The following Management's Discussion and Analysis ("MD&A") is intended to help
the reader understand the financial condition of the Company as of
Cautionary Note Regarding Forward-Looking Statements and Risk Factors
Except for certain historical information contained herein, this report contains certain statements that may be considered "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and such statements are subject to the safe harbor created by those sections. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of revenues, earnings, cash flows, capital expenditures, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning new products or services, or developments; any statements regarding future economic conditions or performance; and any statements of belief and any statement of assumptions underlying any of the foregoing. Words such as "believe," "may," "could," "expects," "hopes," "estimates," "projects," "should," "intends," "will," "anticipates," and "likely," and variations of these words, or similar expressions, terms, or phrases, are intended to identify such forward-looking statements. Forward-looking statements are inherently subject to risks, assumptions, and uncertainties, many of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Item 1A. Risk Factors" of our 2021 Form 10-K and below in Part III - Other Information - Item 1A Risk Factors.
Factors that may cause our actual results to differ materially from those contemplated or projected, forecast, estimated or budgeted in such forward-looking statements include among others, the following possibilities:
? our business plan, particularly including our reinsurance strategy, may not
prove to be successful;
? the success of our recent changes in executive leadership;
? our reliance on third-party insurance marketing organizations to market and
sell our insurance products through a network of independent agents;
40 Table of Contents
? adverse changes in the ratings obtained from independent rating agencies;
? failure to maintain adequate reinsurance;
? our inability to expand our insurance operations outside the 22 states and
? our insurance products may not achieve significant market acceptance;
? we may continue to experience operating losses in the foreseeable future;
? the possible loss or retirement of one or more of our key executive personnel;
intense competition, including the intensification of price competition, the
? entry of new competitors, and the introduction of new products by new and
existing competitors;
adverse state and federal legislation or regulation, including limitations on
? premium levels, increases in minimum capital and reserve requirements, benefit
mandates and tax treatment of insurance products;
fluctuations in interest rates causing a reduction of investment income or
? increase in interest expense and in the market value of interest-rate sensitive
investments;
? failure to obtain new customers, retain existing customers, or reductions in
policies in force by existing customers;
higher service, administrative, or general expense due to the need for
? additional marketing, administrative or management information systems
expenditures related to implementation of our business plan;
? changes in our liquidity due to changes in asset and liability matching;
? possible claims relating to sales practices for insurance products;
? accuracy of management's assumptions and estimates;
? variability of statutory capital required to be held by insurance or
reinsurance entities; and
? lawsuits in the ordinary course of business.
See "Risk Factors" beginning on page Part II, Item 1A for further discussion of the material risks associated with our business.
All such forward-looking statements speak only as of the date of this report. You are cautioned not to place undue reliance on such forward-looking statements. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statements are based.
Overview of Company and Business Model
We are a financial services company focused on helping people plan and secure their future by providing technology-enabled and services-oriented solutions to support individuals' retirement through our annuity products. We currently distribute our
41 Table of Contents
annuities through independent distributors who are primarily independent marketing organizations ("IMOs"). Our operations are comprised of four distinct, inter-connected businesses. We seek to reinsure our annuity policies using a reinsurance platform that is attractive to traditional reinsurance entities and other institutional investors seeking above average risk-adjusted returns uncorrelated to the equity markets. To date we have developed relationships with reinsurers who capitalize and manage their own reinsurance capital vehicles utilizing our infrastructure and expertise. Our long-term goal is to build a platform that provides competitive annuity and life insurance products via efficient technology resulting in a seamless customer experience.
We believe that our operating capabilities and technology platform provides annuity distributors and reinsurers with flexible and cost-effective solutions. We seek to create value through our ability to provide the distributors and reinsurers with annuity product innovation, speed to market for new products, competitive rates and commissions, and streamlined customer and agent experiences. Our capital model allows us to support increasing annuity sales volumes with capital capacity provided by reinsurers.
We provide an end-to-end solution to manage annuity products that includes a broad set of product development, distribution support, policy administration, and asset/liability management services. Our technology platform enables us to efficiently develop, sell and administer a wide range of products. Our asset management services are also provided to third-party insurers and reinsurers.
