, fair value of mortgage loans falls into Level 3 in the fair value hierarchy.
Derivative instruments
The fair values of derivative instruments, primarily call options, are based upon the amount of cash that we will receive to settle each derivative instrument on the reporting date. These amounts are determined by our investment team using industry accepted valuation models and are adjusted for the nonperformance risk of each counterparty net of any collateral held. Inputs include market volatility and risk free interest rates and are used in income valuation techniques in arriving at a fair value for each option contract. The nonperformance risk for each counterparty is based upon its credit default swap rate. We have no performance obligations related to the call options purchased to fund our fixed index annuity policy liabilities.
Other investments
Available for sale equity securities are the only financial instruments included in other investments that are measured at fair value on a recurring basis (see determination of fair value above). Financial instruments included in other investments that are not measured at fair value on a recurring basis are policy loans, equity method investments and company owned life insurance (COLI). We have not attempted to determine the fair values associated with our policy loans, as we believe any differences between carrying value and the fair values afforded these instruments are immaterial to our consolidated financial position and, accordingly, the cost to provide such disclosure does not justify the benefit to be derived. The fair values of our equity method investments are obtained from third parties and are determined by calculating the present value of future cash flows discounted by a risk free rate, a risk spread and a liquidity discount. As the risk spread and liquidity discount are unobservable market inputs, the fair value of our equity method investments falls within Level 3 of the fair value hierarchy. The fair value of our COLI approximates the cash surrender value of the policies and falls within Level 2 of the fair value hierarchy.
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash and cash equivalents
Amounts reported in the consolidated balance sheets for these instruments are reported at their historical cost which approximates fair value due to the nature of the assets assigned to this category.
Interest rate swap and caps
The fair values of our pay fixed/receive variable interest rate swap and our interest rate caps are obtained from third parties and are determined by discounting expected future cash flows using projected LIBOR rates for the term of the swap and caps.
Counterparty collateral
Amounts reported in other assets in the consolidated balance sheets for these instruments are reported at their historical cost which approximates fair value due to the nature of the assets assigned to this category.
Policy benefit reserves, coinsurance deposits and SPIA benefit reserves
The fair values of the liabilities under contracts not involving significant mortality or morbidity risks (principally deferred annuities), are stated at the cost we would incur to extinguish the liability (i.e., the cash surrender value) as these contracts are generally issued without an annuitization date. The coinsurance deposits related to the annuity benefit reserves have fair values determined in a similar fashion. For period-certain annuity benefit contracts, the fair value is determined by discounting the benefits at the interest rates currently in effect for newly issued immediate annuity contracts. We are not required to and have not estimated the fair value of the liabilities under contracts that involve significant mortality or morbidity risks, as these liabilities fall within the definition of insurance contracts that are exceptions from financial instruments that require disclosures of fair value. Policy benefit reserves, coinsurance deposits and SPIA benefit reserves are not measured at fair value on a recurring basis. All of the fair values presented within these categories fall within Level 3 of the fair value hierarchy as most of the inputs are unobservable market data.
Notes and loan payable
The fair values of our senior unsecured notes are based upon pricing matrices developed by a third party pricing service when quoted market prices are not available and are categorized as Level 2 within the fair value hierarchy. The fair value of our term loan is estimated using discounted cash flow calculations based principally on observable inputs including our incremental borrowing rate, which reflects our credit rating, for a similar type of borrowing with a maturity consistent with that remaining for the term loan. Notes and loan payable are not remeasured at fair value on a recurring basis.
Subordinated debentures
Fair values for subordinated debentures are estimated using discounted cash flow calculations based principally on observable inputs including our incremental borrowing rates, which reflect our credit rating, for similar types of borrowings with maturities consistent with those remaining for the debt being valued. These fair values are categorized as Level 2 within the fair value hierarchy. Subordinated debentures are not measured at fair value on a recurring basis.
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, 2017
and
2016
, we utilized an estimate of
3.10%
for the expected cost of annual call options, which are based on estimated long-term account value growth and a historical review of our actual option costs.
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our best estimate assumptions for lapse, partial withdrawal and mortality rates are based on our actual experience and our outlook as to future expectations for such assumptions. These assumptions, which are consistent with the assumptions used in calculating deferred policy acquisition costs and deferred sales inducements, are reviewed on a quarterly basis and are revised as our experience develops and/or as future expectations change. Our mortality rate assumptions are based on
65%
of the 1983 Basic Annuity Mortality Tables. The following table presents average lapse rate and partial withdrawal rate assumptions, by contract duration, used in estimating the fair value of the embedded derivative component of our fixed index annuity policy benefit reserves at each reporting date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Lapse Rates
|
|
Average Partial Withdrawal Rates
|
|
Contract Duration (Years)
|
|
December 31, 2017
|
|
December 31, 2016
|
|
December 31, 2017
|
|
December 31, 2016
|
|
1 - 5
|
|
1.83%
|
|
1.76%
|
|
3.32%
|
|
3.30%
|
|
6 - 10
|
|
7.01%
|
|
6.58%
|
|
3.32%
|
|
3.30%
|
|
11 - 15
|
|
11.31%
|
|
11.25%
|
|
3.34%
|
|
3.32%
|
|
16 - 20
|
|
11.96%
|
|
12.04%
|
|
3.20%
|
|
3.18%
|
|
20+
|
|
11.62%
|
|
11.68%
|
|
3.20%
|
|
3.18%
|
Lapse rates are generally expected to increase as surrender charge percentages decrease. Lapse expectations reflect a significant increase in the year in which the surrender charge period on a contract ends.
The following table provides a reconciliation of the beginning and ending balances for our Level 3 liabilities, which are measured at fair value on a recurring basis using significant unobservable inputs for the years ended
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
|
(Dollars in thousands)
|
|
Fixed index annuities - embedded derivatives
|
|
|
|
|
Beginning balance
|
$
|
6,563,288
|
|
|
$
|
5,983,622
|
|
|
Premiums less benefits
|
2,052,985
|
|
|
434,621
|
|
|
Change in fair value, net
|
174,154
|
|
|
145,045
|
|
|
Ending balance
|
$
|
8,790,427
|
|
|
$
|
6,563,288
|
|
The fair value of our fixed index annuities embedded derivatives is net of coinsurance ceded of
$539.7 million
and
$398.1 million
as of
December 31, 2017
and
2016
, respectively. Change in fair value, net for each period in our embedded derivatives are 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, 2017
, were to increase by
100
basis points, the fair value of the embedded derivatives would decrease by
$579.5 million
recorded through operations as a decrease in the change in fair value of embedded derivatives and there would be a corresponding decrease of
$339.4 million
to our combined balance for deferred policy acquisition costs and deferred sales inducements recorded through operations as an increase in amortization of deferred policy acquisition costs and deferred sales inducements. A decrease by
100
basis points in the discount rate used to discount the excess projected contract values would increase the fair value of the embedded derivatives by
$645.8 million
recorded through operations as an increase in the change in fair value of embedded derivatives and there would be a corresponding increase of
$374.8 million
to our combined balance for deferred policy acquisition costs and deferred sales inducements recorded through operations as a decrease in amortization of deferred policy acquisition costs and deferred sales inducements.
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Investments
At
December 31, 2017
and
2016
, the amortized cost and fair value of fixed maturity securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
|
(Dollars in thousands)
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
United States Government full faith and credit
|
$
|
11,861
|
|
|
$
|
162
|
|
|
$
|
(147
|
)
|
|
$
|
11,876
|
|
|
United States Government sponsored agencies
|
1,308,290
|
|
|
28,457
|
|
|
(31,730
|
)
|
|
1,305,017
|
|
|
United States municipalities, states and territories
|
3,804,360
|
|
|
366,048
|
|
|
(3,596
|
)
|
|
4,166,812
|
|
|
Foreign government obligations
|
228,214
|
|
|
13,171
|
|
|
(2,025
|
)
|
|
239,360
|
|
|
Corporate securities
|
28,127,653
|
|
|
1,897,005
|
|
|
(145,687
|
)
|
|
29,878,971
|
|
|
Residential mortgage backed securities
|
1,028,484
|
|
|
79,554
|
|
|
(2,471
|
)
|
|
1,105,567
|
|
|
Commercial mortgage backed securities
|
5,531,922
|
|
|
82,768
|
|
|
(69,840
|
)
|
|
5,544,850
|
|
|
Other asset backed securities
|
3,075,975
|
|
|
57,966
|
|
|
(13,405
|
)
|
|
3,120,536
|
|
|
|
$
|
43,116,759
|
|
|
$
|
2,525,131
|
|
|
$
|
(268,901
|
)
|
|
$
|
45,372,989
|
|
|
Held for investment:
|
|
|
|
|
|
|
|
|
Corporate security
|
$
|
77,041
|
|
|
$
|
—
|
|
|
$
|
(581
|
)
|
|
$
|
76,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments: equity securities, available for sale
|
$
|
292,429
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
292,429
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
United States Government full faith and credit
|
$
|
11,864
|
|
|
$
|
229
|
|
|
$
|
(288
|
)
|
|
$
|
11,805
|
|
|
United States Government sponsored agencies
|
1,368,340
|
|
|
23,360
|
|
|
(46,913
|
)
|
|
1,344,787
|
|
|
United States municipalities, states and territories
|
3,626,395
|
|
|
322,948
|
|
|
(22,393
|
)
|
|
3,926,950
|
|
|
Foreign government obligations
|
229,589
|
|
|
11,832
|
|
|
(5,080
|
)
|
|
236,341
|
|
|
Corporate securities
|
26,333,213
|
|
|
1,149,978
|
|
|
(368,773
|
)
|
|
27,114,418
|
|
|
Residential mortgage backed securities
|
1,166,944
|
|
|
91,445
|
|
|
(3,554
|
)
|
|
1,254,835
|
|
|
Commercial mortgage backed securities
|
5,422,255
|
|
|
59,994
|
|
|
(117,014
|
)
|
|
5,365,235
|
|
|
Other asset backed securities
|
1,795,355
|
|
|
31,471
|
|
|
(20,703
|
)
|
|
1,806,123
|
|
|
|
$
|
39,953,955
|
|
|
$
|
1,691,257
|
|
|
$
|
(584,718
|
)
|
|
$
|
41,060,494
|
|
|
Held for investment:
|
|
|
|
|
|
|
|
|
Corporate security
|
$
|
76,825
|
|
|
$
|
—
|
|
|
$
|
(8,059
|
)
|
|
$
|
68,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments: equity securities, available for sale
|
$
|
7,521
|
|
|
$
|
479
|
|
|
$
|
—
|
|
|
$
|
8,000
|
|
At
December 31, 2017
,
37%
of our fixed income securities have call features, of which
2.7%
(
$1.2 billion
) were subject to call redemption and another
0.2%
(
$90.1 million
) will become subject to call redemption during
2018
. Approximately
73%
of our fixed income securities that have call features are not callable until within six months of their stated maturities.
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, 2017
, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
Held for investment
|
|
|
Amortized
Cost
|
|
Fair Value
|
|
Amortized
Cost
|
|
Fair Value
|
|
|
(Dollars in thousands)
|
|
Due in one year or less
|
$
|
197,449
|
|
|
$
|
201,079
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Due after one year through five years
|
4,958,029
|
|
|
5,114,727
|
|
|
—
|
|
|
—
|
|
|
Due after five years through ten years
|
10,556,868
|
|
|
10,827,764
|
|
|
—
|
|
|
—
|
|
|
Due after ten years through twenty years
|
9,214,395
|
|
|
10,080,377
|
|
|
—
|
|
|
—
|
|
|
Due after twenty years
|
8,553,637
|
|
|
9,378,089
|
|
|
77,041
|
|
|
76,460
|
|
|
|
33,480,378
|
|
|
35,602,036
|
|
|
77,041
|
|
|
76,460
|
|
|
Residential mortgage backed securities
|
1,028,484
|
|
|
1,105,567
|
|
|
—
|
|
|
—
|
|
|
Commercial mortgage backed securities
|
5,531,922
|
|
|
5,544,850
|
|
|
—
|
|
|
—
|
|
|
Other asset backed securities
|
3,075,975
|
|
|
3,120,536
|
|
|
—
|
|
|
—
|
|
|
|
$
|
43,116,759
|
|
|
$
|
45,372,989
|
|
|
$
|
77,041
|
|
|
$
|
76,460
|
|
Net unrealized gains on available for sale fixed maturity securities and equity securities reported as a separate component of stockholders' equity were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(Dollars in thousands)
|
|
Net unrealized gains on available for sale fixed maturity securities and equity securities
|
$
|
2,256,230
|
|
|
$
|
1,107,018
|
|
|
Adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements
|
(1,206,078
|
)
|
|
(618,661
|
)
|
|
Deferred income tax valuation allowance reversal
|
22,534
|
|
|
22,534
|
|
|
Deferred income tax expense (a)
|
(348,087
|
)
|
|
(170,925
|
)
|
|
Net unrealized gains reported as accumulated other comprehensive income
|
$
|
724,599
|
|
|
$
|
339,966
|
|
|
|
|
|
(a)
|
Includes
$128 million
related to the impact of Tax Reform that we expect to reclassify between accumulated other comprehensive income and retained earnings within our consolidated balance sheet during the first quarter of 2018. For more information regarding the timing of reclassification, see Note 1 to our audited consolidated financial statements.
|
The National Association of Insurance Commissioners ("NAIC") assigns designations to fixed maturity securities. These designations range from Class 1 (highest quality) to Class 6 (lowest quality). In general, securities are assigned a designation based upon the ratings they are given by the Nationally Recognized Statistical Rating Organizations ("NRSRO's"). The NAIC designations are utilized by insurers in preparing their annual statutory statements. NAIC Class 1 and 2 designations are considered "investment grade" while NAIC Class 3 through 6 designations are considered "non-investment grade." Based on the NAIC designations, we had
97%
of our fixed maturity portfolio rated investment grade at both
December 31, 2017
and
2016
, respectively.
