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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________
FORM 10-K
(Mark One)  
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                  to                                 
Commission File Number:    001-31911
______________________________________________
American Equity Investment Life Holding Company
(Exact name of registrant as specified in its charter)
Iowa 42-1447959
(State or other jurisdiction of Incorporation) (I.R.S. Employer Identification No.)
6000 Westown Parkway
West Des Moines, Iowa 50266
(Address of principal executive offices, including zip code)
(515) 221-0002
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common stock, par value $1 AEL New York Stock Exchange
Depositary Shares, each representing a 1/1,000th interest in a share of 5.95% Fixed-Rate Reset Non-Cumulative Preferred Stock, Series A AELPRA New York Stock Exchange
Depositary Shares, each representing a 1/1,000th interest in a share of 6.625% Fixed-Rate Reset Non-Cumulative Preferred Stock, Series B AELPRB New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x    No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o    No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x    No o





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes     No x
Aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $2,945,865,287 based on the closing price of $32.32 per share, the closing price of the common stock on the New York Stock Exchange on June 30, 2021.
Shares of common stock outstanding as of February 23, 2022: 96,949,174
Documents incorporated by reference: Portions of the registrant's definitive proxy statement for the annual meeting of shareholders to be held June 10, 2022, which will be filed within 120 days after December 31, 2021, are incorporated by reference into Part III of this report.



AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2021
TABLE OF CONTENTS
 
1
 
 
 
F-1
Exhibit 21.2 Subsidiaries of American Equity Investment Life Holding Company  
Exhibit 23.1 Consent of Independent Registered Public Accounting Firm  
Exhibit 31.1 Certification  
Exhibit 31.2 Certification  
Exhibit 32.1 Certification  
Exhibit 32.2 Certification  



