Exhibit 99.5

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

YEARS ENDED DECEMBER 31, 2022, 2021 and 2020

 

Reports of Independent Registered Public Accounting Firm (Ernst & Young LLP, Des Moines, Iowa, Auditor Firm ID: 42; KPMG LLP, Des Moines, Iowa, Auditor Firm ID: 185)			F-2
Consolidated Financial Statements:
Consolidated Balance Sheets			F-5
Consolidated Statements of Operations			F-7
Consolidated Statements of Comprehensive Income (Loss)			F-8
Consolidated Statements of Changes in Stockholders’ Equity			F-9
Consolidated Statements of Cash Flows			F-10
Notes to Consolidated Financial Statements
Note 1. Significant Accounting Policies			F-12
Note 2. Fair Value of Financial Instruments			F-19
Note 3. Investments			F-26
Note 4. Mortgage Loans on Real Estate			F-32
Note 5. Variable Interest Entities			F-37
Note 6. Derivative Instruments			F-39
Note 7. Deferred Policy Acquisition Costs and Deferred Sales Inducements			F-42
Note 8. Policyholder Liabilities			F-43
Note 9. Reinsurance and Policy Provisions			F-49
Note 10. Income Taxes			F-52
Note 11. Notes and Loan Payable			F-54
Note 12. Subordinated Debentures			F-54
Note 13. Retirement and Share-based Compensation Plans			F-55
Note 14. Statutory Financial Information and Dividend Restrictions			F-57
Note 15. Commitments and Contingencies			F-57
Note 16. Earnings Per Common Share and Stockholders’ Equity			F-58
Schedules:
Schedule I—Summary of Investments—Other Than Investments in Related Parties			F-60
Schedule II—Condensed Financial Information of Registrant			F-61
Schedule III—Supplementary Insurance Information			F-65
Schedule IV—Reinsurance			F-66

 

F-1

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of

American Equity Investment Life Holding Company

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of American Equity Investment Life Holding Company and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2022, and the related notes and financial statement schedules I to IV (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period December 31, 2022, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 28, 2023 expressed an unqualified opinion thereon.

Adoption of ASU No. 2018-12

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for long-duration contracts in each of the two years in the period ended December 31, 2022 due to the adoption of ASU No. 2018-12, Financial Services – Insurance (Topic 944), Targeted Improvements to the Accounting for Long-Duration Contracts.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

F-2

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

		Fixed Index Annuity Embedded Derivative Liability and Market Risk Benefits
Description of the Matter		As of December 31, 2022, the fair value of the Company’s fixed index annuity embedded derivative liability totaled $4.8 billion, net of coinsurance ceded. The Company’s fixed index annuity contracts contain crediting features, where amounts credited to the contract’s account value are linked to the performance of certain market indices. The index crediting feature is accounted for as an embedded derivative liability and reported at fair value as discussed in Notes 1 and 2 to the consolidated financial statements. A subset of fixed index annuity and fixed rate annuity contracts include guaranteed minimum withdrawal benefits and guaranteed minimum death benefit features that are market risk benefits (MRB) measured at fair value as discussed in Notes 1, 2, and 8 to the consolidated financial statements. The Company’s MRB assets and MRB liabilities totaled $229.9 million and $2,455.5 million, respectively, as of December 31, 2022.   Auditing the valuation of the Company’s fixed index annuity embedded derivative and MRBs was complex because of the highly judgmental nature of the determination of the assumptions required to determine the fair value of the embedded derivative and MRBs. In particular, the fair value was sensitive to the significant assumptions including the expected cost of annual call options and those used to determine future policy growth including lapse, partial withdrawal, mortality, lifetime income benefit rider (LIBR) reset, and LIBR utilization. Nonperformance risk and capital market performance are additional significant assumptions used in the valuation of the MRBs.
How We Addressed the Matter in Our Audit		We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s controls over management’s process for the development of the significant assumptions used in measuring the fair value of the embedded derivative for fixed index annuities and MRBs. These controls included, among others, the review and approval process management has in place for the development of the significant assumptions. To evaluate the judgment used by management in determining the assumptions used in measuring the fair value of the fixed index annuity embedded derivative and MRBs, among other procedures, we involved actuarial specialists and evaluated the methodology applied by management in determining the fair value with those used in the prior period and in the industry.   To evaluate the significant assumptions used by management in the methodology applied, we compared as applicable the significant assumptions noted above to historical experience, observable market data, and management’s estimates of prospective changes in these assumptions. We also performed an independent recalculation of the embedded derivative and MRB for a sample of policies for comparison with the actuarial model used by management.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2020.

Des Moines, Iowa

February 28, 2023, except for the effect of the adoption of ASU No. 2018-12 disclosed in Note 1, as to which the date is August 9, 2023

 

F-3

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

American Equity Investment Life Holding Company:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows of American Equity Investment Life Holding Company and subsidiaries (the Company) for the year ended December 31, 2020, and the related notes (and financial statement schedules II to IV) (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.

/s/ KPMG LLP

We served as the Company’s auditor from 2005 to 2020.

Des Moines, Iowa

March 1, 2021

 

F-4

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share and per share data)

 

		December 31,
		2022				2021
Assets
Investments:
Fixed maturity securities, available for sale, at fair value (amortized cost of $44,866,019 as of 2022 and $46,999,183 as of 2021; allowance for credit losses of $3,347 as of 2022 and $2,846 as of 2021)		$	39,804,617			$	51,305,943
Mortgage loans on real estate (net of allowance for credit losses of $36,972 as of 2022 and $24,024 as of 2021)			6,949,027				5,687,998
Real estate investments related to consolidated variable interest entities			1,056,063				337,939
Limited partnerships and limited liability companies (2022 and 2021 include $684,834 and $168,711 related to consolidated variable interest entities)			1,266,779				520,120
Derivative instruments			431,727				1,277,480
Other investments			1,817,085				1,247,024
Total investments			51,325,298				60,376,504
Cash and cash equivalents (2022 and 2021 include $27,235 and $23,763 related to consolidated variable interest entities)			1,919,669				4,508,982
Coinsurance deposits (net of allowance for credit losses of $8,737 as of 2022 and $2,264 as of 2021)			13,254,956				8,988,891
Market risk benefits			229,871				526,373
Accrued investment income (2022 and 2021 include $3,444 and $3 related to consolidated variable interest entities)			497,851				445,097
Deferred policy acquisition costs			2,773,643				3,062,204
Deferred sales inducements			2,045,683				2,119,962
Deferred income taxes			438,434				—
Income taxes recoverable			55,498				166,586
Other assets (2022 and 2021 include $10,690 and $1,524 related to consolidated variable interest entities)			642,696				349,023
Total assets		$	73,183,599			$	80,543,622

 

F-5

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share and per share data)

 

		December 31,
		2022				2021
Liabilities and Stockholders’ Equity
Liabilities:
Policy benefit reserves		$	58,781,836			$	62,614,822
Market risk benefits			2,455,492				3,162,162
Other policy funds and contract claims			512,790				226,844
Notes and loan payable			792,073				496,250
Subordinated debentures			78,753				78,421
Deferred income taxes			—				914,417
Funds withheld for reinsurance liabilities			6,577,426				3,124,740
Other liabilities (2022 and 2021 include $78,644 and $20,168 related to consolidated variable interest entities)			1,614,479				2,187,249
Total liabilities			70,812,849				72,804,905
Stockholders’ equity:
Preferred stock, Series A; par value $1 per share; $400,000 aggregate liquidation preference; 20,000 shares authorized; issued and outstanding: 2022 and 2021 -16,000 shares			16				16
Preferred stock, Series B; par value $1 per share; $300,000 aggregate liquidation preference; 12,000 shares authorized; issued and outstanding: 2022 and 2021 - 12,000 shares			12				12
Common stock; par value $1 per share; 200,000,000 shares authorized; issued and outstanding:
2022 - 84,810,255 shares (excluding 24,590,353 treasury shares);
2021 - 92,513,517 shares (excluding 9,936,715 treasury shares)			84,810				92,514
Additional paid-in capital			1,325,316				1,614,374
Accumulated other comprehensive income (loss)			(3,746,230	)			3,192,547
Retained earnings			4,685,593				2,839,254
Total stockholders’ equity attributable to American Equity Investment Life Holding Company			2,349,517				7,738,717
Noncontrolling interests			21,233				—
Total stockholders’ equity			2,370,750				7,738,717
Total liabilities and stockholders’ equity		$	73,183,599			$	80,543,622

See accompanying notes to consolidated financial statements.