The following table summarizes the credit quality, as determined by NAIC designation, of our fixed maturity portfolio as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
NAIC
Designation
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
|
|
|
(Dollars in thousands)
|
|
1
|
|
$
|
26,669,427
|
|
|
$
|
28,274,379
|
|
|
$
|
25,607,268
|
|
|
$
|
26,507,798
|
|
|
2
|
|
15,198,551
|
|
|
15,869,219
|
|
|
13,037,592
|
|
|
13,295,648
|
|
|
3
|
|
1,161,737
|
|
|
1,157,420
|
|
|
1,201,059
|
|
|
1,155,702
|
|
|
4
|
|
134,838
|
|
|
117,542
|
|
|
154,226
|
|
|
137,188
|
|
|
5
|
|
17,015
|
|
|
20,927
|
|
|
17,475
|
|
|
24,664
|
|
|
6
|
|
12,232
|
|
|
9,962
|
|
|
13,160
|
|
|
8,260
|
|
|
|
|
$
|
43,193,800
|
|
|
$
|
45,449,449
|
|
|
$
|
40,030,780
|
|
|
$
|
41,129,260
|
|
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
955
and
1,514
securities, respectively) have been in a continuous unrealized loss position, at
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
12 months or more
|
|
Total
|
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
|
(Dollars in thousands)
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government full faith and credit
|
$
|
1,565
|
|
|
$
|
(10
|
)
|
|
$
|
6,731
|
|
|
$
|
(137
|
)
|
|
$
|
8,296
|
|
|
$
|
(147
|
)
|
|
United States Government sponsored agencies
|
44,794
|
|
|
(180
|
)
|
|
958,965
|
|
|
(31,550
|
)
|
|
1,003,759
|
|
|
(31,730
|
)
|
|
United States municipalities, states and territories
|
44,736
|
|
|
(128
|
)
|
|
128,499
|
|
|
(3,468
|
)
|
|
173,235
|
|
|
(3,596
|
)
|
|
Foreign government obligations
|
49,663
|
|
|
(337
|
)
|
|
12,625
|
|
|
(1,688
|
)
|
|
62,288
|
|
|
(2,025
|
)
|
|
Corporate securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance, insurance and real estate
|
456,244
|
|
|
(5,135
|
)
|
|
600,655
|
|
|
(28,043
|
)
|
|
1,056,899
|
|
|
(33,178
|
)
|
|
Manufacturing, construction and mining
|
222,985
|
|
|
(3,475
|
)
|
|
231,196
|
|
|
(10,849
|
)
|
|
454,181
|
|
|
(14,324
|
)
|
|
Utilities and related sectors
|
395,183
|
|
|
(4,099
|
)
|
|
249,416
|
|
|
(8,901
|
)
|
|
644,599
|
|
|
(13,000
|
)
|
|
Wholesale/retail trade
|
152,941
|
|
|
(1,249
|
)
|
|
178,635
|
|
|
(11,371
|
)
|
|
331,576
|
|
|
(12,620
|
)
|
|
Services, media and other
|
729,124
|
|
|
(19,000
|
)
|
|
891,654
|
|
|
(53,565
|
)
|
|
1,620,778
|
|
|
(72,565
|
)
|
|
Residential mortgage backed securities
|
39,771
|
|
|
(387
|
)
|
|
32,917
|
|
|
(2,084
|
)
|
|
72,688
|
|
|
(2,471
|
)
|
|
Commercial mortgage backed securities
|
1,096,757
|
|
|
(10,385
|
)
|
|
1,306,437
|
|
|
(59,455
|
)
|
|
2,403,194
|
|
|
(69,840
|
)
|
|
Other asset backed securities
|
765,531
|
|
|
(3,499
|
)
|
|
217,595
|
|
|
(9,906
|
)
|
|
983,126
|
|
|
(13,405
|
)
|
|
|
$
|
3,999,294
|
|
|
$
|
(47,884
|
)
|
|
$
|
4,815,325
|
|
|
$
|
(221,017
|
)
|
|
$
|
8,814,619
|
|
|
$
|
(268,901
|
)
|
|
Held for investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate security:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
76,460
|
|
|
$
|
(581
|
)
|
|
$
|
76,460
|
|
|
$
|
(581
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government full faith and credit
|
$
|
7,405
|
|
|
$
|
(288
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,405
|
|
|
$
|
(288
|
)
|
|
United States Government sponsored agencies
|
995,548
|
|
|
(46,913
|
)
|
|
—
|
|
|
—
|
|
|
995,548
|
|
|
(46,913
|
)
|
|
United States municipalities, states and territories
|
463,409
|
|
|
(22,393
|
)
|
|
—
|
|
|
—
|
|
|
463,409
|
|
|
(22,393
|
)
|
|
Foreign government obligations
|
29,158
|
|
|
(913
|
)
|
|
20,388
|
|
|
(4,167
|
)
|
|
49,546
|
|
|
(5,080
|
)
|
|
Corporate securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance, insurance and real estate
|
1,940,107
|
|
|
(70,421
|
)
|
|
82,907
|
|
|
(7,723
|
)
|
|
2,023,014
|
|
|
(78,144
|
)
|
|
Manufacturing, construction and mining
|
1,199,420
|
|
|
(34,304
|
)
|
|
311,591
|
|
|
(23,273
|
)
|
|
1,511,011
|
|
|
(57,577
|
)
|
|
Utilities and related sectors
|
1,401,650
|
|
|
(45,015
|
)
|
|
58,597
|
|
|
(5,820
|
)
|
|
1,460,247
|
|
|
(50,835
|
)
|
|
Wholesale/retail trade
|
637,121
|
|
|
(18,880
|
)
|
|
29,719
|
|
|
(1,930
|
)
|
|
666,840
|
|
|
(20,810
|
)
|
|
Services, media and other
|
2,539,519
|
|
|
(82,196
|
)
|
|
716,857
|
|
|
(79,211
|
)
|
|
3,256,376
|
|
|
(161,407
|
)
|
|
Residential mortgage backed securities
|
81,762
|
|
|
(3,463
|
)
|
|
1,853
|
|
|
(91
|
)
|
|
83,615
|
|
|
(3,554
|
)
|
|
Commercial mortgage backed securities
|
3,148,395
|
|
|
(116,938
|
)
|
|
895
|
|
|
(76
|
)
|
|
3,149,290
|
|
|
(117,014
|
)
|
|
Other asset backed securities
|
751,533
|
|
|
(12,289
|
)
|
|
146,167
|
|
|
(8,414
|
)
|
|
897,700
|
|
|
(20,703
|
)
|
|
|
$
|
13,195,027
|
|
|
$
|
(454,013
|
)
|
|
$
|
1,368,974
|
|
|
$
|
(130,705
|
)
|
|
$
|
14,564,001
|
|
|
$
|
(584,718
|
)
|
|
Held for investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate security:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
68,766
|
|
|
$
|
(8,059
|
)
|
|
$
|
68,766
|
|
|
$
|
(8,059
|
)
|
Based on the results of our process for evaluating available for sale securities in unrealized loss positions for other-than-temporary-impairments, which is discussed in detail later in this footnote, we have determined that the unrealized losses on the securities in the preceding table are temporary. The unrealized losses at
December 31, 2017
are principally related to timing of the purchases of these securities, which carry less yield than those available at
December 31, 2017
.
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Approximately
83%
and
86%
of the unrealized losses on fixed maturity securities shown in the above table for
December 31, 2017
and
2016
, respectively, are on securities that are rated investment grade, defined as being the highest two NAIC designations. All of the fixed maturity securities with unrealized losses are current with respect to the payment of principal and interest.
Changes in net unrealized gains on investments for the years ended
December 31, 2017
,
2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(Dollars in thousands)
|
|
Fixed maturity securities held for investment carried at amortized cost
|
$
|
7,478
|
|
|
$
|
3,186
|
|
|
$
|
(10,651
|
)
|
|
Investments carried at fair value:
|
|
|
|
|
|
|
Fixed maturity securities, available for sale
|
$
|
1,149,691
|
|
|
$
|
508,410
|
|
|
$
|
(1,642,027
|
)
|
|
Equity securities, available for sale
|
(479
|
)
|
|
166
|
|
|
17
|
|
|
|
1,149,212
|
|
|
508,576
|
|
|
(1,642,010
|
)
|
|
Adjustment for effect on other balance sheet accounts:
|
|
|
|
|
|
|
Deferred policy acquisition costs and deferred sales inducements
|
(587,417
|
)
|
|
(295,802
|
)
|
|
842,412
|
|
|
Deferred income tax asset/liability
|
(177,162
|
)
|
|
(74,471
|
)
|
|
279,860
|
|
|
|
(764,579
|
)
|
|
(370,273
|
)
|
|
1,122,272
|
|
|
Change in net unrealized gains on investments carried at fair value
|
$
|
384,633
|
|
|
$
|
138,303
|
|
|
$
|
(519,738
|
)
|
Components of net investment income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(Dollars in thousands)
|
|
Fixed maturity securities
|
$
|
1,876,542
|
|
|
$
|
1,729,176
|
|
|
$
|
1,566,409
|
|
|
Equity securities
|
764
|
|
|
531
|
|
|
441
|
|
|
Mortgage loans on real estate
|
122,680
|
|
|
122,985
|
|
|
131,892
|
|
|
Cash and cash equivalents
|
2,562
|
|
|
3,201
|
|
|
601
|
|
|
Other
|
4,073
|
|
|
5,499
|
|
|
4,858
|
|
|
|
2,006,621
|
|
|
1,861,392
|
|
|
1,704,201
|
|
|
Less investment expenses
|
(14,624
|
)
|
|
(11,520
|
)
|
|
(12,009
|
)
|
|
Net investment income
|
$
|
1,991,997
|
|
|
$
|
1,849,872
|
|
|
$
|
1,692,192
|
|
Proceeds from sales of available for sale securities for the years ended
December 31, 2017
,
2016
and
2015
were
$0.7 billion
,
$1.0 billion
and
$0.4 billion
, respectively. Scheduled principal repayments, calls and tenders for available for sale fixed maturity securities for the years ended
December 31, 2017
,
2016
and
2015
were
$1.2 billion
,
$1.7 billion
and
$1.2 billion
, respectively.
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Realized gains and losses on sales are determined on the basis of specific identification of investments based on the trade date. Net realized gains (losses) on investments, excluding net OTTI losses are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(Dollars in thousands)
|
|
Available for sale fixed maturity securities:
|
|
|
|
|
|
|
Gross realized gains
|
$
|
18,254
|
|
|
$
|
14,132
|
|
|
$
|
7,230
|
|
|
Gross realized losses
|
(9,058
|
)
|
|
(4,036
|
)
|
|
(5,787
|
)
|
|
|
9,196
|
|
|
10,096
|
|
|
1,443
|
|
|
Available for sale equity securities:
|
|
|
|
|
|
|
Gross realized gains
|
348
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Other investments:
|
|
|
|
|
|
|
Gain on sale of real estate
|
56
|
|
|
884
|
|
|
4,194
|
|
|
Loss on sale of real estate
|
—
|
|
|
(93
|
)
|
|
(575
|
)
|
|
Impairment losses on real estate
|
—
|
|
|
—
|
|
|
(1,297
|
)
|
|
|
56
|
|
|
791
|
|
|
2,322
|
|
|
Mortgage loans on real estate:
|
|
|
|
|
|
|
Decrease (increase) in allowance for credit losses
|
278
|
|
|
(4,846
|
)
|
|
1,018
|
|
|
Recovery of specific allowance
|
631
|
|
|
5,483
|
|
|
5,428
|
|
|
|
909
|
|
|
637
|
|
|
6,446
|
|
|
|
$
|
10,509
|
|
|
$
|
11,524
|
|
|
$
|
10,211
|
|
Losses on available for sale fixed maturity securities in
2017
,
2016
and
2015
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. Securities were sold at losses in
2017
,
2016
, and 2015 due to our long-term fundamental concern with the issuers' ability to meet their future financial obligations.
The following table summarizes the carrying value of our investments that have been non-income producing for 12 consecutive months:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(Dollars in thousands)
|
|
Fixed maturity securities, available for sale
|
$
|
8,680
|
|
|
$
|
1,651
|
|
We review and analyze all investments on an ongoing basis for changes in market interest rates and credit deterioration. This review process includes analyzing our ability to recover the amortized cost basis of each investment that has a fair value that is materially lower than its amortized cost and requires a high degree of management judgment and involves uncertainty. The evaluation of securities for other than temporary impairments is a quantitative and qualitative process, which is subject to risks and uncertainties.
We have a policy and process to identify securities that could potentially have impairments that are other than temporary. This process involves monitoring market events and other items that could impact issuers. The evaluation includes but is not limited to such factors as:
|
|
|
|
•
|
the length of time and the extent to which the fair value has been less than amortized cost or cost;
|
|
|
|
|
•
|
whether the issuer is current on all payments and all contractual payments have been made as agreed;
|
|
|
|
|
•
|
the remaining payment terms and the financial condition and near-term prospects of the issuer;
|
|
|
|
|
•
|
the lack of ability to refinance due to liquidity problems in the credit market;
|
|
|
|
|
•
|
the fair value of any underlying collateral;
|
|
|
|
|
•
|
the existence of any credit protection available;
|
|
|
|
|
•
|
our intent to sell and whether it is more likely than not we would be required to sell prior to recovery for debt securities;
|
|
|
|
|
•
|
our assessment in the case of equity securities including perpetual preferred stocks with credit deterioration that the security cannot recover to cost in a reasonable period of time;
|
|
|
|
|
•
|
our intent and ability to retain equity securities for a period of time sufficient to allow for recovery;
|
|
|
|
|
•
|
consideration of rating agency actions; and
|
|
|
|
|
•
|
changes in estimated cash flows of mortgage and asset backed securities.
|
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We determine whether other than temporary impairment losses should be recognized for debt and equity securities by assessing all facts and circumstances surrounding each security. Where the decline in fair value of debt securities is attributable to changes in market interest rates or to factors such as market volatility, liquidity and spread widening, and we anticipate recovery of all contractual or expected cash flows, we do not consider these investments to be other than temporarily impaired because we do not intend to sell these investments and it is not more likely than not we will be required to sell these investments before a recovery of amortized cost, which may be maturity. For equity securities, we recognize an impairment charge in the period in which we do not have the intent and ability to hold the securities until recovery of cost or we determine that the security will not recover to book value within a reasonable period of time. We determine what constitutes a reasonable period of time on a security-by-security basis by considering all the evidence available to us, including the magnitude of any unrealized loss and its duration.
Other than temporary impairment losses on equity securities are recognized in operations. If we intend to sell a debt security or if it is more likely than not that we will be required to sell a debt security before recovery of its amortized cost basis, other than temporary impairment has occurred and the difference between amortized cost and fair value will be recognized as a loss in operations.
If we do not intend to sell and it is not more likely than not we will be required to sell the debt security but also do not expect to recover the entire amortized cost basis of the security, an impairment loss would be recognized in operations in the amount of the expected credit loss. We determine the amount of expected credit loss by calculating the present value of the cash flows expected to be collected discounted at each security's acquisition yield based on our consideration of whether the security was of high credit quality at the time of acquisition. The difference between the present value of expected future cash flows and the amortized cost basis of the security is the amount of credit loss recognized in operations. The remaining amount of the other than temporary impairment is recognized in other comprehensive income (loss).
The determination of the credit loss component of a mortgage backed security is based on a number of factors. The primary consideration in this evaluation process is the issuer's ability to meet current and future interest and principal payments as contractually stated at time of purchase. Our review of these securities includes an analysis of the cash flow modeling under various default scenarios considering independent third party benchmarks, the seniority of the specific tranche within the structure of the security, the composition of the collateral and the actual default, loss severity and prepayment experience exhibited. With the input of third party assumptions for default projections, loss severity and prepayment expectations, we evaluate the cash flow projections to determine whether the security is performing in accordance with its contractual obligation.
We utilize the models from a leading structured product software specialist serving institutional investors. These models incorporate each security's seniority and cash flow structure. In circumstances where the analysis implies a potential for principal loss at some point in the future, we use the "best estimate" cash flow projection discounted at the security's effective yield at acquisition to determine the amount of our potential credit loss associated with this security. The discounted expected future cash flows equates to our expected recovery value. Any shortfall of the expected recovery when compared to the amortized cost of the security will be recorded as the credit loss component of the other than temporary impairment.
The cash flow modeling is performed on a security-by-security basis and incorporates actual cash flows on the residential mortgage backed securities through the current period, as well as the projection of remaining cash flows using a number of assumptions including default rates, prepayment rates and loss severity rates. The default curves we use are tailored to the Prime or Alt-A residential mortgage backed securities that we own, which assume lower default rates and loss severity for Prime securities versus Alt-A securities. These default curves are scaled higher or lower depending on factors such as current underlying mortgage loan performance, rating agency loss projections, loan to value ratios, geographic diversity, as well as other appropriate considerations.
The following table presents the range of significant assumptions used to determine the credit loss component of other than temporary impairments we have recognized on residential mortgage backed securities for the years ended
December 31, 2017
and
2016
, which are all senior level tranches within the structure of the securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate
|
|
Default Rate
|
|
Loss Severity
|
|
Sector
|
|
Vintage
|
|
Min
|
|
Max
|
|
Min
|
|
Max
|
|
Min
|
|
Max
|
|
Year ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime
|
|
2005
|
|
7.0
|
%
|
|
7.7
|
%
|
|
8
|
%
|
|
22
|
%
|
|
40
|
%
|
|
50
|
%
|
|
|
|
2006
|
|
7.3
|
%
|
|
7.3
|
%
|
|
14
|
%
|
|
14
|
%
|
|
40
|
%
|
|
40
|
%
|
|
|
|
2007
|
|
6.2
|
%
|
|
6.7
|
%
|
|
15
|
%
|
|
27
|
%
|
|
50
|
%
|
|
60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime
|
|
2005
|
|
7.7
|
%
|
|
7.7
|
%
|
|
8
|
%
|
|
14
|
%
|
|
50
|
%
|
|
50
|
%
|
|
|
|
2006
|
|
6.5
|
%
|
|
7.3
|
%
|
|
12
|
%
|
|
13
|
%
|
|
40
|
%
|
|
50
|
%
|
|
|
|
2007
|
|
6.2
|
%
|
|
6.4
|
%
|
|
18
|
%
|
|
31
|
%
|
|
50
|
%
|
|
55
|
%
|
|
Alt-A
|
|
2005
|
|
7.4
|
%
|
|
7.4
|
%
|
|
11
|
%
|
|
11
|
%
|
|
60
|
%
|
|
60
|
%
|
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The determination of the credit loss component of a corporate bond (including redeemable preferred stocks) is based on the underlying financial performance of the issuer and their ability to meet their contractual obligations. Considerations in our evaluation include, but are not limited to, credit rating changes, financial statement and ratio analysis, changes in management, significant changes in credit spreads, breaches of financial covenants and a review of the economic outlook for the industry and markets in which they trade. In circumstances where an issuer appears unlikely to meet its future obligation, or the security's price decline is deemed other than temporary, an estimate of credit loss is determined. Credit loss is calculated using default probabilities as derived from the credit default swaps markets in conjunction with recovery rates derived from independent third party analysis or a best estimate of credit loss. This credit loss rate is then incorporated into a present value calculation based on an expected principal loss in the future discounted at the yield at the date of purchase and compared to amortized cost to determine the amount of credit loss associated with the security.