PART I

Item 1.    Business
Introduction
We are a leader in the development and sale of fixed index and fixed rate annuity products. We were incorporated in the state of Iowa on December 15, 1995. We issue fixed annuity products through our wholly-owned life insurance subsidiaries, American Equity Investment Life Insurance Company ("American Equity Life"), American Equity Investment Life Insurance Company of New York ("American Equity Life of New York") and Eagle Life Insurance Company ("Eagle Life"). We have one business segment which represents our core business comprised of the sale of fixed index and fixed rate annuities. We are licensed to sell our products in 50 states and the District of Columbia. Throughout this report, unless otherwise specified or the context otherwise requires, all references to "American Equity", the "Company", "we", "our" and similar references are to American Equity Investment Life Holding Company and its consolidated subsidiaries.
Investor related information, including periodic reports filed on Forms 10-K, 10-Q and 8-K and any amendments may be found on our website at www.american-equity.com as soon as reasonably practicable after such reports are filed with the Securities and Exchange Commission ("SEC"). In addition, we have available on our website our: (i) code of business conduct and ethics; (ii) audit and risk committee charter; (iii) compensation and talent management committee charter; (iv) nominating and corporate governance committee charter and (v) corporate governance guidelines. The information incorporated herein by reference is also electronically accessible from the SEC's website at www.sec.gov.
Annuity Market Overview
Our target market includes individuals, typically ages 40 or older, who are seeking to accumulate tax-deferred savings or create guaranteed lifetime income. We believe that significant growth opportunities exist for annuity products because of favorable demographic and economic trends. According to the U.S. Census Bureau, there were approximately 54 million Americans age 65 and older in 2019, representing approximately 16.5% of the U.S. population, up from 14% in 2015. This group is expected to continue to grow and is expected to be over 20% of the total U.S. population during the next decade. Our fixed index and fixed rate annuity products are particularly attractive to this group due to their principal protection, competitive rates of credited interest, tax-deferred growth, guaranteed lifetime income and alternative payout options. Our competitive fixed index and fixed rate annuity products have enabled us to enjoy favorable growth in client assets in recent years and since our formation.
According to Secure Retirement Institute, with preliminary data for 4Q2021, total U.S. annuity sales in 2021 were $254.8 billion, up 16.3% compared to $219.1 billion in 2020. Fixed annuity sales totaled $130.8 billion in 2021, up 8.8% compared to $120.2 billion in 2020. This market is directly comparable to the target market for our products. Fixed index annuity sales totaled $63.7 billion in 2021, up 14.4% compared to $55.7 billion in 2020. Fixed rate deferred annuity sales were $53.4 billion in 2021, up 3.3% compared to $51.7 billion in 2020. Outside of fixed annuities, the other growing part of the U.S. annuity market was the registered index-linked annuity market. Sales in this market were $39.1 billion in 2021, up 62.9% compared to $24.0 billion in 2020.
Strategy
While the business looks considerably different today than it did when it was started back in 1995, the themes have been consistent. We offer our customers simple fixed and fixed index annuity products, which we primarily sell through independent insurance agents in the independent marketing organization (“IMO”) distribution channel. We have consistently been a leader in the IMO market. We benefit from two secular trends: the demographic trends of people retiring or getting close to retirement who want to accumulate wealth through index based investing while protecting their principal and the need of retirees and pre-retirees to have a way to deaccumulate their wealth into income for life. A traditional brokerage based equity bond portfolio can’t really meet these unique needs, but a fixed index annuity can as part of holistic financial plan. Finally, there is a scarcity value to what we do: that is originating billions of dollars of annuity funding each year at scale from the IMO channel, which is generally longer term funding than that achieved through sales in the bank and broker dealer channel.
In the past decade, the fixed and fixed index annuity market has seen many new entrants and as a result has become more competitive. Adding to that, low interest rates have made it more difficult for traditional, core investment grade fixed income asset allocations to support return expectations on annuity liabilities.
With these changes in the macro environment, we began to implement an updated strategy, referred to as AEL 2.0, after having undertaken a thorough review of our business in 2020. AEL 2.0 is designed to capitalize on the scarcity value of our annuity origination and couple it with an “open architecture” investment management platform for investing the annuity assets. Our approach to investment management is to partner with best in class investment management firms across a wide array of asset classes and capture part of the asset management value chain economics for our shareholders. This will enable us to operate at the intersection of both asset management and insurance. Our updated strategy focuses on four key pillars: Go-to-Market, Investment Management, Capital Structure and Foundational Capabilities.
The Go-to-Market pillar focuses on how we generate long-term client assets, referred to as policyholder funds under management, through annuity product sales. We consider our marketing capabilities and franchise to be one of our core competitive strengths. The liabilities we originate result in stable, long-term attractive funding, which is invested to earn a spread and return over the prudent level of risk capital. American Equity Life has become one of the leading insurance companies in the IMO distribution channel over our 25-year history and can
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tap into a core set of loyal independent producers to originate new annuity product sales. We are focused on growing our loyal producers with one million dollars or greater of annuity product sales each year. We plan to increase our share of annuity product sales generated by IMOs and accelerate our expansion into bank, broker dealer and registered investment advisor distribution through our subsidiary, Eagle Life. Our strategy is to improve sales execution and enhance producer loyalty with product solutions, focused marketing campaigns, distribution analytics to enhance both sales productivity and producer engagement and new client engagement models that complement traditional physical face-to-face interactions.
The Investment Management pillar is focused on generating a strong return on assets which, in turn, will generate adequate spread income to support our liabilities, operations, and profitability. In an environment where risk free interest rates continue to be historically low, insurers need to invest for better risk-adjusted yields than what are available in traditional fixed income securities. Our investment strategy is to supplement our core fixed income investment portfolio with opportunistic investments in alpha-producing specialty sub-sectors like middle market credit and sectors with contractually strong cash flows like real estate and infrastructure. We execute on this strategy by forming partnerships with certain asset managers that will provide access to specific asset sectors, resulting in a sustainable supply of quality private investments, in addition to traditional fixed income securities. The partnerships with asset managers may include us taking an equity interest in the asset manager to create greater alignment or forming an alternate economic sharing arrangement so we benefit as our partners scale their platforms with third party assets under management.
The Capital Structure pillar is focused on greater use of reinsurance structuring to both optimize asset allocation for our balance sheet and enable American Equity Life to free up capital and become a capital-light company over time. We worked diligently to complete in 2021 the announced reinsurance partnership with Brookfield Asset Management Reinsurance Partners Ltd. and its affiliated entities (collectively, "Brookfield Reinsurance" or "Brookfield") and the formation of our own reinsurance platforms. The use of reinsurance will enable us to achieve three business outcomes over time: first, free up capital to potentially return to shareholders, second, redeploy capital into higher yielding alpha generating assets to grow investment income relative to new money yields in a traditional core fixed income portfolio and third, successfully demonstrating the first two outcomes will allow us to raise third-party capital into reinsurance vehicles ("side-cars") to provide risk capital to back a portion of our existing liabilities and future sales of annuity products. This will enable us to convert from an investment spread business with our own capital at risk into a combination spread based and fee based business with externally sourced risk capital. In combination, these three outcomes are likely to generate sustained, deployable capital for shareholders and significant accretion in return on equity (“ROE”) over time.
The Foundational Capabilities pillar is focused on upgrading our operating platform to enhance the digital customer experience, create differentiation through data analytics to support the first three pillars, enhance core technology and align talent. We have maintained high quality personal service as one of our highest priorities since our inception and continue to strive for an unprecedented level of timely and accurate service to both our agents and policyholders. Examples of our high quality service include a live person answering phone calls and issuing policies within 24 hours of receiving the application if the paperwork is in good order. We believe high quality service is one of our strongest competitive advantages and the foundational capabilities pillar will look to continue to enhance our high quality service.
The combination of differentiated investment strategies and increased capital efficiency improves annuity product competitiveness, thereby enhancing new business growth potential and further strengthening the operating platform. This completes the virtuous cycle of the AEL 2.0 business model, having started with a strong, at scale annuity originator, that is even further strengthened by the power of the investments and capital structure pillars.
During 2021, we made significant progress in the execution of the AEL 2.0 strategy. Key areas of progress include the following:
we continued revitalization of our Go-to-Market strategy pillar. We regained relevance and growth in the IMO distribution channel, built additional distribution through independent broker dealers and banks with Eagle Life, focused on growing sales that convert to reinsured liabilities to drive "fee like" earnings and emerged as a talent magnet and builder of next generation distribution capabilities. We completed a complete refresh of the general account "Shield series" product suite for the IMO channel and focused the Eagle Life product portfolio on fixed index annuities with newer market indices and client crediting strategies. Income Shield remains the number one guaranteed income product in the industry with a 10-year surrender charge period. We have also negotiated a purchase agreement to acquire a broker dealer to enter into the registered products market.
we continued to build out our investment management pillar capabilities. We transitioned the management of our core fixed income and private placement investments to BlackRock Financial Management, Inc. and entered into an agreement with Conning, Inc. to manage assets for our Bermuda reinsurer once that entity is fully functional. In addition, we re-tooled our investment management platform, expanded our underwriting and risk capital allocation lens for additional sectors, and expanded our capabilities in commercial real estate lending. We also created and expanded relationships with specialty asset managers to target certain sub-sectors and began leveraging those partnerships to invest in private assets including single-family rentals and short term mortgage loans. In 2021, we added $3.4 billion of private assets to the investment portfolio.
we continued to optimize our capital structure to drive sustained free cash flow. We completed a reinsurance treaty with North End Re (Cayman) SPC (“North End Re”), a wholly owned subsidiary of Brookfield Reinsurance that covers both a portion of our in-force and a portion of new business flow. This transaction will start to drive our evolution to a higher return on equity business through building a capital efficient, return on assets model by providing attractive fee-like revenues on assets. We established AEL Re Bermuda Ltd., a wholly owned subsidiary domiciled in Bermuda, and executed a reinsurance treaty to transfer a block of in-force policies to this entity which operates in a jurisdiction with a principles based regulatory regime for both sides of the balance sheet. We also completed the restructuring of the redundant reserve financing for policies with a fee based lifetime income benefit rider which resulted in an improved
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RBC ratio for American Equity Life and quarterly expense savings compared to the prior financing. See Note 9 - Reinsurance and Policy Provisions for more information.
In the next few years, we expect to migrate to a capital efficient business model with increased fee-like earnings. We will scale our investments into higher returning private assets, grow reinsured liabilities to side-cars to grow return on asset earnings, and write new business that converts us from the traditional spread based return on equity model to a “fee like” return on assets model through reinsurance.
Products
Annuities offer our policyholders a tax-deferred means of accumulating retirement savings, as well as a reliable source of income during the payout period. When our policyholders deposit cash for an annuity, we account for these receipts as policy benefit reserves in the liability section of our consolidated balance sheet. The annuity deposits collected, by product type, during the three most recent fiscal years are as follows:
Year Ended December 31,
2021 2020 2019
Product Type Deposits
Collected
Deposits
as a % of
Total
Deposits
Collected
Deposits
as a % of
Total
Deposits
Collected
Deposits
as a % of
Total
(Dollars in thousands)
Fixed index annuities $ 3,450,547  58  % $ 2,337,578  64  % $ 4,705,541  95  %
Annual reset fixed rate annuities 6,483  —  % 8,225  —  % 11,444  —  %
Multi-year fixed rate annuities 2,452,994  41  % 1,303,133  35  % 234,226  %
Single premium immediate annuities 59,816  % 33,461  % 12,002  —  %
$ 5,969,840  100  % $ 3,682,397  100  % $ 4,963,213  100  %
Fixed Index Annuities
Fixed index annuities allow policyholders to earn index credits based on the performance of a particular index without the risk of loss of their account value. Most of these products allow policyholders to transfer funds once a year among several different crediting strategies, including one or more index based strategies and a traditional fixed rate strategy. Bonus products represented 65%, 75% and 76% of our net annuity account values at December 31, 2021, 2020 and 2019, respectively. The initial annuity deposit on these policies is increased at issuance by a specified premium bonus ranging from 5% to 10%. Generally, the surrender charge and bonus vesting provisions of our policies are structured such that we have comparable protection from early termination between bonus and non-bonus products.
The annuity contract value is equal to the sum of premiums paid, premium bonuses and interest credited ("index credits" for funds allocated to an index based strategy), which is based upon an overall limit (or "cap") or a percentage (the "participation rate") of the appreciation (based in certain situations on monthly averages or monthly point-to-point calculations) in a recognized index or benchmark. Caps and participation rates limit the amount of interest the policyholder may earn in any one contract year and may be adjusted by us annually subject to stated minimums. Caps generally range from 1% to 12% and participation rates range from 10% to 175%. In addition, some products have a spread or "asset fee" generally ranging from 0.75% to 5%, which is deducted from interest to be credited. For products with asset fees, if the appreciation in the index does not exceed the asset fee, the policyholder's index credit is zero. The minimum guaranteed surrender values are equal to no less than 87.5% of the premium collected plus interest credited at an annual rate ranging from 0.5% to 3%.
The initial caps and participation rates are largely a function of the cost of the call options we purchase to fund the index credits, the interest rate we can earn on invested assets acquired with new annuity deposits and the rates offered on similar products by our competitors. For subsequent adjustments to caps and participation rates, we take into account the cost of the call options we purchase to fund the index credits, yield on our investment portfolio, annuity surrender and withdrawal assumptions and crediting rate history for particular groups of annuity policies with similar characteristics.
Fixed Rate Annuities
Fixed rate deferred annuities include annual, multi-year rate guaranteed products ("MYGAs") and single premium deferred annuities ("SPDAs") . Our annual reset fixed rate annuities have an annual interest rate (the "crediting rate") that is guaranteed for the first policy year. After the first policy year, we have the discretionary ability to change the crediting rate once annually to any rate at or above a guaranteed minimum rate. Our MYGAs and SPDAs are similar to our annual reset products except that the initial crediting rate on MYGAs is guaranteed for up to seven years before it may be changed at our discretion while the initial crediting rate on SPDAs is guaranteed for either three or five years. The minimum guaranteed rate on our annual reset fixed rate deferred annuities ranges from 1.00% to 4.00%, the initial guaranteed rate on our multi-year rate guaranteed deferred annuities ranges from 1.00% to 4.00% and the initial guaranteed rate on our SPDAs ranges from 1.45% to 2.65%.
The initial crediting rate is largely a function of the interest rate we can earn on invested assets acquired with new annuity deposits and the rates offered on similar products by our competitors. For subsequent adjustments to crediting rates, we take into account the yield on our investment portfolio, experience factors and crediting rate history for particular groups of annuity policies with similar characteristics. As of December 31, 2021, crediting rates on our outstanding fixed rate deferred annuities generally ranged from 1.0% to 4.0%. The average
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crediting rates on our outstanding annual reset and multi-year rate guaranteed fixed rate deferred annuities at December 31, 2021 were 1.64% and 2.37%, respectively.
We also sell single premium immediate annuities ("SPIAs"). Our SPIAs provide a series of periodic payments for a fixed period of time or for life, according to the policyholder's choice at the time of issue. The amounts, frequency and length of time of the payments are fixed at the outset of the annuity contract. SPIAs are often purchased by persons at or near retirement age who desire a steady stream of payments over a future period of years.
Withdrawal Options - Fixed Index and Fixed Rate Annuities
Policyholders are typically permitted penalty-free withdrawals up to 10% of the contract value in each year after the first year, subject to limitations. Withdrawals in excess of allowable penalty-free amounts are assessed a surrender charge during a penalty period which ranges from 5 to 17 years for fixed index annuities and 3 to 15 years for fixed rate annuities from the date the policy is issued. This surrender charge initially ranges from 5% to 20% for fixed index annuities and 8% to 20% for fixed rate annuities of the contract value and generally decreases by approximately one-half to two percentage points per year during the surrender charge period. For certain policies, the premium bonus is considered in the establishment of the surrender charge percentages. For other policies, there is a vesting schedule ranging from 9 to 14 years that applies to the premium bonus and any interest earned on that premium bonus. Surrender charges and bonus vesting are set at levels aimed at protecting us from loss on early terminations and reducing the likelihood of policyholders terminating their policies during periods of increasing interest rates. This practice enhances our ability to maintain profitability on such policies. Policyholders may elect to take the proceeds of the annuity either in a single payment or in a series of payments for life, for a fixed number of years or a combination of these payment options.
Information on surrender charge protection and net account values are as follows:
December 31,
2021 2020 2019
(Dollars in thousands)
Annuity Surrender Charges:
Average years at issue 11.8 12.4 12.7
Average years remaining 5.5 6.1 6.7
Average surrender charge percentage remaining 9.1  % 9.9  % 10.8  %
Annuity Account Value (net of coinsurance) $ 53,191,277  $ 54,056,725  $ 53,233,898 
A significant amount of our fixed index annuity policies and many of our annual reset fixed rate deferred annuities have been issued with a lifetime income benefit rider. This rider provides an additional liquidity option to policyholders. With the lifetime income benefit rider, a policyholder can elect to receive guaranteed payments for life from their contract without requiring them to annuitize their contract value. The amount of the lifetime income benefit available is determined by the growth in the policy's income account value and the policyholder's age at the time the policyholder elects to begin receiving lifetime income benefit payments. The growth in the policy's income account value is based on the growth rate specified in the policy which ranges from 3.0% to 8.5% and the time period over which that growth rate is applied which ranges from 5 to 20 years for the majority of these policies. Generally, the time period consists of an initial period of up to 10 years and the policyholder has the option to elect to continue the time period for an additional period of up to 10 years. We have the option to either increase the rider fee or decrease the specified growth rate, depending on the specifics of the policy, at the time the policyholder elects to continue the time period. Lifetime income benefit payments may be stopped and restarted at the election of the policyholder. Policyholders have the choice of selecting a rider with a base level of benefit for no explicit fee or paying a fee for a rider that has a higher level of benefits, and since 2013 we have issued products where the addition of a rider to the policy is completely optional. Rider fees range from 0.15% to 1.60% of either the policy's account value or the policy's income account value. The additional value to the policyholder provided by these riders through the lifetime income benefit base is not transferable to other contracts, and we believe the riders will improve the persistency of the contract.
Investments/Spread Management
Investment activities are an integral part of our business, and net investment income is a significant component of our total revenues. Profitability of our annuity products is significantly affected by spreads between interest yields on investments, the cost of options to fund the index credits on our fixed index annuities and rates credited on our fixed rate annuities and the fixed rate strategy in our fixed index annuities. We manage the index-based risk component of our fixed index annuities by purchasing call options on the applicable indices to fund the index credits on these annuities and by adjusting the caps, participation rates and asset fees on policy anniversary dates to reflect the change in the cost of such options which varies based on market conditions. All options are purchased on the respective policy anniversary dates, and new options are purchased on each of the anniversary dates to fund the next index credits. All credited rates on annual reset fixed rate deferred annuities and the fixed rate strategy in fixed index annuities may be changed annually, subject to minimum guarantees. Changes in caps, participation rates and asset fees on fixed index annuities and crediting rates on fixed rate and fixed index annuities may not be sufficient to maintain targeted investment spreads in all economic and market environments. In addition, competition and other factors, including the potential for increases in surrenders and withdrawals, may limit our ability to adjust or to maintain caps, participation rates, asset fees and crediting rates at levels necessary to avoid narrowing of spreads under certain market conditions.
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For additional information regarding the composition of our investment portfolio and our interest rate risk management, see Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Investments, Quantitative and Qualitative Disclosures About Market Risk and Note 4 - Investments to our audited consolidated financial statements.
Marketing/Distribution
We market our products through a variable cost distribution network, including independent agents through IMOs, broker/dealers, banks and registered investment advisors. We emphasize high quality service to our agents, distribution partners and policyholders along with the prompt payment of commissions to our agents and distribution partners. We believe this has been significant in building excellent relationships with our distribution network.
Our independent agents and agencies range in profile from national sales organizations to personal producing general agents. A value proposition that we emphasize with agents is they have direct access to our senior leadership, giving us an edge over larger and foreign-owned competitors. We also emphasize our products, service and our focused fixed annuity expertise. We also have favorable relationships with our IMOs, which have enabled us to efficiently sell through an expanded number of independent agents.
The independent agent distribution system is comprised of insurance brokers and marketing organizations. We are pursuing a strategy to increase the efficiency of our independent agent distribution network by strengthening our relationships with key IMOs and are alert for opportunities to establish relationships with organizations not presently associated with us. These organizations typically recruit agents for us by advertising our products and our commission structure through direct mail advertising or seminars for insurance agents and brokers. We monitor agent activity and will terminate those who have not produced business for us in recent periods and are unlikely to sell our products in the future. The IMOs bear most of the cost incurred in marketing our products. We compensate marketing organizations by paying them a percentage of the commissions earned on new annuity policy sales generated by the agents recruited by such organizations. American Equity Life has relationships with 50 national marketing organizations, through which nearly 25,800 independent agents are under contract. We generally do not enter into exclusive arrangements with these marketing organizations.
Agents contracted with us through two national marketing organizations accounted for approximately 25% of the annuity deposits and insurance premiums collected during 2021, and we expect these organizations to continue as marketers for American Equity Life with a focus on selling our products. The states with the largest share of direct premium collected during 2021 were: Florida (9.3%), Texas (7.5%), Ohio (6.2%), Pennsylvania (5.5%), and New Jersey (4.8%).
Eagle Life's fixed index and fixed rate annuities are distributed pursuant to selling agreements with broker/dealers, banks and registered investment advisors. Eagle Life has 84 broker-dealer/firm selling agreements, through which nearly 10,700 representatives are appointed. Twenty-four of these agreements are with broker/dealers affiliated with banks. Relationships with certain of these firms are facilitated by third party wholesalers who promote Eagle Life and are compensated based upon the sales of the firms they have contracted with Eagle Life. We are developing our employee wholesaling force, which will be a key to our success at Eagle Life. Beginning in 2020, the majority of our third-party wholesaling partners no longer market Eagle Life products to new accounts as new account acquisition is handled almost entirely on an internal basis. American Equity Life to a lesser extent also sells through broker/dealers and we have introduced products specifically for this distribution channel.
Competition and Ratings
We operate in a highly competitive industry. Our annuity products compete with fixed index, fixed rate and variable annuities sold by other insurance companies and also with mutual fund products, traditional bank products and other investment and retirement funding alternatives offered by asset managers, banks, and broker/dealers. Our insurance products compete with products of other insurance companies, financial intermediaries and other institutions based on a number of features, including crediting rates, index options, policy terms and conditions, service provided to distribution channels and policyholders, ratings, reputation and distributor compensation.
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The sales agents for our products use the ratings assigned to an insurer by independent rating agencies as one factor in determining which insurer's annuity to market. The degree to which ratings adjustments have affected and will affect our sales and persistency is unknown. Following is a summary of American Equity Life's financial strength ratings:
Financial Strength Rating Outlook Statement
A.M. Best Company, Inc.
January 2011 - current A- Stable
S&P Global
August 2020 - current A- Stable
March 2020 - August 2020 A- Negative
August 2015 - March 2020 A- Stable
June 2013 - August 2015 BBB+ Positive
October 2011 - June 2013 BBB+ Stable
Fitch Ratings Ltd.
April 2021 - current A- Stable
April 2020 - April 2021 A- Negative
August 2019 - April 2020 A- Stable
September 2018 - August 2019 BBB+ Positive
May 2013 - September 2018 BBB+ Stable
Financial strength ratings generally involve quantitative and qualitative evaluations by rating agencies of a company's financial condition and operating performance. Generally, rating agencies base their ratings upon information furnished to them by the insurer and upon their own investigations, studies and assumptions. Ratings are based upon factors of concern to policyholders, agents and intermediaries and are not directed toward the protection of investors and are not recommendations to buy, sell or hold securities.
In addition to the financial strength ratings, rating agencies use an "outlook statement" to indicate a medium or long-term trend which, if continued, may lead to a rating change. A positive outlook indicates a rating may be raised and a negative outlook indicates a rating may be lowered. A stable outlook is assigned when ratings are not likely to be changed. Outlook statements should not be confused with expected stability of the insurer's financial or economic performance. A rating may have a "stable" outlook to indicate that the rating is not expected to change, but a "stable" outlook does not preclude a rating agency from changing a rating at any time without notice.
In March 2021, A.M. Best affirmed its rating outlook on the U.S. life/annuity sector as ‘negative’, reflecting its view that while annuity writers have maintained strong capital and liquidity positions, the segment faces a number of challenges and threats. In May 2021, Fitch revised its rating outlook on the U.S. life insurance sector to 'stable' from ‘negative’, reflecting the improved macroeconomic environment and reduced concerns regarding asset quality deterioration within general account investment portfolios. In January 2022, S&P affirmed its rating outlook on the U.S. life insurance sector as 'stable', reflecting its expectation that companies in the sector will be able to navigate uncertainty without a significant negative impact on their credit quality.
A.M. Best financial strength ratings currently range from "A++" (superior) to "F" (in liquidation), and include 16 separate ratings categories. Within these categories, "A++" (superior) and "A+" (superior) are the highest, followed by "A" (excellent) and "A-" (excellent) then followed by "B++" (good) and "B+" (good). Publications of A.M. Best indicate that the "A-" rating is assigned to those companies that, in A.M. Best's opinion, have demonstrated an excellent ability to meet their ongoing obligations to policyholders.
S&P financial strength ratings currently range from "AAA" (extremely strong) to "R" (under regulatory supervision), and include 21 separate ratings categories, while "NR" indicates that S&P has no opinion about the insurer's financial strength. Within these categories, "AAA" and "AA" are the highest, followed by "A" and "BBB". Publications of S&P indicate that an insurer rated "A-" is regarded as having strong financial security characteristics, but is somewhat more likely to be affected by adverse business conditions than are higher rated insurers.
Fitch financial strength ratings currently range from "AAA" (exceptionally strong) to "C" (distressed). Ratings of "BBB-" and higher are considered to be "secure," and those of "BB+" and lower are considered to be "vulnerable."
A.M. Best, S&P and Fitch review their ratings of insurance companies from time to time. There can be no assurance that any particular rating will continue for any given period of time or that it will not be changed or withdrawn entirely if, in their judgment, circumstances so warrant. If our ratings were to be negatively adjusted for any reason, we could experience a material decline in the sales of our products and the persistency of our existing business, as well as an increase in the cost of debt or equity financing.
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Reinsurance
We follow the industry practice of reinsuring a portion of our annuity risks with third party reinsurers. Our reinsurance agreements play a part in managing our regulatory capital, risk and returns.
Coinsurance
American Equity Life has three coinsurance agreements with Athene Life Re Ltd. ("Athene"), an unauthorized life reinsurer domiciled in Bermuda. One agreement ceded 20% of certain of American Equity Life's fixed index annuities issued from January 1, 2009 through March 31, 2010. The second agreement ceded 80% of American Equity Life's multi-year rate guaranteed annuities issued from July 1, 2009 through December 31, 2013 and 80% of Eagle Life's multi-year rate guaranteed annuities issued from November 20, 2013 through December 31, 2013. The third agreement ceded 80% of certain of American Equity Life's and Eagle Life's multi-year rate guaranteed annuities issued on or after January 1, 2014, 80% of Eagle Life's fixed index annuities issued prior to January 1, 2017, 50% of certain of Eagle Life's fixed index annuities issued from January 1, 2017 through December 31, 2018, 20% of certain of Eagle Life's fixed index annuities issued on or after January 1, 2019 and 80% of certain of American Equity Life's fixed index annuities issued from August 1, 2016 through December 31, 2016. Effective January 1, 2021, no new business is being ceded to Athene. The business reinsured under any of the Athene agreements may not be recaptured. American Equity Life is an intermediary for reinsurance of Eagle Life's business ceded to Athene. American Equity Life and Eagle Life remain liable to policyholders with respect to the policy liabilities ceded to Athene should Athene fail to meet the obligations it has coinsured. The annuity deposits that have been ceded to Athene are secured by assets held in trusts and American Equity Life is the sole beneficiary of the trusts. The assets in the trusts are required to remain at a value that is sufficient to support the current balance of policy benefit liabilities of the ceded business on a statutory basis. If the value of the trust accounts would ever be less than the amount of the ceded policy benefit liabilities on a statutory basis, Athene is required to either establish a letter of credit or deposit securities in the trusts for the amount of any shortfall. Athene has received a financial strength rating of "A" (Excellent) with a stable outlook from A.M. Best.
American Equity Life has two coinsurance agreements with EquiTrust Life Insurance Company ("EquiTrust"), covering 70% of certain of American Equity Life's fixed index and fixed rate annuities issued from August 1, 2001 through December 31, 2001, 40% of those contracts issued during 2002 and 2003, and 20% of those contracts issued from January 1, 2004 to July 31, 2004. The business reinsured under these agreements may not be recaptured. We remain liable to policyholders with respect to the policy liabilities ceded to EquiTrust should EquiTrust fail to meet the obligations it has coinsured. EquiTrust has received a financial strength rating of "B++" (Good) with a stable outlook from A.M. Best.
Effective July 1, 2021 American Equity Life entered into a reinsurance agreement with North End Re (“North End Re reinsurance treaty”), a wholly owned subsidiary of Brookfield Reinsurance to reinsure certain in-force fixed indexed annuity product liabilities as of the effective date of the reinsurance agreement, 70% on a modified coinsurance (“modco”) basis and 30% on a coinsurance basis. The liabilities reinsured on a coinsurance basis are secured by assets held in trusts with American Equity Life as the beneficiary. The liabilities reinsured on a modco basis are secured by assets held by American Equity Life in a segregated modco account. American Equity Life will receive an annual ceding commission equal to 49 basis points and the Company will receive an annual asset liability management fee equal to 30 basis points calculated based on the initial cash surrender value of liabilities ceded. Such fees are fixed and contractually guaranteed for six years with the additional and final seventh year payment partially contingent on certain performance obligations for both parties.
As part of the North End Re reinsurance treaty, American Equity Life is also ceding 75% of certain fixed index annuities issued after the effective date of the agreement, 70% on a modco basis and 30% on a coinsurance basis to North End Re. On sales subsequent to the effective date of the North End Re reinsurance treaty, American Equity Life will receive an annual ceding commission equal to 140 basis points and the Company will receive an annual asset liability management fee equal to 30 basis points calculated based on the initial cash surrender value of liabilities ceded. Such fees are fixed and contractually guaranteed for six years with the additional and final seventh year payment being contingent on certain performance obligations for both parties.
Although American Equity Life remains liable to policyholders with respect to the policy liabilities ceded to North End Re, should North End Re fail to meet the obligations it has reinsured the assets in the trusts and modco account are required to remain at a value that is sufficient to support the current balance of policy benefit liabilities of the ceded business on a statutory basis. The assets in the trusts and modco account are subject to investment management agreements between American Equity Life and North End Re.
Financing Arrangements
Effective April 1, 2019, we entered into a coinsurance agreement with Hannover Life Reassurance Company of America ("Hannover") covering 80% of lifetime income benefit rider payments in excess of policy fund values and waived surrender charges related to penalty free withdrawals on certain business (the "2019 Hannover Agreement"). The 2019 Hannover Agreement was treated as reinsurance under statutory accounting practices and as a financing arrangement under U.S. generally accepted accounting principles ("GAAP"). Under GAAP, the statutory surplus benefit under the 2019 Hannover Agreement was eliminated and the associated charges were recorded as risk charges that were included in other operating costs and expenses in the consolidated statements of operations. Effective October 1, 2021, we recaptured the 2019 Hannover agreement.
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Intercompany Reinsurance Agreements
Effective October 1, 2021, American Equity Life entered into a coinsurance agreement with AEL Re Vermont Inc., a wholly-owned captive reinsurance company, to cede a portion of lifetime income benefit rider payments in excess of policy fund values on a funds withheld basis ("the AEL Re Vermont Agreement"). In connection with the agreement, AEL Re Vermont entered into an excess of loss reinsurance agreement (the "XOL treaty") with Hannover, to retrocede the lifetime income benefit rider payments in excess of the policy fund values ceded under the AEL Re Vermont Agreement upon exhaustion of the funds withheld account balance under the AEL Re Vermont Agreement.
AEL Re Vermont is permitted to carry the XOL treaty as an admitted asset on the AEL Re Vermont statutory balance sheet. The XOL treaty does not satisfy risk transfer and is treated as a financing agreement. The associated charges are recorded as risk charges that are included in other operating costs and expenses in the consolidated statements of operations.
Effective December 31, 2021, American Equity Life entered into a coinsurance agreement with AEL Re Bermuda, an affiliated Bermuda reinsurer wholly owned by American Equity Investment Life Holding Company, to reinsure a quota share of fixed index annuities issued from January 1, 1997 through December 31, 2007 on a funds withheld basis.
The impact of all intercompany reinsurance agreements and related intercompany balances have been eliminated in the preparation of the accompanying consolidated financial statements.
For more information regarding reinsurance, see Note 9 - Reinsurance and Policy Provisions to our audited consolidated financial statements. For risks involving reinsurance see "Item 1A. Risk Factors."
Regulation
General Scope of Insurance Regulation
Life insurance companies are subject to regulation and supervision by the states in which they transact business. State insurance laws establish supervisory agencies with broad regulatory authority, including the power to:
grant and revoke licenses to transact business;
regulate and supervise trade practices and market conduct;
establish guaranty associations;
license agents;
approve policy forms;
approve premium rates for some lines of business;
establish reserve requirements;
prescribe the form and content of required financial statements and reports;
determine the reasonableness and adequacy of statutory capital and surplus;
perform financial, market conduct and other examinations;
define acceptable accounting principles for statutory reporting;
regulate the type and amount of permitted investments;
establish requirements for reinsurance credit;
prescribe the terms of agreements between or among affiliates;
approve changes in direct or indirect ownership above certain thresholds;
review corporate governance practices; and
limit the amount of dividends and surplus note payments that can be paid without obtaining regulatory approval.
Our life subsidiaries are subject to periodic examinations by state regulatory authorities. In 2020, the Iowa Insurance Division completed financial examinations of American Equity Life and Eagle Life for the five-year period ending December 31, 2018. There were no adjustments to American Equity Life's or Eagle Life's statutory financial statements as a result of these examinations. In 2020, the New York Department of Financial Services completed its financial examination of American Equity Life of New York for the five-year period ending December 31, 2018. There were no adjustments to American Equity Life of New York's statutory financial statements as a result of this examination.
State regulators also review matters related to us and our life subsidiaries in connection with requests for regulatory approval of transactions. For example, in 2021 we successfully applied for regulatory approval from Iowa and New York regulators for our reinsurance arrangements with North End Re and for transactions among us and our affiliates for intra-enterprise services and allocation of tax costs.
We also established captive reinsurers in Vermont and in Bermuda in 2021, which required the approval of regulators in those jurisdictions and initiated our regulation by those authorities. Iowa regulators also approved the related reinsurance arrangements. Bermuda regulations address matters such as fitness and adequate knowledge and expertise to engage in insurance, and impose solvency, auditing, and reporting requirements.
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Dividends, Distributions, and Transactions Among Affiliates
The payment of dividends or distributions, including surplus note payments, by our life subsidiaries is subject to regulation by each subsidiary's state of domicile's insurance department. Currently, American Equity Life may pay dividends or make other distributions without the prior approval of the Iowa Insurance Commissioner, unless such payments, together with all other such payments within the preceding twelve months, exceed the greater of (1) American Equity Life's statutory net gain from operations for the preceding calendar year, or (2) 10% of American Equity Life's statutory surplus at the prior year-end. For 2022, up to $407.9 million can be distributed as dividends by American Equity Life without prior approval of the Iowa Insurance Commissioner. In addition, dividends and surplus note payments may be made only out of earned surplus, and all surplus note payments are subject to prior approval by regulatory authorities. American Equity Life had $2.4 billion of statutory earned surplus at December 31, 2021.
Most states have also enacted regulations on the activities of insurance holding company systems, including acquisitions, extraordinary dividends, the terms of surplus notes, the terms of affiliate transactions, corporate governance, risk management, and other related matters. We are registered pursuant to such legislation in Iowa. A number of state legislatures have also considered or have enacted legislative proposals that alter and, in many cases, increase the authority of state agencies to regulate insurance companies and holding company systems.
Acquisition and Exercise of Control
Most states, including Iowa and New York where our life subsidiaries are domiciled, have enacted legislation or adopted administrative regulations affecting the acquisition of control of insurance companies as well as transactions between insurance companies and persons controlling them. The nature and extent of such legislation and regulations currently in effect vary from state to state. However, most states require administrative approval of the direct or indirect acquisition of 10% or more of the outstanding voting securities of an insurance company incorporated in the state. The acquisition of 10% of such securities is generally deemed to be the acquisition of "control" for the purpose of the holding company statutes and requires not only the filing of detailed information concerning the acquiring parties and the plan of acquisition, but also administrative approval prior to the acquisition. In many states, the insurance authority may find that "control" in fact does not exist in circumstances in which a person owns or controls more than 10% of the voting securities. In 2021, Brookfield Reinsurance received Iowa and New York regulatory approval to increase its ownership of our common stock, and chose to increase its ownership to 16%.
Risk-Based Capital Requirements
The National Association of Insurance Commissioners ("NAIC") risk-based capital ("RBC") requirements are intended as an early warning tool for regulators to identify deteriorating or weakly capitalized insurance companies for the purpose of initiating regulatory action. The RBC formula defines a minimum capital standard which supplements low, fixed minimum capital and surplus requirements previously implemented on a state-by-state basis. Such requirements are not designed as a ranking mechanism for adequately capitalized companies.
The NAIC's RBC requirements provide for four levels of regulatory attention depending on the ratio of a company's total adjusted capital to its RBC. Adjusted capital is defined as the total of statutory capital and surplus, asset valuation reserve and certain other adjustments. Calculations using the NAIC formula at December 31, 2021, indicated that American Equity Life's ratio of total adjusted capital to the highest level at which regulatory action might be initiated was 400%.
Reserves Adequacy
Our life subsidiaries, and our affiliated captive reinsurers, must annually analyze their statutory reserves adequacy. In each case, a qualified actuary must submit an opinion that states that the statutory reserves make adequate provision, according to accepted actuarial standards of practice, for the anticipated cash flows required by the contractual obligations and related expenses of the subsidiary. The actuary considers the adequacy of the statutory reserves in light of the assets held by the insurer with respect to such reserves and related actuarial items, such as the investment earnings on such assets and the consideration the insurer anticipates receiving and retaining under the related policies and contracts. We may increase reserves in order to submit such an opinion without qualification. Our subsidiaries that must provide these opinions did so in 2021 without qualifications.
Investments Regulation
State laws and regulations limit the amount of investments that our U.S. insurance subsidiaries may have in certain asset categories, such as below investment grade fixed income securities, real estate equity, other equity investments, and derivatives, and require diversification of investment portfolios. Investments exceeding regulatory limitations are not admitted for purposes of measuring surplus. In some instances, laws require us to divest any non-qualifying investments.
Derivatives Regulation
We use derivatives, primarily call options, to provide the income needed to fund the annual index credits on our fixed index annuity products. We may also use derivatives to hedge interest rate, foreign currency and additional equity market exposure. As such, we and our counterparties are subject to Dodd-Frank Act regulation of collateral posting, clearing, and reporting of over-the-counter derivatives transactions.
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Financial Strength Ratings
Financial strength ratings issued by Nationally Recognized Statistical Rating Organizations ("NRSRO's") are measures of an insurance company's ability to meet policyholder obligations and generally involve quantitative and qualitative evaluations by rating agencies of a company's financial condition and operating performance. While not enforced by law, ratings are based upon factors of concern to agents, policyholders and intermediaries and strongly influence an insurer's competitiveness. Factors that could negatively influence financial strength ratings include:
Sustained reductions in new sales of insurance products;
Unfavorable operational and/or financial trends;
Significant losses and/or ratings deterioration in our investment portfolio;
Changes in equity market levels, interest rates, and market volatility;
Inability to access capital markets to provide reserve relief;
Changes in statutory accounting or reserve requirements applicable to our insurance subsidiaries;
Inability to sustain senior management or other key personnel;
Rapid or excessive growth; and
Ineffective enterprise risk management.
Long-Duration Targeted Improvements
The Financial Accounting Standards Board ("FASB") has revised aspects of the measurement models and disclosure requirements for long duration insurance and investment contracts. The revisions include updating cash flow assumptions in the calculation of the liability for traditional life products, introducing the term ‘market risk benefit’ ("MRB") and requiring all contract features meeting the definition of an MRB to be measured at fair value and simplifying the method used to amortize deferred policy acquisition costs and deferred sales inducements to a constant basis over the expected term of the related contracts rather than based on actual and estimated gross profits and enhancing disclosure requirements. While this revised guidance is effective for us on January 1, 2023, the transition date (the remeasurement date) is January 1, 2021. Early adoption is permitted. We are in the process of evaluating the impact this guidance will have on our consolidated financial statements.
Privacy and Cybersecurity
Various U.S. federal and state government agencies protect the privacy and security of personal information. These laws and rules vary significantly from jurisdiction to jurisdiction. Insurance and other regulators are also increasingly focused on cybersecurity. The NAIC’s Insurance Data Security Model Law (the “Cybersecurity Model Law”) established standards for data security and for the investigation of and notification to insurance commissioners of cybersecurity events involving unauthorized access to, or the misuse of, certain nonpublic information. The Cybersecurity Model Law imposes regulatory requirements intended to protect the confidentiality, integrity, and availability of information systems. Recent regulations with a significant impact on our operations include the New York Department of Financial Services cybersecurity requirements for financial services companies and the California Consumer Privacy Act. The California Consumer Privacy Act contains protections for individuals, such as notification requirements for data breaches, the right to access personal data and the right to be forgotten.
ERISA
We provide products and services to certain employee benefit plans that are subject to the Employee Retirement Income Security Act ("ERISA") and the Internal Revenue Code of 1986, as amended (the “Code”). ERISA and the Code impose restrictions, including fiduciary duties to perform solely in the interests of ERISA plan participants and beneficiaries, and to avoid certain prohibited transactions. The applicable provisions of ERISA and the Code are subject to enforcement by the U.S. Department of Labor (“DOL”), the Internal Revenue Service (“IRS”) and the Pension Benefit Guaranty Corporation.
The prohibited transaction rules of ERISA and the Code generally restrict the provision of investment advice to ERISA plans and participants and IRAs if the investment recommendation results in fees paid to an individual advisor, the firm that employs the advisor or their affiliates that vary according to the investment recommendation chosen, unless an exemption or exception is available. Similarly, without an exemption or exception, fiduciary advisors are prohibited from receiving compensation from third parties in connection with their advice. ERISA also affects certain of our in-force insurance policies and annuity contracts, as well as insurance policies and annuity contracts we may sell in the future.
Heightened standards of conduct as a result of a fiduciary or best interest standard or other similar rules or regulations could increase the compliance and regulatory burdens on our sales representatives. On February 16, 2021, the DOL's new fiduciary regulation and interpretative guidance regarding the provision of investment advice in retirement accounts became effective. The DOL's final guidance confirms the restatement of the definition of "investment advice" that previously applied but broadens the circumstances under which sales representatives could be considered fiduciaries under ERISA in connection with recommendations to "rollover" assets from a qualified retirement plan to an individual retirement account. This guidance reverses an earlier DOL interpretation suggesting that "rollover" advice did not constitute investment advice giving rise to a fiduciary relationship. We have adapted our business practices accordingly, and continue to adapt them as regulatory requirements evolve.
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Broker-Dealer Regulation
One of our subsidiaries is registered with the SEC as a broker-dealer under the Exchange Act and a member of, and subject to regulation by, FINRA. Federal and state securities regulatory authorities and FINRA from time to time make inquiries and conduct examinations regarding compliance with securities and other laws and regulations.
London Interbank Offered Rate Developments
The Financial Conduct Authority (“FCA”), the U.K. regulator of the London Interbank Offered Rate ("LIBOR"), previously indicated that it intends to stop persuading or compelling panel banks to submit quotes used to determine LIBOR after 2021. On November 30, 2020, the Intercontinental Exchange (“ICE”) Benchmark Administration (“IBA”), the administrator of LIBOR, announced a consultation regarding its intention to cease the publication of one week and two-month U.S. Dollar LIBOR settings at the end of December 2021, but to extend the publication of the remaining U.S. Dollar LIBOR settings (overnight and one, three, six and 12 month U.S. Dollar LIBOR) until the end of June 2023. The IBA intends to share the results of the consultation with the FCA and publish a summary of the responses. U.S. bank regulators acknowledged the announcement and, subject to certain limited exceptions, advised banks to cease writing new U.S. Dollar LIBOR contracts by the end of 2021.
We use LIBOR and other interbank offered rates as interest reference rates in many of our financial instruments. Existing contract fallback provisions, and whether, how, and when we and others develop and adopt alternative reference rates, will influence the effect of any changes to or discontinuation of LIBOR on us. We are identifying, assessing and monitoring market and regulatory developments, assessing agreement terms, and evaluating operational readiness. We also monitor the FASB’s, International Accounting Standards Board’s, and U.S. Treasury Department’s updates on the accounting and tax implications of reference rate reform. We continue to assess current and alternative reference rates’ merits, limitations, risks and suitability for our investment and insurance processes.
Pandemic and Public Health Related Conditions and Regulation
The outbreak of COVID-19 and related conditions has created significant economic and financial turmoil both in the U.S. and around the world. Government, regulatory, business, and social reactions to COVID-19 also have significant effects on our business and the conditions in which we operate. For example, governments have imposed vaccination requirements, lock-downs, travel limitations, school closures, and other requirements. All of these conditions have disrupted distribution channels through which we sell our products, including independent agents and their clients. They have, and may continue to, depress economic activity that affects demands for our products. They may also materially affect our investment portfolio.
Guaranty Laws
Our life subsidiaries also may be required, under the solvency or guaranty laws of most states in which they do business, to pay assessments up to certain prescribed limits to fund policyholder losses or liabilities of insolvent insurance companies. These assessments may be deferred or forgiven under most guaranty laws if they would threaten an insurer's financial strength and, in certain instances, may be offset against future premium taxes.
Environmental Laws and Regulations
We are subject to environmental laws and regulations as an owner and operator of real property, which can include liabilities and costs in connection with any required remediation of such properties. In addition, we hold equity interests in companies that could potentially be subject to environmental liabilities. We assess real estate we acquire for environmental exposure, but unexpected environmental liabilities may arise.
Other State and NAIC Regulatory Developments
State insurance regulators and the NAIC are continually reexamining existing laws and regulations and developing new legislation for passage by state legislatures and new regulations for adoption by insurance authorities. Proposed laws and regulations or those still under development pertain to insurer solvency and market conduct and in recent years have focused on:
insurance company investments;
RBC guidelines, which consist of regulatory targeted surplus levels based on the relationship of statutory capital and surplus, with prescribed adjustments, to the sum of stated percentages of each element of a specified list of company risk exposures;
suitability/best interest standard;
the implementation of non-statutory guidelines and the circumstances under which dividends may be paid;
principles-based reserving;
own-risk solvency and enterprise risk management assessment;
cybersecurity assessments;
product approvals;
agent licensing; and
sales practices; and
algorithmic underwriting.
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Other U.S. Federal Initiatives
Historically, the federal government has not directly regulated the business of insurance. However, federal legislation and administrative policies in several areas, including pension regulation, age and sex discrimination, financial services regulation, securities regulation and federal taxation can significantly affect the insurance business. Additionally, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") generally provides for enhanced federal supervision of financial institutions, including insurance companies in certain circumstances, and financial activities that represent a systemic risk to financial stability or the U.S. economy. Under the Dodd-Frank Act, a Federal Insurance Office has been established within the U.S. Treasury Department to monitor all aspects of the insurance industry and its authority may extend to our business, although the Federal Insurance Office is not empowered with any general regulatory authority over insurers. The director of the Federal Insurance Office serves in an advisory capacity to the Financial Stability Oversight Council ("FSOC").
Federal Income Tax
Generally, U.S. federal tax law permits tax deferral on the inside build-up of investment value of certain retirement savings, including annuity products, until a contract distribution has occurred. In general, death benefits paid under a life insurance contract are excluded from taxation. Attractiveness of the Company's products for some individuals may depend on the enacted tax rates and the impact on the value of the deferral. Congress from time to time may enact other changes to the tax law that could make our products less attractive to consumers, including legislation that would modify the tax favored treatment of retirement savings, life insurance and annuity products.
Human Capital
Our Team Members
American Equity's growth and innovation strategy leverages our veteran and newly-engaged employees, building on and expanding our long-standing capabilities and adding new expertise. Our human capital management is crucial to our delivery on our decades- and often life-long promises to policyholders, and as we continue to transform into an at-scale origination, spread and capital light fee-based business, and to manage capital to grow as well as produce returns for shareholders. As of December 31, 2021, American Equity employed approximately 800 full-time team members. All of our employees are located in the United States, and none were covered by a collective bargaining agreement. American Equity engaged less than 100 temporary or part-time workers.
Engagement
Our culture is the foundation for our efforts to provide the best products and exemplary customer service, as well as to build an engaged and valued team. We seek to cultivate a culture of growth, innovation, and purposeful teamwork that builds off of our foundation of customer service, stewardship. product integrity, and financial strength. Our cultural beliefs focus on:
Performing as One Team to foster a trusting and transparent environment to work toward common objectives.
Inspiring Innovation by leaving our comfort zones daily to advance the company's goals.
Taking Action to seek the best available information and deliver results.
Owning It by taking responsibility for our actions and growing from our experiences.
Breaking Boundaries to engage in respectful conversations that invite diverse perspectives and experiences.
In 2021, we asked team members to complete a cultural advantage index survey to assess our cultural progress and over 70% responded. We used the results to identify practices we should continue and encourage, as well as areas where we needed to devote more attention to cultivate the culture we need to succeed.
Health and Safety
We continue to protect team member health and safeguard our business in light of the COVID-19 pandemic. We engaged over 90% of our workforce remotely in 2021 for substantially all or the overwhelming majority of their work time. We engaged expert advice to design and deploy safety protocols and facility upgrades for team members while on-site at our main offices in Iowa, and we continued to update benefits, offer well-being programs, and enhance management practices. We offered team members free on-site vaccination and testing at our offices.
Our employee benefits programs support our growing workforce's evolving needs. Healthcare options for benefit-eligible employees aim to maintain affordable team member contribution and proactively promote physical and mental well-being. One measure of the caliber of our benefits in 2021 was that over 85% of our employees chose coverage through our medical plan, and similarly high levels chose dental and/or vision coverage. During 2021, the company paid an average of 84% of participating employees' monthly medical premiums. We also offered out team members a free robust virtual holistic wellness program, in which hundreds took part.
Retirement Benefits
American Equity team members are eligible to participate in our 401(k) plan after thirty days of employment and age 18. We match 100% of team member contributions to the 401(k) plan up to 3% of the employee’s total eligible compensation and match 50% of employee contributions up to the next 2% of the employee’s total eligible compensation, subject to the Internal Revenue Code (the “Code”) limitations.
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We also align employee and shareholder interests and promote team members' ownership mindset through our long-standing Employee Stock Ownership Plan (“ESOP”). We make semi-annual discretionary contributions for all employees after a minimum of six months of service, and their interests vest after two years of service.
Training
At American Equity, we encourage and invest in a wide variety of professional development opportunities and in-role stretch assignments. Our employees expanded their skills and expertise through thousands of hours of training in our Academy for Excellence and and LinkedIn Learning in 2021. We also engaged employees through a wide variety of internal and external leadership and subject-matter seminars, degree, and certificate programs.
Community Action
We support and partner with a diverse range of organizations to make a positive difference where our team members live and work. In 2021, we sponsored the LGBTQ Legacy Leader Awards; Black and Brown Business Summit; Central Iowa DEI Awards Minority Scholarship; and Women Lead Change. We also took concrete local action to partner with Pro Iowa to redevelop an EPA superfund site into a multi-use facility for youth and community sports and recreation, and by offering our team members hours of paid time to volunteer in community-building efforts.
Compensation
For more information on our executive compensation programs and how they align with our business strategy and results, see our Proxy Statement to be filed during the second quarter of 2022.
Item 1A.    Risk Factors
Any or each of the events described below may (or may continue to) adversely affect our reputation, our regulatory, customer, or other relationships, our business, our net income and results of operations, our expenses, our profitability, our liquidity or cash flows, our statutory capital position, our book value and book value per share, our ability to meet our obligations, our credit and financial strength ratings, our risk-based capital ratios, our financial condition, our cost of capital, or the market price of our common stock. The effects may vary widely from time to time, product to product, market to market, region to region, or segment to segment. Many of these risks are interrelated and could occur under similar business and economic conditions, and the occurrence of any of them may cause others to emerge or worsen. Such combinations could materially increase the severity of the cumulative or separate impact of these risks.
These risk factors are not a complete set of all potential risks that could affect us. You should carefully consider the risk factors together with other information contained in this Annual Report on Form 10-K, including “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes in “Financial Statements and Supplementary Data,” as well as in other reports and materials we submit to the SEC.
Risks Relating to Our Business and Economic Conditions
1. Our results may differ from our management assumptions, estimates, and models.
Our financial results are based on assumptions and estimates that depend on many factors, none of which are certain. Our actual results may differ significantly from our expectations. As a result, our decisions on products and pricing, calculation of account balances within our financial statements, and the amounts of regulatory and rating agency capital we expect to need to hold may be wrong. Our estimates are based on complex analysis and interpretation of large quantities of data, involve sophisticated judgment and expertise, and are imprecise. We may change our assumptions and estimates from time to time as a result of engaging more sophisticated methods, obtaining additional information, or due to discovery of errors. Our expected pricing expenses and benefits are based on assumptions about how long a policy will remain in force and about mortality and longevity. Our actual experience may differ from our pricing assumptions. We may have to change our actuarial estimates, accelerate amortization of deferred acquisition expenses, increase our policy benefit reserves, or pay higher benefits than we projected. For example, persistency lower than our assumptions may require us to accelerate the amortization of expenses we deferred in connection with the acquisition of the policy.
Certain financial statement balances depend on estimates and assumptions including the calculations of policyholder benefit reserves, derivatives and embedded derivatives, deferred policy acquisition costs and deferred sales inducements, the fair value of investments and valuation allowances. The calculations we use to estimate these balances are complex. We make significant assumptions such as expected index credits, the age when a policyholder may begin to utilize the lifetime income benefit rider, the number of policyholders that may not utilize the lifetime income benefit rider, expected policyholder behavior including expected lapse rates, discount rates and the expected cost of annual call options, any of which may change over time and may be inaccurate. We use judgement in making estimates and assumptions, and our accuracy depends on multiple factors, including market conditions, interest rates, credit conditions, spreads, liquidity, and observable market data. Our investment returns or cash flows may also differ from our expectations.
In addition, our risk management policies, procedures, and models may be imperfect or may not be sufficiently comprehensive. As a result, they may not identify or adequately protect us from every risk to which we are exposed.
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2. Interest rate conditions could change.
Interest rate increases or decreases could harm our investment spread, or the difference between yields on our invested assets and our cost of money, the fair value of our investments and the reported value of stockholders' equity and the unrealized gain or loss position of our investment portfolio.
Sustained low interest rates may harm our ability to offer attractive rates and benefits to customers while maintaining profitability. This may reduce our fixed index annuity sales, as consumers seek potentially higher returns. Rising interest rates may lead customers to surrender their policies, increasing our net cash outflows, requiring us to sell assets at a disadvantaged price and accelerating our amortization of deferred policy acquisition costs and deferred sales inducements. Our sales may decline during such times, or we may increase annuity crediting rates but be unable to generate the investment returns or spreads we desire.
3. Our investments may lose value or fail to grow as quickly as we expect due to market, credit, liquidity, concentration, default, and other risks.
Our investments and their performance, including our derivative financial instruments, are subject to credit defaults, market value volatility and changes to credit spreads. The impact of these items can be exacerbated by financial and credit market volatility. We may fail to adjust to market conditions, producing investment portfolio losses. Our portfolio diversification management by asset class, creditor, industry, and other limitations may be inadequate.
We may have to sell investments that are not publicly traded or that otherwise lack liquidity (such as privately placed fixed maturity securities, below investment grade securities, investments in mortgage loans and alternative investments) below fair market values and could incur losses. We may be unable to liquidate positions quickly to meet unexpected policyholder withdrawal obligations.
Our mortgage loans may fail to perform and borrowers may default on their obligations. Declining debt service coverage ratios and increasing loan to value ratios, poor loan performance, borrower or tenant financial difficulties, catastrophes, and other events may harm mortgage carrying values, which could lead to investment losses.
Derivatives margin requirements may increase, and we may be required to post collateral. In addition, our costs may increase due to counterparties' higher capital requirements for derivatives. We may need to liquidate higher yielding assets for cash to cover some or all of these costs.
4. Our option costs could increase.
Our cost of call options, which we use to manage the index-based risk component of our fixed index annuities, may increase due to higher equity market volatility, higher interest rates, or other market factors. We may be unable to effectively mitigate this risk by adjusting caps, participation rates, and asset fees on policy anniversary dates to reflect these increases.
5. We are exposed to counterparty credit risk.
We have counterparty credit risk with other insurance companies through reinsurance. Our efforts to mitigate these risks, such as by securing assets in trusts and requiring the reinsurer to establish a letter of credit or deposit securities in the trusts for any shortfall, may be inadequate to protect us. Where the annuity deposits we ceded are unsecured, our claims would be subordinated to those of the reinsurer's policyholders. Should our reinsurers fail to meet their obligations to us, we remain liable for the ceded policy liabilities. If we were forced to recapture reinsured business, we may have inadequate capital to do so.
We may be unable to use reinsurance to the extent and on the terms we want. As a result, we would have to accept an increase in our net liability exposure or a decrease in our statutory surplus, reduce the amount of business we write, or develop other alternatives.
Our call options counterparties may fail to perform. Our efforts to maintain quality and credit exposure concentration limits may be inadequate to mitigate this risk.
Counterparties' failure to perform their derivative instrument obligations may impose costs on us to fund index credits on our fixed index annuities. We may be unable to enforce our counterparties' obligations to post collateral to secure their obligations to us.
6. The third parties on whom we rely for services may fail to perform or to comply with legal or regulatory requirements.
The third parties who perform various services for us, including sales agents, marketing organizations, investment managers, and information technologists, may fail to meet our performance expectations. Our controls to monitor their service levels and compliance with our rules and legal and regulatory standards may be inadequate.
7. Our competitors have greater resources, a broader array of products, and higher ratings, which may limit our ability to attract and retain customers or distributors.
We may be unable to compete successfully with larger companies who enjoy larger financial resources, broader and more diversified product lines, higher ratings, and more widespread agency relationships. Customers may choose fixed index, fixed rate, or variable annuities sold by other insurance companies, or chose mutual fund products, traditional bank products, and other retirement funding alternatives offered by asset managers, banks and broker/dealers. Competitors' products may have competitive or other advantages based on design, participation
14