 

F-6

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

 

		Year Ended December 31,
		2022				2021				2020
Revenues:
Premiums and other considerations		$	19,739			$	58,202			$	39,382
Annuity product charges			230,354				242,631				251,227
Net investment income			2,307,463				2,037,475				2,182,078
Change in fair value of derivatives			(1,138,128	)			1,348,735				34,666
Net realized losses on investments			(47,848	)			(13,242	)			(80,680	)
Other revenue			42,245				16,160				—
Loss on extinguishment of debt			—				—				(2,024	)
Total revenues			1,413,825				3,689,961				2,424,649
Benefits and expenses:
Insurance policy benefits and change in future policy benefits (remeasurement losses of future policy benefit reserves of $(1,959) for 2022 and $(1,907) for 2021)			33,220				73,896				49,742
Interest sensitive and index product benefits			554,871				2,231,567				1,543,270
Market risk benefits (gains) losses			3,684				268,973				—
Amortization of deferred sales inducements			181,970				191,884				438,164
Change in fair value of embedded derivatives			(2,352,598	)			(358,302	)			(1,286,787	)
Interest expense on notes and loan payable			32,098				25,581				25,552
Interest expense on subordinated debentures			5,331				5,324				5,557
Amortization of deferred policy acquisition costs			284,011				306,370				649,554
Other operating costs and expenses			239,526				241,882				183,636
Total benefits and expenses			(1,017,887	)			2,987,175				1,608,688
Income before income taxes			2,431,712				702,786				815,961
Income tax expense			511,135				149,763				144,501
Net income			1,920,577				553,023				671,460
Less: Net income available to noncontrolling interests			358				—				—
Net income available to American Equity Investment Life Holding Company stockholders			1,920,219				553,023				671,460
Less: Preferred stock dividends			43,675				43,675				33,515
Net income available to American Equity Investment Life Holding Company common stockholders		$	1,876,544			$	509,348			$	637,945
Earnings per common share		$	20.72			$	5.43			$	6.93
Earnings per common share - assuming dilution		$	20.50			$	5.39			$	6.90
Weighted average common shares outstanding (in thousands):
Earnings per common share			90,558				93,860				92,055
Earnings per common share - assuming dilution			91,538				94,491				92,392

See accompanying notes to consolidated financial statements.

 

F-7

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands)

 

		Year Ended December 31,
		2022				2021				2020
Net income		$	1,920,577			$	553,023			$	671,460
Other comprehensive income (loss):
Change in net unrealized investment gains/losses (1)			(9,361,135	)			(978,461	)			1,058,289
Change in current discount rate for liability for future policy benefits			73,091				19,065				—
Changes in instrument-specific credit risk for market risk benefits			519,525				(18,514	)			—
Reclassification of unrealized investment gains/losses to net income (1)			(13,893	)			(8,973	)			16,690
Other comprehensive income (loss) before income tax			(8,782,412	)			(986,883	)			1,074,979
Income tax effect related to other comprehensive income (loss)			1,843,635				207,353				(225,746	)
Other comprehensive income (loss)			(6,938,777	)			(779,530	)			849,233
Comprehensive income (loss)		$	(5,018,200	)		$	(226,507	)		$	1,520,693

 

(1)	Net of related adjustments to amortization of deferred sales inducements, deferred policy acquisition costs and policy benefit reserves for 2020.

See accompanying notes to consolidated financial statements.

 

F-8

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in thousands, except per share data)

 

		Preferred Stock				Common Stock				Additional Paid-in Capital				Accumulated Other Comprehensive Income (Loss)				Retained Earnings				Noncontrolling Interest				Total Stockholders’ Equity
Balance at December 31, 2019		$	16			$	91,107			$	1,212,311			$	1,354,324			$	1,768,764			$	—			$	4,426,522
Net income for the year			—				—				—				—				671,460				—				671,460
Other comprehensive income			—				—				—				849,233				—				—				849,233
Issuance of preferred stock			12				—				290,248				—				—				—				290,260
Share-based compensation			—				—				10,215				—				—				—				10,215
Issuance of common stock			—				10,053				328,008				—				—				—				338,061
Treasury stock acquired, common			—				(5,439	)			(159,655	)			—				—				—				(165,094	)
Cumulative effect of change in accounting principle			—				—				—				—				(9,295	)			—				(9,295	)
Dividends on preferred stock			—				—				—				—				(33,515	)			—				(33,515	)
Dividends on common stock ($0.32 per share)			—				—				—				—				(28,859	)			—				(28,859	)
Balance at December 31, 2020			28				95,721				1,681,127				2,203,557				2,368,555				—				6,348,988
Cumulative effect of change in accounting principle			—				—				—				1,768,520				(7,199	)			—				1,761,321
Net income for the year			—				—				—				—				553,023				—				553,023
Other comprehensive loss			—				—				—				(779,530	)			—				—				(779,530	)
Share-based compensation			—				—				24,601				—				—				—				24,601
Issuance of common stock			—				460				4,394				—				—				—				4,854
Treasury stock acquired, common			—				(3,667	)			(95,748	)			—				—				—				(99,415	)
Dividends on preferred stock			—				—				—				—				(43,675	)			—				(43,675	)
Dividends on common stock ($0.34 per share)			—				—				—				—				(31,450	)			—				(31,450	)
Balance at December 31, 2021			28				92,514				1,614,374				3,192,547				2,839,254				—				7,738,717
Net income for the year			—				—				—				—				1,920,219				358				1,920,577
Other comprehensive loss			—				—				—				(6,938,777	)			—				—				(6,938,777	)
Share-based compensation			—				—				15,827				—				—				—				15,827
Issuance of common stock			—				7,112				246,866				—				—				—				253,978
Treasury stock acquired, common			—				(14,816	)			(551,751	)			—				—				—				(566,567	)
Dividends on preferred stock			—				—				—				—				(43,675	)			—				(43,675	)
Dividends on common stock ($0.36 per share)			—				—				—				—				(30,205	)			—				(30,205	)
Contributions from noncontrolling interests			—				—				—				—				—				20,875				20,875
Balance at December 31, 2022		$	28			$	84,810			$	1,325,316			$	(3,746,230	)		$	4,685,593			$	21,233			$	2,370,750

See accompanying notes to consolidated financial statements.