In addition, for debt securities which we do not intend to sell and it is not more likely than not we will be required to sell, but our intent changes due to changes or events that could not have been reasonably anticipated, an other than temporary impairment charge is recognized. Once an impairment charge has been recorded, we then continue to review the other than temporarily impaired securities for appropriate valuation on an ongoing basis. Unrealized losses may be recognized in future periods through a charge to earnings should we later conclude that the decline in fair value below amortized cost is other than temporary pursuant to our accounting policy described above. The use of different methodologies and assumptions to determine the fair value of investments and the timing and amount of impairments may have a material effect on the amounts presented in our consolidated financial statements.
The following table summarizes other than temporary impairments by asset type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Securities
|
|
Total
OTTI Losses
|
|
Portion of
OTTI Losses
Recognized in (from)
Other
Comprehensive
Income
|
|
Net OTTI
Losses
Recognized
in Operations
|
|
|
|
|
(Dollars in thousands)
|
|
Year ended December 31, 2017
|
|
|
|
|
|
|
|
|
Fixed maturity securities, available for sale:
|
|
|
|
|
|
|
|
|
Corporate securities:
|
|
|
|
|
|
|
|
|
Industrial
|
1
|
|
|
$
|
(2,485
|
)
|
|
$
|
—
|
|
|
$
|
(2,485
|
)
|
|
Residential mortgage backed securities
|
8
|
|
|
(273
|
)
|
|
(1,585
|
)
|
|
(1,858
|
)
|
|
Other asset backed securities
|
1
|
|
|
—
|
|
|
(287
|
)
|
|
(287
|
)
|
|
|
10
|
|
|
$
|
(2,758
|
)
|
|
$
|
(1,872
|
)
|
|
$
|
(4,630
|
)
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
Fixed maturity securities, available for sale:
|
|
|
|
|
|
|
|
|
Corporate securities:
|
|
|
|
|
|
|
|
|
Energy
|
2
|
|
|
$
|
(642
|
)
|
|
$
|
—
|
|
|
$
|
(642
|
)
|
|
Materials
|
1
|
|
|
(4,554
|
)
|
|
1,575
|
|
|
(2,979
|
)
|
|
Telecommunications
|
1
|
|
|
(4,462
|
)
|
|
562
|
|
|
(3,900
|
)
|
|
Utilities
|
2
|
|
|
(6,961
|
)
|
|
798
|
|
|
(6,163
|
)
|
|
Residential mortgage backed securities
|
9
|
|
|
—
|
|
|
(783
|
)
|
|
(783
|
)
|
|
Commercial mortgage backed securities
|
5
|
|
|
(1,540
|
)
|
|
—
|
|
|
(1,540
|
)
|
|
Other asset backed securities
|
2
|
|
|
(3,190
|
)
|
|
(3,482
|
)
|
|
(6,672
|
)
|
|
|
22
|
|
|
$
|
(21,349
|
)
|
|
$
|
(1,330
|
)
|
|
$
|
(22,679
|
)
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2015
|
|
|
|
|
|
|
|
|
Fixed maturity securities, available for sale:
|
|
|
|
|
|
|
|
|
Corporate securities:
|
|
|
|
|
|
|
|
|
Industrial
|
2
|
|
|
$
|
(15,414
|
)
|
|
$
|
2,975
|
|
|
$
|
(12,439
|
)
|
|
Residential mortgage backed securities
|
11
|
|
|
(133
|
)
|
|
(2,089
|
)
|
|
(2,222
|
)
|
|
Other asset backed securities
|
1
|
|
|
(10,000
|
)
|
|
5,125
|
|
|
(4,875
|
)
|
|
|
14
|
|
|
$
|
(25,547
|
)
|
|
$
|
6,011
|
|
|
$
|
(19,536
|
)
|
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The cumulative portion of other than temporary impairments determined to be credit losses which have been recognized in operations for debt securities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
|
(Dollars in thousands)
|
|
Cumulative credit loss at beginning of year
|
$
|
(166,375
|
)
|
|
$
|
(145,824
|
)
|
|
Credit losses on securities for which OTTI has not previously been recognized
|
(2,758
|
)
|
|
(18,414
|
)
|
|
Additional credit losses on securities for which OTTI has previously been recognized
|
(1,872
|
)
|
|
(4,265
|
)
|
|
Accumulated losses on securities that were disposed of during the period
|
13,939
|
|
|
2,128
|
|
|
Cumulative credit loss at end of year
|
$
|
(157,066
|
)
|
|
$
|
(166,375
|
)
|
The following table summarizes the cumulative noncredit portion of OTTI and the change in fair value since recognition of OTTI, both of which were recognized in other comprehensive income, by major type of security, for securities that are part of our investment portfolio at
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
OTTI Recognized in Other Comprehensive Income
|
|
Change in Fair Value Since OTTI was Recognized
|
|
Fair Value
|
|
|
(Dollars in thousands)
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Fixed maturity securities, available for sale:
|
|
|
|
|
|
|
|
|
Corporate securities
|
$
|
13,015
|
|
|
$
|
(4,263
|
)
|
|
$
|
10,739
|
|
|
$
|
19,491
|
|
|
Residential mortgage backed securities
|
297,582
|
|
|
(168,355
|
)
|
|
201,620
|
|
|
330,847
|
|
|
Other asset backed securities
|
4,567
|
|
|
(1,356
|
)
|
|
(1,875
|
)
|
|
1,336
|
|
|
|
$
|
315,164
|
|
|
$
|
(173,974
|
)
|
|
$
|
210,484
|
|
|
$
|
351,674
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Fixed maturity securities, available for sale:
|
|
|
|
|
|
|
|
|
Corporate securities
|
$
|
17,549
|
|
|
$
|
(5,910
|
)
|
|
$
|
13,566
|
|
|
$
|
25,205
|
|
|
Residential mortgage backed securities
|
368,862
|
|
|
(169,941
|
)
|
|
205,854
|
|
|
404,775
|
|
|
Commercial mortgage backed securities
|
6,596
|
|
|
—
|
|
|
(107
|
)
|
|
6,489
|
|
|
Other asset backed securities
|
6,683
|
|
|
(1,643
|
)
|
|
(1,566
|
)
|
|
3,474
|
|
|
|
$
|
399,690
|
|
|
$
|
(177,494
|
)
|
|
$
|
217,747
|
|
|
$
|
439,943
|
|
At
December 31, 2017
and
2016
, fixed maturity securities and short-term investments with an amortized cost of
$47.5 billion
and
$43.5 billion
, respectively, were on deposit with state agencies to meet regulatory requirements. There are no restrictions on these assets.
At
December 31, 2017
and
2016
, we had
no
investment in any person or its affiliates (other than bonds issued by agencies of the United States Government) that exceeded
10%
of stockholders' equity.
4. Mortgage Loans on Real Estate
Our mortgage loan portfolio is summarized in the following table. There were commitments outstanding of
$62.0 million
at
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(Dollars in thousands)
|
|
Principal outstanding
|
$
|
2,674,315
|
|
|
$
|
2,490,619
|
|
|
Loan loss allowance
|
(7,518
|
)
|
|
(8,427
|
)
|
|
Deferred prepayment fees
|
(1,266
|
)
|
|
(1,236
|
)
|
|
Carrying value
|
$
|
2,665,531
|
|
|
$
|
2,480,956
|
|
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The portfolio consists of commercial mortgage loans collateralized by the related properties and diversified as to property type, location and loan size. Our mortgage lending policies establish limits on the amount that can be loaned to one borrower and other criteria to attempt to reduce the risk of default. The mortgage loan portfolio is summarized by geographic region and property type as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
Principal
|
|
Percent
|
|
Principal
|
|
Percent
|
|
|
(Dollars in thousands)
|
|
Geographic distribution
|
|
|
|
|
|
|
|
|
East
|
$
|
548,067
|
|
|
20.5
|
%
|
|
$
|
635,434
|
|
|
25.5
|
%
|
|
Middle Atlantic
|
163,485
|
|
|
6.1
|
%
|
|
151,640
|
|
|
6.1
|
%
|
|
Mountain
|
308,486
|
|
|
11.5
|
%
|
|
235,932
|
|
|
9.5
|
%
|
|
New England
|
12,265
|
|
|
0.5
|
%
|
|
12,724
|
|
|
0.5
|
%
|
|
Pacific
|
466,030
|
|
|
17.4
|
%
|
|
385,683
|
|
|
15.5
|
%
|
|
South Atlantic
|
609,736
|
|
|
22.8
|
%
|
|
519,065
|
|
|
20.8
|
%
|
|
West North Central
|
324,808
|
|
|
12.2
|
%
|
|
325,447
|
|
|
13.1
|
%
|
|
West South Central
|
241,438
|
|
|
9.0
|
%
|
|
224,694
|
|
|
9.0
|
%
|
|
|
$
|
2,674,315
|
|
|
100.0
|
%
|
|
$
|
2,490,619
|
|
|
100.0
|
%
|
|
Property type distribution
|
|
|
|
|
|
|
|
|
Office
|
$
|
283,926
|
|
|
10.6
|
%
|
|
$
|
308,578
|
|
|
12.4
|
%
|
|
Medical Office
|
34,338
|
|
|
1.3
|
%
|
|
50,780
|
|
|
2.1
|
%
|
|
Retail
|
1,040,028
|
|
|
38.9
|
%
|
|
886,942
|
|
|
35.6
|
%
|
|
Industrial/Warehouse
|
677,770
|
|
|
25.3
|
%
|
|
700,644
|
|
|
28.1
|
%
|
|
Apartment
|
462,897
|
|
|
17.3
|
%
|
|
375,837
|
|
|
15.1
|
%
|
|
Mixed use/other
|
175,356
|
|
|
6.6
|
%
|
|
167,838
|
|
|
6.7
|
%
|
|
|
$
|
2,674,315
|
|
|
100.0
|
%
|
|
$
|
2,490,619
|
|
|
100.0
|
%
|
Our financing receivables currently consist of
one
portfolio segment which is our commercial mortgage loan portfolio. These are mortgage loans with collateral consisting of commercial real estate and borrowers consisting mostly of limited liability partnerships or limited liability corporations.
We evaluate our mortgage loan portfolio for the establishment of a loan loss allowance by specific identification of impaired loans and the measurement of an estimated loss for each individual loan identified. A mortgage loan is impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. If we determine that the value of any specific mortgage loan is impaired, the carrying amount of the mortgage loan will be reduced to its fair value, based upon the present value of expected future cash flows from the loan discounted at the loan's effective interest rate, or the fair value of the underlying collateral less estimated costs to sell.
In addition, we analyze the mortgage loan portfolio for the need of a general loan allowance for probable losses on all other loans on a quantitative and qualitative basis. The amount of the general loan allowance is based upon management's evaluation of the collectability of the loan portfolio, historical loss experience, delinquencies, credit concentrations, underwriting standards and national and local economic conditions.
We rate each of the mortgage loans in our portfolio based on factors such as historical operating performance, loan to value ratio and economic outlook, among others. We calculate a loss factor to apply to each rating based on historical losses we have recognized in our mortgage loan portfolio. We apply the loss factors to the total principal outstanding within each rating category to determine an appropriate estimate of the general loan loss allowance. We also assess the portfolio qualitatively and apply a loss rate to all loans without a specific allowance based on management's assessment of economic conditions, and we apply an additional amount of loss allowance to a group of loans that we have identified as having higher risk of loss.
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents a rollforward of our specific and general valuation allowances for mortgage loans on real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
Specific
Allowance
|
|
General
Allowance
|
|
Specific
Allowance
|
|
General
Allowance
|
|
Specific
Allowance
|
|
General
Allowance
|
|
|
(Dollars in thousands)
|
|
Beginning allowance balance
|
$
|
(1,327
|
)
|
|
$
|
(7,100
|
)
|
|
$
|
(7,842
|
)
|
|
$
|
(6,300
|
)
|
|
$
|
(12,333
|
)
|
|
$
|
(10,300
|
)
|
|
Charge-offs
|
—
|
|
|
—
|
|
|
5,078
|
|
|
—
|
|
|
2,045
|
|
|
—
|
|
|
Recoveries
|
631
|
|
|
—
|
|
|
5,483
|
|
|
—
|
|
|
5,428
|
|
|
—
|
|
|
Change in provision for credit losses
|
(722
|
)
|
|
1,000
|
|
|
(4,046
|
)
|
|
(800
|
)
|
|
(2,982
|
)
|
|
4,000
|
|
|
Ending allowance balance
|
$
|
(1,418
|
)
|
|
$
|
(6,100
|
)
|
|
$
|
(1,327
|
)
|
|
$
|
(7,100
|
)
|
|
$
|
(7,842
|
)
|
|
$
|
(6,300
|
)
|
The specific allowance represents the total credit loss allowances on loans which are individually evaluated for impairment. The general allowance is for the group of loans discussed above which are collectively evaluated for impairment. The following table presents the total outstanding principal of loans evaluated for impairment by basis of impairment method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(Dollars in thousands)
|
|
Individually evaluated for impairment
|
$
|
5,445
|
|
|
$
|
4,640
|
|
|
$
|
21,277
|
|
|
Collectively evaluated for impairment
|
2,668,870
|
|
|
2,485,979
|
|
|
2,428,632
|
|
|
Total loans evaluated for impairment
|
$
|
2,674,315
|
|
|
$
|
2,490,619
|
|
|
$
|
2,449,909
|
|
Charge-offs include allowances that have been established on loans that were satisfied either by taking ownership of the collateral or by some other means such as discounted pay-off or loan sale. When ownership of the property is taken it is recorded at the lower of the mortgage loan's carrying value or the property's fair value (based on appraised values) less estimated costs to sell. The real estate owned is recorded as a component of Other investments and the mortgage loan is recorded as fully paid, with any allowance for credit loss that has been established charged off. Fair value of the real estate is determined by third party appraisal. Recoveries are situations where we have received a payment from the borrower in an amount greater than the carrying value of the loan (principal outstanding less specific allowance).
We did not own any real estate during the year ended
December 31, 2017
. The following table summarizes the activity in the real estate owned, included in Other investments, which was obtained in satisfaction of mortgage loans on real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
|
(Dollars in thousands)
|
|
Real estate owned at beginning of period
|
$
|
6,485
|
|
|
$
|
20,238
|
|
|
Additions
|
—
|
|
|
121
|
|
|
Sales
|
(6,444
|
)
|
|
(12,322
|
)
|
|
Impairments
|
—
|
|
|
(1,297
|
)
|
|
Depreciation
|
(41
|
)
|
|
(255
|
)
|
|
Real estate owned at end of period
|
$
|
—
|
|
|
$
|
6,485
|
|
We analyze credit risk of our mortgage loans by analyzing all available evidence on loans that are delinquent and loans that are in a workout period.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(Dollars in thousands)
|
|
Credit Exposure - By Payment Activity
|
|
|
|
|
Performing
|
$
|
2,670,657
|
|
|
$
|
2,489,028
|
|
|
In workout
|
1,436
|
|
|
1,591
|
|
|
Collateral dependent
|
2,222
|
|
|
—
|
|
|
|
$
|
2,674,315
|
|
|
$
|
2,490,619
|
|
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The loans that are categorized as "in workout" consist of loans that we have agreed to lower or no mortgage payments for a period of time while the borrowers address cash flow and/or operational issues. The key features of these workouts have been determined on a loan-by-loan basis. Most of these loans are in a period of low cash flow due to tenants vacating their space or tenants requesting rent relief during difficult economic periods. Generally, we have allowed the borrower a
six
month interest only period and in some cases a
twelve
month period of interest only. Interest only workout loans are expected to return to their regular debt service payments after the interest only period. Interest only loans that are not fully amortizing will have a larger balance at their balloon date than originally contracted. Fully amortizing loans that are in interest only periods will have larger debt service payments for their remaining term due to lost principal payments during the interest only period. In limited circumstances we have allowed borrowers to pay the principal portion of their loan payment into an escrow account that can be used for capital and tenant improvements for a period of not more than
twelve
months. In these situations new loan amortization schedules are calculated based on the principal not collected during this
twelve
month workout period and larger payments are collected for the remaining term of each loan. In all cases, the original interest rate and maturity date have not been modified, and we have not forgiven any principal amounts.
Mortgage loans are considered delinquent when they become
60
days or more past due. In general, when loans become
90
days past due, become collateral dependent or enter a period with no debt service payments required we place them on non-accrual status and discontinue recognizing interest income. If payments are received on a delinquent loan, interest income is recognized to the extent it would have been recognized if normal principal and interest would have been received timely. If the payments are received to bring a delinquent loan back to current we will resume accruing interest income on that loan. Outstanding principal of loans in non-accrual status at
December 31, 2017
totaled
$2.2 million
. There were
no
loans in non-accrual status at
December 31, 2016
.