rates and crediting rates, policy terms and conditions, services provided to distributors and policyholders, ratings by rating agencies, reputation and distributor compensation.
We may be unable to compete successfully for product distribution sources (such as IMOs, other marketers, agents, broker/dealers, banks and registered investment advisors) based on innovative and timely products, financial strength, services provided to and the relationships developed with distributors, or competitive commission structures and timely payments. Our distributors may choose to sell others' products, and are generally free to do so.
8. Our information technology and communication systems may fail or suffer a security breach.
We may lose access to or use of our information technology (IT) systems to accurately perform necessary business functions such as issuing new policies, providing customer support, maintaining existing policies, paying claims, managing our investment portfolios, and producing financial statements. Our efforts, policies, and processes to avoid or mitigate systems failures, fraud, cyberattacks, processing errors, and regulatory breaches may fail or prove inadequate.
We may be unable to keep the confidential information within our IT infrastructure secure or maintain adherence to privacy standards or expectations. Our complex information security controls framework that leverages multiple leading industry control standards, as well as extensive commercial control technologies we use to maintain the security of those systems, is imperfect and may fail. An attacker who circumvents our comprehensive information security controls infrastructure could access, view, misappropriate, alter, or delete information contained within the accessed systems, including personally identifiable policyholder information and proprietary business information.
Our efforts and expenses to maintain and enhance our existing systems to keep pace with changing security requirements, industry standards, and evolving customer preferences may be insufficient or misguided, impairing our ability to rely on information for product design, product pricing, and risk management decisions. Our extensive backup and recovery systems and contingency plans may not prevent system interruptions, failures, or allow us to promptly remediate those that do occur.
9. We may suffer a credit or financial strength downgrade.
We may fail to maintain or improve our financial strength or credit ratings, whether due to the results of operations of our subsidiaries or our financial condition.
A ratings downgrade, or the potential for a ratings downgrade, could cause distributors and sales agents to stop or reduce our product sales in favor of our competitors, could increase our policy or contract surrenders, and harm our ability to obtain reinsurance or to do so at competitive prices.
10. We may be unable to raise additional capital to support our business and sustain our growth on favorable terms.
We may need to increase or maintain the statutory capital and surplus of our life insurance subsidiaries, or the capital of our holding company, through debt, equity, and/or other transactions. We may be unable to do so because of adverse market conditions or high cost of capital, or be able to do so only on unfavorable terms. As a result, we may have to limit sales of new annuity products. We may also agree to restrictions on other activities, transactions, or financial arrangements in order to obtain necessary capital.
11. U.S. and global capital markets and economies could deteriorate due to major public health issues, including the COVID-19 pandemic, political or social developments, or otherwise.
Economic and capital markets could suffer downturns, uncertainties, or market disruptions. For example, armed conflict in Europe or elsewhere, sanctions intended to address those conflicts or achieve other ends, COVID-19 and the related pandemic, and government and business efforts in reaction to any of these, may continue to create economic and financial turmoil and contribute to a recession, to decreased economic output, to unemployment, to market dislocations, to political uncertainties, to inflation, to stagnated economic growth, and other effects. These may reduce the performance, and increase the risks, of our investment portfolio. They may also prevent us from continuing normal business operations, and our measures to mitigate their effects - such as remote working and workplace safety measures - may be inadequate to limit the strain on our business continuity plans and contain operational risk, such as information technology and third-party service provider risks.
12. We may fail to authorize and pay dividends on our preferred stock.
We may fail to authorize and pay dividends on our preferred stock. Unpaid dividends would not accrue, and could result in our inability to pay or declare a dividend on our common stock or repurchase, redeem or otherwise acquire for consideration our common stock. Any such failure would also prevent us from making certain distributions to common shareholders. They may also give preferred shareholders the right to elect members of our Board of Directors or other corporate governance rights that could weaken the rights and interests of common shareholders and other stakeholders.
13. Our subsidiaries may be unable to pay dividends or make other payments to us.
Our future cash flows may be limited, as they depend upon the availability of dividends, surplus note interest payments and other statutorily permissible payments from our insurance subsidiaries, such as payments under our investment advisory agreements and tax allocation agreements with our subsidiaries. Without such cash flow, we may be unable to service debt we incur from time to time (including senior
15