We currently offer annuity products, consisting of multi-year guaranteed annuity
("MYGA") and fixed indexed annuity ("FIA") policies, through IMOs that in turn
distribute our products and services to independent insurance agents in 22
states and the
We seek to reinsure substantially all of our annuity policies with third-party reinsurers and our captive reinsurance subsidiary, Seneca Re. Our third-party reinsurers include traditional reinsurers and capital markets reinsurers, which are third-party investors, who are seeking exposure to reinsurance revenue and typically do not have their own reinsurance platforms or insurance related operations. We also have the flexibility to selectively retain assets and liabilities associated with our policies for a period of time when we expect that doing so will provide an attractive return on our capital.
We operate our core business through four subsidiaries under one reportable
segment. American Life is a
Our other insurance subsidiary, Seneca Re, is a
We seek to deliver long-term value by growing our annuity volumes and generating profitable fee-based revenue. We generate fees and other revenue based on the gross deposits received on the annuity policies we issue, reinsure, and administer.
By reinsuring a significant portion of the annuity policies we issue, the level of capital needed for American Life is significantly less than retaining all of the business on its books. We believe this "capital light" approach has the potential to produce enhanced returns for our business compared to a traditional insurance company capital structure. This strategy helps alleviate our insurance regulatory capital requirements because policies that are reinsured require substantially less capital and surplus than policies retained by us.
42
Table of Contents
As of
We receive ceding commissions and expense reimbursement from reinsurers at the
time we cede our primary insurance liabilities to them, providing meaningful
cash flow. During the three months ended
million and
For the three months ended
Through our ancillary services businesses we administer the policies we issue and offer asset management services to our reinsurance partners for a fee. Through Seneca Re, we also assist capital market investors in establishing and licensing new special purpose reinsurance entities. We believe our broad service offering provides a growing and valuable fee stream and expect that our policy administration and asset management fee income will increase as we grow our number of administered policies and the associated assets that we manage. In the future, we expect to have opportunities to increase our policy administration and asset management revenue by providing these services on a stand-alone basis to new customers.
We seek to create value for our distribution and reinsurance partners by facilitating product innovation, rapid speed to market for new products, competitively priced products, streamlined customer and agent experience, and efficient technology-enabled operations. We generate fee income from reinsurers in the form of ceding commissions, policy administration fees, and asset management fees. We typically receive upfront ceding commissions and expense reimbursements at the time the policies are reinsured and policy administration fees over the policy lifetimes. We also earn asset management fees on the assets we hold that support the obligations of a majority of our reinsurers. In investing on behalf of our insurance and reinsurance company subsidiaries, we seek to maximize yield by constructing portfolios that include a diversified portfolio of bonds, mortgages, private credit and structured securities (including collateralized loan obligations), while minimizing the difference in duration between our investment assets and liabilities.
Our Products
Through American Life we presently issue several MYGA and FIA products. American Life presently offers fix annuity products, two MYGAs, two FIAs, and two bonus plans associated with the FIA product. It is not presently offering any traditional life insurance products. Fixed annuities are a type of insurance contract in which the policyholder makes one or more premium deposits, earning interest at a crediting rate determined in relation to a specific market index, on a tax deferred basis. MYGAs are insurance contracts under which the policyholder makes deposits and earns a crediting rate guaranteed for a specified number of years before it may be changed. American Life's MYGA products are three and five-year single premium deferred individual annuity contracts, providing consumers with an attractive, low risk, predictable and tax-deferred investment option. American Life's FIA products are long-term (7 and 10-year) annuity products with interest rates that are tied, in part, to published stock market indices chosen by customers. The FIA products are modified single premium annuity contracts designed for individuals seeking to benefit from potential market gains with fully protected principal. American Life began selling its MYGA and FIA products in 2019.