We define collateral dependent loans as those mortgage loans for which we will depend on the value of the collateral real estate to satisfy the outstanding principal of the loan.
All of our commercial mortgage loans depend on the cash flow of the borrower to be at a sufficient level to service the principal and interest payments as they come due. In general, cash inflows of the borrowers are generated by collecting monthly rent from tenants occupying space within the borrowers' properties. Our borrowers face collateral risks such as tenants going out of business, tenants struggling to make rent payments as they become due, and tenants canceling leases and moving to other locations. We have a number of loans where the real estate is occupied by a single tenant. Our borrowers sometimes face both a reduction in cash flow on their mortgage property as well as a reduction in the fair value of the real estate collateral. If borrowers are unable to replace lost rent revenue and increases in the fair value of their property do not materialize, we could potentially incur more losses than what we have allowed for in our specific and general loan loss allowances.
Aging of financing receivables is summarized in the following table, with loans in a "workout" period as of the reporting date considered current if payments are current in accordance with agreed upon terms:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 - 59 Days
|
|
60 - 89 Days
|
|
90 Days
and Over
|
|
Total
Past Due
|
|
Current
|
|
Collateral
Dependent
Receivables
|
|
Total
Financing
Receivables
|
|
|
(Dollars in thousands)
|
|
Commercial Mortgage Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,672,093
|
|
|
$
|
2,222
|
|
|
$
|
2,674,315
|
|
|
December 31, 2016
|
$
|
2,737
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,737
|
|
|
$
|
2,487,882
|
|
|
$
|
—
|
|
|
$
|
2,490,619
|
|
Financing receivables summarized in the following two tables represent all loans that we are either not currently collecting, or those we feel it is probable we will not collect all amounts due according to the contractual terms of the loan agreements (all loans that we have worked with the borrower to alleviate short-term cash flow issues, loans delinquent for
60
days or more at the reporting date, loans we have determined to be collateral dependent and loans that we have recorded specific impairments on that we feel may continue to have performance issues).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded Investment
|
|
Unpaid Principal Balance
|
|
Related
Allowance
|
|
|
(Dollars in thousands)
|
|
December 31, 2017
|
|
|
|
|
|
|
Mortgage loans with an allowance
|
$
|
4,027
|
|
|
$
|
5,445
|
|
|
$
|
(1,418
|
)
|
|
Mortgage loans with no related allowance
|
1,436
|
|
|
1,436
|
|
|
—
|
|
|
|
$
|
5,463
|
|
|
$
|
6,881
|
|
|
$
|
(1,418
|
)
|
|
December 31, 2016
|
|
|
|
|
|
|
Mortgage loans with an allowance
|
$
|
3,313
|
|
|
$
|
4,640
|
|
|
$
|
(1,327
|
)
|
|
Mortgage loans with no related allowance
|
1,591
|
|
|
1,591
|
|
|
—
|
|
|
|
$
|
4,904
|
|
|
$
|
6,231
|
|
|
$
|
(1,327
|
)
|
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Recorded Investment
|
|
Interest Income Recognized
|
|
|
(Dollars in thousands)
|
|
December 31, 2017
|
|
|
|
|
Mortgage loans with an allowance
|
$
|
4,464
|
|
|
$
|
221
|
|
|
Mortgage loans with no related allowance
|
1,513
|
|
|
91
|
|
|
|
$
|
5,977
|
|
|
$
|
312
|
|
|
December 31, 2016
|
|
|
|
|
Mortgage loans with an allowance
|
$
|
3,398
|
|
|
$
|
301
|
|
|
Mortgage loans with no related allowance
|
1,665
|
|
|
73
|
|
|
|
$
|
5,063
|
|
|
$
|
374
|
|
|
December 31, 2015
|
|
|
|
|
Mortgage loans with an allowance
|
$
|
13,893
|
|
|
$
|
1,117
|
|
|
Mortgage loans with no related allowance
|
8,930
|
|
|
584
|
|
|
|
$
|
22,823
|
|
|
$
|
1,701
|
|
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 was 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. A summary of mortgage loans on commercial real estate with outstanding principal at
December 31, 2017
and
2016
that we determined to be TDRs are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic Region
|
|
Number of
TDRs
|
|
Principal
Balance
Outstanding
|
|
Specific Loan
Loss Allowance
|
|
Net
Carrying
Amount
|
|
|
|
|
|
(Dollars in thousands)
|
|
Year ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
South Atlantic
|
|
1
|
|
$
|
2,947
|
|
|
$
|
—
|
|
|
$
|
2,947
|
|
|
East North Central
|
|
1
|
|
1,933
|
|
|
(467
|
)
|
|
1,466
|
|
|
|
|
2
|
|
$
|
4,880
|
|
|
$
|
(467
|
)
|
|
$
|
4,413
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
South Atlantic
|
|
1
|
|
$
|
3,004
|
|
|
$
|
—
|
|
|
$
|
3,004
|
|
|
East North Central
|
|
1
|
|
2,020
|
|
|
(467
|
)
|
|
1,553
|
|
|
|
|
2
|
|
$
|
5,024
|
|
|
$
|
(467
|
)
|
|
$
|
4,557
|
|
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Derivative Instruments
None of our derivatives qualify for hedge accounting, thus, any change in the fair value of the derivatives is recognized immediately in the consolidated statements of operations. The fair value of our derivative instruments, including derivative instruments embedded in fixed index annuity contracts, presented in the consolidated balance sheets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
Derivative instruments
|
|
|
|
|
Call options
|
$
|
1,568,380
|
|
|
$
|
830,519
|
|
|
Other assets
|
|
|
|
|
Interest rate caps
|
415
|
|
|
1,082
|
|
|
|
$
|
1,568,795
|
|
|
$
|
831,601
|
|
|
Liabilities
|
|
|
|
|
Policy benefit reserves - annuity products
|
|
|
|
|
Fixed index annuities - embedded derivatives, net
|
$
|
8,790,427
|
|
|
$
|
6,563,288
|
|
|
Other liabilities
|
|
|
|
|
Interest rate swap
|
789
|
|
|
2,113
|
|
|
|
$
|
8,791,216
|
|
|
$
|
6,565,401
|
|
The changes in fair value of derivatives included in the consolidated statements of operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(Dollars in thousands)
|
|
Change in fair value of derivatives:
|
|
|
|
|
|
|
Call options
|
$
|
1,678,283
|
|
|
$
|
165,029
|
|
|
$
|
(327,921
|
)
|
|
2015 notes hedges
|
—
|
|
|
—
|
|
|
(4,516
|
)
|
|
Interest rate swap
|
255
|
|
|
(482
|
)
|
|
(2,341
|
)
|
|
Interest rate caps
|
(667
|
)
|
|
(328
|
)
|
|
(1,368
|
)
|
|
|
$
|
1,677,871
|
|
|
$
|
164,219
|
|
|
$
|
(336,146
|
)
|
|
Change in fair value of embedded derivatives:
|
|
|
|
|
|
|
Fixed index annuities - embedded derivatives (see Note 2)
|
$
|
174,154
|
|
|
$
|
145,045
|
|
|
$
|
(825,668
|
)
|
|
Other changes in difference between policy benefit reserves computed using derivative accounting vs. long-duration contracts accounting
|
745,581
|
|
|
398,420
|
|
|
365,486
|
|
|
2015 notes embedded conversion derivative (see Note 9)
|
—
|
|
|
—
|
|
|
(4,516
|
)
|
|
|
$
|
919,735
|
|
|
$
|
543,465
|
|
|
$
|
(464,698
|
)
|
The amounts presented as "Other changes in difference between policy benefit reserves computed using derivative accounting vs. long-duration contracts accounting" represents the total change in the difference between policy benefit reserves for fixed index annuities computed under the derivative accounting standard and the long-duration contracts accounting standard at each balance sheet date, less the change in fair value of our fixed index annuities embedded derivatives that is presented as Level 3 liabilities in Note 2.
We have fixed index annuity products that guarantee the return of principal to the policyholder and credit interest based on a percentage of the gain in a specified market index. When fixed index annuity deposits are received, a portion of the deposit is used to purchase derivatives consisting of call options on the applicable market indices to fund the index credits due to fixed index annuity policyholders. Substantially all such call options are one year options purchased to match the funding requirements of the underlying policies. The call options are marked to fair value with the change in fair value included as a component of revenues. The change in fair value of derivatives includes the gains or losses recognized at the expiration of the option term or upon early termination and the changes in fair value for open positions. On the respective anniversary dates of the index policies, the index used to compute the annual index credit is reset and we purchase new
one
-year call options to fund the next annual 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.
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our strategy attempts to mitigate any potential risk of loss due to the nonperformance of the counterparties to these call options through a regular monitoring process which evaluates the program's effectiveness. We do not purchase call options that would require payment or collateral to another institution and our call options do not contain counterparty credit-risk-related contingent features. We are exposed to risk of loss in the event of nonperformance by the counterparties and, accordingly, we purchase our option contracts from multiple counterparties and evaluate the creditworthiness of all counterparties prior to purchase of the contracts. All of these options have been purchased from nationally recognized financial institutions with a Standard and Poor's credit rating of A- or higher at the time of purchase and the maximum credit exposure to any single counterparty is subject to concentration limits. We also have credit support agreements that allow us to request the counterparty to provide collateral to us when the fair value of our exposure to the counterparty exceeds specified amounts.
The notional amount and fair value of our call options by counterparty and each counterparty's current credit rating are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Counterparty
|
|
Credit Rating (S&P)
|
|
Credit Rating (Moody's)
|
|
Notional
Amount
|
|
Fair Value
|
|
Notional
Amount
|
|
Fair Value
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Bank of America
|
|
A+
|
|
Aa3
|
|
$
|
4,645,366
|
|
|
$
|
237,955
|
|
|
$
|
5,958,884
|
|
|
$
|
178,477
|
|
|
Barclays
|
|
A
|
|
A1
|
|
4,135,537
|
|
|
154,127
|
|
|
3,441,832
|
|
|
89,721
|
|
|
BNP Paribas
|
|
A
|
|
Aa3
|
|
1,411,989
|
|
|
73,650
|
|
|
1,199,265
|
|
|
19,598
|
|
|
Canadian Imperial Bank of Commerce
|
|
A+
|
|
A1
|
|
2,808,030
|
|
|
84,268
|
|
|
—
|
|
|
—
|
|
|
Citibank, N.A.
|
|
A+
|
|
A1
|
|
4,104,666
|
|
|
219,900
|
|
|
4,038,528
|
|
|
97,094
|
|
|
Credit Suisse
|
|
A
|
|
A1
|
|
3,538,855
|
|
|
137,384
|
|
|
2,130,710
|
|
|
44,242
|
|
|
Deutsche Bank
|
|
A-
|
|
Baa2
|
|
—
|
|
|
—
|
|
|
25,935
|
|
|
892
|
|
|
J.P. Morgan
|
|
A+
|
|
Aa3
|
|
1,753,649
|
|
|
109,689
|
|
|
1,785,583
|
|
|
19,645
|
|
|
Morgan Stanley
|
|
A+
|
|
A1
|
|
3,408,179
|
|
|
184,323
|
|
|
2,543,421
|
|
|
64,425
|
|
|
Royal Bank of Canada
|
|
AA-
|
|
A1
|
|
3,027,469
|
|
|
104,141
|
|
|
3,384,310
|
|
|
103,510
|
|
|
SunTrust
|
|
A-
|
|
Baa1
|
|
2,331,168
|
|
|
90,399
|
|
|
2,375,418
|
|
|
72,990
|
|
|
Wells Fargo
|
|
AA-
|
|
Aa2
|
|
4,036,255
|
|
|
162,781
|
|
|
3,850,842
|
|
|
130,545
|
|
|
Exchange traded
|
|
|
|
|
|
296,840
|
|
|
9,763
|
|
|
313,354
|
|
|
9,380
|
|
|
|
|
|
|
|
|
$
|
35,498,003
|
|
|
$
|
1,568,380
|
|
|
$
|
31,048,082
|
|
|
$
|
830,519
|
|
As of
December 31, 2017
and
2016
, we held
$1.6 billion
and
$827.8 million
, respectively, of cash and cash equivalents and other securities from counterparties for derivative collateral, which is included in Other liabilities on our consolidated balance sheets. This derivative collateral limits the maximum amount of economic loss due to credit risk that we would incur if parties to the call options failed completely to perform according to the terms of the contracts to
$11.9 million
and
$55.5 million
at
December 31, 2017
and
2016
, respectively.
The future annual index credits on our fixed index annuities are treated as a "series of embedded derivatives" over the expected life of the applicable contract. We do not purchase call options to fund the index liabilities which may arise after the next policy anniversary date. We must value both the call options and the related forward embedded options in the policies at fair value.
We entered into an interest rate swap and interest rate caps to manage interest rate risk associated with the floating rate component on certain of our subordinated debentures. See Note 10 for more information on our subordinated debentures. The terms of the interest rate swap provide that we pay a fixed rate of interest and receive a floating rate of interest. The terms of the interest rate caps limit the three month London Interbank Offered Rate ("LIBOR") to
2.50%
. The interest rate swap and caps are not effective hedges under accounting guidance for derivative instruments and hedging activities. Therefore, we record the interest rate swap and caps at fair value and any net cash payments received or paid are included in the change in fair value of derivatives in the consolidated statements of operations.
Details regarding the interest rate swap are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Maturity Date
|
|
Notional
Amount
|
|
Receive Rate
|
|
Pay Rate
|
|
Counterparty
|
|
Fair Value
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
March 15, 2021
|
|
$
|
85,500
|
|
|
LIBOR
|
|
2.415%
|
|
SunTrust
|
|
$
|
(789
|
)
|
|
$
|
(2,113
|
)
|
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Details regarding the interest rate caps are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Maturity Date
|
|
Notional Amount
|
|
Floating Rate
|
|
Cap Rate
|
|
Counterparty
|
|
Fair Value
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
July 7, 2021
|
|
$
|
40,000
|
|
|
LIBOR
|
|
2.50%
|
|
SunTrust
|
|
$
|
207
|
|
|
$
|
542
|
|
|
July 8, 2021
|
|
12,000
|
|
|
LIBOR
|
|
2.50%
|
|
SunTrust
|
|
62
|
|
|
163
|
|
|
July 29, 2021
|
|
27,000
|
|
|
LIBOR
|
|
2.50%
|
|
SunTrust
|
|
146
|
|
|
377
|
|
|
|
|
$
|
79,000
|
|
|
|
|
|
|
|
|
$
|
415
|
|
|
$
|
1,082
|
|
The interest rate swap converts floating rates to fixed rates for
seven
years which began in March 2014. The interest rate caps cap our interest rates for
seven
years which began in July 2014. As of
December 31, 2017
, we deposited
$0.5 million
of collateral with the counterparty to the swap.
In September 2010, concurrently with the issuance of
$200.0 million
principal amount of
3.50%
Convertible Senior Notes due September 15, 2015 (the "2015 notes"), we entered into hedge transactions (the "2015 notes hedges") with
two
counterparties whereby we would receive the cash equivalent of the conversion spread on
16.0 million
shares of our common stock based upon a strike price of
$12.50
per share, subject to certain conversion rate adjustments in the 2015 notes. The number of shares and strike price of the 2015 notes hedges were subject to adjustment based on dividends we paid subsequent to their purchase. The 2015 notes hedges expired on September 15, 2015, and we received
$25.8 million
in cash. The 2015 notes hedges were accounted for as derivative assets and were included in other assets in our consolidated balance sheets. The 2015 notes embedded conversion derivative liability was settled with the extinguishment of the 2015 notes (see Note 9) whereby we paid holders of the notes a total of
$25.8 million
in cash to settle the conversion premium. The 2015 notes hedges and 2015 notes embedded conversion derivative were adjusted to fair value each reporting period and unrealized gains and losses are reflected in our consolidated statements of operations.
In separate transactions, we sold warrants (the "2015 warrants") to the 2015 notes hedges counterparties for the purchase of up to
16.0 million
shares of our common stock at a price of
$16.00
per share. We received
$15.6 million
in cash proceeds from the sale of the 2015 warrants, which was recorded as an increase in additional paid-in capital. The number of shares and strike price of the warrants were subject to adjustment based on dividends we paid subsequent to selling the warrants. The warrants expired on various dates from December 2015 through June 2016. Changes in the fair value of these warrants were not recognized in our consolidated financial statements as the instruments remain classified as equity.
