8-K: American Equity Reports Record FIA Sales and Strong Financial Results for 2023

American Equity announced record annual fixed index annuity (FIA) sales of over $7 billion and strong financial results for 2023, despite a net loss in the fourth quarter due to accounting adjustments.

Summary

• American Equity reported a net loss of $(475.9) million, or $(6.04) per diluted common share, for the fourth quarter of 2023, compared to a net income of $21.7 million, or $0.25 per diluted common share, for the same period in 2022.
• Full year 2023 net income available to common stockholders was $166.9 million, or $2.06 per diluted common share, compared to $1.9 billion, or $20.50 per diluted common share, in 2022.
• Non-GAAP operating income for the fourth quarter and full year 2023 was $159.6 million and $607.1 million, respectively, or $1.99 and $7.50 per diluted common share, respectively.
• The company achieved record FIA sales of over $7.0 billion in 2023, compared to $2.3 billion in 2020.
• The investment yield for the fourth quarter was 4.65%, a 35 basis point increase year-over-year.
• Private assets now constitute 25.8% of the investment portfolio, with $7 billion in liquidity available at year-end.
• The company expects to have $10 billion of liquidity available after the merger with Brookfield Reinsurance.
• Outflows in the fourth quarter of 2023 increased to $2.1 billion, including a $497 million increase in surrenders of multi-year guaranteed annuities (MYGA).
• American Equity anticipates $1.5 billion to $2 billion of MYGA in-force to lapse in the first half of 2024.
• Total adjusted capital at American Equity Life was $4.3 billion as of December 31, 2023, with an estimated $800 million in excess capital.
• The company expects the merger with Brookfield Reinsurance to close in the first half of 2024.

Sentiment

Score: 6

Explanation: The document presents a mixed picture with record sales and strong non-GAAP operating income offset by a net loss and decreased investment spread. The pending merger is a positive catalyst, but the near-term challenges temper overall sentiment.

Positives

• The company achieved record FIA sales, demonstrating strong demand for its products.
• Non-GAAP operating income shows a positive trend, indicating underlying profitability.
• The increase in investment yield enhances the company's earnings potential.
• The growth in private assets diversifies the investment portfolio.
• The redundant reserve financing facility improves capital efficiency.
• The company has a strong capital position with $800 million in excess capital.
• The pending merger with Brookfield Reinsurance is expected to create shareholder value.

Negatives

• The company reported a net loss of $(475.9) million in the fourth quarter of 2023.
• Net income for the full year 2023 was significantly lower than in 2022, primarily due to the adoption of LDTI.
• Outflows increased to $2.1 billion in the fourth quarter, driven by higher surrenders of MYGA policies.
• The investment spread decreased from 2.73% in the third quarter to 2.64% in the fourth quarter of 2023.
• The company expects $1.5 billion to $2 billion of MYGA in-force to lapse in the first half of 2024.

Risks

• The company faces risks related to market fluctuations and interest rate changes.
• Higher-than-expected surrenders could negatively impact the company's financial performance.
• The merger with Brookfield Reinsurance is subject to regulatory approvals and other closing conditions.
• Lower-than-expected returns on private assets could affect investment income.
• The company is exposed to credit risk in its investment portfolio.

Future Outlook

American Equity expects the merger with Brookfield Reinsurance to close in the first half of 2024 and anticipates $1.5 billion to $2 billion of MYGA in-force to lapse in the first half of 2024.

Management Comments

• Anant Bhalla, President and CEO, stated that American Equity had an outstanding 2023, capped off by strong fourth quarter results.
• Bhalla highlighted the record FIA sales of $7.0 billion and the company's expertise in tactical asset allocation.
• Bhalla noted that the merger with Brookfield Reinsurance was an important marker in the transformation of the American Equity business model.
• Jim Hamalainen, Chief Investment Officer, stated that credit metrics in the investment portfolio remained stable in the fourth quarter.

Industry Context

The announcement reflects a trend in the insurance industry towards increased focus on fixed index annuities and alternative asset management. The merger with Brookfield Reinsurance is part of a broader trend of consolidation and strategic partnerships in the insurance sector.

Comparison to Industry Standards

• American Equity's FIA sales growth significantly outpaces many of its peers, demonstrating a strong market position in this product segment.
• The company's allocation to private assets at 25.8% is higher than many traditional insurance companies, reflecting a more aggressive investment strategy.
• The reported investment yield of 4.65% is competitive within the industry, but the decrease in investment spread is a concern.
• The company's return on equity of 8.4% is within the range of industry averages, but the non-GAAP operating return on equity of 18.7% is notably higher.
• The expected lapse of $1.5 billion to $2 billion of MYGA in the first half of 2024 is a significant event that will impact the company's financial results and is a common issue for companies with large MYGA books.

Stakeholder Impact

• Shareholders will be impacted by the net loss in the fourth quarter and the lower full-year net income, but the merger with Brookfield Reinsurance is expected to create value.
• Employees may experience changes due to the merger with Brookfield Reinsurance.
• Customers will continue to be served by the company's annuity products.
• Suppliers and creditors will be impacted by the company's financial performance and the merger.

Next Steps

• The company will focus on closing the merger with Brookfield Reinsurance in the first half of 2024.
• American Equity will continue to manage its investment portfolio and monitor market conditions.
• The company will address the expected lapse of MYGA policies in the first half of 2024.

Key Dates

Keywords

Fixed Index Annuities, FIA Sales, Reinsurance, Investment Yield, Private Assets, Brookfield Reinsurance, Merger, Capital, Operating Income, Net Loss, MYGA, Surrenders