notes, term loans, subordinated debentures issued to a subsidiary trust, and others), pay operating expenses and pay dividends to common and preferred stockholders.
14. We may fail at reinsurance, investment management, or third-party capital arrangements.
We may be unable to source, negotiate, obtain timely regulatory approval for, and execute the reinsurance, investment management, or third-party-capital arrangements for our strategy to succeed. As a result, we may not realize our anticipated economic, strategic or other benefits of any such transaction and may incur unforeseen expenses or liabilities. Any reorganization or consolidation of the legal entities through which we conduct business may raise similar risks.
15. We may fail to prevent excessive risk-taking.
Our employees, including executives and others who manage sales, investments, products, wholesaling, underwriting, and others, may take excessive risks. Our compensation programs and practices, and our other controls, may not effectively deter excessive risk-taking or misconduct.
16. Our policies and procedures may fail to protect us from operational risks.
We may make errors or fail to detect incorrect or incomplete information in any of the large number of transactions we process through our complex administrative systems. Our controls and procedures to prevent such errors may not be effective. For example, we may fail to escheat property timely and completely, or fail to detect, deter or mitigate fraud against us or our customers. We may fail to maintain service standards or to operate efficiently or control costs. In addition, we may fail to attract, motivate and retain employees, develop talent, or adequately plan for management succession. We may also suffer internal control deficiencies or disclosure control deficiencies that result in significant deficiencies or material weaknesses.
Risks Relating to Legal, Regulatory, Environment, Social, or Governance Matters
17. We may be subject to increased litigation, regulatory examinations, and tax audits.
We may become involved in increased litigation, including class action lawsuits, alleging improper product design, improper sales practices and similar claims. State regulatory bodies, such as state insurance departments, the SEC and the DOL may investigate our compliance with, among other things, insurance laws, securities laws and ERISA. In addition, U.S. and state authorities have and may continue to audit our compliance with tax laws.
18. Laws, regulations, accounting, and benchmarking standards may change.
Any of the myriad of insurance statutes and regulations in the various states in which our life insurance subsidiaries transact business, including those related to insurance holding companies, may change at any time with or without warning. Laws affecting our investments, such as rules on enforcing mortgage rights, may change. Accounting standards such as those issued by the FASB, statutory accounting standards, or others may change, and interest rate benchmarking standards, such as LIBOR's replacements, may change, evolve, or be replaced. U.S. federal laws and rules, such as those related to securities or ERISA, may also change. In addition, those with authority or influence may change their interpretation of such laws or accounting standards, or may disagree with our interpretation of them. We may be unable to adapt to any such changes or disagreements in a timely or effective manner. Tax law changes may also harm us. For example, should individual income tax rates decrease, some of the income tax advantages of our products would likewise decrease. Moreover, tax law may change or eliminate any of the income tax advantages of our products. Further, changes to the basis of U.S. income taxation (e.g., taxation of unearned gains), corporate tax rates, capital gains tax rates, and other changes, may affect us.
19. Iowa or other applicable law, or our corporate governance documents or change-in-control agreements, may delay or deter takeovers or combinations.
State laws, our certificate of incorporation and by-laws, and agreements into which we have entered concerning changes in control may delay, deter or prevent a takeover attempt that stockholders might consider favorable.
20. Climate changes, or responses to it, may affect us.
Climate change may increase the frequency and severity of near- or long-term weather-related disasters, public health incidents, and pandemics, and their effects may increase over time. Climate change regulation may harm the value of investments we hold or harm our counterparties, including reinsurers. Our regulators may also increasingly focus their examinations on climate-related risks.
21. Our efforts to meet environmental, social, and governance standards and to enhance our sustainability may not meet expectations.
Our investors or others may evaluate our business practices by continually evolving and unclear environmental, social, and governance (“ESG”) criteria that may reflect contrasting or conflicting values or agendas. Our practices may also not change in the particulars or at the rate all parties expect, and may involve management trade-offs. To the extent we establish specific commitments or targets, we may fail to meet them.
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Item 1B.    Unresolved Staff Comments
None.
Item 2.    Properties
Not applicable.
Item 3.    Legal Proceedings
See Note 15 - Commitments and Contingencies to our audited consolidated financial statements.
Item 4.    Mine Safety Disclosures
Not applicable.
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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange ("NYSE") under the symbol AEL. The following table sets forth the high and low sales prices of our common stock for each quarterly period within the two most recent fiscal years as quoted on the NYSE.
High Low
2021
First Quarter $32.54 $26.21
Second Quarter $33.68 $29.18
Third Quarter $33.79 $27.12
Fourth Quarter $39.88 $29.46
2020
First Quarter $34.16 $9.07
Second Quarter $27.09 $14.76
Third Quarter $27.32 $19.06
Fourth Quarter $34.25 $22.37
As of February 11, 2022, to the best of our knowledge, there were approximately 29,524 beneficial holders of our common stock. In 2021 and 2020, we paid an annual cash dividend of $0.34 and $0.32, respectively, per share on our common stock. We intend to continue to pay an annual cash dividend on such shares so long as we have sufficient capital and/or future earnings to do so. Any further determination as to dividend policy will be made by our board of directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition and future prospects and such other factors as our board of directors may deem relevant.
Since we are a holding company, our ability to pay cash dividends depends in large measure on our subsidiaries' ability to make distributions of cash or property to us. Iowa insurance laws restrict the amount of distributions American Equity Life and Eagle Life can pay to us without the approval of the Iowa Insurance Commissioner. See Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 14 - Statutory Financial Information and Dividend Restrictions to our audited consolidated financial statements, which are incorporated by reference in this Item 5.
For disclosure on securities authorized for issuance under equity compensation plans, see our definitive proxy statement to be filed within the Commission pursuant to Regulation 14A within 120 days after December 31, 2021.
Issuer Purchases of Equity Securities
The following table presents the amount of our share purchase activity for the periods indicated:
Total Number of
Shares Purchased
Average Price
Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Program (a) Approximate Dollar Value of Shares That May Yet Be Purchased Under Program
Period (shares) (dollars) (shares) (dollars in thousands)
October 1, 2021 - October 31, 2021 —  $ —  —  $ 236,000 
November 1, 2021 - November 30, 2021 —  $ —  —  $ 736,000 
December 1, 2021 - December 31, 2021 —  $ —  —  $ 736,000 
Total — 
(a)On October 18, 2020, the Company's Board of Directors approved a $500 million share repurchase program. On November 19, 2021, the Company's Board of Directors authorized the repurchase of an additional $500 million of Company common stock.
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Common Stock Performance Graph
The graph and table below compare the total return on our common shares with the total return on the S&P Global Ratings (“S&P”) 500 and S&P 500 Financials indices for the five-year period ended on December 31, 2021. The graph and table show the total return on a hypothetical $100 investment in our common shares and in each index on December 31, 2016 including the reinvestment of all dividends. The graph and table below shall not be deemed to be “soliciting material” or to be “filed,” or to be incorporated by reference in future filings with the SEC, or to be subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act or the Exchange Act.
ael-20211231_g1.jpg
12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020 12/31/2021
American Equity Investment Life Holding Co. 100.00  137.51  126.06  136.41  127.53  181.14 
S&P 500 Index 100.00  121.83  116.49  153.17  181.35  233.41 
S&P 500 Financials Index 100.00  122.18  106.26  140.40  138.02  186.38 
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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's discussion and analysis reviews our consolidated financial position at December 31, 2021 compared with December 31, 2020, and our consolidated results of operations for the years ended December 31, 2021 and 2020, and where appropriate, factors that may affect future financial performance. This analysis should be read in conjunction with our audited consolidated financial statements, notes thereto and selected consolidated financial data appearing elsewhere in this report.
For information and analysis relating to our financial condition and consolidated results of operations as of and for the year ended December 31, 2020, as well as for the year ended December 31, 2020 compared with the year ended December 31, 2019, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2020.
Cautionary Statement Regarding Forward-Looking Information
All statements, trend analysis and other information contained in this report and elsewhere (such as in filings by us with the SEC, press releases, presentations by us or management or oral statements) may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may relate to markets for our products, trends in our operations or financial results, strategic alternatives, future operations, strategies, plans, partnerships, investments, share buybacks and other financial developments, and are subject to assumptions, risks and uncertainties. Statements such as [“guidance”, “expect”, “anticipate”, “strong”, “believe”, “intend”, “goal”, “objective”, “target”, “position”, “potential”, “will”, “may”, “would”, “should”, “can”, “deliver”, “accelerate”, “enable”, “estimate”, “projects”, “outlook”, “opportunity”] or similar words, as well as specific projections of future events or results qualify as forward-looking statements. Forward-looking statements, by their nature, are subject to a variety of inherent risks and uncertainties that could cause actual results to differ materially from the results projected. Many of these risks and uncertainties cannot be controlled by the Company. Factors that may cause our actual decisions or results to differ materially from those contemplated by these forward-looking statements include, among other things:
results differing from assumptions, estimates, and models.
interest rate condition changes.
investments losses or failures to grow as quickly as expected due to market, credit, liquidity, concentration, default, and other risks.
option costs increases.
counterparty credit risks.
third parties service-provider failures to perform or to comply with legal or regulatory requirements.
poor attraction and retention of customers or distributors due to competitors’ greater resources, broader array of products, and higher ratings.
information technology and communication systems failures or security breaches.
credit or financial strength downgrades.
inability to raise additional capital to support our business and sustain our growth on favorable terms.
U.S. and global capital market and economic deterioration due to major public health issues, including the COVID-19 pandemic, political or social developments, or otherwise.
failure to authorize and pay dividends on our preferred stock.
subsidiaries’ inability to pay dividends or make other payments to us.
failure at reinsurance, investment management, or third-party capital arrangements.
failure to prevent excessive risk-taking.
failure of policies and procedures to protect from operational risks.
increased litigation, regulatory examinations, and tax audits.
changes to laws, regulations, accounting, and benchmarking standards.
takeover or combination delays or deterrence by laws, corporate governance documents, or change-in-control agreements.
effects of climate changes, or responses to it.
failure of efforts to meet environmental, social, and governance standards and to enhance sustainability.
For a detailed discussion of these and other factors that might affect our performance, see Item 1A of this report.
Executive Summary
As previously noted, we began to implement an updated strategy, referred to as AEL 2.0, after having undertaken a thorough review of our business in 2020. During 2021, we made significant progress in the execution of the AEL 2.0 strategy in all four key pillars: Go-to-Market, Investment Management, Capital Structure and Foundational Capabilities. See Item 1. Business - Strategy for more information on the AEL 2.0 strategy and progress made during 2021.
Excellent customer service teamed with our ability to offer innovative insurance products that provide principal protection and lifetime income continued to result in significant sales of our annuity products. In 2021, our sales were $6.0 billion which increased cash and investments to a balance in excess of $64.0 billion at December 31, 2021. Our sales for the last five years have ranged from $3.7 billion to $6.0 billion.
The economic and personal investing environments continued to be conducive to the sale of fixed index and fixed rate annuity products as retirees and others looked to put their money in instruments that will protect their principal and provide them with consistent cash flow sources in their retirement years and a paycheck for life. Sales of both fixed index and fixed rate annuity products increased during 2021.
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Total sales increased to $6.0 billion in 2021 compared to $3.7 billion in 2020. The increase in fixed rate annuity products was driven by the introduction of competitive three and five-year single premium deferred annuity products at both American Equity Life and Eagle Life. The increase in fixed index annuity products was driven by product refreshes at both American Equity Life and Eagle Life, including the addition of two new proprietary indices to our refreshed AssetShield product and the introduction of two new products at American Equity Life. Sales levels in 2021 also benefited from an improving sales environment compared to 2020. We lowered crediting rates on our single premium deferred annuity products during the fourth quarter of 2021 in order to focus on sales of fixed index annuity products as we believe such products align with the transformation of the Company from a spread based return on equity insurer to more of a fee-based return on asset insurer.
We continue to be in the midst of an unprecedented period of low interest rates and low yields for investments with the credit quality we prefer. In response, we have been reducing policyholder crediting rates for new annuities and existing annuities. Active management of policyholder crediting rates resulted in a lower aggregate cost of money during 2021. We continue to have flexibility to reduce our crediting rates if necessary and could decrease our cost of money by approximately 62 basis points if we reduce current rates to guaranteed minimums. We now have 7 sleeves of private asset sectors in which we have conviction, specifically as a landlord in both single family rental homes and multi-family apartments, residential whole loans for individuals and professional investors, infrastructure debt, infrastructure equity, with a priority around sub-sectors like energy transition, middle market loans to private companies, and annual recurring revenue based lending to companies in the software and technology sector. During 2021, we deployed $3.4 billion in private assets with expected returns in the 5.1% to 5.2% range. In aggregate, we successfully repositioned the portfolio in 2021 with close to $10 billion of new assets purchases resulting in an estimated portfolio yield 3.85% at the end of 2021. We are on track to achieve close to or above 4% aggregate portfolio yield in 2022 as we further ramp our allocation in private assets from approximately 15% at year-end 2021 to 30-40% over time.
On October 18, 2020, we announced an agreement with Brookfield under which Brookfield will acquire up to a 19.9% ownership interest of common stock in the Company. The equity investment by Brookfield will take place in two stages: an initial purchase of a 9.9% equity interest at $37.00 per share which closed on November 30, 2020 with Brookfield purchasing 9,106,042 shares, and a second purchase of up to an incremental 10.0% equity interest, at the greater value of $37.00 per share or adjusted book value per share (excluding AOCI and the net impact of fair value accounting for derivatives and embedded derivatives). The second equity investment was subject to finalization of a reinsurance transaction that closed on October 8, 2021, receipt of applicable regulatory approvals and other closing conditions. Regulatory approval related to the second equity investment was received on December 29, 2021 and an additional 6,775,000 shares were issued to Brookfield at $37.33 per share in January of 2022. Brookfield also received one seat on the Company’s Board of Directors following the initial equity investment.
On October 18, 2020, the Company's Board of Directors approved a $500 million share repurchase program. The purpose of the share repurchase program is to both offset dilution from the issuance of shares to Brookfield and to institute a regular cash return program for shareholders. On November 19, 2021, the Company's Board of Directors authorized the repurchase of an additional $500 million of Company common stock. As of December 31, 2021, we have repurchased approximately 9.1 million shares of our common stock at an average price of $29.04 per common share. Through February 25, 2022, we have repurchased approximately 11.6 million shares of our common shares at an average price of $31.78 per common share and have approximately $630 million remaining under our share repurchase program.
We specialize in the sale of individual annuities (primarily fixed and fixed index deferred annuities) through IMOs, agents, banks and broker-dealers. Fixed and fixed index annuities are an important product for Americans looking to fund their retirement needs as annuities have the ability to provide retirees a paycheck for life.
Under U.S. GAAP, premium collections for deferred annuities are reported as deposit liabilities instead of as revenues. Similarly, cash payments to policyholders are reported as decreases in the liabilities for policyholder account balances and not as expenses. Sources of revenues for products accounted for as deposit liabilities are net investment income, surrender charges assessed against policy withdrawals and fees deducted from policyholder account balances for lifetime income benefit riders, net realized gains (losses) on investments and changes in fair value of derivatives. Components of expenses for products accounted for as deposit liabilities are interest sensitive and index product benefits (primarily interest credited to account balances and changes in the liability for lifetime income benefit riders), changes in fair value of embedded derivatives, amortization of deferred sales inducements and deferred policy acquisition costs, other operating costs and expenses and income taxes.
Our profitability depends in large part upon:
the amount of assets under our management,
investment spreads we earn on our policyholder account balances,
our ability to manage our investment portfolio to maximize returns and minimize risks such as interest rate changes and defaults or credit losses,
our ability to appropriately price for lifetime income benefit riders offered on certain of our fixed rate and fixed index annuity policies,
our ability to manage interest rates credited to policyholders and costs of the options purchased to fund the annual index credits on our fixed index annuities,
our ability to manage the costs of acquiring new business (principally commissions paid to agents and distribution partners and bonuses credited to policyholders),
our ability to manage our operating expenses, and
income taxes.
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Life insurance companies are subject to NAIC RBC requirements and rating agencies utilize a form of RBC to partially determine capital strength of insurance companies. Our RBC ratio at December 31, 2021 and December 31, 2020 was 400% and 372%, respectively.
We intend to manage our capitalization in normal economic conditions at a level that is consistent with rating agency capital at or above the A-level. It may drift downwards, at times, for reasons including, but not limited to, realized credit losses or temporary increases in required risk capital for ratings migrations. This level is intended to reflect a level that is consistent with the rating agencies expectations for capital adequacy ratios at different points in an economic cycle. This implies operating with a peak to trough swing whereby capital is absorbing risk at the low point of the economic cycle.
On August 21, 2020 S&P affirmed its "A-" financial strength rating on American Equity Life and its "BBB-" long-term issuer credit rating on American Equity Investment Life Holding Company, and revised its outlook to "stable" from "negative" primarily due to capital management actions taken during 2020.
On July 29, 2021, A.M. Best affirmed its "A-" financial strength rating on American Equity Investment Life Insurance Company and its subsidiaries, American Equity Investment Life Insurance Company of New York and Eagle Life Insurance Company, its "bbb-" long-term issuer credit rating of American Equity Investment Life Holding Company, its "bbb-" senior unsecured debt ratings, and its "bb" perpetual, non-cumulative preferred stock ratings. The outlook for these credit ratings of "stable" was also affirmed by A.M. Best on July 29, 2021.
On April 14, 2021, Fitch affirmed its "A-" financial strength rating on American Equity Investment Life Insurance Company and its life insurance subsidiaries, its "BBB" issuer default rating on American Equity Investment Life Holding Company and its "BBB-" senior unsecured debt ratings, and revised its outlook to "stable" from "negative" on its financial strength, issuer default and senior unsecured debt ratings.
Earnings from products accounted for as deposit liabilities are primarily generated from the excess of net investment income earned over the interest credited or the cost of providing index credits to the policyholder, or the "investment spread." Our investment spread is summarized as follows:
Year Ended December 31,
2021 2020 2019
Average yield on invested assets 3.73% 4.12% 4.52%
Aggregate cost of money 1.55% 1.69% 1.84%
Aggregate investment spread 2.18% 2.43% 2.68%
Impact of:
Investment yield - additional prepayment income 0.11% 0.08% 0.06%
Cost of money benefit from over hedging 0.07% 0.02% 0.03%
The cost of money for fixed index annuities and average crediting rates for fixed rate annuities are computed based upon policyholder account balances and do not include the impact of amortization of deferred sales inducements. See Critical Accounting Policies and Estimates—Deferred Policy Acquisition Costs and Deferred Sales Inducements. With respect to our fixed index annuities, the cost of money includes the average crediting rate on amounts allocated to the fixed rate strategy and expenses we incur to fund the annual index credits. Proceeds received upon expiration of call options purchased to fund annual index credits are recorded as part of the change in fair value of derivatives, and are largely offset by an expense for interest credited to annuity policyholder account balances. See Critical Accounting Policies and Estimates - Policy Liabilities for Fixed Index Annuities and Financial Condition - Derivative Instruments.
Average yield on invested assets decreased primarily as a result of a higher level of cash and cash equivalent holdings during 2021 compared to 2020. The higher level of cash and cash equivalent holdings was a result of our decision to execute a series of trades in the fourth quarter of 2020 designed to raise liquidity to fund block reinsurance transactions and de-risk the investment portfolio. See Net investment income. Active management of policyholder crediting rates has continued to lower the aggregate cost of money. We expect to have flexibility to reduce our crediting rates if necessary and could decrease our cost of money by approximately 62 basis points if we reduce current rates to guaranteed minimums.
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Results of Operations for the Three Years Ended December 31, 2021
Annuity deposits by product type collected during 2021, 2020 and 2019, were as follows:
Year Ended December 31,
Product Type 2021 2020 2019
(Dollars in thousands)
American Equity Life:
Fixed index annuities $ 2,753,479  $ 1,992,059  $ 4,058,638 
Annual reset fixed rate annuities 6,133  8,128  11,245 
Multi-year fixed rate annuities 855,702  395,982  1,613 
Single premium immediate annuities 59,816  33,461  12,002 
3,675,130  2,429,630  4,083,498 
Eagle Life:
Fixed index annuities 697,068  345,519  646,903 
Annual reset fixed rate annuities 350  97  199 
Multi-year fixed rate annuities 1,597,292  907,151  232,613 
2,294,710  1,252,767  879,715 
Consolidated:
Fixed index annuities 3,450,547  2,337,578  4,705,541 
Annual reset fixed rate annuities 6,483  8,225  11,444 
Multi-year fixed rate annuities 2,452,994  1,303,133  234,226 
Single premium immediate annuities 59,816  33,461  12,002 
Total before coinsurance ceded 5,969,840  3,682,397  4,963,213 
Coinsurance ceded 424,819  35,667  290,040 
Net after coinsurance ceded $ 5,545,021  $ 3,646,730  $ 4,673,173 
Annuity deposits before coinsurance ceded increased 62% during 2021 compared to 2020. Annuity deposits after coinsurance ceded increased 52% during 2021 compared to 2020. The increase in sales in 2021 compared to 2020 was driven by the sales of multi-year fixed rate annuity products introduced in late 2020 at both American Equity Life and Eagle Life and increased sales of fixed index annuities at both American Equity Life and Eagle Life. This growth is due to fixed index annuity product refreshes at both American Equity Life and Eagle Life, the introduction of two new products at American Equity Life and strong sales of single premium deferred annuity products at both Eagle Life and American Equity Life during the first three quarters of 2021. Sales levels in 2021 also benefited from an improving sales environment compared to 2020.
Prior to January 1, 2021, we had been ceding 80% of the annuity deposits received from certain multi-year rate guaranteed annuities and 20% of certain fixed index annuities sold by Eagle Life through broker/dealers and banks to an unaffiliated reinsurer. Beginning January 1, 2021, no new business is being ceded to the unaffiliated reinsurer. Effective July 1, 2021, we ceded 100% of an in-force block of fixed index annuities and began ceding 75% of certain fixed index annuities issued after July 1, 2021 to North End Re which caused the increase in coinsurance ceded premiums for the year ended December 31, 2021 compared to 2020.
Net income available to common stockholders decreased 33% to $430.3 million in 2021 and increased 159% to $637.9 million in 2020 from $246.1 million in 2019. The decrease in net income available to common stockholders for the year ended December 31, 2021 was primarily a result of the impact of assumption updates made during 2021 compared to the impact of assumption updates made during 2020.
Net income available to common stockholders for the year ended December 31, 2021 was negatively impacted by a decrease in the aggregate investment spread as previously noted. Net income, in general, is impacted by the volume of business in force and the investment spread earned on this business. The average amount of annuity account balances outstanding (net of annuity liabilities ceded under coinsurance agreements) increased 1% to $53.7 billion for the year ended December 31, 2021 compared to $53.3 billion in 2020 and increased 2% for the year ended December 31, 2020 compared to $52.3 billion in 2019. Our investment spread measured in dollars was $1.2 billion, $1.3 billion, and $1.3 billion for the years ended December 31, 2021, 2020 and 2019, respectively. Our investment spread has been negatively impacted by the extended low interest rate environment and by holding higher levels of cash and cash equivalents (see Net investment income). The higher levels of cash and cash equivalent holdings decreased in the fourth quarter of 2021 with the execution of the reinsurance treaty with North End Re. We expect to invest most of the cash balances above our target cash levels into traditional fixed income securities and privately sourced assets during early 2022. The impact of the extended low interest rate environment and higher cash and cash equivalent holdings has been partially offset by a lower aggregate cost of money due to our continued active management of new business and renewal rates. Net income available to common stockholders for the year ended December 31, 2021 was negatively impacted by an increase in other operating costs and expenses (see Other operating costs and expenses). We expect the level of other operating costs and expenses to settle into the $60 million per quarter range for the foreseeable future as we continue to execute on the AEL 2.0 strategy.
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Net income is impacted by the change in fair value of derivatives and embedded derivatives which fluctuates from year to year based upon changes in fair values of call options purchased to fund the annual index credits for fixed index annuities and changes in interest rates used to discount the embedded derivative liability. See Change in fair value of derivatives, Change in fair value of embedded derivatives, Amortization of deferred sales inducements and Amortization of deferred policy acquisition costs.
We periodically update the key assumptions used in the calculation of amortization of deferred policy acquisition costs and deferred sales inducements retrospectively through an unlocking process when estimates of current or future gross profits/margins (including the impact of realized investment gains and losses) to be realized from a group of products are revised. In addition, we periodically update the assumptions used in determining the liability for lifetime income benefit riders and the embedded derivative component of our fixed index annuity policy benefit reserves as experience develops that is different from our assumptions.
Net income available to common stockholders for 2021, 2020 and 2019 includes effects from updates to assumptions as follows:
Year Ended December 31,
2021 2020 2019
(Dollars in thousands)
Increase (decrease) in amortization of deferred sales inducements $ (45,107) $ 428,101  $ (104,707)
Increase (decrease) in amortization of deferred policy acquisition costs (45,662) 646,785  (192,982)
Increase in interest sensitive and index product benefits 243,658  285,825  315,383 
Increase (decrease) in change in fair value of embedded derivatives (122,294) (2,341,279) 28,208 
Effect on net income available to common stockholders (24,017) 769,611  (35,987)
We review these assumptions quarterly and as a result of these reviews, we made updates to assumptions during each year. In addition, we implemented an enhanced actuarial valuation system during 2019, and as a result, our 2019 assumption updates include model refinements resulting from the implementation.
The most significant assumption updates made in 2021 were to investment spread assumptions, including the net investment earned rate and crediting rate on policies, lifetime income benefit rider utilization assumptions, mortality assumptions, and lapse rate assumptions as discussed below. In addition, we made assumption updates to change the reinsurance expense assumption associated with the refinancing of statutory redundant reserves effective October 1, 2021.
Due to the continued low interest rate environment, we updated our assumption for investment spread for American Equity Life to 2.25% in the near term and increasing to 2.50% over an eight-year reversion period and our assumption for crediting/discount rate to 1.55% increasing to 2.10% over an eight-year reversion period. Prior to these assumption updates, our long-term assumption for aggregate investment spread was at 2.60% at the end of an eight-year reversion period, with a near term crediting/discount rate of 1.90% increasing to 2.10% over an eight-year reversion period. The assumption change to decrease aggregate investment spread resulted in lower expected future gross profits as compared to previous estimates and a decrease in the balances of deferred policy acquisition costs and deferred sales inducements.
We updated lapse rate and mortality assumptions based on historical experience. For certain annuity products without a lifetime income benefit rider, the lapse rate assumption was increased in more recent cohorts to reflect higher lapses on polices with a market value adjustment ("MVA") feature. For other annuity products with a lifetime income benefit rider, the population was bifurcated based on whether policies had utilized the rider. For those policies which had utilized the rider, the lapse rate assumption was decreased in later durations. The overall mortality assumption was lowered to reflect historical experience. The net impact of the updates to the lapse rate and mortality assumptions resulted in higher expected future gross profits as compared to previous estimates and an increase in the balances of deferred policy acquisition costs and deferred sales inducements. The net impact of the updates to lapse rate and mortality assumptions resulted in an increase in the liability for lifetime income benefit riders due to a greater amount of expected benefit payments in excess of account values.
We updated the lifetime income benefit rider utilization assumption based on historical experience. The ultimate utilization assumption was lowered for policies with a fee rider and certain policies with a no-fee rider. In addition, the utilization assumption was changed to reflect seasonality with higher utilization rates during the first quarter of each year. The net impact of the updates to the utilization assumption resulted in a decrease in the liability for lifetime income benefit riders due to a lower amount of expected benefits payments due to lower expected utilization. The net impact of the updates to the utilization assumption resulted in higher expected future gross profits as compared to previous estimates and an increase in the balances of deferred policy acquisition costs and deferred sales inducements.
The most significant assumption update to the calculation of the fair value of the embedded derivative component of our fixed index annuity policy benefit reserve in 2021 was the change in lapse rate assumptions discussed above. The net impact of the updates to the lapse rate assumption resulted in a decrease in the embedded derivative component of our fixed index annuity policy benefit reserves as less funds ultimately qualify for excess benefits.
The most significant assumption updates from the 2020 review were to investment spread assumptions, including the net investment earned rate and crediting rates on policies, as well as updates to lapse rate and partial withdrawal assumptions.
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Due to the economic and low interest rate environments, we updated our assumption for aggregate investment spread to 2.40% in the near-term increasing to 2.60% over an eight-year reversion period and our assumption for crediting/discount rate to 1.60% increasing to 2.10% over an eight-year reversion period. Prior to these assumption updates, our long-term assumption for aggregate investment spread was steady at 2.60%, with a near term crediting/discount rate of 1.90% increasing to 2.90% over a 20-year reversion period. The assumption update to decrease aggregate investment spread resulted in lower expected future gross profits as compared to previous estimates and a decrease in the balances of deferred policy acquisition costs and deferred sales inducements. The decrease in the crediting rate, which is used as the discount rate in the calculation of the liability for lifetime income benefit riders, resulted in an increase in the liability for lifetime income benefit riders.
We updated lapse rate and partial withdrawal assumptions based on actual historical experience. For certain annuity products without a lifetime income benefit rider, lapse rate and partial withdrawal assumptions were increased while for certain annuity products with a lifetime income benefit rider, lapse rate and partial withdrawal assumptions were decreased. The net impact of the updates to lapse rate and partial withdrawal assumptions resulted in lower expected future gross profits as compared to previous estimates and a decrease in the balances of deferred policy acquisition costs and deferred sales inducements. The net impact of the updates to lapse rate and partial withdrawal assumptions resulted in an increase in the liability for lifetime income benefit riders due to a greater amount of expected benefit payments in excess of account values.
The most significant assumption update to the calculation of the fair value of the embedded derivative component of our fixed index annuity policy benefit reserves during 2020 was a decrease in the crediting rate/option budget to 2.10% from 2.90% as a result of a revised estimate of the cost of options. This assumption change resulted in a decrease in the fair value of the embedded derivative component of our fixed index annuity policy benefit reserves due to a reduction in the projected policy contract values over the expected lives of the contracts. The net impact of the the updates to lapse and partial withdrawal assumptions noted above resulted in an increase in the embedded derivative component of our fixed index annuity policy benefit reserves as more funds ultimately qualify for excess benefits. In addition, during 2020, we refined the derivation of the discount rate used in calculating the fair value of embedded derivatives which increased the discount rate and resulted in a decrease in the change in fair value of embedded derivatives offset by increases in amortization of deferred sales inducements and deferred policy acquisition costs.
Non-GAAP operating income available to common stockholders, a non-GAAP financial measure increased 320% to $290.5 million in 2021 and decreased 87% to $69.1 million in 2020 from $548.2 million in 2019. The increase in non-GAAP operating income available to common stockholders for the year ended December 31, 2021 was primarily a result of the impact of assumption updates made during 2021 compared to the impact of assumption updates made during 2020. Non-GAAP operating income available to common stockholders and Non-GAAP operating income available to common stockholders per common share - assuming dilution, excluding the impact of notable items, for the year ended December 31, 2021 were $368.5 million and $3.90 per share, respectively. Non-GAAP operating income available to common stockholders and Non-GAAP operating income available to common stockholders per common share - assuming dilution, excluding the impact of notable items, for the year ended December 31, 2020 were $379.2 million and $4.11 per share, respectively. Non-GAAP operating income available to common stockholders for both the years ended December 31, 2021 and 2020 was negatively impacted by a decrease in the aggregate investment spread as previously noted. In addition, Non-GAAP operating income available to common stockholders for the year ended December 31, 2021 was negatively impacted by an increase in other operating costs and expenses (see Other operating costs and expenses).
In addition to net income available to common stockholders, we have consistently utilized non-GAAP operating income available to common stockholders, a non-GAAP financial measure commonly used in the life insurance industry, as an economic measure to evaluate our financial performance. Non-GAAP operating income available to common stockholders equals net income available to common stockholders adjusted to eliminate the impact of items that fluctuate from year to year in a manner unrelated to core operations, and we believe measures excluding their impact are useful in analyzing operating trends. The most significant adjustments to arrive at non-GAAP operating income available to common stockholders eliminate the impact of fair value accounting for our fixed index annuity business and are not economic in nature but rather impact the timing of reported results. We believe the combined presentation and evaluation of non-GAAP operating income available to common stockholders together with net income available to common stockholders provides information that may enhance an investor's understanding of our underlying results and profitability.
Non-GAAP operating income available to common stockholders is not a substitute for net income available to common stockholders determined in accordance with GAAP. The adjustments made to derive non-GAAP operating income available to common stockholders are important to understand our overall results from operations and, if evaluated without proper context, non-GAAP operating income available to common stockholders possesses material limitations. As an example, we could produce a low level of net income available to common stockholders or a net loss available to common stockholders in a given period, despite strong operating performance, if in that period we experience significant net realized losses from our investment portfolio. We could also produce a high level of net income available to common stockholders in a given period, despite poor operating performance, if in that period we generate significant net realized gains from our investment portfolio. As an example of another limitation of non-GAAP operating income available to common stockholders, it does not include the decrease in cash flows expected to be collected as a result of credit losses on financial assets. Therefore, our management reviews net realized investment gains (losses) and analyses of our net investment income, including impacts related to credit losses, in connection with their review of our investment portfolio. In addition, our management examines net income available to common stockholders as part of their review of our overall financial results.
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The adjustments made to net income available to common stockholders to arrive at non-GAAP operating income available to common stockholders and non-GAAP operating income available to common stockholders, excluding notable items for 2021, 2020 and 2019 are set forth in the table that follows:
Year Ended December 31,
2021 2020 2019
(Dollars in thousands)
Reconciliation from net income available to common stockholders to non-GAAP operating income available to common stockholders:
Net income available to common stockholders $ 430,317  $ 637,945  $ 246,090 
Adjustments to arrive at non-GAAP operating income available to common stockholders:
Net realized losses on financial assets, including credit losses 10,299  59,355  7,361 
Change in fair value of derivatives and embedded derivatives (187,290) (784,005) 374,468 
Income taxes 37,184  155,808  (79,736)
Non-GAAP operating income available to common stockholders 290,510  69,103  548,183 
Impact of notable items 78,036  310,117  (123,739)
Non-GAAP operating income available to common stockholders, excluding notable items $ 368,546  $ 379,220  $ 424,444 
Per common share - assuming dilution:
Non-GAAP operating income available to common stockholders $ 3.07  $ 0.75  $ 5.97 
Impact of notable items 0.83  3.36  (1.35)
Non-GAAP operating income available to common stockholders, excluding notable items $ 3.90  $ 4.11  $ 4.62 
Notable items impacting non-GAAP operating income available to common stockholders:
Impact of actuarial assumption updates $ 78,036  $ 340,895  $ (123,739)
Tax benefit related to the CARES Act —  (30,778) — 
Total notable items $ 78,036  $ 310,117  $ (123,739)
The amounts disclosed in the reconciliation above are presented net of related adjustments to amortization of deferred sales inducements and deferred policy acquisition costs and accretion of lifetime income benefit rider reserves where applicable. Notable items reflect the after-tax impact to non-GAAP operating income available to common stockholders for certain items that do not reflect the company's expected ongoing operations. Notable items primarily include the impact from actuarial assumption updates. The presentation of notable items is intended to help investors better understand our results and to evaluate and forecast those results.
Non-GAAP operating income available to common stockholders for 2021, 2020 and 2019 includes effects from updates to assumptions as follows:
Year Ended December 31,
2021 2020 2019
(Dollars in thousands)
Increase (decrease) in amortization of deferred sales inducements $ (66,066) $ 57,467  $ (184,882)
Increase (decrease) in amortization of deferred policy acquisition costs (78,183) 90,970  (288,332)
Increase in interest sensitive and index product benefits 243,658  285,825  315,383 
Effect on non-GAAP operating income available to common stockholders (78,036) (340,895) 123,739 
The impact to net income available to common stockholders and non-GAAP operating income available to common stockholders from assumption updates varies due to the impact of fair value accounting for our fixed index annuity business as non-GAAP operating income available to common stockholders eliminates the impact of fair value accounting for our fixed index annuity business. While the assumption updates made during 2021, 2020 and 2019 were consistently applied, the impact to net income available to common stockholders and non-GAAP operating income available to common stockholders varies due to different amortization rates being applied to gross profit adjustments included in the valuation.
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Annuity product charges (surrender charges assessed against policy withdrawals and fees deducted from policyholder account balances for lifetime income benefit riders) decreased 3% to $242.6 million in 2021 and increased 5% to $251.2 million in 2020 from $240.0 million in 2019. The components of annuity product charges are set forth in the table that follows:
Year Ended December 31,
2021 2020 2019
(Dollars in thousands)
Surrender charges $ 67,657  $ 72,551  $ 71,565 
Lifetime income benefit riders (LIBR) fees 174,974  178,676  168,470 
$ 242,631  $ 251,227  $ 240,035 
Withdrawals from annuity policies subject to surrender charges $ 1,099,098  $ 776,305  $ 662,795 
Average surrender charge collected on withdrawals subject to surrender charges 6.2  % 9.3  % 10.8  %
Fund values on policies subject to LIBR fees $ 22,183,623  $ 22,986,903  $ 22,490,676 
Weighted average per policy LIBR fee 0.79  % 0.78  % 0.75  %
The decrease in annuity product charges during 2021 was attributable to lower average surrender charges collected on withdrawals subject to surrender charges primarily due to an increase in market value adjustments on such surrenders and a decrease in fees assessed for lifetime income benefit riders due to a smaller volume of business in force subject to the fee slightly offset by an increase in the average fees being charged as compared to prior periods. See Interest sensitive and index product benefits below for corresponding expense recognized on lifetime income benefit riders.
Net investment income decreased 7% to $2.0 billion in 2021 and 5% to $2.2 billion in 2020 from $2.3 billion in 2019. The decrease for 2021 compared to 2020 was attributable to a decrease in the average yield earned on invested assets during 2021 compared to 2020. Average invested assets excluding derivative instruments (on an amortized cost basis) increased 3% to $54.8 billion in 2021 and 4% to $53.1 billion in 2020 compared to $51.1 billion in 2019.
The average yield earned on average invested assets was 3.73%, 4.12% and 4.52% for 2021, 2020 and 2019, respectively. The decrease in yield earned on average invested assets in 2021 was primarily attributable to an increase in our level of cash and cash equivalent holdings as previously described and a decline in yields on our floating rate investment portfolio due to decreases in the average benchmark rates associated with these investments offset by an increase in mark to market gains on investment partnerships due to changes in market valuations.
The expected return on investments purchased during 2021 was 3.92%, net of third-party investment management expenses. Purchases for 2021 included $6.4 billion of fixed maturity securities with an expected return of 3.25% and $3.4 billion of privately sourced assets with an expected return of 5.19%. The privately sourced assets include investments in investment real estate, middle market loans, infrastructure debt, mortgage loans and strategic investments in limited partnerships. The expected return on investments purchased during 2020 and 2019 was 3.84% and 3.88%, respectively.
Change in fair value of derivatives consists of call options purchased to fund annual index credits on fixed index annuities, and an interest rate swap and interest rate caps that hedged our floating rate subordinated debentures. The interest rate swap and interest rate caps were terminated during 2019 and 2020 in conjunction with the redemption of our floating rate subordinated debentures. The components of change in fair value of derivatives are as follows:
Year Ended December 31,
2021 2020 2019
(Dollars in thousands)
Call options:
Gain (loss) on option expiration $ 1,368,381  $ 15,042  $ (190,376)
Change in unrealized gains/losses (20,456) 19,562  1,098,932 
Warrants 810  —  — 
Interest rate swap —  —  (1,059)
Interest rate caps —  62  (591)
$ 1,348,735  $ 34,666  $ 906,906 
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The differences between the change in fair value of derivatives between years for call options are primarily due to the performance of the indices upon which our call options are based which impacts the level of gains on call option expirations, the fair values of those call options and changes in the fair values of those call options between years. The changes in gain (loss) on option expiration and in unrealized gains/losses on call options for the year ended December 31, 2021 as compared to 2020 are due to equity market performance in 2021 compared to 2020. A substantial portion of our call options are based upon the S&P 500 Index with the remainder based upon other equity and bond market indices. The range of index appreciation (after applicable caps, participation rates and asset fees) for options expiring during these years is as follows:
Year Ended December 31,
2021 2020 2019
S&P 500 Index
Point-to-point strategy 0.0% - 42.6% 0.0% - 17.4% 0.0% - 22.3%
Monthly average strategy 0.0% - 29.4% 0.0% - 11.9% 0.0% - 14.7%
Monthly point-to-point strategy 0.0% - 21.7% 0.0% - 14.0% 0.0% - 14.0%
Volatility control index point-to-point strategy 0.0% - 9.7% 0.0% - 9.3% 0.0% - 10.3%
Fixed income (bond index) strategies 0.0% - 10.0% 0.0% - 13.6% 0.0% - 10.0%
The change in fair value of derivatives is also influenced by the aggregate costs of options purchased. During 2021, the aggregate cost of options were lower than in 2020 as option costs generally decreased during 2020 and 2021. The aggregate cost of options is also influenced by the amount of policyholder funds allocated to the various indices and market volatility which affects option pricing. See Critical Accounting Policies and Estimates - Policy Liabilities for Fixed Index Annuities.
Net realized gains (losses) on investments include gains and losses on the sale of securities and other investments and changes in allowances for credit losses on our securities and mortgage loans on real estate. Net realized gains (losses) on investments fluctuate from year to year primarily due to changes in the interest rate and economic environment and the timing of the sale of investments. See Note 4 - Investments and Note 5 - Mortgage Loans on Real Estate to our audited consolidated financial statements and Financial Condition - Credit Losses for a detailed presentation of the types of investments that generated the gains (losses) as well as discussion of credit losses on our securities recognized during the periods presented and Financial Condition - Investments and Note 5 - Mortgage Loans on Real Estate to our audited consolidated financial statements for discussion of credit losses recognized on mortgage loans on real estate.
Securities sold at losses are generally due to our long-term fundamental concern with the issuers' ability to meet their future financial obligations or to improve our risk or duration profiles as they pertain to our asset liability management.
Other revenue was $15.7 million for the year ended December 31, 2021 and primarily consists of $5.5 million related to asset liability management fees and $10.2 million of amortization related to the deferred gain associated with the cost of reinsurance. Both of these items are associated with the North End Re reinsurance treaty which was effective July 1, 2021. See Note 9 - Reinsurance and Policy Provisions to our audited consolidated financial statements for more information.
Interest sensitive and index product benefits increased 74% to $2.7 billion in 2021 and 20% to $1.5 billion in 2020 from $1.3 billion in 2019. The components of interest sensitive and index product benefits are summarized as follows:
Year Ended December 31,
2021 2020 2019
(Dollars in thousands)
Index credits on index policies $ 1,977,888  $ 747,489  $ 587,818 
Interest credited (including changes in minimum guaranteed interest for fixed index annuities)
253,725  198,745  204,474 
Lifetime income benefit riders 449,793  597,036  495,284 
$ 2,681,406  $ 1,543,270  $ 1,287,576 
The changes in index credits were attributable to changes in the level of appreciation of the underlying indices (see discussion above under Change in fair value of derivatives) and the amount of funds allocated by policyholders to the respective index options. Total proceeds received upon expiration of the call options purchased to fund the annual index credits were $2.0 billion, $0.8 billion and $0.6 billion for the years ended December 31, 2021, 2020 and 2019, respectively. The increase in interest credited in 2021 was due to increases in sales of single premium deferred annuity products that receive a fixed rate of interest partially offset by a reduction in interest credited to funds allocated to the fixed option within our fixed index annuities due to a decrease in the average balance allocated to the fixed option. The decrease in benefits recognized for lifetime income benefit riders for 2021 compared to 2020 was due to the impact of assumption updates made during 2021 compared to the impact of assumption updates made during 2020 and the increased level of index credits on index policies during 2021 compared to 2020. In addition, fund value of policies with lifetime income benefit riders decreased as a result of the North End Re reinsurance treaty executed during 2021. See Net income available to common stockholders above for discussion of the changes in the assumptions used in determining reserves for lifetime income benefit riders for the years ended December 31, 2021 and 2020.
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Amortization of deferred sales inducements before gross profit adjustments decreased in 2021 compared to 2020 primarily due to the impact of assumption updates made during 2021 compared to the impact of assumption updates made during 2020. Amortization of deferred sales inducements is based on historical, current and future expected gross profits. The changes in amortization from period to period are the result of differences in actual gross profits compared to expected or modeled gross profits and changes to the underlying business. In addition, amortization of deferred sales inducements for the year ended December 31, 2021 decreased as index credits on index policies for the year ended December 31, 2021 were in excess of expected index credits and index credits on index policies for the same period of 2020. Bonus products represented 65%, 75% and 76% of our net annuity account values at December 31, 2021, 2020 and 2019, respectively. The amount of amortization is affected by amortization associated with fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business and amortization associated with net realized gains (losses) on investments. Fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business creates differences in the recognition of revenues and expenses from derivative instruments including the embedded derivative liabilities in our fixed index annuity contracts. The change in fair value of the embedded derivatives will not correspond to the change in fair value of the derivatives (purchased call options), because the purchased call options are one-year options while the options valued in the fair value of embedded derivatives cover the expected lives of the contracts which typically exceed ten years. Amortization of deferred sales inducements is summarized as follows:
Year Ended December 31,
2021 2020 2019
(Dollars in thousands)
Amortization of deferred sales inducements before gross profit adjustments $ 112,790  $ 243,067  $ 78,398 
Gross profit adjustments:
Fair value accounting for derivatives and embedded derivatives 40,899  202,660  12,189 
Net realized losses on investments (997) (7,563) (2,002)
Amortization of deferred sales inducements after gross profit adjustments $ 152,692  $ 438,164  $ 88,585 
See Net income available to common stockholders and Non-GAAP operating income available to common stockholders, a non-GAAP financial measure above for discussion of the impact of assumption updates on amortization of deferred sales inducements for the years ended December 31, 2021 and 2020. See Critical Accounting Policies and Estimates - Deferred Policy Acquisition Costs and Deferred Sales Inducements.
Change in fair value of embedded derivatives includes changes in the fair value of our fixed index annuity embedded derivatives (see Note 7 - Derivative Instruments to our audited consolidated financial statements). The components of change in fair value of embedded derivatives are as follows:
Year Ended December 31,
2021 2020 2019
(Dollars in thousands)
Fixed index annuities - embedded derivatives
$ (876,803) $ (1,922,085) $ 562,302 
Other changes in difference between policy benefit reserves computed using derivative accounting vs. long-duration contracts accounting
520,863  635,298  891,740 
Reinsurance related embedded derivative (2,362) —  — 
$ (358,302) $ (1,286,787) $ 1,454,042 
The change in fair value of the fixed index annuity embedded derivatives resulted from (i) changes in the expected index credits on the next policy anniversary dates, which are related to the change in fair value of the call options acquired to fund those index credits discussed above in Change in fair value of derivatives; (ii) changes in the expected annual cost of options we will purchase in the future to fund index credits beyond the next policy anniversary; (iii) changes in the discount rates used in estimating our embedded derivative liabilities; and (iv) the growth in the host component of the policy liability. The amounts presented as "Other changes in difference between policy benefit reserves computed using derivative accounting vs. long-duration contracts accounting" represents the total change in the difference between policy benefit reserves for fixed index annuities computed under the derivative accounting standard and the long-duration contracts accounting standard at each balance sheet date, less the change in fair value of our fixed index annuities embedded derivative. See Critical Accounting Policies and Estimates- Policy Liabilities for Fixed Index Annuities.
The primary reason for the increase in the change in fair value of the fixed index annuity embedded derivatives during 2021 compared to 2020 was the impact of assumption updates made during 2021 compared to the impact of assumption updates made during 2020. See Net Income available to common stockholders above for a discussion of the impact of assumption updates on the fair value of the fixed index annuity embedded derivative for the years ended December 31, 2021 and 2020.
The increase in change in fair value of the fixed index annuity embedded derivatives for the year ended December 31, 2021 was also due to an increase in the net discount rate during the year ended December 31, 2021 compared to a decrease in the net discount rate during the same period of 2020 offset by a larger increase in expected index credits on the next policy anniversary dates resulting from a larger increase in the fair value of the call options acquired to fund these index credits during year ended December 31, 2021 compared to the year ended December 31, 2020. The discount rates used in estimating our embedded derivative liabilities fluctuate based on the changes in the general level of risk free interest rates and our own credit spread.
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The reinsurance agreement executed in 2021 with Brookfield to cede certain fixed index annuity product liabilities on a modified coinsurance basis contains an embedded derivative. See Note 7 - Derivative Instruments for discussion on this embedded derivative.
Amortization of deferred policy acquisition costs before gross profit adjustments decreased in 2021 compared to 2020 primarily due to the impact of assumption updates made during 2021 compared to the impact of assumption updates made during 2020. Amortization of deferred policy acquisition costs is based on historical, current and future expected gross profits. The changes in amortization from period to period are the result of differences in actual gross profits compared to expected or modeled gross profits and changes to the underlying business. In addition, amortization of deferred policy acquisition costs for year ended December 31, 2021 decreased as index credits on index policies for the year ended December 31, 2021 were in excess of expected index credits and index credits on index policies for the same periods of 2020. The amount of amortization is affected by amortization associated with fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business and amortization associated with net realized gains (losses) on investments. As discussed above, fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business creates differences in the recognition of revenues and expenses from derivative instruments including the embedded derivative liabilities in our fixed index annuity contracts. Amortization of deferred policy acquisition costs is summarized as follows:
Year Ended December 31,
2021 2020 2019
(Dollars in thousands)
Amortization of deferred policy acquisition costs before gross profit adjustments $ 181,589  $ 368,139  $ 97,736 
Gross profit adjustments:
Fair value accounting for derivatives and embedded derivatives 88,576  293,827  (7,618)
Net realized losses on investments (1,837) (12,412) (2,401)
Amortization of deferred policy acquisition costs after gross profit adjustments $ 268,328  $ 649,554  $ 87,717 
See Net income available to common stockholders and non-GAAP operating income available to common stockholders, a non-GAAP financial measure, above for discussion of the impact of assumption updates on amortization of deferred policy acquisition costs for the years ended December 31, 2021 and 2020. See Critical Accounting Policies and Estimates - Deferred Policy Acquisition Costs and Deferred Sales Inducements.
Other operating costs and expenses increased 33% to $243.7 million in 2021 and increased 19% to $183.6 million in 2020 from $154.2 million in 2019 and are summarized as follows:
Year Ended December 31,
2021 2020 2019
(Dollars in thousands)
Salary and benefits $ 139,155  $ 95,815  $ 82,883 
Risk charges 36,272  45,091  38,342 
Other 68,285  42,730  32,928 
Total other operating costs and expenses $ 243,712  $ 183,636  $ 154,153 
Salary and benefits expense increased in 2021 as a result of an increase in salary and benefits of $22.2 million and an increase of $22.2 million related to expense recognized under our equity and cash incentive compensation programs ("incentive compensation programs"). The increases in salary and benefits were due to an increased number of employees related to our continued growth and implementation of AEL 2.0. The increase in expense for our incentive compensation programs was primarily due to an increase in the expected payouts due to a larger number of employees participating in the programs and higher payouts for certain employees participating in the programs partially due to progress made in the execution of the AEL 2.0 strategy during 2021. The increases in salary and benefits for 2021 includes $6.1 million of expenses associated with talent transition as we implement the AEL 2.0 strategy.
The decrease in risk charges during 2021 compared to 2020 was due to the recapture of an existing reinsurance agreement which was replaced with a new agreement with a lower risk charge. We expect the risk charge to be approximately $9 million lower per quarter than the previous agreement.
Other expenses increased in 2021 compared to 2020 primarily as a result of increases in legal and consulting fees related to the implementation of AEL 2.0, increases in depreciation and maintenance expenses primarily related to software and hardware assets, and increases in agent conference related expenses as conferences resumed as we emerge from the COVID-19 pandemic.
We expect the level of other operating costs and expenses to settle into the $60 million per quarter range for the foreseeable future as we continue to execute on the AEL 2.0 strategy.
30