In December 2015, we began settling the 2015 warrants in net shares on a weekly basis, and completed the settlement of all warrants by June 30, 2016.
140,866
shares of our common stock were delivered to holders of the expiring warrants, of which
92,998
shares were issued during 2016. 2015 warrants remained outstanding on
1.6 million
shares of our common stock at a strike price of
$15.59
per share at December 31, 2015. As the average price of our common stock exceeded the strike price of the 2015 warrants while they were outstanding the dilutive effect of the 2015 warrants has been included in diluted earnings per share for the years ended December 31, 2016 and 2015.
6. Deferred Policy Acquisition Costs, Deferred Sales Inducements and Lifetime Income Benefit Rider Reserves
Policy acquisition costs deferred and amortized are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(Dollars in thousands)
|
|
Balance at beginning of year
|
$
|
2,905,377
|
|
|
$
|
2,905,136
|
|
|
$
|
2,058,556
|
|
|
Costs deferred during the year:
|
|
|
|
|
|
|
Commissions
|
401,124
|
|
|
538,863
|
|
|
651,094
|
|
|
Policy issue costs
|
5,517
|
|
|
4,462
|
|
|
6,545
|
|
|
Amortization
|
(255,964
|
)
|
|
(374,012
|
)
|
|
(286,114
|
)
|
|
Effect of net unrealized gains/losses
|
(341,531
|
)
|
|
(169,072
|
)
|
|
475,055
|
|
|
Balance at end of year
|
$
|
2,714,523
|
|
|
$
|
2,905,377
|
|
|
$
|
2,905,136
|
|
Sales inducements deferred and amortized are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(Dollars in thousands)
|
|
Balance at beginning of year
|
$
|
2,208,218
|
|
|
$
|
2,232,148
|
|
|
$
|
1,587,257
|
|
|
Costs deferred during the year
|
216,172
|
|
|
353,966
|
|
|
486,924
|
|
|
Amortization
|
(176,612
|
)
|
|
(251,166
|
)
|
|
(209,390
|
)
|
|
Effect of net unrealized gains/losses
|
(245,886
|
)
|
|
(126,730
|
)
|
|
367,357
|
|
|
Balance at end of year
|
$
|
2,001,892
|
|
|
$
|
2,208,218
|
|
|
$
|
2,232,148
|
|
We periodically revise the key assumptions used in the calculation of amortization of deferred policy acquisition costs and deferred sales inducements retrospectively through an unlocking process when estimates of current or future gross profits/margins (including the impact of realized investment gains and losses) to be realized from a group of products are revised. In addition, we periodically revise the assumptions used in determining reserves held for lifetime income benefit riders as experience develops that is different from our assumptions.
The unlocking adjustments in
2017
decreased amortization of deferred policy acquisition costs by
$48.2 million
and amortization of deferred sales inducements by
$34.3 million
. During the third quarter of 2017, the most significant revisions to such assumptions were account balance true-ups which were favorable to us due to stronger index credits than we assumed due to strong equity market performance and adjustments to generally decrease lapse rate assumptions to reflect better persistency experienced than assumed. The favorable impact of the account balance true-ups and lapse rate assumption changes was partially offset by reductions in estimated future gross profits attributable to revisions to assumptions used in determining reserves held for lifetime income benefit riders as well as an increase in estimated expenses associated with a reinsurance agreement with an unaffiliated reinsurer.
The unlocking adjustments in
2016
increased amortization of deferred policy acquisition costs by
$48.2 million
and amortization of deferred sales inducements by
$35.8 million
. During the first quarter of 2016, we made adjustments to lower future spread assumptions as actual investment spreads being earned showed investment spread and gross profits being less than what we were assuming in our models due to decreases in the average yield on invested assets resulting from the continued low interest rate environment. We made further adjustments in the third quarter of 2016 to extend the period of time in which we assume investment spread will grade up to our long-term spread targets by an additional two years as yields obtained on investments purchased in the third quarter of 2016 were much lower than we had anticipated as a result of the overall decline in investment yields that followed the Brexit vote. In addition, during the third quarter of 2016, revisions to assumptions used in determining reserves held for living income benefit riders resulted in a decrease in estimated future gross profits.
The unlocking adjustments in
2015
decreased amortization of deferred policy acquisition costs by
$11.0 million
and amortization of deferred sales inducements by
$5.6 million
and included the impact of account balance true-ups as of September 30, 2015, which were favorable to us due to stronger equity market performance than we assumed, favorable adjustments to lapse assumptions to reflect better persistency experienced than assumed and unfavorable adjustments to investment spread to reflect lower spreads being earned than assumed. The favorable impact of the account balance true-up and lapse assumption change was largely offset by reductions in estimated future gross profits attributable to revisions to assumptions used in determining reserves held for lifetime income benefit riders.
The 2017, 2016 and 2015 revisions to reserves for lifetime income benefit riders were consistent with unlocking for deferred policy acquisition costs and deferred sales inducements described above. The 2017 revisions increased interest sensitive and index product benefits by
$21.6 million
and were primarily due to the lapse rate assumption changes described above and changes to our account value growth projections. The 2016 revisions increased interest sensitive and index product benefits by
$42.0 million
and were primarily due to actual index credits on policies being lower than projected over the past four quarters. The 2015 revisions increased interest sensitive and index product benefits by
$18.3 million
and were primarily due to an increase to the primary election age to begin receiving lifetime income from
67
to
70
as our experience had shown that age
70
is the most popular age at which policyholders elect to begin receiving lifetime income benefit payments. The lifetime income benefit payments are determined by applying a payout factor to the rider's benefit base. The reserve (net of coinsurance ceded) held for lifetime income benefit riders was
$704.4 million
and
$533.4 million
at
December 31, 2017
and
2016
, respectively.
7. Reinsurance and Policy Provisions
Coinsurance
We have
two
coinsurance agreements with EquiTrust Life Insurance Company ("EquiTrust"), covering
70%
of certain of American Equity Life's fixed index and fixed rate annuities issued from August 1, 2001 through December 31, 2001,
40%
of those contracts issued during 2002 and 2003, and
20%
of those contracts issued from January 1, 2004 to July 31, 2004. The business reinsured under these agreements may not be recaptured. Coinsurance deposits (aggregate policy benefit reserves transferred to EquiTrust under these agreements) were
$0.6 billion
and
$0.7 billion
at
December 31, 2017
and
2016
, respectively. We remain liable to policyholders with respect to the policy liabilities ceded to EquiTrust should EquiTrust fail to meet the obligations it has coinsured. None of the coinsurance deposits with EquiTrust are deemed by management to be uncollectible. The balance due under these agreements to EquiTrust was
$11.0 million
and
$9.7 million
at
December 31, 2017
and
2016
, 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.
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We have
three
coinsurance agreements with Athene Life Re Ltd. ("Athene"), an unauthorized life reinsurer domiciled in Bermuda. One agreement ceded
20%
of certain of American Equity Life's fixed index annuities issued from January 1, 2009 through March 31, 2010. The business reinsured under this agreement is no longer eligible for recapture. The second agreement ceded
80%
of American Equity Life's multi-year rate guaranteed annuities issued from July 1, 2009 through December 31, 2013 and
80%
of Eagle Life's multi-year rate guaranteed annuities issued from November 20, 2013 through December 31, 2013. The business reinsured under this agreement may not be recaptured. The third agreement cedes
80%
of American Equity Life's and Eagle Life's multi-year rate guaranteed annuities issued on or after January 1, 2014,
80%
of Eagle Life's fixed index annuities issued prior to January 1, 2017,
50%
of Eagle Life's fixed index annuities issued from January 1, 2017 through December 31, 2018 and
80%
of certain of American Equity Life's fixed index annuities issued from August 1, 2016 through December 31, 2016. The reinsurance agreement specifies that the coinsurance percentage for Eagle Life's fixed index annuities decreases to
20%
for policies issued on or after January 1, 2019. The business reinsured under this agreement may not be recaptured. Coinsurance deposits (aggregate policy benefit reserves transferred to Athene under these agreements) were
$4.2 billion
and
$3.9 billion
at
December 31, 2017
and
2016
, respectively. American Equity Life is an intermediary for reinsurance of Eagle Life's business ceded to Athene. American Equity Life and Eagle Life remain liable to policyholders with respect to the policy liabilities ceded to Athene should Athene fail to meet the obligations it has coinsured. The annuity deposits that have been ceded to Athene are held in trusts and American Equity Life is named as the sole beneficiary of the trusts. The assets in the trusts are required to remain at a value that is sufficient to support the current balance of policy benefit liabilities of the ceded business on a statutory basis. If the value of the trust accounts would ever be less than the amount of the ceded policy benefit liabilities on a statutory basis, Athene is required to either establish a letter of credit or deposit securities in the trusts for the amount of any shortfall. None of the coinsurance deposits with Athene are deemed by management to be uncollectible. The balance due under these agreements to Athene was
$79.9 million
and
$45.8 million
at
December 31, 2017
and
2016
, respectively, and represents the fair value of call options held by us to fund index credits related to the ceded business net of cash due from Athene related to monthly settlements of policy activity.
Amounts ceded to EquiTrust and Athene under these agreements are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(Dollars in thousands)
|
|
Consolidated Statements of Operations
|
|
|
|
|
|
|
Annuity product charges
|
$
|
6,458
|
|
|
$
|
5,366
|
|
|
$
|
5,427
|
|
|
Change in fair value of derivatives
|
94,382
|
|
|
18,446
|
|
|
(14,360
|
)
|
|
|
$
|
100,840
|
|
|
$
|
23,812
|
|
|
$
|
(8,933
|
)
|
|
|
|
|
|
|
|
|
Interest sensitive and index product benefits
|
$
|
177,332
|
|
|
$
|
93,487
|
|
|
$
|
88,923
|
|
|
Change in fair value of embedded derivatives
|
35,561
|
|
|
23,848
|
|
|
(22,616
|
)
|
|
Other operating costs and expenses
|
19,877
|
|
|
24,039
|
|
|
9,922
|
|
|
|
$
|
232,770
|
|
|
$
|
141,374
|
|
|
$
|
76,229
|
|
|
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
Annuity deposits
|
$
|
(387,280
|
)
|
|
$
|
(1,736,054
|
)
|
|
$
|
(471,822
|
)
|
|
Cash payments to policyholders
|
380,683
|
|
|
418,499
|
|
|
391,045
|
|
|
|
$
|
(6,597
|
)
|
|
$
|
(1,317,555
|
)
|
|
$
|
(80,777
|
)
|
Financing Arrangements
We have a reinsurance transaction with Hannover Life Reassurance Company of America ("Hannover"), which is treated as reinsurance under statutory accounting practices and as a financing arrangement under GAAP. The statutory surplus benefit under this agreement is eliminated under GAAP and the associated charges are recorded as risk charges and included in other operating costs and expenses in the consolidated statements of operations. The transaction became effective July 1, 2013 (the "2013 Hannover Transaction").
The 2013 Hannover Transaction, which was amended effective October 1, 2016, is a yearly renewable term reinsurance agreement for statutory purposes covering
45.6%
of waived surrender charges related to penalty free withdrawals, deaths and lifetime income benefit rider payments as well as lifetime income benefit rider payments in excess of policy fund values on certain business. We may recapture the risks reinsured under this agreement as of the end of any quarter after December 31, 2020 and the agreement, as amended, makes it punitive to us if we do not recapture the business ceded no later than the first quarter of 2021. The reserve credit recorded on a statutory basis by American Equity Life was
$737.3 million
and
$638.1 million
at
December 31, 2017
and
2016
, respectively. We pay quarterly reinsurance premiums under this agreement with an experience refund calculated on a quarterly basis and a risk charge based on the pretax statutory benefit as of the end of each calendar quarter. Risk charges attributable to the 2013 Hannover Transaction were
$28.5 million
,
$27.7 million
, and
$21.0 million
during
2017
,
2016
and
2015
, respectively.
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Indemnity Reinsurance
In the normal course of business, we seek to limit our exposure to loss on any single insured and to recover a portion of benefits paid under our annuity, life and accident and health insurance products by ceding reinsurance to other insurance enterprises or reinsurers. Reinsurance contracts do not relieve us of our obligations to our policyholders. To the extent that reinsuring companies are later unable to meet obligations under reinsurance agreements, our life insurance subsidiaries would be liable for these obligations, and payment of these obligations could result in losses to us. To limit the possibility of such losses, we evaluate the financial condition of our reinsurers, and monitor concentrations of credit risk. No allowance for uncollectible amounts has been established against our asset for amounts receivable from other insurance companies as none of the receivables are deemed by management to be uncollectible.
8. Income Taxes
We file consolidated federal income tax returns that include all of our wholly-owned subsidiaries. Our income tax expense as presented in the consolidated financial statements is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(Dollars in thousands)
|
|
Consolidated statements of operations:
|
|
|
|
|
|
|
Current income taxes
|
$
|
188,356
|
|
|
$
|
57,412
|
|
|
$
|
75,568
|
|
|
Deferred income taxes (benefits)
|
(46,730
|
)
|
|
(10,408
|
)
|
|
41,916
|
|
|
Total income tax expense included in consolidated statements of operations
|
141,626
|
|
|
47,004
|
|
|
117,484
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
Expense (benefit) relating to:
|
|
|
|
|
|
|
Change in net unrealized investment losses
|
177,162
|
|
|
74,471
|
|
|
(279,860
|
)
|
|
Share-based compensation
|
—
|
|
|
(527
|
)
|
|
(3,649
|
)
|
|
Total income tax expense (benefit) included in consolidated financial statements
|
$
|
318,788
|
|
|
$
|
120,948
|
|
|
$
|
(166,025
|
)
|
Income tax expense in the consolidated statements of operations differed from the amount computed at the applicable statutory federal income tax rate of
35%
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(Dollars in thousands)
|
|
Income before income taxes
|
$
|
316,271
|
|
|
$
|
130,247
|
|
|
$
|
337,314
|
|
|
|
|
|
|
|
|
|
Income tax expense on income before income taxes
|
$
|
110,695
|
|
|
$
|
45,586
|
|
|
$
|
118,060
|
|
|
Tax effect of:
|
|
|
|
|
|
|
State income taxes
|
1,961
|
|
|
2,559
|
|
|
2,924
|
|
|
Tax exempt net investment income
|
(4,288
|
)
|
|
(2,167
|
)
|
|
(3,834
|
)
|
|
Impact of Tax Reform
|
35,932
|
|
|
—
|
|
|
—
|
|
|
Other
|
(2,674
|
)
|
|
1,026
|
|
|
334
|
|
|
Income tax expense
|
$
|
141,626
|
|
|
$
|
47,004
|
|
|
$
|
117,484
|
|
|
Effective tax rate
|
44.8
|
%
|
|
36.1
|
%
|
|
34.8
|
%
|
Tax Reform was enacted on December 22, 2017, reducing the statutory federal income tax rate from
35%
to
21%
effective January 1, 2018. The primary impact on our 2017 financial results is the reduction in the U.S. statutory tax rate from
35%
to
21%
on our deferred tax balances as of December 31, 2017.
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, 2017
and
2016
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(Dollars in thousands)
|
|
Deferred income tax assets:
|
|
|
|
|
Policy benefit reserves
|
$
|
1,842,049
|
|
|
$
|
2,354,786
|
|
|
Other than temporary impairments
|
11,262
|
|
|
15,681
|
|
|
Amounts due reinsurer
|
6,852
|
|
|
1,321
|
|
|
Other policyholder funds
|
3,724
|
|
|
6,474
|
|
|
Deferred compensation
|
3,827
|
|
|
7,963
|
|
|
Share-based compensation
|
3,383
|
|
|
5,407
|
|
|
State net operating loss carryforwards
|
3,196
|
|
|
3,745
|
|
|
Other
|
10,253
|
|
|
11,367
|
|
|
Gross deferred tax assets
|
1,884,546
|
|
|
2,406,744
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
Deferred policy acquisition costs and deferred sales inducements
|
(1,212,509
|
)
|
|
(1,951,333
|
)
|
|
Net unrealized gains on available for sale fixed maturity and equity securities
|
(220,533
|
)
|
|
(170,925
|
)
|
|
Derivative instruments
|
(179,776
|
)
|
|
(75,405
|
)
|
|
Policy benefit reserves
|
(197,233
|
)
|
|
—
|
|
|
Investment income items
|
(34,849
|
)
|
|
(39,118
|
)
|
|
Other
|
(1,499
|
)
|
|
(1,385
|
)
|
|
Gross deferred tax liabilities
|
(1,846,399
|
)
|
|
(2,238,166
|
)
|
|
Net deferred income tax asset
|
$
|
38,147
|
|
|
$
|
168,578
|
|
Included in the deferred income taxes is the expected income tax benefit attributable to unrealized losses on available for sale fixed maturity securities. There is
no
valuation allowance provided for the deferred income tax asset attributable to unrealized losses on available for sale fixed maturity securities. Management expects that the passage of time will result in the reversal of these unrealized losses due to the fair value increasing as these securities near maturity. We have the intent and ability to hold these securities to maturity, because we generate adequate cash flow from new business to fund all foreseeable cash flow needs and do not believe it would be necessary to liquidate these securities at a loss to meet cash flow needs.