In 2021, we introduced two new indexes into the selections on FIA products. The
S&P 500 ESG index for fixed annuities is comprised of a subset S&P 500 companies
built to meet the increasing needs of investors seeking socially responsible
investments aligned with a mainstream index which is published by one of the
foremost index authorities in the world,
Our second new index, the Goldman Sachs Xenith Index is a multi-asset strategy that uses the anticipated macro regime, as identified by a leading economic indicator, to make asset allocations. By using a leading economic indicator, the Goldman Sachs Xenith Index differs from indices that rely on a backward-looking methodology alone. Instead of relying purely on the
43
Table of Contents
S&P 500 Index for exposure to
We expect to expand American Life's product line in the future. Depending on market demand, we expect to consider having American Life write a wide variety of insurance products, including fixed deferred, fixed indexed and other annuities. Any new insurance products we create must be filed with and approved by appropriate state insurance regulatory authorities before being offered to the public. American Life's MYGA and FIA products were developed using an independent consulting actuary, and we expect that any new products will utilize similar services. Our long-term plan is to broaden our products to life and Medicare supplements under attractive market conditions.
The table below sets forth American Life's MYGA and FIA deposits received during
the three months ended
Three months ended March 31, 2022 2021 (In thousands) Deposits Received(1) Deposits Received(1) Annuity Premium MYGA $ 25,464 $ 9,369 FIA 72,647 114,285 Total issued $ 98,111 $ 123,654
1) Under generally accepted accounting principles in
44 Table of Contents
Industry Trends and Market Conditions
Market
We participate in a large U.S. market that we expect to grow in part due to a
number of demographic trends. As measured by annual premiums written, annuities
are the largest product line in the life, annuity, and accident and health
sector. Annuities play an important role in retirement planning by providing
individuals with stable, tax-efficient sources of income. In 2020 annuity
premiums, accounted for
An increasing portion of the
We believe that capital markets investors have been actively seeking investing in and acquiring insurance and reinsurance companies in recent years. Fixed annuities provide upfront premiums and stable, long-term payment obligations and are thus attractive sources of liability-funded assets for a variety of traditional and alternative asset managers and investors. However, there are significant regulatory and operational hurdles for capital providers looking to enter the insurance market. These hurdles are exacerbated by the limited legacy administrative capabilities, product development processes and technology systems, of traditional insurers and reinsurers. We provide asset managers and investors the ability to seamlessly access funding from annuities through a variety of reinsurance entities that we can form quickly and operate efficiently with lower upfront and ongoing regulatory and operating costs.
State expansion efforts have taken more time than anticipated, as states would like to see a more meaningful historical financial footprint. We are working diligently to file in more states, responding and providing increased information to regulators and discussing how the model ensures policyholders are protected, given the capital held and supported by the use of reinsurance.
We currently distribute annuity products through eight third-party IMOs. We believe our product development, prompt policy processing, operating flexibility and speed to market make us a desirable partner for insurance distributors. We will seek to grow by increasing volumes with our current IMOs and by establishing new IMO relationships.
45 Table of Contents Competition
We operate in highly competitive markets with a variety of participants,
including insurance companies, financial institutions, asset managers, and
reinsurance companies. These companies compete in various forms in the annuity
market, for investment assets and for services. We seek to build strong
relationships along with offering technology-enabled and services-oriented
solutions for our partners. The market for annuities is dynamic we believe. The
combination of the treasury market experiencing the largest rate increase since
1928 1 and the volatility in the market resulting from the war in
Given the potential premium growth, we have capacity to cover the capital needs of writing new business through existing reinsurers. Additionally, we have a number of potential reinsurance transactions in the pipeline that are anticipated to close in the year.
Interest Rate Environment
The
If interest rates were to rise, we believe the yield on floating rate investments and the yield on new investment purchases would rise. We also believe our products would be more attractive to consumers and impact sales positively.
Discontinuation of Libor
We are in the process of analyzing and identifying our population of securities,
financial instruments and contracts that utilize LIBOR (collectively "LIBOR
Instruments") to determine if we have any material exposure to the transition
from LIBOR. To the extent we hold LIBOR Instruments, the terms of these
instruments may have fallback provisions that provide for an alternative
reference rate when LIBOR ceases to exist. For securities without adequate
fallback provisions already in place, legislation governing securities under
Notwithstanding, in preparation for the phase out of LIBOR, we may need to renegotiate our LIBOR Instruments that utilize LIBOR. However, these efforts may not be successful in mitigating the legal and financial risk from changing the reference
1 Sources: Natixis, NYU Stern
46
Table of Contents
rate in our LIBOR Instruments. Furthermore, the discontinuation of LIBOR may adversely impact our ability to manage and hedge exposures to fluctuations in interest rates using derivative instruments.