Income tax expense decreased in 2021 primarily due to an decrease in income before income taxes. The effective income tax rates were 21.4% and 17.7% for 2021 and 2020, respectively.
Income tax expense and the resulting effective tax rate are based upon two components of income before income taxes ("pretax income") that are taxed at different tax rates. Life insurance income is generally taxed at a statutory rate of approximately 21.5% reflecting the absence of state income taxes for substantially all of the states that the life insurance subsidiaries do business in. The income for the parent company and other non-life insurance subsidiaries (the "non-life insurance group") is generally taxed at a statutory tax rate of 28.7% reflecting the combined federal and state income tax rates. The effective income tax rates resulting from the combination of the income tax provisions for the life and non-life sources of income vary from year to year based primarily on the relative size of pretax income from the two sources.
The effective income tax rate for 2021 was not significantly impacted by discrete tax items. The effective tax rate for 2020 was impacted by a discrete tax item related to the provision of the Coronavirus Aid, Relief, and Economic Security Act that allowed net operating losses for 2018 through 2020 to be carried back to previous tax years in which a 35% statutory tax rate was in effect. The effective income tax rate excluding the impact of the discrete items was 21.4% for the year ended December 31, 2020.
Financial Condition
Investments
Our investment strategy is to maximize current income and total investment return through active management while maintaining a responsible asset allocation strategy containing high credit quality investments and providing adequate liquidity to meet our cash obligations to policyholders and others. Our investment strategy is also reflective of insurance statutes, which regulate the type of investments that our life subsidiaries are permitted to make and which limit the amount of funds that may be used for any one type of investment.
As previously noted, as part of our AEL 2.0 investment pillar, we intend to ramp up our allocation to private assets in part by partnering with proven asset managers in our focus expansion sectors of commercial real estate, residential real estate including mortgages and single family rental homes, infrastructure debt and equity, middle market lending and lending to revenue, technology and software sector companies.
The composition of our investment portfolio is summarized as follows:
December 31,
2021 2020
Carrying
Amount
Percent Carrying
Amount
Percent
(Dollars in thousands)
Fixed maturity securities:
United States Government full faith and credit $ 37,793  0.1  % $ 39,771  0.1  %
United States Government sponsored agencies 1,040,953  1.7  % 1,039,551  1.9  %
United States municipalities, states and territories 3,927,201  6.5  % 3,776,131  7.0  %
Foreign government obligations 402,545  0.7  % 202,706  0.4  %
Corporate securities 34,660,234  57.4  % 31,156,827  58.1  %
Residential mortgage backed securities 1,125,049  1.9  % 1,512,831  2.8  %
Commercial mortgage backed securities 4,840,311  8.0  % 4,261,227  8.0  %
Other asset backed securities 5,271,857  8.7  % 5,549,849  10.4  %
Total fixed maturity securities 51,305,943  85.0  % 47,538,893  88.7  %
Mortgage loans on real estate 5,687,998  9.4  % 4,165,489  7.8  %
Real estate investments 337,939  0.6  % —  —  %
Derivative instruments 1,277,480  2.1  % 1,310,954  2.4  %
Other investments 1,767,144  2.9  % 590,078  1.1  %
$ 60,376,504  100.0  % $ 53,605,414  100.0  %
31