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, 2017
and
2016
.
There were no material income tax contingencies requiring recognition in our consolidated financial statements as of
December 31, 2017
. We are no longer subject to income tax examinations by tax authorities for years prior to 2013.
At
December 31, 2017
, we have
no
non-life net operating loss carryforwards remaining for federal income tax purposes.
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Notes and Loan Payable and Amounts Due Under Repurchase Agreements
Notes and loan payable includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(Dollars in thousands)
|
|
Senior notes due 2027
|
|
|
|
|
Principal
|
$
|
500,000
|
|
|
$
|
—
|
|
|
Unamortized debt issue costs
|
(5,572
|
)
|
|
—
|
|
|
Unamortized discount
|
(335
|
)
|
|
—
|
|
|
Senior notes due 2021
|
|
|
|
|
Principal
|
—
|
|
|
400,000
|
|
|
Unamortized debt issue costs
|
—
|
|
|
(5,733
|
)
|
|
Term loan due 2019
|
|
|
|
|
Principal
|
—
|
|
|
100,000
|
|
|
Unamortized debt issue costs
|
—
|
|
|
(512
|
)
|
|
|
$
|
494,093
|
|
|
$
|
493,755
|
|
On June 16, 2017, we issued
$500 million
aggregate principal amount of senior unsecured notes due 2027 which bear interest at
5.0%
per year and will mature on June 15, 2027 (the “2027 Notes”). The 2027 Notes were issued at a
$0.3 million
discount, which is being amortized over the term of the 2027 Notes using the effective interest method. Contractual interest is payable semi-annually in arrears each June 15th and December 15th. The initial transaction fees and costs totaling
$5.8 million
were capitalized as deferred financing costs and are being amortized over the term of the 2027 Notes using the effective interest method. We used the net proceeds from the issuance of the 2027 Notes to prepay our
$100 million
term loan (the "Term Loan") that was scheduled to mature in 2019 on June 16, 2017, and to redeem our
$400 million
notes that were scheduled to mature in 2021 (the "2021 Notes") on July 17, 2017. We paid
$413.3 million
to redeem the 2021 Notes which included a redemption premium equal to
3.313%
of the
$400 million
principal amount of the 2021 Notes. We incurred a loss of
$18.4 million
on the redemption of the 2021 Notes.
On September 30, 2016, we entered into a credit agreement with
six
banks that provided for a
$150 million
unsecured revolving line of credit (the "Revolving Facility") that terminates on September 30, 2021 and a
$100 million
term loan that was scheduled to terminate on September 30, 2019 but was repaid on June 16, 2017 without penalty. We utilized the proceeds from the Term Loan to make a contribution to the capital and surplus of our subsidiary, American Equity Life. Any proceeds from the Revolving Facility will be used to finance our general corporate purposes. Interest was payable quarterly on the Term Loan. The interest rate for all borrowings under the credit agreement is floating at a rate based on our election that will be equal to the alternate base rate (as defined in the credit agreement) plus the applicable margin or the adjusted LIBOR rate (as defined in the credit agreement) plus the applicable margin. We also pay a commitment fee based on the available unused portion of the Revolving Facility. The applicable margin and commitment fee rate are based on our credit rating and can change throughout the period of the borrowings. Based upon our current credit rating, the applicable margin is
0.75%
for alternate base rate borrowings and
1.75%
for adjusted LIBOR rate borrowings, and the commitment fee is
0.275%
. The interest rate in effect on the Term Loan was
3.125%
and
2.625%
in 2017 and 2016, respectively. Under this agreement, we are required to maintain a minimum risk-based capital ratio at our subsidiary, American Equity Life, of
275%
, a maximum ratio of adjusted debt to total adjusted capital of
0.35
, and a minimum level of statutory surplus at American Equity Life equal to the sum of 1)
80%
of statutory surplus at June 30, 2016, 2)
50%
of the statutory net income for each fiscal quarter ending after June 30, 2016, and 3)
50%
of all capital contributed to American Equity Life after June 30, 2016. The Revolving Facility contains an accordion feature that allows us, on up to
three
occasions and subject to credit availability, to increase the credit facility by an additional
$50 million
in the aggregate. We also have the ability to extend the maturity date of the Revolving Facility by an additional
one year
past the initial maturity date of September 30, 2021 with the consent of the extending banks. There are currently
no
guarantors of the Revolving Facility, but certain of our subsidiaries must guarantee our obligations under the credit agreement if such subsidiaries guarantee other material amounts of our debt.
No
amounts were outstanding under the Revolving Facility at
December 31, 2017
. As of
December 31, 2017
,
$723.2 million
is unrestricted and could be distributed to shareholders and still be in compliance with all covenants under this credit agreement.
The preceding replaced a
$140 million
unsecured revolving line of credit agreement with
five
banks dated November 22, 2013 that was scheduled to terminate on November 22, 2017.
On July 17, 2013, we issued
$400 million
aggregate principal amount of senior unsecured notes due 2021 which bore interest at
6.625%
per year and would have matured on July 15, 2021 had we not redeemed them in 2017. Contractual interest was payable semi-annually in arrears each January 15th and July 15th. The initial transaction fees and expenses totaling
$9.0 million
were capitalized as deferred financing costs and were being amortized over the term of the 2021 Notes using the effective interest method.
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In September 2010, we issued
$200.0 million
principal amount of 2015 notes (the "2015 Notes"). The 2015 Notes had a coupon interest rate of
3.5%
per year, matured on September 15, 2015, and were settled in cash on the maturity date. Contractual interest was payable semi-annually in arrears each March 15th and September 15th. The initial transaction fees and expenses totaling
$6.8 million
were capitalized as deferred financing costs and were amortized over the term of the 2015 Notes using the effective interest method.
The conversion option of the 2015 Notes (the "2015 notes embedded conversion derivative") was an embedded derivative that required bifurcation from the 2015 notes and was accounted for as a derivative liability, which was included in Other liabilities in our Consolidated Balance Sheets. The fair value of the 2015 notes embedded conversion derivative at the time of issuance of the 2015 Notes was
$37.0 million
, and was recorded as the original debt discount for purposes of accounting for the debt component of the 2015 Notes. This discount was amortized and recognized as interest expense using the effective interest method over the term of the 2015 Notes.
The 2015 Notes, that had not previously been extinguished, matured and were extinguished on September 15, 2015. Total consideration paid to holders of the 2015 Notes at maturity was
$48.2 million
in cash, which included
$22.4 million
principal amount and
$25.8 million
conversion premium. See Note 5 for a discussion of the settlement of the 2015 notes embedded derivative liability.
As part of our investment strategy, we enter into securities repurchase agreements (short-term collateralized borrowings). The maximum amount borrowed during
2017
,
2016
and
2015
was
$274.5 million
,
$113.0 million
and
$40.6 million
, respectively. When we do borrow cash on these repurchase agreements, we pledge collateral in the form of debt securities with fair values approximately equal to the amount due and we use the cash to purchase debt securities ahead of the time we collect the cash from selling annuity policies to avoid a lag between the investment of funds and the obligation to credit interest to policyholders. We earn investment income on the securities purchased with these borrowings at a rate in excess of the cost of these borrowings. Such borrowings averaged
$40.0 million
,
$4.5 million
and
$0.5 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. The weighted average interest rate on amounts due under repurchase agreements was
0.84%
,
0.66%
and
0.39%
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
10. Subordinated Debentures
Our wholly-owned subsidiary trusts (which are not consolidated) have issued fixed rate and floating rate trust preferred securities and have used the proceeds from these offerings to purchase subordinated debentures from us. We also issued subordinated debentures to the trusts in exchange for all of the common securities of each trust. The sole assets of the trusts are the subordinated debentures and any interest accrued thereon. The interest payment dates on the subordinated debentures correspond to the distribution dates on the trust preferred securities issued by the trusts. The trust preferred securities mature simultaneously with the subordinated debentures. Our obligations under the subordinated debentures and related agreements provide a full and unconditional guarantee of payments due under the trust preferred securities. All subordinated debentures are callable by us at any time, except for the Trust II subordinated debt obligations.
Following is a summary of subordinated debt obligations to the trusts at
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Interest Rate
|
|
Due Date
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
American Equity Capital Trust II
|
$
|
77,298
|
|
|
$
|
77,061
|
|
|
5%
|
|
June 1, 2047
|
|
American Equity Capital Trust III
|
27,840
|
|
|
27,840
|
|
|
*LIBOR +
|
3.90%
|
|
April 29, 2034
|
|
American Equity Capital Trust IV
|
12,372
|
|
|
12,372
|
|
|
*LIBOR +
|
4.00%
|
|
January 8, 2034
|
|
American Equity Capital Trust VII
|
10,830
|
|
|
10,830
|
|
|
*LIBOR +
|
3.75%
|
|
December 14, 2034
|
|
American Equity Capital Trust VIII
|
20,620
|
|
|
20,620
|
|
|
*LIBOR +
|
3.75%
|
|
December 15, 2034
|
|
American Equity Capital Trust IX
|
15,470
|
|
|
15,470
|
|
|
*LIBOR +
|
3.65%
|
|
June 15, 2035
|
|
American Equity Capital Trust X
|
20,620
|
|
|
20,620
|
|
|
*LIBOR +
|
3.65%
|
|
September 15, 2035
|
|
American Equity Capital Trust XI
|
20,620
|
|
|
20,620
|
|
|
*LIBOR +
|
3.65%
|
|
December 15, 2035
|
|
American Equity Capital Trust XII
|
41,238
|
|
|
41,238
|
|
|
*LIBOR +
|
3.50%
|
|
April 7, 2036
|
|
|
246,908
|
|
|
246,671
|
|
|
|
|
|
|
|
Unamortized debt issue costs
|
(4,343
|
)
|
|
(4,818
|
)
|
|
|
|
|
|
|
|
$
|
242,565
|
|
|
$
|
241,853
|
|
|
|
|
|
|
*—three month London Interbank Offered Rate
The principal amount of the subordinated debentures issued by us to American Equity Capital Trust II ("Trust II") is
$100.0 million
. These debentures were assigned a fair value of
$74.7 million
at the date of issue (based upon an effective yield-to-maturity of
6.8%
). The difference between the fair value at the date of issue and the principal amount is being accreted over the life of the debentures. The trust preferred securities issued by Trust II were issued to Iowa Farm Bureau Federation, which owns more than
50%
of the voting capital stock of FBL Financial Group, Inc. ("FBL"). The consideration received by Trust II in connection with the issuance of its trust preferred securities consisted of fixed income securities of equal value which were issued by FBL.
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Retirement and Share-based Compensation Plans
We have adopted a contributory defined contribution plan which is qualified under Section 401(k) of the Internal Revenue Code. The plan covers substantially all of our full-time employees subject to minimum eligibility requirements. Employees can contribute a percentage of their annual salary (up to a maximum annual contribution of
$18,000
in
2017
,
2016
and
2015
) to the plan. We contribute an additional amount, subject to limitations, based on the voluntary contribution of the employee. Further, the plan provides for additional employer contributions based on the discretion of the Board of Directors. Plan contributions charged to expense were
$1.4 million
,
$1.3 million
and
$0.4 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
The following table summarizes compensation expense recognized for employees and directors as a result of share-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(Dollars in thousands)
|
|
ESOP
|
$
|
1,474
|
|
|
$
|
2,522
|
|
|
$
|
2,604
|
|
|
Employee Incentive Plans
|
2,155
|
|
|
1,207
|
|
|
1,911
|
|
|
Director Equity and Incentive Plan and Stock Option Plan
|
812
|
|
|
685
|
|
|
613
|
|
|
|
$
|
4,441
|
|
|
$
|
4,414
|
|
|
$
|
5,128
|
|
The principal purpose of the American Equity Investment Employee Stock Ownership Plan ("ESOP") is to provide each eligible employee with an equity interest in us. Employees become eligible once they have completed a minimum of
six
months of service. Employees become
100%
vested after
two years
of service. Our contribution to the ESOP is determined by the Board of Directors.
In 2016, we adopted the 2016 Employee Incentive Plan which authorized the issuance of up to
2,500,000
shares of our Common stock in the form of grants of options, stock appreciation rights, restricted stock awards and restricted stock units. At
December 31, 2017
, we had
2,101,954
shares of common stock available for future grant under the 2016 Employee Incentive Plan. The 2009 Employee Incentive Plan, which expired in June 2014, authorized the issuance of up to
2,500,000
shares of our common stock in the form of grants of options, stock appreciation rights, restricted stock awards and restricted stock units. All options granted under this plan had
six
or
ten
year terms and a
three
year vesting period after which they become fully exercisable immediately.
We have a long-term performance incentive plan under which certain members of our senior management team are granted restricted stock units pursuant to the 2016 Employee Incentive Plan or the 2009 Employee Incentive Plan. During
2017
,
2016
and
2015
, we granted
84,476
,
208,565
and
60,947
restricted stock units under these plans, respectively. For the 2017 grant, vesting is tied to threshold, target and maximum performance goals for the
three
year period ending December 31,
2019
.
Fifty
percent of the restricted stock units will vest if we meet threshold goals,
100%
of the restricted stock units will vest if we meet target performance goals and
150%
of the restricted stock units will vest if we meet maximum performance goals. For the 2016 and 2015 grants, vesting is tied to threshold and target performance goals for the three year periods ending December 31,
2018
and December 31,
2017
, respectively.
Fifty
percent of the restricted stock units will vest if we meet threshold goals and
100%
of the restricted stock units will vest if we meet target performance goals. Compensation expense is recognized over the
three
year vesting period based on the likelihood of meeting threshold and target 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 2016, the 2015 restricted stock unit award agreements were amended and the restricted stock units granted during 2015 will be settled in cash. This amendment was due to an administrative issue related to the grant, which was made under an expired equity plan.
During
2017
,
2016
and
2015
, we issued
39,826
,
43,373
and
25,784
, respectively, shares of restricted common stock under the 2016 Employee Incentive Plan or the 2009 Employee Incentive Plan to certain employees. These shares will generally vest on the date
three
years following the grant date provided the participant remains employed with us. The 2017 grant includes
6,727
shares that will vest on the date
one year
following the grant date provided the participant remains employed with us. Compensation expense is recognized over the
one year
or
three
year vesting period. Shares vest immediately for participants over
65
years of age with
10
years of service with us, and compensation expense under this plan for these participants was recognized upon approval of the incentive award by the compensation committee. During 2016, the shares of restricted stock granted during 2015 were canceled due to an administrative issue related to the grant, which was made under an expired equity plan. During 2016, we issued
21,806
shares of common stock to the employees impacted by the cancellation taking into consideration the canceled 2015 grants.
The 2013 Director Equity and Incentive Plan authorizes the grant of options, stock appreciation rights, restricted stock awards and restricted stock units convertible into or based upon our common stock of up to
250,000
shares to our Directors. During
2017
,
2016
and
2015
, we issued
33,000
,
47,500
and
22,000
shares of common stock, respectively, all of which are restricted stock, and which vest the earlier of the next annual meeting date or
one
year from the grant date provided the individual remains a Director during that time period. At
2017
, we had
83,500
shares of common stock available for future grant under the 2013 Director and Equity Incentive Plan.
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our 1996 Stock Option Plan, 2000 Employee Stock Option Plan, 2000 Directors Stock Option Plan and 2011 Director Stock Option Plan authorized grants of options to officers, directors and employees for an aggregate of up to
3,475,000
shares of our common stock. All options granted under these plans have
ten
year terms and a
six
month or
three
year vesting period after which they become fully exercisable immediately. At
December 31, 2017
, we had
18,000
shares of common stock available for future grant under the 2011 Director Stock Option Plan.
During 2014, we established the 2014 Independent Insurance Agent Restricted Stock and Restricted Stock Unit Plan, which was amended during 2016. Under the amended plan, agents of American Equity Life may receive grants of restricted stock and restricted stock units based upon their individual sales. The plan authorizes grants of up to
1,800,000
shares of our common stock. We recognize commission expense and an increase to additional paid-in capital as share-based compensation equal to the fair value of the restricted stock and restricted stock units as they are earned.