As a result, the transition of our LIBOR Instruments to alternative reference rates may result in adverse changes to the net investment income, fair market value and return on those investments. We intend to continue to evaluate and monitor the risks associated with the LIBOR transition which include identifying and monitoring our exposure to LIBOR, monitoring the market adoption of alternative reference rates and ensuring operational processes are updated to accommodate alternative rates. Due to uncertainty surrounding alternative rates, we are unable to predict the overall impact of this change at this time.
COVID-19
We continue to closely monitor developments related to the COVID-19 pandemic to
assess any potential adverse impact on our business. Due to the evolving and
highly uncertain nature of this pandemic, it currently is not possible to
provide a longer-term estimate of potential insurance or reinsurance exposure or
the indirect effects the pandemic may have on our results of operations,
financial condition or liquidity. Management implemented our business continuity
plan in early
Critical Accounting Policies and Estimates
Part II - Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2021 Form 10-K ("2021 Form 10-K MD&A") contains a detailed discussion of our critical accounting policies and estimates. This report should be read in conjunction with the "Critical Accounting Policies and Estimates" discussed in our 2021 Form 10-K MD&A.
Derivatives
The Company entered into derivative instruments to hedge FIA products that
guarantee the return of principal to the policyholders and credit interest based
on a percentage of the gain in a specified market index. To hedge against
adverse changes in equity indices, the Company entered into contracts to buy
equity indexed options. The change in fair value of the derivatives for hedging
the FIA index credits and the related embedded derivative liability fluctuate
from period to period based on the change in the market interest rates. The
indexed reserves are measured at fair value for the current period and future
periods. We hedge with options that align with the terms of our FIA products
which is between three and seven years. We have analyzed our hedging strategy on
our FIA products and, while the correlation of the hedges to the FIA products is
not matched dollar for dollar, we believe the hedges are effective as of
American Life also has agreements with several third-party reinsurers that have
FW and
approximately
47
Table of Contents
Comprehensive Net Income (Loss)
In this section, unless otherwise noted the discussion below first compares the
three months ended
We incurred a comprehensive loss of
Other reasons for the increase in Consolidated Statements of Comprehensive Loss:
Taxes. Our GAAP effective tax rates are unusually high in 2021 compared to
2020. The increase is primarily due to our change in valuation allowances. We
1) expect the effective rates will come down throughout the remainder of 2022.
Note 8 to our financial statements provides further information related to this increase in tax rate. Change in Unrealized Investment Losses (Gains). This change was a loss of
2)
interest rates in 2022 decreased the value of our fixed-income investments to
a much greater extent than occurred in 2021.
Our FIA products have three components influencing our Consolidated Statements of Comprehensive Loss:
The derivatives we purchase to hedge interest rate risk we would otherwise face
from our FIA. We carry these derivatives at fair value on our Consolidated
Balance Sheets, recording the change in fair value in our Consolidated
Statements of Comprehensive Loss as either a realized gain or realized loss. In
2022, the decrease in the market value of the derivative option assets was
The embedded derivative in our FIAs. We carry this derivative at fair value,
with the change in fair value recorded in the interest credited line of our
Consolidated Statements of Comprehensive Loss. Across all of products,
interest credited was a negative
1)
related to our FIAs was included in this overall interest credited. Reflecting our risk management, the change in the value of the embedded derivative equaled the change in the value of option contracts we use to hedge this exposure. The option budget reinsurers pay us to purchase derivative assets. We mark these assets to market each period. Separately, we record a payable to the reinsurers that is owed to a reinsurer when a policy is surrendered, an annuitant dies, or a policy lapses. We compare what the reinsurer paid for the
2) original option budget to the market value at the end of the period. The
change in the market value is added to or subtracted from the payable to the reinsurer to cover the reinsurer's obligations to the policyholder. This change in market value that resulted in negative$6.4 million was included in our other operating expense in 2022 compared to a negative$4.1 million expense in the prior year.
Consolidated Results of Operations - Three Months Ended
48
Table of Contents
© Edgar Online, source