Fixed Maturity Securities
Our fixed maturity security portfolio is managed to minimize risks such as interest rate changes and defaults or credit losses while earning a sufficient and stable return on our investments. The largest portion of our fixed maturity securities are in investment grade (typically NAIC designation 1 or 2) publicly traded or privately placed corporate securities.
A summary of our fixed maturity securities by NRSRO ratings is as follows:
December 31,
2021 2020
Rating Agency Rating Carrying
Amount
Percent of Fixed Maturity Securities Carrying
Amount
Percent of Fixed Maturity Securities
(Dollars in thousands)
Aaa/Aa/A $ 28,275,431  55.2  % $ 27,883,428  58.7  %
Baa 21,875,939  42.6  % 18,408,954  38.7  %
Total investment grade 50,151,370  97.8  % 46,292,382  97.4  %
Ba 930,384  1.8  % 973,581  2.0  %
B 118,065  0.2  % 122,553  0.3  %
Caa 39,354  0.1  % 61,037  0.1  %
Ca and lower 66,770  0.1  % 89,340  0.2  %
Total below investment grade 1,154,573  2.2  % 1,246,511  2.6  %
$ 51,305,943  100.0  % $ 47,538,893  100.0  %
The NAIC's Securities Valuation Office ("SVO") is responsible for the day-to-day credit quality assessment of securities owned by state regulated insurance companies. The purpose of such assessment and valuation is for determining regulatory capital requirements and regulatory reporting. Insurance companies report ownership to the SVO when such securities are eligible for regulatory filings. The SVO conducts credit analysis on these securities for the purpose of assigning a NAIC designation and/or unit price. Typically, if a security has been rated by an NRSRO, the SVO utilizes that rating and assigns a NAIC designation based upon the following system:
NAIC Designation NRSRO Equivalent Rating
1 Aaa/Aa/A
2 Baa
3 Ba
4 B
5 Caa
6 Ca and lower
As of December 31, 2020, the NAIC had introduced 20 NAIC designation modifiers that will be applied to each NAIC designation to determine a security's NAIC designation category. The NAIC has approved new unique risk-based capital charges for each of the 20 designated categories for reporting effective December 31, 2021.
For most of the bonds held in our portfolio the NAIC designation matches the NRSRO equivalent rating. However, for certain loan-backed and structured securities, as defined by the NAIC, the NAIC rating is not always equivalent to the NRSRO rating presented in the previous table. The NAIC has adopted revised rating methodologies for certain loan-backed and structured securities comprised of non-agency residential mortgage backed securities ("RMBS") and commercial mortgage backed securities ("CMBS"). The NAIC’s objective with the revised rating methodologies for these structured securities is to increase the accuracy in assessing expected losses and use the improved assessment to determine a more appropriate capital requirement for such structured securities. The revised methodologies reduce regulatory reliance on rating agencies and allow for greater regulatory input into the assumptions used to estimate expected losses from structured securities.
The use of this process by the SVO may result in certain non-agency RMBS and CMBS being assigned an NAIC designation that is different than the equivalent NRSRO rating. The NAIC designations for non-agency RMBS and CMBS are based on security level expected losses as modeled by an independent third party (engaged by the NAIC) and the statutory carrying value of the security, including any purchase discounts or impairment charges previously recognized. Evaluation of non-agency RMBS and CMBS held by insurers using the NAIC rating methodologies is performed on an annual basis.
Our fixed maturity security portfolio is managed to minimize risks such as defaults or impairments while earning a sufficient and stable return on our investments. Our strategy with respect to our fixed maturity securities portfolio has been to invest primarily in investment grade securities. Investment grade is NAIC 1 and 2 securities and Baa3/BBB- and better securities on the NRSRO scale. This strategy meets the objective of minimizing risk while also managing asset capital charges on a regulatory capital basis.
32