In January 2017, American Equity Life's agents were granted
363,624
restricted stock units based on their production during 2016, and we recorded commission expense (capitalized as deferred policy acquisition costs) of
$2.6 million
in 2016. In January 2018, agents vested in
138,820
restricted stock units granted in January 2017 based on their continued service as an independent agent and their 2017 individual sales of our products, and for which we recorded commission expense (capitalized as deferred policy acquisition costs) of
$1.3 million
in 2017.
In January 2016, American Equity Life's agents were granted
650,683
restricted stock units based on their production during 2015, and we recorded commission expense (capitalized as deferred policy acquisition costs) of
$3.5 million
in 2015. In January 2017, agents vested in
246,532
restricted stock units granted in January 2016 based on their continued service as an independent agent and their 2016 individual sales of our products, and for which we recorded commission expense (capitalized as deferred policy acquisition costs) of
$1.7 million
in 2016. In January 2018, agents vested in
100,586
restricted stock units granted in January 2016 based on their continued service as an independent agent and their 2017 individual sales of our products, and for which we recorded commission expense (capitalized as deferred policy acquisition costs) of
$2.2 million
in 2017.
20%
of the restricted stock units will vest
one
year from the grant date if the agent is in good standing with American Equity Life at that date. The remaining
80%
of the restricted stock units granted to retirement eligible individuals will vest over a
three
year period if the agent remains in good standing with American Equity Life. The remaining
80%
of the restricted stock units granted to non-retirement eligible individuals will vest based on the agent's individual sales and continued service as an independent agent over a period of time not to exceed
five
years.
In January 2015, American Equity Life's agents were granted
27,985
shares of restricted stock and
221,489
restricted stock units based on their production during 2014, and we recorded commission expense (capitalized as deferred policy acquisition costs) of
$1.9 million
in 2014. In January 2016, agents vested in
85,104
restricted stock units granted in January of 2015 based on their continued service as an independent agent and their 2015 individual sales of our products, and for which we recorded commission expense (capitalized as deferred policy acquisition costs) of
$1.3 million
in 2015. In January 2017, agents vested in
36,609
restricted stock units granted in January 2015 based on their continued service as an independent agent and their 2016 individual sales of our products, and for which we recorded commission expense (capitalized as deferred policy acquisition costs) of
$0.6 million
in 2016. In January 2018, agents vested in
32,815
restricted stock units granted in January 2015 based on their continued service as an independent agent and their 2017 individual sales of our products, and for which we recorded commission expense (capitalized as deferred policy acquisition costs) of
$0.8 million
in 2017. The restricted stock was granted to retirement eligible individuals and vested immediately upon grant.
20%
of the restricted stock units vested
one
year from the grant date if the agent was in good standing with American Equity Life at that date. The remaining
80%
of the restricted stock units granted will vest based on the agent's individual sales and continued service as an independent agent over a period of time not to exceed
five
years.
During 2007, 2010 and 2012 we established Independent Insurance Agent Stock Option plans. Under these plans, agents of American Equity Life received grants of options to acquire shares of our common stock based upon their individual sales. The plans authorize grants of options to agents for an aggregate of up to
8,000,000
shares of our common stock. We recognize commission expense and an increase to additional paid-in capital as share-based compensation equal to the fair value of the options as they are earned.
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Changes in the number of stock options outstanding during the years ended
December 31, 2017
,
2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-Average
Exercise Price
per Share
|
|
Total
Exercise
Price
|
|
|
(Dollars in thousands, except per share data)
|
|
Outstanding at January 1, 2015
|
4,044,175
|
|
|
$
|
15.02
|
|
|
$
|
60,760
|
|
|
Granted
|
—
|
|
|
—
|
|
|
—
|
|
|
Canceled
|
(47,300
|
)
|
|
10.54
|
|
|
(499
|
)
|
|
Exercised
|
(552,884
|
)
|
|
14.51
|
|
|
(8,021
|
)
|
|
Outstanding at December 31, 2015
|
3,443,991
|
|
|
15.17
|
|
|
52,240
|
|
|
Granted
|
—
|
|
|
—
|
|
|
—
|
|
|
Canceled
|
(24,700
|
)
|
|
14.83
|
|
|
(366
|
)
|
|
Exercised
|
(500,345
|
)
|
|
9.97
|
|
|
(4,989
|
)
|
|
Outstanding at December 31, 2016
|
2,918,946
|
|
|
16.06
|
|
|
46,885
|
|
|
Granted
|
—
|
|
|
—
|
|
|
—
|
|
|
Canceled
|
(57,200
|
)
|
|
13.66
|
|
|
(781
|
)
|
|
Exercised
|
(881,481
|
)
|
|
15.90
|
|
|
(14,020
|
)
|
|
Outstanding at December 31, 2017
|
1,980,265
|
|
|
16.20
|
|
|
$
|
32,084
|
|
The following table summarizes information about stock options outstanding at
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Outstanding and Vested
|
|
Range of Exercise Prices
|
Number of
Awards
|
|
Remaining
Life (yrs)
|
|
Weighted-Average
Exercise Price
Per Share
|
|
$5.07 - $8.02
|
182,500
|
|
|
1.36
|
|
$
|
6.85
|
|
|
$9.27 - $11.35
|
575,055
|
|
|
1.75
|
|
10.15
|
|
|
$12.04 - $24.79
|
1,222,710
|
|
|
2.53
|
|
20.44
|
|
|
$5.07 - $24.79
|
1,980,265
|
|
|
2.20
|
|
16.20
|
|
The aggregate intrinsic value for stock options outstanding and vested awards was
$28.8 million
at
December 31, 2017
. For the years ended
December 31, 2017
,
2016
and
2015
, the total intrinsic value of options exercised by officers, directors and employees was
$1.5 million
,
$4.0 million
and
$1.4 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, 2017
,
2016
and
2015
was
$14.0 million
,
$5.0 million
and
$8.1 million
, respectively.
We have deferred compensation arrangements with certain officers, directors, and consultants, whereby these individuals agreed to take our common stock at a future date in lieu of cash payments at the time of service. The common stock is to be issued in conjunction with a "trigger event," as that term is defined in the individual agreements. At both
December 31, 2017
and
2016
, these individuals have earned, and we have reserved for future issuance,
364,000
shares of common stock, respectively, pursuant to these arrangements. No deferred compensation arrangements were in effect during 2017 or 2016. We incurred expense of
$102,000
for the year ended
December 31, 2015
, under one of these arrangements.
We have deferred compensation agreements with certain officers whereby these individuals have deferred certain salary and bonus compensation which is deposited into the American Equity Officer Rabbi Trust (Officer Rabbi Trust). The amounts deferred for certain employees are invested in assets at the direction of the employee. The assets of the Officer Rabbi Trust are included in our assets and a corresponding deferred compensation liability is recorded. The deferred compensation liability is recorded at the fair market value of the assets in the Officer Rabbi Trust with the change in fair value included as a component of compensation expense. The deferred compensation liability related to these agreements was
$2.0 million
and
$3.5 million
at
December 31, 2017
and
2016
, respectively. The Officer Rabbi Trust held
34,539
shares and
102,932
shares of our common stock at
December 31, 2017
and
2016
, respectively, which are treated as treasury shares.
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Statutory Financial Information and Dividend Restrictions
Statutory accounting practices prescribed or permitted by regulatory authorities for our life insurance subsidiaries differ from GAAP. Net income for our primary life insurance subsidiary as determined in accordance with statutory accounting practices was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(Dollars in thousands)
|
|
American Equity Life
|
$
|
375,900
|
|
|
$
|
75,035
|
|
|
$
|
131,452
|
|
Statutory capital and surplus for our primary life insurance subsidiary was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(Dollars in thousands)
|
|
American Equity Life
|
$
|
3,005,654
|
|
|
$
|
2,726,664
|
|
American Equity Life is domiciled in the state of Iowa and is regulated by the Iowa Insurance Division. Life insurance companies are subject to the National Association of Insurance Commissioners ("NAIC") risk-based capital (RBC) requirements which are intended to be used by insurance regulators as an early warning tool to identify deteriorating or weakly capitalized insurance companies for the purpose of initiating regulatory action. Calculations using the NAIC formula indicated that American Equity Life's ratio of total adjusted capital to the highest level of required capital at which regulatory action might be initiated (Company Action Level) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(Dollars in thousands)
|
|
Total adjusted capital
|
$
|
3,260,328
|
|
|
$
|
2,933,193
|
|
|
Company Action Level RBC
|
861,419
|
|
|
857,321
|
|
|
Ratio of adjusted capital to Company Action Level RBC
|
378
|
%
|
|
342
|
%
|
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
$377.1 million
as of
December 31, 2017
.
No
dividends were paid by any of our insurance subsidiaries for any of the years presented in these financial statements.
The Parent Company relies on its subsidiaries for cash flow, which has primarily been in the form of investment management fees. Retained earnings in our consolidated financial statements primarily represent undistributed earnings of American Equity Life. As such, our ability to pay dividends is limited by the regulatory restriction placed upon insurance companies as described above. In addition, American Equity Life retains funds to allow for sufficient capital for growth.
13. Commitments and Contingencies
We lease our home office space and certain equipment under various operating leases. Rent expense for the years ended
December 31, 2017
,
2016
and
2015
totaled
$2.9 million
,
$2.8 million
and
$2.7 million
, respectively. At
December 31, 2017
, the aggregate future minimum lease payments are
$15.4 million
. The following represents payments due by period for operating lease obligations as of
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
Year Ending December 31:
|
|
|
2018
|
$
|
1,998
|
|
|
2019
|
1,981
|
|
|
2020
|
2,033
|
|
|
2021
|
1,837
|
|
|
2022
|
1,680
|
|
|
2023 and thereafter
|
5,845
|
|
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We are occasionally involved in litigation, both as a defendant and as a plaintiff. In addition, state regulatory bodies, such as state insurance departments, the SEC, FINRA, the Department of Labor, and other regulatory bodies regularly make inquiries and conduct examinations or investigations concerning our compliance with, among other things, insurance laws, securities laws, the Employee Retirement Income Security Act of 1974, as amended, and laws governing the activities of broker/dealers.
In accordance with applicable accounting guidelines, we establish an accrued liability for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. As a litigation or regulatory matter is developing we, in conjunction with outside counsel, evaluate on an ongoing basis whether the matter presents a loss contingency that meets conditions indicating the need for accrual and/or disclosure, and if not the matter will continue to be monitored for further developments. If and when the loss contingency related to litigation or regulatory matters is deemed to be both probable and estimable, we will establish an accrued liability with respect to that matter and will continue to monitor the matter for further developments that may affect the amount of the accrued liability.
There can be no assurance that any pending or future litigation will not have a material adverse effect on our business, financial condition, or results of operations.
In addition to our commitments to fund mortgage loans, we have unfunded commitments at
December 31, 2017
to limited partnerships of
$47.9 million
and to secured bank loans of
$11.2 million
.
14. Earnings Per Share and Stockholders' Equity
Earnings Per Share
The following table sets forth the computation of earnings per common share and earnings per common share—assuming dilution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(Dollars in thousands, except per share data)
|
|
Numerator:
|
|
|
|
|
|
|
Net income—numerator for earnings per common share
|
$
|
174,645
|
|
|
$
|
83,243
|
|
|
$
|
219,830
|
|
|
|
|
|
|
|
|
|
Denominator
:
|
|
|
|
|
|
|
Weighted average common shares outstanding (1)
|
88,982,442
|
|
|
84,793,151
|
|
|
78,936,828
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Equity forward sale agreements
|
—
|
|
|
—
|
|
|
67,575
|
|
|
2015 warrants
|
—
|
|
|
15,136
|
|
|
759,723
|
|
|
Stock options and deferred compensation agreements
|
945,612
|
|
|
456,236
|
|
|
1,040,922
|
|
|
Restricted stock and restricted stock units
|
382,954
|
|
|
340,646
|
|
|
155,520
|
|
|
Denominator for earnings per common share—assuming dilution
|
90,311,008
|
|
|
85,605,169
|
|
|
80,960,568
|
|
|
|
|
|
|
|
|
|
Earnings per common share
|
$
|
1.96
|
|
|
$
|
0.98
|
|
|
$
|
2.78
|
|
|
Earnings per common share - assuming dilution
|
$
|
1.93
|
|
|
$
|
0.97
|
|
|
$
|
2.72
|
|
|
|
|
|
(1)
|
Weighted average common shares outstanding include shares vested under the NMO Deferred Compensation Plan.
|
Options to purchase shares of our common stock that were outstanding during the respective periods indicated but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares are as follows:
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Number of
Shares
|
|
Range of
Exercise Prices
|
|
|
|
|
|
Minimum
|
|
Maximum
|
|
Year ended December 31, 2017
|
|
—
|
|
$—
|
|
$—
|
|
Year ended December 31, 2016
|
|
1,054,091
|
|
$24.79
|
|
$24.79
|
|
Year ended December 31, 2015
|
|
1,061,541
|
|
$24.79
|
|
$24.79
|
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stockholders' Equity
In August 2015, we completed an underwritten public offering of
8,600,000
shares of our common stock at a public offering price of
$25.25
per share, of which
4,300,000
shares were subject to a forward sale agreement. The underwriters exercised in full their option to purchase
1,290,000
additional shares of common stock, which were subject to a separate forward sale agreement. We settled the forward sale agreements on August 1, 2016 and issued
5,590,000
shares of our common stock and received
$134.7 million
in net proceeds. We contributed the net proceeds from the settlement to the capital and surplus of American Equity Life.
The forward sale agreements had no initial fair value since they were entered into at the then market price of the common stock. The forward sale agreements were equity instruments and qualified for an exception from derivative and fair value accounting.
15. Quarterly Financial Information (Unaudited)
Unaudited quarterly results of operations are summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
(Dollars in thousands, except per share data)
|
|
2017
|
|
|
|
|
|
|
|
|
Premiums and product charges
|
$
|
52,974
|
|
|
$
|
56,323
|
|
|
$
|
60,500
|
|
|
$
|
64,925
|
|
|
Net investment income
|
485,597
|
|
|
493,489
|
|
|
500,202
|
|
|
512,709
|
|
|
Change in fair value of derivatives
|
386,533
|
|
|
266,820
|
|
|
362,525
|
|
|
661,993
|
|
|
Net realized gains on investments, excluding OTTI losses
|
2,338
|
|
|
3,873
|
|
|
1,579
|
|
|
2,719
|
|
|
Net OTTI losses recognized in operations
|
(141
|
)
|
|
(949
|
)
|
|
(464
|
)
|
|
(3,076
|
)
|
|
Loss on extinguishment of debt
|
—
|
|
|
(428
|
)
|
|
(18,389
|
)
|
|
—
|
|
|
Total revenues
|
927,301
|
|
|
819,128
|
|
|
905,953
|
|
|
1,239,270
|
|
|
Net income
|
53,939
|
|
|
26,946
|
|
|
56,957
|
|
|
36,803
|
|
|
Earnings per common share
|
0.61
|
|
|
0.30
|
|
|
0.64
|
|
|
0.41
|
|
|
Earnings per common share - assuming dilution
|
0.60
|
|
|
0.30
|
|
|
0.63
|
|
|
0.41
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
Premiums and product charges
|
$
|
43,850
|
|
|
$
|
52,582
|
|
|
$
|
60,406
|
|
|
$
|
60,508
|
|
|
Net investment income
|
450,826
|
|
|
459,830
|
|
|
463,583
|
|
|
475,633
|
|
|
Change in fair value of derivatives
|
(74,065
|
)
|
|
39,099
|
|
|
103,794
|
|
|
95,391
|
|
|
Net realized gains on investments, excluding OTTI losses
|
2,687
|
|
|
2,737
|
|
|
5,256
|
|
|
844
|
|
|
Net OTTI losses recognized in operations
|
(5,694
|
)
|
|
(4,446
|
)
|
|
(2,979
|
)
|
|
(9,560
|
)
|
|
Total revenues
|
417,604
|
|
|
549,802
|
|
|
630,060
|
|
|
622,816
|
|
|
Net income (loss)
|
(44,841
|
)
|
|
14,708
|
|
|
(7,420
|
)
|
|
120,796
|
|
|
Earnings (loss) per common share
|
(0.55
|
)
|
|
0.18
|
|
|
(0.09
|
)
|
|
1.37
|
|
|
Earnings (loss) per common share - assuming dilution
|
(0.55
|
)
|
|
0.18
|
|
|
(0.09
|
)
|
|
1.35
|
|
Earnings (loss) per common share for each quarter is computed independently of earnings (loss) per common share for the year. As a result, the sum of the quarterly earnings (loss) per common share amounts may not equal the earnings (loss) per common share for the year.