 

F-9

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

 

		Year Ended December 31,
		2022				2021				2020
Operating activities
Net income		$	1,920,577			$	553,023			$	671,460
Adjustments to reconcile net income to net cash provided by operating activities:
Interest sensitive and index product benefits			554,871				2,231,567				1,543,270
Amortization of deferred sales inducements			181,970				191,884				438,164
Annuity product charges			(230,354	)			(242,631	)			(251,227	)
Change in fair value of embedded derivatives			(2,352,598	)			(358,302	)			(1,286,787	)
Change in traditional life and accident and health insurance reserves			(83,456	)			83,734				8,694
Policy acquisition costs deferred			(199,075	)			(309,683	)			(255,154	)
Amortization of deferred policy acquisition costs			284,011				306,370				649,554
Provision for depreciation and other amortization			14,185				5,527				5,199
Amortization of discounts and premiums on investments			2,640				19,861				57,437
Loss on extinguishment of debt			—				—				2,024
Realized gains/losses on investments			47,848				13,242				80,680
Change in fair value of derivatives			1,138,127				(1,348,704	)			(34,668	)
Distributions from equity method investments			4,090				12,409				1,968
Deferred income taxes			490,926				149,431				141,071
Share-based compensation			15,827				24,601				10,215
Change in accrued investment income			(52,754	)			(47,015	)			74,744
Change in income taxes recoverable/payable			111,088				(165,724	)			(1,291	)
Change in other assets			2,852				(5,085	)			(849	)
Change in other policy funds and contract claims			279,936				(19,809	)			(21,865	)
Change in market risk benefits, net			(22,915	)			208,257				—
Change in collateral held for derivatives			(851,971	)			17,423				(72,413	)
Change in collateral held for securities lending			—				—				(495,039	)
Change in funds withheld from reinsurers			931,600				3,124,740				—
Change in other liabilities			9,033				(224,171	)			38,995
Other			(152,639	)			12,219				804
Net cash provided by operating activities			2,043,819				4,233,164				1,304,986
Investing activities
Sales, maturities, or repayments of investments:
Fixed maturity securities, available for sale			9,691,210				4,490,736				8,291,316
Mortgage loans on real estate			1,916,328				862,666				378,812
Derivative instruments			584,055				2,260,959				860,520
Other investments			739,027				368,837				4,324
Acquisitions of investments:
Fixed maturity securities, available for sale			(8,894,629	)			(9,206,733	)			(2,429,114	)
Mortgage loans on real estate			(3,092,385	)			(2,386,712	)			(1,121,756	)
Real estate investments acquired			(724,484	)			(335,767	)			—
Derivative instruments			(790,229	)			(748,061	)			(730,333	)
Other investments			(1,842,843	)			(1,512,123	)			(105,925	)
Purchases of property, furniture and equipment			(40,961	)			(18,109	)			(13,240	)
Net cash provided by (used in) investing activities			(2,454,911	)			(6,224,307	)			5,134,604

 

F-10

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in thousands)

 

		Year Ended December 31,
		2022				2021				2020
Financing activities
Receipts credited to annuity policyholder account balances		$	3,316,221			$	5,910,024			$	3,648,936
Coinsurance deposits			(186,637	)			(3,187,332	)			430,644
Return of annuity policyholder account balances			(5,257,487	)			(5,145,193	)			(4,040,054	)
Repayment of loan payable			(3,750	)			—				—
Proceeds from issuance of loan payable			300,000				—				—
Repayment of subordinated debentures			—				—				(81,450	)
Proceeds from issuance of common stock, net			253,978				4,854				338,061
Acquisition of treasury stock			(566,567	)			(99,415	)			(165,094	)
Proceeds from issuance of preferred stock, net			—				—				290,260
Change in checks in excess of cash balance			39,901				(3,210	)			3,611
Dividends paid on common stock			(30,205	)			(31,450	)			(28,859	)
Dividends paid on preferred stock			(43,675	)			(43,675	)			(33,515	)
Net cash provided by (used in) financing activities			(2,178,221	)			(2,595,397	)			362,540
Increase (decrease) in cash and cash equivalents			(2,589,313	)			(4,586,540	)			6,802,130
Cash and cash equivalents at beginning of year			4,508,982				9,095,522				2,293,392
Cash and cash equivalents at end of year		$	1,919,669			$	4,508,982			$	9,095,522
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest expense		$	36,289			$	30,000			$	31,427
Income taxes			4,873				165,537				4,842
Income tax refunds received			98,644				—				—
Non-cash operating activity:
Deferral of sales inducements			107,691				95,161				93,610

See accompanying notes to consolidated financial statements.

 

F-11

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.	Significant Accounting Policies

Nature of Operations

American Equity Investment Life Holding Company (“we”, “us”, “our” or “parent company”), through its wholly-owned subsidiaries, American Equity Investment Life Insurance Company (“American Equity Life”), American Equity Investment Life Insurance Company of New York (“American Equity Life of New York”) and Eagle Life Insurance Company (“Eagle Life”), is licensed to sell insurance products in 50 states and the District of Columbia at December 31, 2022. We operate solely in the insurance business.

We market fixed index and fixed rate annuities. Annuity deposits (net of coinsurance) collected in 2022, 2021 and 2020, by product type were as follows:

 

		Year Ended December 31,
Product Type		2022				2021				2020
		(Dollars in thousands)
Fixed index annuities		$	2,202,688			$	3,026,211			$	2,309,580
Annual reset fixed rate annuities			5,535				6,000				7,846
Multi-year fixed rate annuities			139,092				2,452,994				1,295,843
Single premium immediate annuities (SPIA)			18,935				59,816				33,461
		$	2,366,250			$	5,545,021			$	3,646,730

Agents contracted with us through four national marketing organizations accounted for more than 10% of annuity deposits we collected during 2022 representing 22%, 16%, 10%, and 10% individually, of the annuity deposits collected. Agents contracted with us through two national marketing organization accounted for more than 10% of annuity deposits we collected during 2021 representing 14% and 11%, individually, of the annuity deposits collected. Agents contracted with us through two national marketing organization accounted for more than 10% of annuity deposits we collected during 2020 representing 17% and 10%, individually, of the annuity deposits collected.

Consolidation and Basis of Presentation

The consolidated financial statements include our accounts and our wholly-owned subsidiaries: American Equity Life, American Equity Life of New York, Eagle Life, AERL, L.C., AE Capital, LLC., American Equity Investment Properties, L.C., High Trestle Investment Management, LLC., AEL RE Vermont, Inc., AEL Re Bermuda, Ltd, NC Securities Holdco, LLC, AEL Financial Services, LLC, and North Wolf Bay Holdings, LLC. All significant intercompany accounts and transactions have been eliminated.

In addition, our consolidated financial statements include variable interest entities (“VIE“s) in which we are the primary beneficiary. We have relationships with various special purpose entities and other legal entities that must be evaluated to determine if the entities meet the criteria of a VIE. This assessment is performed by reviewing contractual, ownership and other rights and requires use of judgment. First, we determine if we hold a variable interest in an entity by assessing if we have the right to receive expected losses and expected residual returns of the entity. If we hold a variable interest, then the entity is assessed to determine if it is a VIE. An entity is a VIE if the equity at risk is not sufficient to support its activities, if the equity holders lack a controlling financial interest or if the entity is structured with non-substantive voting rights. In addition to the previous criteria, if the entity is a limited partnership or similar entity, it is a VIE if the limited partners do not have the power to direct the entity’s most significant activities through substantive kick-out rights or participating rights. A VIE is evaluated to determine the primary beneficiary. The primary beneficiary of a VIE is the enterprise with (1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. When we are the primary beneficiary, we are required to consolidate the entity in our financial statements. We reassess our involvement with VIEs on a quarterly basis. For further information about VIEs, refer to Note 5 - Variable Interest Entities.

Estimates and Assumptions

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are utilized in the calculation of deferred policy acquisition costs, deferred sales inducements, policy benefit reserves, including the fair value of embedded derivatives in fixed index annuity contracts, market risk benefits, valuation of derivatives, valuation of investments, valuation of real estate, allowances for credit losses on available-for-sale fixed maturity securities, allowances for loan losses on mortgage loans and valuation allowances on deferred tax assets. A description of each critical estimate is incorporated within the discussion of the related accounting policies which follow. It is reasonably possible that actual experience could differ from the estimates and assumptions utilized.

 

F-12

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Investments

Fixed maturity securities (bonds maturing more than one year after issuance) that may be sold prior to maturity are classified as available for sale. Available for sale securities are reported at fair value and unrealized gains and losses, if any, on these securities are included directly in a separate component of stockholders’ equity, net of income taxes and certain adjustments for assumed changes in amortization of deferred policy acquisition costs, deferred sales inducements and policy benefit reserves. Fair values, as reported herein, of fixed maturity securities are based on quoted market prices in active markets when available, or for those fixed maturity securities not actively traded, yield data and other factors relating to instruments or securities with similar characteristics are used. See Note 2 - Fair Value of Financial Instruments for more information on the determination of fair value. Premiums and discounts are amortized/accrued using methods which result in a constant yield over the securities’ expected lives. Amortization/accrual of premiums and discounts on residential and commercial mortgage backed securities incorporate prepayment assumptions to estimate the securities’ expected lives. Interest income is recognized as earned.