A summary of our fixed maturity securities by NAIC designation is as follows:
December 31, 2021 December 31, 2020
NAIC
Designation
Amortized
Cost
Fair Value Carrying
Amount
Percentage
of Total
Carrying
Amount
Amortized
Cost
Fair Value Carrying
Amount
Percentage
of Total
Carrying
Amount
(Dollars in thousands) (Dollars in thousands)
1 $ 26,157,531  $ 28,785,839  $ 28,785,839  56.1  % $ 23,330,149  $ 26,564,542  $ 26,564,542  55.9  %
2 19,758,594  21,396,020  21,396,020  41.7  % 17,312,485  19,377,013  19,377,013  40.8  %
3 909,311  941,210  941,210  1.9  % 1,292,124  1,299,455  1,299,455  2.7  %
4 133,070  147,160  147,160  0.3  % 282,049  256,651  256,651  0.5  %
5 16,496  15,357  15,357  —  % 29,396  16,288  16,288  —  %
6 24,181  20,357  20,357  —  % 58,533  24,944  24,944  0.1  %
$ 46,999,183  $ 51,305,943  $ 51,305,943  100.0  % $ 42,304,736  $ 47,538,893  $ 47,538,893  100.0  %
The amortized cost and fair value of fixed maturity securities at December 31, 2021, by contractual maturity are presented in Note 4 - Investments to our audited consolidated financial statements in this Form 10-K, which is incorporated by reference in this Item 7.
Unrealized Losses
The amortized cost and fair value of fixed maturity securities that were in an unrealized loss position were as follows:
Number of
Securities
Amortized
Cost
Unrealized
Losses, Net of Allowance
Allowance for Credit Losses Fair Value
(Dollars in thousands)
December 31, 2021
Fixed maturity securities, available for sale:
United States Government full faith and credit $ 1,041  $ (34) $ —  $ 1,007 
United States Government sponsored agencies 760,060  (90) —  759,970 
United States municipalities, states and territories 42  190,471  (3,042) (2,776) 184,653 
Foreign government obligations 43,704  (843) —  42,861 
Corporate securities 600  2,530,864  (38,442) —  2,492,422 
Residential mortgage backed securities 74  280,044  (2,093) (70) 277,881 
Commercial mortgage backed securities 108  944,407  (17,719) —  926,688 
Other asset backed securities 592  3,172,613  (50,107) —  3,122,506 
1,427  $ 7,923,204  $ (112,370) $ (2,846) $ 7,807,988 
December 31, 2020
Fixed maturity securities, available for sale:
United States Government sponsored agencies $ 250,521  $ (46) $ —  $ 250,475 
United States municipalities, states and territories 14  36,558  (1,044) (2,844) 32,670 
Corporate securities 103  856,995  (35,892) (60,193) 760,910 
Residential mortgage backed securities 43  173,875  (2,526) (1,734) 169,615 
Commercial mortgage backed securities 122  1,034,424  (64,678) —  969,746 
Other asset backed securities 558  3,728,144  (146,640) —  3,581,504 
843  $ 6,080,517  $ (250,826) $ (64,771) $ 5,764,920 
The unrealized losses at December 31, 2021 are principally related to the timing of the purchases of certain securities, which carry less yield than those available at December 31, 2021, and the continued impact the COVID-19 pandemic had on credit markets. Approximately 85% and 75% of the unrealized losses on fixed maturity securities shown in the above table for December 31, 2021 and December 31, 2020, respectively, are on securities that are rated investment grade, defined as being the highest two NAIC designations.
The decrease in unrealized losses from December 31, 2020 to December 31, 2021 was primarily related to pricing improvements due to improved credit quality for certain fixed maturity securities during the twelve months ended December 31, 2021 and strategies to reposition the fixed maturity security portfolio that resulted in the sales of certain securities that were in an unrealized loss position at December 31, 2020. This decrease was partially offset by an increase in treasury yields during the twelve months ended December 31, 2021. The 10-year U.S. Treasury yields at December 31, 2021 and December 31, 2020 were 1.52% and 0.93%, respectively. The 30-year U.S. Treasury yields at December 31, 2021 and December 31, 2020 were 1.90% and 1.65%, respectively.
33