The differences between the change in fair value of derivatives for each quarter primarily correspond to the performance of the indices upon which our call options are based. The comparability of net income (loss) is impacted by the application of fair value accounting to our fixed index annuity business as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
(Dollars in thousands)
|
|
2017
|
$
|
7,069
|
|
|
$
|
37,075
|
|
|
$
|
30,806
|
|
|
$
|
3,518
|
|
|
2016
|
62,822
|
|
|
34,215
|
|
|
6,054
|
|
|
(66,618
|
)
|
Schedule I—Summary of Investments—
Other Than Investments in Related Parties
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
Column C
|
|
Column D
|
|
Type of Investment
|
|
Amortized
Cost (1)
|
|
Fair
Value
|
|
Amount at
which shown
in the balance
sheet
|
|
|
|
(Dollars in thousands)
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
United States Government full faith and credit
|
|
$
|
11,861
|
|
|
$
|
11,876
|
|
|
$
|
11,876
|
|
|
United States Government sponsored agencies
|
|
1,308,290
|
|
|
1,305,017
|
|
|
1,305,017
|
|
|
United States municipalities, states and territories
|
|
3,804,360
|
|
|
4,166,812
|
|
|
4,166,812
|
|
|
Foreign government obligations
|
|
228,214
|
|
|
239,360
|
|
|
239,360
|
|
|
Corporate securities
|
|
28,127,653
|
|
|
29,878,971
|
|
|
29,878,971
|
|
|
Residential mortgage backed securities
|
|
1,028,484
|
|
|
1,105,567
|
|
|
1,105,567
|
|
|
Commercial mortgage backed securities
|
|
5,531,922
|
|
|
5,544,850
|
|
|
5,544,850
|
|
|
Other asset backed securities
|
|
3,075,975
|
|
|
3,120,536
|
|
|
3,120,536
|
|
|
|
|
43,116,759
|
|
|
45,372,989
|
|
|
45,372,989
|
|
|
Held for investment:
|
|
|
|
|
|
|
|
Corporate security
|
|
77,041
|
|
|
76,460
|
|
|
77,041
|
|
|
Total fixed maturity securities
|
|
43,193,800
|
|
|
45,449,449
|
|
|
45,450,030
|
|
|
Mortgage loans on real estate
|
|
2,665,531
|
|
|
2,670,037
|
|
|
2,665,531
|
|
|
Derivative instruments
|
|
373,244
|
|
|
1,568,380
|
|
|
1,568,380
|
|
|
Other investments
|
|
616,764
|
|
|
|
|
616,764
|
|
|
Total investments
|
|
$
|
46,849,339
|
|
|
|
|
$
|
50,300,705
|
|
|
|
|
|
(1)
|
On the basis of cost adjusted for other than temporary impairments, repayments and amortization of premiums and accrual of discounts for fixed maturity securities and short-term investments, original cost for derivative instruments and unpaid principal balance less allowance for credit losses for mortgage loans.
|
See accompanying Report of Independent Registered Public Accounting Firm.
Schedule II—Condensed Financial Information of Registrant
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
Condensed Balance Sheets
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
Assets
|
|
|
|
|
Cash and cash equivalents
|
$
|
22,486
|
|
|
$
|
36,394
|
|
|
Equity securities of subsidiary trusts
|
7,429
|
|
|
7,422
|
|
|
Receivable from subsidiaries
|
166
|
|
|
182
|
|
|
Deferred income taxes
|
7,945
|
|
|
9,528
|
|
|
Federal income tax recoverable, including amount from subsidiaries
|
1,059
|
|
|
—
|
|
|
Other assets
|
1,566
|
|
|
2,540
|
|
|
|
40,651
|
|
|
56,066
|
|
|
Investment in and advances to subsidiaries
|
3,550,405
|
|
|
2,992,217
|
|
|
Total assets
|
$
|
3,591,056
|
|
|
$
|
3,048,283
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
Liabilities:
|
|
|
|
|
Notes and loan payable
|
$
|
494,093
|
|
|
$
|
493,755
|
|
|
Subordinated debentures payable to subsidiary trusts
|
242,565
|
|
|
241,853
|
|
|
Federal income tax payable
|
—
|
|
|
3,614
|
|
|
Other liabilities
|
4,241
|
|
|
17,466
|
|
|
Total liabilities
|
740,899
|
|
|
756,688
|
|
|
Stockholders' equity:
|
|
|
|
|
Common stock
|
89,331
|
|
|
88,001
|
|
|
Additional paid-in capital
|
791,446
|
|
|
770,344
|
|
|
Accumulated other comprehensive income
|
724,599
|
|
|
339,966
|
|
|
Retained earnings
|
1,244,781
|
|
|
1,093,284
|
|
|
Total stockholders' equity
|
2,850,157
|
|
|
2,291,595
|
|
|
Total liabilities and stockholders' equity
|
$
|
3,591,056
|
|
|
$
|
3,048,283
|
|
See accompanying note to condensed financial statements.
See accompanying Report of Independent Registered Public Accounting Firm.
Schedule II—Condensed Financial Information of Registrant (Continued)
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
Condensed Statements of Operations
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Revenues:
|
|
|
|
|
|
|
Net investment income
|
$
|
492
|
|
|
$
|
78
|
|
|
$
|
62
|
|
|
Dividends from subsidiary trusts
|
410
|
|
|
384
|
|
|
363
|
|
|
Investment advisory fees
|
83,941
|
|
|
75,706
|
|
|
65,957
|
|
|
Surplus note interest from subsidiary
|
4,080
|
|
|
4,080
|
|
|
4,080
|
|
|
Change in fair value of derivatives
|
(412
|
)
|
|
(810
|
)
|
|
(8,225
|
)
|
|
Loss on extinguishment of debt
|
(18,817
|
)
|
|
—
|
|
|
—
|
|
|
Total revenues
|
69,694
|
|
|
79,438
|
|
|
62,237
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
Change in fair value of embedded derivatives
|
—
|
|
|
—
|
|
|
(4,516
|
)
|
|
Interest expense on notes and loan payable
|
30,368
|
|
|
28,248
|
|
|
28,849
|
|
|
Interest expense on subordinated debentures issued to subsidiary trusts
|
14,124
|
|
|
12,958
|
|
|
12,239
|
|
|
Other operating costs and expenses
|
9,234
|
|
|
8,551
|
|
|
8,195
|
|
|
Total expenses
|
53,726
|
|
|
49,757
|
|
|
44,767
|
|
|
Income before income taxes and equity in undistributed income of subsidiaries
|
15,968
|
|
|
29,681
|
|
|
17,470
|
|
|
Income tax expense
|
6,895
|
|
|
12,073
|
|
|
7,338
|
|
|
Income before equity in undistributed income of subsidiaries
|
9,073
|
|
|
17,608
|
|
|
10,132
|
|
|
Equity in undistributed income of subsidiaries
|
165,572
|
|
|
65,635
|
|
|
209,698
|
|
|
Net income
|
$
|
174,645
|
|
|
$
|
83,243
|
|
|
$
|
219,830
|
|
See accompanying note to condensed financial statements.
See accompanying Report of Independent Registered Public Accounting Firm.
Schedule II—Condensed Financial Information of Registrant (Continued)
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
Condensed Statements of Cash Flows
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Operating activities
|
|
|
|
|
|
|
Net income
|
$
|
174,645
|
|
|
$
|
83,243
|
|
|
$
|
219,830
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
Change in fair value of 2015 notes embedded conversion derivative
|
—
|
|
|
—
|
|
|
(4,516
|
)
|
|
Provision for depreciation and amortization
|
1,610
|
|
|
1,946
|
|
|
1,613
|
|
|
Accrual of discount on equity security
|
(7
|
)
|
|
(7
|
)
|
|
(6
|
)
|
|
Equity in undistributed income of subsidiaries
|
(165,572
|
)
|
|
(65,635
|
)
|
|
(209,698
|
)
|
|
Accrual of discount on contingent convertible notes
|
—
|
|
|
—
|
|
|
698
|
|
|
Change in fair value of derivatives
|
(657
|
)
|
|
(698
|
)
|
|
6,377
|
|
|
Loss on extinguishment of debt
|
18,817
|
|
|
—
|
|
|
—
|
|
|
Accrual of discount on debenture issued to subsidiary trust
|
236
|
|
|
221
|
|
|
207
|
|
|
Share-based compensation
|
951
|
|
|
818
|
|
|
1,026
|
|
|
Deferred income taxes
|
1,583
|
|
|
2,117
|
|
|
8,967
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
Receivable from subsidiaries
|
16
|
|
|
(125
|
)
|
|
93
|
|
|
Federal income tax recoverable/payable
|
(4,673
|
)
|
|
11,361
|
|
|
2,683
|
|
|
Other assets
|
158
|
|
|
(326
|
)
|
|
(4
|
)
|
|
Other liabilities
|
(12,427
|
)
|
|
2,546
|
|
|
(1,664
|
)
|
|
Net cash provided by operating activities
|
14,680
|
|
|
35,461
|
|
|
25,606
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
Capital contributions to subsidiaries
|
$
|
—
|
|
|
$
|
(255,000
|
)
|
|
$
|
(120,000
|
)
|
|
Purchases of property, plant and equipment
|
(45
|
)
|
|
(54
|
)
|
|
—
|
|
|
Net cash used in investing activities
|
(45
|
)
|
|
(255,054
|
)
|
|
(120,000
|
)
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
Financing fees incurred and deferred
|
$
|
(5,817
|
)
|
|
$
|
(1,456
|
)
|
|
$
|
—
|
|
|
Repayment of notes payable
|
(413,252
|
)
|
|
—
|
|
|
(48,152
|
)
|
|
Repayment of loan payable
|
(100,000
|
)
|
|
—
|
|
|
—
|
|
|
Proceeds from issuance of notes payable
|
499,650
|
|
|
—
|
|
|
—
|
|
|
Proceeds from issuance of loan payable
|
—
|
|
|
100,000
|
|
|
—
|
|
|
Proceeds from issuance of common stock
|
14,028
|
|
|
139,654
|
|
|
112,481
|
|
|
Net proceeds from settlement of notes hedges and warrants
|
—
|
|
|
—
|
|
|
25,775
|
|
|
Dividends paid
|
(23,152
|
)
|
|
(21,114
|
)
|
|
(17,946
|
)
|
|
Net cash provided by (used in) financing activities
|
(28,543
|
)
|
|
217,084
|
|
|
72,158
|
|
|
Decrease in cash and cash equivalents
|
(13,908
|
)
|
|
(2,509
|
)
|
|
(22,236
|
)
|
|
Cash and cash equivalents at beginning of year
|
36,394
|
|
|
38,903
|
|
|
61,139
|
|
|
Cash and cash equivalents at end of year
|
$
|
22,486
|
|
|
$
|
36,394
|
|
|
$
|
38,903
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
Interest on notes and loan payable
|
$
|
40,537
|
|
|
$
|
27,164
|
|
|
$
|
27,283
|
|
|
Interest on subordinated debentures
|
14,573
|
|
|
12,454
|
|
|
11,833
|
|
|
Non-cash financing activity:
|
|
|
|
|
|
|
Common stock issued to settle warrants that have expired
|
—
|
|
|
93
|
|
|
48
|
|
See accompanying note to condensed financial statements.
See accompanying Report of Independent Registered Public Accounting Firm.
Schedule II—Condensed Financial Information of Registrant (Continued)
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY (PARENT COMPANY)
Note to Condensed Financial Statements
December 31, 2017
1. Basis of Presentation
The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of American Equity Investment Life Holding Company (Parent Company).
In the Parent Company financial statements, its investment in and advances to subsidiaries are stated at cost plus equity in undistributed income (losses) of subsidiaries since the date of acquisition and net unrealized gains/losses on the subsidiaries' fixed maturity securities classified as "available for sale" and equity securities.
See Notes 9 and 10 to the consolidated financial statements for a description of the Parent Company's notes payable and subordinated debentures payable to subsidiary trusts.
Schedule III—Supplementary Insurance Information
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
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)
|
|
As of December 31, 2017:
Life insurance
|
|
$
|
2,714,523
|
|
|
$
|
56,142,673
|
|
|
$
|
—
|
|
|
$
|
282,884
|
|
|
As of December 31, 2016:
Life insurance
|
|
$
|
2,905,377
|
|
|
$
|
51,637,026
|
|
|
$
|
—
|
|
|
$
|
298,347
|
|
|
As of December 31, 2015:
Life insurance
|
|
$
|
2,905,136
|
|
|
$
|
45,495,431
|
|
|
$
|
—
|
|
|
$
|
324,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column F
|
|
Column G
|
|
Column H
|
|
Column I
|
|
Column J
|
|
|
|
Premium
revenue
|
|
Net
investment
income
|
|
Benefits,
claims,
losses and
settlement
expenses
|
|
Amortization
of deferred
policy
acquisition
costs
|
|
Other
operating
expenses
|
|
|
|
(Dollars in thousands)
|
|
For the year ended December 31, 2017:
Life insurance
|
|
$
|
234,722
|
|
|
$
|
1,991,997
|
|
|
$
|
3,163,234
|
|
|
$
|
255,964
|
|
|
$
|
156,183
|
|
|
For the year ended December 31, 2016:
Life insurance
|
|
$
|
217,346
|
|
|
$
|
1,849,872
|
|
|
$
|
1,572,586
|
|
|
$
|
374,012
|
|
|
$
|
143,437
|
|
|
For the year ended December 31, 2015:
Life insurance
|
|
$
|
172,216
|
|
|
$
|
1,692,192
|
|
|
$
|
758,203
|
|
|
$
|
286,114
|
|
|
$
|
137,306
|
|
See accompanying Report of Independent Registered Public Accounting Firm.
Schedule IV—Reinsurance
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
Column C
|
|
Column D
|
|
Column E
|
|
Column F
|
|
|
|
Gross amount
|
|
Ceded to
other
companies
|
|
Assumed
from
other
companies
|
|
Net amount
|
|
Percent of
amount
assumed
to net
|
|
|
|
(Dollars in thousands)
|
|
Year ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force, at end of year
|
|
$
|
1,942,129
|
|
|
$
|
9,378
|
|
|
$
|
57,965
|
|
|
$
|
1,990,716
|
|
|
2.91
|
%
|
|
Insurance premiums and other considerations:
|
|
|
|
|
|
|
|
|
|
|
|
Annuity product charges
|
|
$
|
206,952
|
|
|
$
|
6,458
|
|
|
$
|
—
|
|
|
$
|
200,494
|
|
|
—
|
|
|
Traditional life, accident and health insurance, and life contingent immediate annuity premiums
|
|
33,938
|
|
|
215
|
|
|
505
|
|
|
34,228
|
|
|
1.48
|
%
|
|
|
|
$
|
240,890
|
|
|
$
|
6,673
|
|
|
$
|
505
|
|
|
$
|
234,722
|
|
|
0.22
|
%
|
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force, at end of year
|
|
$
|
1,996,446
|
|
|
$
|
10,045
|
|
|
$
|
57,849
|
|
|
$
|
2,044,250
|
|
|
2.83
|
%
|
|
Insurance premiums and other considerations:
|
|
|
|
|
|
|
|
|
|
|
|
Annuity product charges
|
|
$
|
178,945
|
|
|
$
|
5,366
|
|
|
$
|
—
|
|
|
$
|
173,579
|
|
|
—
|
|
|
Traditional life, accident and health insurance, and life contingent immediate annuity premiums
|
|
43,521
|
|
|
251
|
|
|
497
|
|
|
43,767
|
|
|
1.14
|
%
|
|
|
|
$
|
222,466
|
|
|
$
|
5,617
|
|
|
$
|
497
|
|
|
$
|
217,346
|
|
|
0.23
|
%
|
|
Year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force, at end of year
|
|
$
|
2,036,690
|
|
|
$
|
10,677
|
|
|
$
|
56,882
|
|
|
$
|
2,082,895
|
|
|
2.73
|
%
|
|
Insurance premiums and other considerations:
|
|
|
|
|
|
|
|
|
|
|
|
Annuity product charges
|
|
$
|
141,595
|
|
|
$
|
5,427
|
|
|
$
|
—
|
|
|
$
|
136,168
|
|
|
—
|
|
|
Traditional life, accident and health insurance, and life contingent immediate annuity premiums
|
|
35,715
|
|
|
256
|
|
|
589
|
|
|
36,048
|
|
|
1.63
|
%
|
|
|
|
$
|
177,310
|
|
|
$
|
5,683
|
|
|
$
|
589
|
|
|
$
|
172,216
|
|
|
0.34
|
%
|
See accompanying Report of Independent Registered Public Accounting Firm.