Available-for-sale fixed maturity securities are subject to an allowance for credit loss and changes in the allowance are reported in net income as a component of net realized losses on investments. See Note 3 - Investments for further discussion of the allowance for credit losses on available-for-sale fixed maturity securities.

Mortgage loans on real estate are reported at cost adjusted for amortization of premiums and accrual of discounts and net of valuation allowances. Interest income is recorded when earned; however, interest ceases to accrue for loans on which interest is more than 90 days past due based upon contractual terms and/or when the collection of interest is not considered probable. Interest income on impaired loans is recorded on a cash basis. Any changes in the loan valuation allowances are reported in net realized losses on investments. See Note 4 - Mortgage Loans on Real Estate for further discussion of the valuation allowance on the mortgage loan portfolios.

Beginning in 2021, we held residential real estate investments through consolidation of an investment company VIE. As this is an investment company VIE, the residential real estate investments are reported at fair value and the change in fair value on these investments is reported in net income as a component of net investment income. Fair values of residential real estate investments are initially based on the cost to purchase the properties and subsequently based on a discounted cash flow methodology. See Note 2 - Fair Values of Financial Instruments for more information on the determination of fair value. The residential real estate investments are leased to renters through operating lease arrangements. Rental income is recognized on a straight-line basis over the term of the respective leases.

Beginning in 2022, we held a commercial real estate investment in the ultra-luxury hospitality sector through consolidation of a VIE that is not an investment company. The commercial real estate investment is held at depreciated cost and was initially held at the cost to purchase the property.

Our limited partnerships and limited liability companies are accounted for either using the equity method of accounting, NAV as a practical expedient, or fair value. For our equity method investments, we record our share of earnings and losses of the limited partnership or limited liability company as a component of net investment income. Our consolidated limited partnerships are measured using NAV as a practical expedient, as the investments do not have a readily determinable fair value and the investments are in an investment company within scope of Topic 946. Our consolidated real estate limited liability companies are fair valued on a recurring basis using the methods described in Note 2 - Fair Values of Financial Instruments. For all of our limited partnerships and limited liability company investments, recognition of income is reported on a quarter lag due to the availability of the related financial statements of the limited partnerships and limited liability companies.

Other invested assets include company owned life insurance, equity securities, short-term debt securities with maturities of greater than three months but less than twelve months when purchased, and short-term loans and collateral loans with maturities less than one year. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the end of the reporting period, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Dividends are recognized when declared.

Realized gains and losses on sales of investments are determined on the basis of specific identification based on the trade date.

Federal Home Loan Bank

During the first quarter of 2022, American Equity Life became a member of the Federal Home Loan Bank (“FHLB”) which provides access to collateralized borrowings and other FHLB products. We may also issue funding agreements to the FHLB. Both the collateralized borrowings and funding agreements require us to pledge qualified assets as collateral. Obligations arising from funding agreements are used in investment spread activities and reported in Other policy funds and contract claims on the Consolidated Balance Sheets. See Note 15 - Commitments and Contingencies for more information on the funding agreements issued. Entering into FHLB membership, borrowings and funding agreements requires the ownership of FHLB stock and the pledge of assets as collateral. See Note 2 - Fair Value of Financial Instruments and Note 15 - Commitments and Contingencies for more information on the common stock purchased and assets pledged as collateral.    

 

F-13

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Derivative Instruments

Our derivative instruments include call options used to fund fixed index annuity credits and interest rate swaps which were designated as fair value hedges. Our call option derivative instruments are recognized in the balance sheet at fair value and changes in fair value are recognized immediately in operations.

A fair value hedge is a hedge of the exposure to changes in the fair value of a recognized asset or liability, or of an unrecognized firm commitment, that are attributable to a particular risk. The accounting for a fair value hedge is determined at hedge inception. Hedge accounting can be applied if, at inception, and throughout the hedging period, the changes in the fair value of the derivative are highly effective at offsetting the changes in fair value of the hedged asset, liability or unrecognized firm commitment that are attributable to the risk being hedged. When hedge accounting is applied, the change in fair value of the hedged asset, liability or unrecognized firm commitment attributable to the hedged risk are reported in the same line item in the Consolidated Statements of Operations as the changes in fair value of the derivative instrument. For fair value hedges of fixed maturity securities, the change in fair value attributable to the risk being hedged is recognized in the Change in fair value of derivatives line item of the Consolidated Statements of Operations. For any change in fair value of our interest rate swaps that are excluded from hedge effectiveness, we have elected to recognize the change immediately in earnings rather than amortizing over the life of the hedge.

At hedge inception, we formally document our risk management objective and strategy for entering into hedging relationships for any fair value hedge. We also quantitatively test for hedge effectiveness using statistical regression analysis on both a prospective and retrospective basis. The results of the testing determine whether we have a highly effective hedging relationship and can apply hedge accounting.

Prior to the redemption of our floating rate subordinated debentures in 2020, our derivative instruments also included an interest rate swap and interest rate caps which were used to manage interest rate risk associated with the floating rate component on certain of our subordinated debentures. These interest rate swaps and interest rate caps were recognized in the balance sheet at fair value and changes in fair value were recognized immediately in operations.

See Note 6 - Derivative Instruments for more information on derivative instruments.

Cash and Cash Equivalents

We consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

Book Overdrafts

Under our cash management system, checks issued but not yet presented to banks frequently result in overdraft balances for accounting purposes and are classified as Other liabilities on our consolidated balance sheets. We report the changes in the amount of the overdraft balance as a financing activity in our consolidated statement of cash flows as Change in checks in excess of cash balance.

Deferred Income Taxes

Deferred income tax assets or liabilities are computed based on the temporary differences between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. The effect on deferred income tax assets and liabilities resulting from a change in the enacted marginal tax rate is recognized in income in the period that includes the enactment date. Deferred income tax expenses or benefits are based on the changes in the asset or liability from period to period. Deferred income tax assets are subject to ongoing evaluation of whether such assets will more likely than not be realized. The realization of deferred income tax assets primarily depends on generating future taxable income during the periods in which temporary differences become deductible. Deferred income tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. In making such a determination, all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations, is considered. The realization of deferred income tax assets related to unrealized losses on available-for-sale fixed maturity securities is also based upon our intent and ability to hold those securities for a period of time sufficient to allow for a recovery in fair value and not realize the unrealized loss. See Note 10 - Income Taxes for more information on deferred income taxes.

Recognition of Premium Revenues and Costs

Revenues for annuity products include surrender and living income benefit rider charges assessed against policyholder account balances during the period. Interest sensitive and index product benefits related to annuity products include interest credited or index credits to policyholder account balances pursuant to accounting by insurance companies for certain long-duration contracts. The change in fair value of the embedded derivatives for fixed index annuities equals the change in the difference between policy benefit reserves for fixed index annuities computed under the derivative accounting standard and the long-duration contracts accounting standard at each balance sheet date.    

Considerations from immediate annuities and supplemental contract annuities with life contingencies are recognized as revenue when the policy is issued.

 

F-14

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

All insurance-related revenues, including the change in the fair value of derivatives for call options related to the business ceded under coinsurance agreements (see Note 9 - Reinsurance and Policy Provisions), benefits, losses and expenses are reported net of reinsurance ceded. Revenue and fees associated with reinsurance agreements (see Note 9 - Reinsurance and Policy Provisions) are recognized in Other revenue when earned over the life of the reinsured policies or when service is performed.

Other Comprehensive Income (Loss)

Other comprehensive income (loss) includes all changes in stockholders’ equity during a period except those resulting from investments by and distributions to stockholders. Other comprehensive income (loss) excludes net realized investment gains (losses) included in net income which represents transfers from unrealized to realized gains and losses.