The following table sets forth the composition by credit quality (NAIC designation) of fixed maturity securities with gross unrealized losses:
NAIC Designation Carrying Value of
Securities with
Gross Unrealized
Losses
Percent of
Total
Gross
Unrealized
Losses (1)
Percent of
Total
(Dollars in thousands)
December 31, 2021
1 $ 4,174,438  53.5  % $ (37,884) 33.7  %
2 3,197,575  41.0  % (57,354) 51.0  %
3 376,996  4.8  % (13,723) 12.2  %
4 33,229  0.4  % (1,083) 1.0  %
5 9,506  0.1  % (1,140) 1.0  %
6 16,244  0.2  % (1,186) 1.1  %
$ 7,807,988  100.0  % $ (112,370) 100.0  %
December 31, 2020
1 $ 2,625,341  45.5  % $ (82,045) 32.7  %
2 2,286,377  39.7  % (106,700) 42.5  %
3 650,364  11.3  % (42,040) 16.8  %
4 178,669  3.1  % (16,274) 6.5  %
5 4,991  0.1  % (1,640) 0.7  %
6 19,178  0.3  % (2,127) 0.8  %
$ 5,764,920  100.0  % $ (250,826) 100.0  %
(1)Gross unrealized losses have been adjusted to reflect the allowance for credit loss of $2.8 million and $64.8 million as of December 31, 2021 and 2020, respectively.
Our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities (consisting of 1,427 and 843 securities, respectively) have been in a continuous unrealized loss position at December 31, 2021 and 2020, along with a description of the factors causing the unrealized losses is presented in Note 4 - Investments to our audited consolidated financial statements in this Form 10-K, which is incorporated by reference in this Item 7.
34

The amortized cost and fair value of fixed maturity securities in an unrealized loss position and the number of months in a continuous unrealized loss position (fixed maturity securities that carry an NRSRO rating of BBB/Baa or higher are considered investment grade) were as follows:
Number of
Securities
Amortized
Cost, Net of Allowance (1)
Fair Value Gross
Unrealized
Losses, Net of Allowance (1)
(Dollars in thousands)
December 31, 2021
Fixed maturity securities, available for sale:
Investment grade:
Less than six months 1,024  $ 5,582,431  $ 5,536,216  $ (46,215)
Six months or more and less than twelve months 39  132,110  130,156  (1,954)
Twelve months or greater 281  1,752,779  1,705,640  (47,139)
Total investment grade 1,344  7,467,320  7,372,012  (95,308)
Below investment grade:
Less than six months 12  43,808  43,057  (751)
Six months or more and less than twelve months 28,544  25,706  (2,838)
Twelve months or greater 64  380,686  367,213  (13,473)
Total below investment grade 83  453,038  435,976  (17,062)
1,427  $ 7,920,358  $ 7,807,988  $ (112,370)
December 31, 2020
Fixed maturity securities, available for sale:
Investment grade:
Less than six months 54  $ 686,711  $ 679,337  $ (7,374)
Six months or more and less than twelve months 310  2,201,769  2,118,844  (82,925)
Twelve months or greater 338  2,400,833  2,288,755  (112,078)
Total investment grade 702  5,289,313  5,086,936  (202,377)
Below investment grade:
Less than six months 48,355  47,984  (371)
Six months or more and less than twelve months 37  155,451  146,779  (8,672)
Twelve months or greater 95  522,627  483,221  (39,406)
Total below investment grade 141  726,433  677,984  (48,449)
843  $ 6,015,746  $ 5,764,920  $ (250,826)
(1)Amortized cost and gross unrealized losses have been adjusted to reflect the allowance for credit loss of $2.8 million and $64.8 million as of December 31, 2021 and 2020, respectively.
35

The amortized cost and fair value of fixed maturity securities (excluding United States Government and United States Government sponsored agency securities) segregated by investment grade (NRSRO rating of BBB/Baa or higher) and below investment grade that had unrealized losses greater than 20% and the number of months in a continuous unrealized loss position were as follows:
Number of
Securities
Amortized
Cost, Net of Allowance (1)
Fair
Value
Gross
Unrealized
Losses, Net of Allowance (1)
(Dollars in thousands)
December 31, 2021
Investment grade:
Less than six months —  $ —  $ —  $ — 
Six months or more and less than twelve months —  —  —  — 
Twelve months or greater —  —  —  — 
Total investment grade —  —  —  — 
Below investment grade:
Less than six months —  —  —  — 
Six months or more and less than twelve months —  —  —  — 
Twelve months or greater —  —  —  — 
Total below investment grade —  —  —  — 
—  $ —  $ —  $ — 
December 31, 2020
Investment grade:
Less than six months $ 2,453  $ 1,909  $ (544)
Six months or more and less than twelve months 21,368  15,589  (5,779)
Twelve months or greater —  —  —  — 
Total investment grade 23,821  17,498  (6,323)
Below investment grade:
Less than six months 5,963  4,323  (1,640)
Six months or more and less than twelve months 38,046  38,046  — 
Twelve months or greater 3,875  3,062  (813)
Total below investment grade 14  47,884  45,431  (2,453)
19  $ 71,705  $ 62,929  $ (8,776)
(1)Amortized cost and gross unrealized losses have been adjusted to reflect the allowance for credit loss of $2.8 million and $64.8 million as of December 31, 2021 and 2020, respectively.
36

The amortized cost and fair value of fixed maturity securities, by contractual maturity, that were in an unrealized loss position are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. All of our mortgage and other asset backed securities provide for periodic payments throughout their lives, and are shown below as a separate line.
Available for sale
Amortized
Cost
Fair Value
(Dollars in thousands)
December 31, 2021
Due in one year or less $ 762,035  $ 761,590 
Due after one year through five years 509,458  505,312 
Due after five years through ten years 546,453  535,258 
Due after ten years through twenty years 638,205  627,275 
Due after twenty years 1,069,989  1,051,478 
3,526,140  3,480,913 
Residential mortgage backed securities 280,044  277,881 
Commercial mortgage backed securities 944,407  926,688 
Other asset backed securities 3,172,613  3,122,506 
$ 7,923,204  $ 7,807,988 
December 31, 2020
Due in one year or less $ 2,324  $ 1,864 
Due after one year through five years 382,843  360,761 
Due after five years through ten years 396,842  355,188 
Due after ten years through twenty years 216,725  203,282 
Due after twenty years 145,340  122,960 
1,144,074  1,044,055 
Residential mortgage backed securities 173,875  169,615 
Commercial mortgage backed securities 1,034,424  969,746 
Other asset backed securities 3,728,144  3,581,504 
$ 6,080,517  $ 5,764,920 
International Exposure
We hold fixed maturity securities with international exposure. As of December 31, 2021, 11.8% of the carrying value of our fixed maturity securities was comprised of corporate debt securities of issuers based outside of the United States and debt securities of foreign governments. Our fixed maturity securities with international exposure are primarily denominated in U.S. dollars. Our investment professionals analyze each holding for credit risk by economic and other factors of each country and industry. The following table presents our international exposure in our fixed maturity portfolio by country or region:
December 31, 2021
Amortized
Cost
Carrying Amount/
Fair Value
Percent
of Total
Carrying
Amount
(Dollars in thousands)
Europe $ 2,591,444  $ 2,852,787  5.6  %
Asia/Pacific 397,281  440,845  0.9  %
Latin America 239,427  260,903  0.5  %
Non-U.S. North America 1,351,057  1,497,014  2.9  %
Australia & New Zealand 326,657  351,018  0.7  %
Other 571,475  619,334  1.2  %
$ 5,477,341  $ 6,021,901  11.8  %

37

All of the securities presented in the table above are investment grade (NAIC designation of either 1 or 2), except for the following:
December 31, 2021
Amortized Cost Carrying Amount/
Fair Value
(Dollars in thousands)
Europe $ 38,773  $ 40,129 
Asia/Pacific 83  81 
Latin America 50,166  51,817 
Non-U.S. North America 44,904  45,789 
Australia & New Zealand 497  482 
Other 64,470  67,600 
$ 198,893  $