Reclassifications

Certain amounts in the prior years’ consolidated financial statements and related footnotes thereto have been reclassified to conform with the current year presentation.

The following accounting policies were applicable prior to the adoption of LDTI accounting guidance which was effective January 1, 2023 with a transition date of January 1, 2021:

Deferred Policy Acquisition Costs (DAC) and Deferred Sales Inducements (DSI)

For annuity products, these costs are being amortized in proportion to actual and expected gross profits. Actual and expected gross profits include the excess of net investment income earned over the interest credited or the cost of providing index credits to the policyholders, or the “investment spread”; and to a lesser extent, product charges and fees net of expected excess payments for lifetime income benefit riders and certain policy expenses. Actual and expected gross profits for fixed index annuities also include the impact of amounts recorded for the change in fair value of derivatives and the change in fair value of embedded derivatives. Current period amortization is adjusted retrospectively through an unlocking process when estimates of actual and expected gross profits (including the impact of net realized gains (losses) on investments) to be realized from a group of products are revised. Deferred policy acquisition costs and deferred sales inducements are also adjusted for the change in amortization that would have occurred if available for sale fixed maturity securities had been sold at their aggregate fair value at the end of the reporting period and the proceeds reinvested at current yields. The impact of this adjustment is included in accumulated other comprehensive income (loss) within consolidated stockholders’ equity, net of applicable taxes.

Policy Benefit Reserves

Policy benefit reserves for fixed index annuities with returns linked to the performance of a specified market index are equal to the sum of the fair value of the embedded derivatives and the host (or guaranteed) component of the contracts. The host value is established at inception of the contract and accreted over the policy’s life at a constant rate of interest. Future policy benefit reserves for fixed index annuities earning a fixed rate of interest and other deferred annuity products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. For the years ended December 31, 2022, 2021 and 2020, interest crediting rates for these products ranged from 1.45% to 2.65%.

The liability for lifetime income benefit riders is based on the actual and present value of expected benefit payments to be paid in excess of projected policy values recognizing the excess over the expected lives of the underlying policies based on the actual and present value of expected assessments including investment spreads, product charges and fees. The inputs used in the calculation of the liability for lifetime income benefit riders include actual policy values, actual income account values, actual payout factors, actual roll-up rates and our best estimate assumptions for future policy growth, expected utilization of lifetime income benefit riders, which includes the ages at which policyholders are expected to elect to begin to receive lifetime income benefit payments and the percentage of policyholders who elect to receive lifetime income benefit payments, the type of income benefit payments selected upon election and future assumptions for lapse, partial withdrawal and mortality rates.

Policy benefit reserves are not reduced for amounts ceded under coinsurance agreements which are reported as coinsurance deposits on our consolidated balance sheets. See Note 9 - Reinsurance and Policy Provisions for more information on reinsurance.    

 

F-15

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

The following accounting policies were new or changed subsequent to the adoption of LDTI accounting guidance which was effective January 1, 2023 with a transition date of January 1, 2021:

Deferred Policy Acquisition Costs (DAC) and Deferred Sales Inducements (DSI)

The Company incurs costs in connection with acquiring new and renewal business. The portion of these costs which are incremental and direct to the acquisition of a new or renewal policy are deferred as they are incurred. DAC and DSI are amortized on a constant level basis over the expected term of the contracts based on projected policy counts. Contracts are grouped consistent with the grouping used in the estimating of the liability. The assumptions used in the calculation of DAC and DSI include full surrenders, partial withdrawals, mortality, utilization and reset assumptions associated with lifetime income benefit riders, and the option budget assumption. If the actual experience is different from our expectations, the amortization pattern is adjusted prospectively. See Note 7 - Deferred Policy Acquisition Costs and Deferred Sales Inducements for more information on DAC and DSI.

Policy Benefit Reserves

Policy benefit reserves for fixed index annuities with returns linked to the performance of a specified market index are equal to the sum of the fair value of the embedded derivatives and the host (or guaranteed) component of the contracts. The host value is established at inception of the contract and accreted over the policy’s life at a constant rate of interest. Future policy benefit reserves for fixed index annuities earning a fixed rate of interest and other deferred annuity products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. For the years ended December 31, 2022, 2021 and 2020, interest crediting rates for these products ranged from 1.45% to 2.65%.

A liability for future policy benefits is recorded for our traditional limited-payment insurance contracts and is generally equal to the present value of expected future policy benefit payments. The present value calculation uses assumptions for mortality, morbidity, termination, and expense. The contracts are grouped into cohorts based on issue year and product type.

The liability for future policy benefits is discounted using an upper-medium grade fixed-income instrument yield that reflects the duration characteristics of the liabilities and maximizes the use of observable data. The discount rate is updated each reporting period and any changes in the liability resulting from changes in the upper medium grade fixed income instrument yield are recognized in AOCI. Any changes to the liability as a result of assumption changes will be recognized as remeasurement gains (losses) in insurance policy benefits and change in future policy benefits in the Consolidated Statement of Operations. See Note 8 - Policyholder Liabilities for more information on the liability for future policy benefits.

Market Risk Benefits

Market risk benefits (MRBs) are contracts or contract features that both provide protection to the policyholder from other-than-nominal capital market risk and expose the Company to other-than-nominal capital market risk. We issue certain fixed indexed annuity and fixed rate annuity contracts that provide minimum guarantees to policyholders including guaranteed minimum withdrawal benefits (GMWB) and guaranteed minimum death benefits (GMDB) that are MRBs.

MRBs are measured at fair value, at the individual contract level, and can be either an asset or a liability. Contracts which contain more than one MRB feature are combined into one single MRB. The fair value is calculated using stochastic models that include a risk margin and incorporate a spread for our instrument specific credit risk. At contract inception, attributed fees are calculated based on the present value of the fees and assessments collectible from the policyholder relative to the present value of expected benefits paid attributable to the MRB. The attributed fees remain static over the life of the MRB and is used to calculate the fair value of the MRB using a risk neutral valuation method. The attributed fees cannot be negative and cannot exceed the total explicit fees collectible from the policyholder.

The MRB assets and liabilities are presented separately on the Consolidated Balance Sheets. The ceded MRB assets are presented in coinsurance deposits on the Consolidated Balance Sheets. Changes in fair value of the MRB are recognized in market risk benefits (gains) losses on the Consolidated Statements of Operations each period with the exception of the portion of the change in fair value related to a changes in our nonperformance risk, which is recognized in other comprehensive income (OCI). See Note 8 - Policyholder Liabilities for more information on MRBs.

 

F-16

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Adopted Accounting Pronouncements

Financial Instruments - Credit Losses

In June 2016, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update (“ASU”) that significantly changed the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model that requires these assets be presented at the net amount expected to be collected. In addition, credit losses on available-for-sale debt securities are recorded through an allowance account subsequent to the adoption of this ASU. We adopted this ASU on January 1, 2020. The adoption of this ASU resulted in an increase in our mortgage loan allowance for credit losses of $8.6 million and the recognition of an allowance for credit losses on our reinsurance recoverable/coinsurance deposits balances of $3.2 million on the date of adoption. Retained earnings was decreased by $9.3 million, which reflects the net of tax impact of the increase in the mortgage loan allowance for credit losses and the recognition of an allowance for credit losses on our reinsurance recoverable/coinsurance deposits balances on the date of adoption.

Targeted Improvements to the Accounting for Long-Duration Insurance Contracts

In August 2018, the FASB issued an ASU that revises certain aspects of the measurement models and disclosure requirements for long duration insurance and investment contracts. The FASB’s objective in issuing this ASU is to improve, simplify, and enhance the accounting for long-duration contracts. The revisions include updating cash flow assumptions in the calculation of the liability for traditional life products, introducing the term ‘market risk benefit’ (“MRB”) and requiring all contract features meeting the definition of an MRB to be measured at fair value with the change in fair value recognized in net income excluding the change in fair value related to our own-credit risk which is recognized in AOCI and simplifying the method used to amortize deferred policy acquisition costs and deferred sales inducements to a constant level basis over the expected term of the related contracts rather than based on actual and estimated gross profits and enhancing disclosure requirements. While this ASU was effective for us January 1, 2023, the transition date (the remeasurement date) was January 1, 2021. We adopted the guidance for the liability for future policyholder benefits, deferred acquisition costs, and deferred sales inducements on a modified retrospective basis such that those balances were adjusted to conform to ASU 2018-12 on January 1, 2021. The guidance for market risk benefits was applied retrospectively. Below are the transition date impacts for each of these items.

 

		Liability for Future Policy Benefits for Payout Annuity With Life Contingency
		(Dollars in thousands)
Pre-adoption 1/1/2021 balance		$	337,467
Adjustment to opening retained earnings for expected future policy benefits			2,566
Adjustment for the effect of remeasurement of liability at current single A rate			68,717
Post adoption 1/1/2021 balance		$	408,750
		Market Risk Benefit Liability
		(Dollars in thousands)
Pre-adoption 1/1/2021 carrying amount for features now classified as MRBs		$	2,547,231
Adjustment for the removal of shadow adjustments			(584,636	)
Adjustment for the cumulative effect of the changes in the instrument-specific credit risk between the original contract issuance date and the transition date			229,108
Adjustment for the remaining difference between previous carrying amount and fair value measurement for the MRB, exclusive of the instrument specific credit risk			33,781
Post adoption 1/1/2021 balance		$	2,225,484
		Ceded Market Risk Benefit
		(Dollars in thousands)
Pre-adoption 1/1/2021 carrying amount for features now classified as MRBs		$	62,108
Adjustment for the difference between previous carrying amount and fair value measurement for the MRB, exclusive of the instrument specific credit risk			27,230
Post adoption 1/1/2021 ceded MRB balance		$	89,338

 

F-17

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

		Deferred Policy Acquisition Costs
		Fixed Index Annuities and Fixed Rate Annuities
		(Dollars in thousands)
Pre-adoption 1/1/2021 balance		$	2,225,199
Adjustments for the removal of shadow adjustments			1,183,306
Post adoption 1/1/2021 balance		$	3,408,505
		Deferred Sales Inducements
		Fixed Index Annuities and Fixed Rate Annuities
		(Dollars in thousands)
Pre-adoption 1/1/2021 balance		$	1,448,375
Adjustments for the removal of shadow adjustments			768,310
Post adoption 1/1/2021 balance		$	2,216,685

For deferred acquisition costs, the Company removed shadow adjustments previously recorded in accumulated other comprehensive income for the impact of unrealized gains and losses that were included in the pre-ASU 2018-12 expected gross profits amortization calculation as of the transition date.

As a result of the adoption of ASU 2018-12, the Company decreased beginning retained earnings by $7.2 million and increased accumulated other comprehensive income by $1.8 billion as of January 1, 2021.

Certain amounts in the 2022 and 2021 consolidated financial statements and related footnotes thereto have been recast, to the extent impacted by ASU 2018-12, to conform to the new guidance. ASU 2018-12 also requires disaggregated roll forwards for the liability for future policy benefits, MRBs, DAC and DSI. We disaggregated the roll forwards by product type consistent with how we internally view our business.

 

F-18

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.	Fair Values of Financial Instruments

The following sets forth a comparison of the carrying amounts and fair values of our financial instruments:

 

		December 31,
		2022								2021
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
		(Dollars in thousands)
Assets
Fixed maturity securities, available for sale		$	39,804,617			$	39,804,617			$	51,305,943			$	51,305,943
Mortgage loans on real estate			6,949,027				6,502,463				5,687,998				5,867,227
Real estate investments			1,056,063				1,056,063				337,939				337,939
Limited partnerships and limited liability companies			684,835				684,835				168,711				168,711
Derivative instruments			431,727				431,727				1,277,480				1,277,480
Other investments			1,817,085				1,817,085				1,247,024				1,247,024
Cash and cash equivalents			1,919,669				1,919,669				4,508,982				4,508,982
Coinsurance deposits			13,254,956				12,640,797				8,988,891				8,188,338
Market risk benefits			229,871				229,871				526,373				526,373
Liabilities
Policy benefit reserves			58,419,911				55,572,896				62,169,441				56,375,076
Market risk benefits			2,455,492				2,455,492				3,162,162				3,162,162
Single premium immediate annuity (SPIA) benefit reserves			212,119				221,130				226,207				235,891
Other policy funds - FHLB			300,000				300,000				—				—
Notes and loan payable			792,073				774,220				496,250				569,485
Subordinated debentures			78,753				87,293				78,421				93,721

Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. The objective of a fair value measurement is to determine that price for each financial instrument at each measurement date. We meet this objective using various methods of valuation that include market, income and cost approaches.

We categorize our financial instruments into three levels of fair value hierarchy based on the priority of inputs used in determining fair value. The hierarchy defines the highest priority inputs (Level 1) as quoted prices in active markets for identical assets or liabilities. The lowest priority inputs (Level 3) are our own assumptions about what a market participant would use in determining fair value such as estimated future cash flows. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, a financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument. We categorize financial assets and liabilities recorded at fair value in the consolidated balance sheets as follows:

 

Level 1 –		Quoted prices are available in active markets for identical financial instruments as of the reporting date. We do not adjust the quoted price for these financial instruments, even in situations where we hold a large position and a sale could reasonably impact the quoted price.
Level 2 –		Quoted prices in active markets for similar financial instruments, quoted prices for identical or similar financial instruments in markets that are not active; and models and other valuation methodologies using inputs other than quoted prices that are observable.
Level 3 –		Models and other valuation methodologies using significant inputs that are unobservable for financial instruments and include situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair value require significant management judgment or estimation. Financial instruments that are included in Level 3 are securities for which no market activity or data exists and for which we used discounted expected future cash flows with our own assumptions about what a market participant would use in determining fair value.
NAV –		Our consolidated limited partnership funds are typically measured using NAV as a practical expedient in determining fair value and are not classified in the fair value hierarchy. Our carrying value reflects our pro rata ownership percentage as indicated by NAV in the investment fund financial statements and is recorded on a quarter lag due to the timing of when financial statements are available.

Transfers of securities among the levels occur at times and depend on the type of inputs used to determine fair value of each security.

 

F-19

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Our assets and liabilities which are measured at fair value on a recurring basis as of December 31, 2022 and 2021 are presented below based on the fair value hierarchy levels:

 

		Total Fair Value				NAV				Quoted Prices in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(Dollars in thousands)
December 31, 2022
Assets
Fixed maturity securities, available for sale:
U.S. Government and agencies		$	169,071			$	—			$	26,184			$	142,887			$	—
States, municipalities and territories			3,822,982				—				—				3,822,982				—
Foreign corporate securities and foreign governments			676,852				—				—				676,852				—
Corporate securities			24,161,921				—				—				23,759,573				402,348
Residential mortgage backed securities			1,377,611				—				—				1,377,611				—
Commercial mortgage backed securities			3,687,478				—				—				3,687,478				—
Other asset backed securities			5,908,702				—				—				5,465,784				442,918
Other investments			1,013,297				—				398,280				615,017				—
Real estate investments			940,559				—				—				—				940,559
Limited partnerships and limited liability companies			684,835				620,626				—				—				64,209
Derivative instruments			431,727				—				—				431,727				—
Cash and cash equivalents			1,919,669				—				1,919,669				—				—
Market risk benefits (a)			229,871				—				—				—				229,871
		$	45,024,575			$	620,626			$	2,344,133			$	39,979,911			$	2,079,905
Liabilities
Funds withheld liability - embedded derivative		$	(441,864	)		$	—			$	—			$	—			$	(441,864	)
Fixed index annuities - embedded derivatives			4,820,845				—				—				—				4,820,845
Market risk benefits (a)			2,455,492				—				—				—				2,455,492
		$	6,834,473			$	—			$	—			$	—			$	6,834,473
December 31, 2021
Assets
Fixed maturity securities, available for sale:
U.S. Government and agencies		$	1,078,746			$	—			$	32,737			$	1,046,009			$	—
States, municipalities and territories			3,927,201				—				—				3,927,201				—
Foreign corporate securities and foreign governments			402,545				—				—				402,545				—
Corporate securities			34,660,234				—				32,700				34,627,534				—
Residential mortgage backed securities			1,125,049				—				—				1,125,049				—
Commercial mortgage backed securities			4,840,311				—				—				4,840,311				—
Other asset backed securities			5,271,857				—				—				5,271,857				—
Other investments			12,226				—				—				5,877				6,349
Real estate investments			337,939				—				—				—				337,939
Limited partnerships and limited liability companies			168,711				168,711				—				—				—
Derivative instruments			1,277,480				—				—				1,277,480				—
Cash and cash equivalents			4,508,982				—				4,508,982				—				—
Market risk benefits (a)			526,373				—				—				—				526,373
		$	58,137,654			$	168,711			$	4,574,419			$	52,523,863			$	870,661
Liabilities
Funds withheld liability - embedded derivative		$	(2,362	)		$	—			$	—			$	(2,362	)		$	—
Fixed index annuities - embedded derivatives			7,964,961				—				—				—				7,964,961
Market risk benefits (a)			3,162,162				—				—				—				3,162,162
		$	11,124,761			$	—			$	—			$	(2,362	)		$	11,127,123

 

(a)	See Note 8 - Policyholder Liabilities for additional information related to market risk benefits, including the balances of and changes in market risk benefits as well as significant inputs and assumptions used in the fair value measurements of market risk benefits.

 

F-20

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

The following methods and assumptions were used in estimating the fair values of financial instruments during the periods presented in these consolidated financial statements.

Fixed maturity securities

The fair values of fixed maturity securities in an active and orderly market are determined by utilizing independent pricing services. The independent pricing services incorporate a variety of observable market data in their valuation techniques, including:

 

•

reported trading prices,

 

•

benchmark yields,

 

•

broker-dealer quotes,

 

•

benchmark securities,

 

•

bids and offers,

 

•

credit ratings,

 

•

relative credit information, and

 

•

other reference data.

The independent pricing services also take into account perceived market movements and sector news, as well as a security’s terms and conditions, including any features specific to that issue that may influence risk and marketability. Depending on the security, the priority of the use of observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary.

The independent pricing services provide quoted market prices when available. Quoted prices are not always available due to market inactivity. When quoted market prices are not available, the third parties use yield data and other factors relating to instruments or securities with similar characteristics to determine fair value for securities that are not actively traded. We generally obtain one value from our primary external pricing service. In situations where a price is not available from this service, we may obtain quotes or prices from additional parties as needed. Market indices of similar rated asset class spreads are considered for valuations and broker indications of similar securities are compared. Inputs used by the broker include market information, such as yield data and other factors relating to instruments or securities with similar characteristics. Valuations and quotes obtained from third party commercial pricing services are non-binding and do not represent quotes on which one may execute the disposition of the assets.

We validate external valuations at least quarterly through a combination of procedures that include the evaluation of methodologies used by the pricing services, comparison of the prices to a secondary pricing source, analytical reviews and performance analysis of the prices against trends, and maintenance of a securities watch list. Additionally, as needed we utilize discounted cash flow models or perform independent valuations on a case-by-case basis using inputs and assumptions similar to those used by the pricing services. Although we do identify differences from time to time as a result of these validation procedures, we did not make any significant adjustments as of December 31, 2022 and 2021.

Fixed maturity security valuations that include at least one significant unobservable input are reflected in Level 3 in the fair value hierarchy and can include fixed maturity securities across all asset classes. Quantitative information about the significant unobservable inputs used are provided below for fixed maturity securities that were either valued internally or were valued by a third party and the inputs were reasonably available. The fair value of corporate securities that utilized at least one significant unobservable input was $84.7 million and $0 million as of December 31, 2022 and 2021, respectively. A discounted cash flow methodology was utilized in the valuation, which included an unobservable liquidity premium of 20 basis points being incorporated along with other observable market data. The fair value of other asset backed securities that utilized at least one significant unobservable input was $296.8 million and $0 million as of December 31, 2022 and 2021, respectively. A discounted cash flow methodology was utilized in the valuation, which included unobservable discount rates and weighted average lives being incorporated along with other observable market data. At December 31, 2022, the discount rates used in the fair value calculations ranged from 4.04% to 28.58% with a weighted average rate of 4.36%. At December 31, 2022, the weighted average lives used in the fair value calculations ranged from 8.79 years to 12.48 years with a weighted average of 9.29 years.

Mortgage loans on real estate

Mortgage loans on real estate are not measured at fair value on a recurring basis. The fair values of mortgage loans on real estate are calculated using discounted expected cash flows using competitive market interest rates currently being offered for similar loans. The fair values of impaired mortgage loans on real estate that we have considered to be collateral dependent are based on the fair value of the real estate collateral (based on appraised values) less estimated costs to sell. The inputs utilized to determine fair value of all mortgage loans are unobservable market data (competitive market interest rates); therefore, fair value of mortgage loans falls into Level 3 in the fair value hierarchy.

 

F-21

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Real estate investments

The fair values of residential real estate investments held through consolidation of investment company VIEs are initially calculated based on the cost to purchase the properties and subsequently calculated based on a discounted cash flow methodology. Under the discounted cash flow method, net operating income is forecasted assuming a 10-year hold period commencing as of the valuation date. An additional year is forecasted in order to determine the residual sale price at the end of the hold period, using a residual (terminal) capitalization rate. The significant inputs into the fair value calculation under the discounted cash flow method include the residual capitalization rate and discount rate. These inputs are unobservable market data; therefore, fair value of residential real estate investments falls into Level 3 in the fair value hierarchy. At December 31, 2022, the residual capitalization rates used in the fair value calculations ranged from 4.75% to 6.50% with an average rate of 5.44%. At December 31, 2022, the discount rates used in the fair value calculations ranged from 6.00% to 8.00% with an average rate of 6.91%. At December 31, 2021, the residual capitalization rates used in the fair value calculations ranged from 5.00% to 6.25% with an average rate of 5.72%. At December 31, 2021, the discount rates used in the fair value calculations ranged from 6.25% to 7.50% with an average rate of 6.97%.

In Q4 2022, we purchased one real estate investment through consolidation of a VIE that is not measured at fair value on a recurring basis. Due to the proximity of the purchase date to year end, the cost to purchase the property approximates fair value.

Limited partnerships and limited liability companies

Two of our consolidated variable interest entities, which are fair valued on a recurring basis, invest in limited liability companies that invest in operating entities which hold multifamily real estate properties. The fair value of our variable interest entities was $64.2 million as of December 31, 2022 and falls within Level 3 of the fair value hierarchy. The fair value of the limited liability companies was obtained from a third party and is based on the fair value of the underlying real estate held by the various operating entities. The real estate is initially calculated based on the cost to purchase the properties and subsequently calculated based on a discounted cash flow methodology. At December 31, 2022, the residual capitalization rates used in the fair value calculations of the underlying real estate ranged from 4.25% to 4.75% with a weighted average rate of 4.46%. The discount rates used in the fair value calculations of the underlying real estate ranged from 5.75% to 6.00% with a weighted average rate of 5.86%. The fair value of this investment falls within Level 3 of the fair value hierarchy.

Each of our consolidated limited partnership funds, which are measured using NAV as a practical expedient, are closed-end funds that invest in infrastructure credit assets and tech-centric middle-market loans, respectively. Redemptions are not allowed until the funds’ termination dates and liquidations begin. At December 31, 2022, our unfunded commitments for our consolidated limited partnership funds are $926.3 million.

Derivative instruments

The fair values of our call options are based upon the amount of cash that we will receive to settle each derivative instrument on the reporting date. These amounts are determined by our investment team using industry accepted valuation models and are adjusted for the nonperformance risk of each counterparty net of any collateral held. Inputs include market volatility and risk free interest rates and are used in income valuation techniques in arriving at a fair value for each option contract. The nonperformance risk for each counterparty is based upon its credit default swap rate. We have no performance obligations related to the call options purchased to fund our fixed index annuity policy liabilities.

The fair values of our pay fixed/receive float interest rate swaps are determined using internal valuation models that generate discounted expected future cash flows by constructing a projected Secured Overnight Financing Rate (SOFR) curve over the term of the swap.

Other investments

Equity securities and short-term debt securities with maturities of greater than three months but less than twelve months when purchased are the only financial instruments included in other investments that are measured at fair value on a recurring basis. The fair value for these investments are determined using the same methods discussed above for fixed maturity securities. Financial instruments included in other investments that are not measured at fair value on a recurring basis are FHLB common stock, short-term loans, collateral loans and company owned life insurance (“COLI”). FHLB common stock is carried at cost which approximates fair value. FHLB common stock was $22.0 million as of December 31, 2022 and falls within Level 2 of the fair value hierarchy. Due to the short-term nature of the investments, the fair value of a portion of our short-term loans approximates the carrying value. The fair value of short-term loans was $316.4 million and $320.0 million as of December 31, 2022 and December 31, 2021, respectively. Our short-term loans fall within Level 2 of the fair value hierarchy. For our collateral loans, we have concluded the fair value approximates carrying value and falls within Level 2 of the fair value hierarchy. The fair value of collateral loans was $64.6 million and $0 million as of December 31, 2022 and December 31, 2021, respectively. The fair value of our COLI approximates the cash surrender value of the policies and falls within Level 2 of the fair value hierarchy. The fair value of COLI was $397.7 million and $384.3 million as of December 31, 2022 and December 31, 2021, respectively.

Cash and cash equivalents

Amounts reported in the consolidated balance sheets for these instruments are reported at their historical cost which approximates fair value due to the nature of the assets assigned to this category.

 

F-22

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Policy benefit reserves, coinsurance deposits and SPIA benefit reserves

The fair values of the liabilities under contracts not involving significant mortality or morbidity risks (principally deferred annuities), are stated at the cost we would incur to extinguish the liability (i.e., the cash surrender value) as these contracts are generally issued without an annuitization date. The coinsurance deposits related to the annuity benefit reserves have fair values determined in a similar fashion. For period-certain annuity benefit contracts, the fair value is determined by discounting the benefits at the interest rates currently in effect for newly issued immediate annuity contracts. We are not required to and have not estimated the fair value of the liabilities under contracts that involve significant mortality or morbidity risks, as these liabilities fall within the definition of insurance contracts that are exceptions from financial instruments that require disclosures of fair value. Policy benefit reserves, coinsurance deposits and SPIA benefit reserves without life contingencies are not measured at fair value on a recurring basis. SPIA benefit reserves without life contingencies are recognized in other policy funds and contract claims on the Consolidated Balance Sheets. All of the fair values presented within these categories fall within Level 3 of the fair value hierarchy as most of the inputs are unobservable market data.

Other policy funds - FHLB

The fair values of the Company’s funding agreements with the FHLB are estimated using discounted cash flow calculations based on interest rates currently being offered for similar agreements with similar maturities.

Notes and loan payable

The fair value of our senior unsecured notes is based upon quoted market price. The carrying value of the term loan approximates fair value as the interest rate is reset on a quarterly basis utilizing SOFR adjusted for a credit spread. Both of these are categorized as Level 2 within the fair value hierarchy and are not remeasured at fair value on a recurring basis.

Subordinated debentures

Fair values for subordinated debentures are estimated using discounted cash flow calculations based principally on observable inputs including our incremental borrowing rates, which reflect our credit rating, for similar types of borrowings with maturities consistent with those remaining for the debt being valued. These fair values are categorized as Level 2 within the fair value hierarchy. Subordinated debentures are not measured at fair value on a recurring basis.

Funds withheld liability - embedded derivative

We estimate the fair value of the embedded derivative based on the fair value of the assets supporting the funds withheld payable under modified coinsurance and funds withheld coinsurance reinsurance agreements. The fair value of the embedded derivative is classified as Level 3 based on valuation methods used for the assets held supporting the reinsurance agreements.

Fixed index annuities - embedded derivatives

We estimate the fair value of the embedded derivative component of our fixed index annuity policy benefit reserves at each valuation date by (i) projecting policy contract values and minimum guaranteed contract values over the expected lives of the contracts and (ii) discounting the excess of the projected contract value amounts at the applicable risk free interest rates adjusted for our nonperformance risk related to those liabilities. The projections of policy contract values are based on our best estimate assumptions for future policy growth and future policy decrements. Our best estimate assumptions for future policy growth include assumptions for the expected index credit on the next policy anniversary date which are derived from the fair values of the underlying call options purchased to fund such index credits and the expected costs of annual call options we will purchase in the future to fund index credits beyond the next policy anniversary. The projections of minimum guaranteed contract values include the same best estimate assumptions for policy decrements as were used to project policy contract values.

Within this determination we have the following significant unobservable inputs: 1) the expected cost of annual call options we will purchase in the future to fund index credits beyond the next policy anniversary and 2) our best estimates for future policy decrements, primarily lapse, partial withdrawal and mortality rates. As of December 31, 2022 and 2021, we utilized an estimate of 2.40% and 2.10%, respectively, for the expected cost of annual call options, which is based on estimated long-term account value growth and a historical review of our actual option costs.

 

 

F-23

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Our best estimate assumptions for lapse, partial withdrawal and mortality rates are based on our actual experience and our outlook as to future expectations for such assumptions. These assumptions, which are consistent with the assumptions used in calculating deferred policy acquisition costs and deferred sales inducements, are reviewed on a quarterly basis and are updated as our experience develops and/or as future expectations change. The following table presents average lapse rate and partial withdrawal rate assumptions, by contract duration, used in estimating the fair value of the embedded derivative component of our fixed index annuity policy benefit reserves at each reporting date:

 

		Average Lapse Rates								Average Partial Withdrawal Rates
Contract Duration (Years)		December 31, 2022				December 31, 2021				December 31, 2022				December 31, 2021
1 - 5			2.17	%			3.04	%			1.86	%			2.19	%
6 - 10			3.28	%			2.84	%			1.97	%			2.26	%
11 - 15			3.63	%			4.47	%			1.86	%			2.14	%
16 - 20			8.55	%			8.93	%			2.96	%			1.33	%
20+			4.90	%			4.93	%			1.81	%			—	%

Lapse rates are generally expected to increase as surrender charge percentages decrease for policies without a lifetime income benefit rider. Lapse expectations reflect a significant increase in the year in which the surrender charge period on a contract ends.

The following table provides a reconciliation of the beginning and ending balances for our Level 3 assets and liabilities, which are measured at fair value on a recurring basis using significant unobservable inputs for the years ended December 31, 2022 and 2021:

 

		Year Ended  December 31,
		2022				2021
		(Dollars in thousands)
Fixed maturity securities, available for sale - Corporate securities
Beginning balance		$	—			$	—
Purchases			2,233				—
Transfers in			391,702				—
Transfers out			—				—
Total realized/unrealized gains (losses):
Included in net income			—				—
Included in other comprehensive income (loss)			8,413				—
Ending balance		$	402,348			$	—
Fixed maturity securities, available for sale - Other asset backed securities
Beginning balance		$	—			$	—
Purchases			296,800				—
Transfers in			153,669				—
Transfers out			—				—
Total realized/unrealized gains (losses):
Included in net income			—				—
Included in other comprehensive income (loss)			(7,551	)			—
Ending balance		$	442,918			$	—
Other investments
Beginning balance		$	6,349			$	—
Transfers in			—				6,349
Transfers out			(3,867	)			—
Total realized/unrealized gains (losses):
Included in net income			(2,482	)			—
Included in other comprehensive income (loss)			—				—
Ending balance		$	—			$	6,349

 

F-24