American Equity Investment Life Holding Company (NYSE:AEL), a
leading issuer of fixed index annuities, today reported third
quarter 2015 net income of $97.3 million, or $1.19 per diluted
common share, compared to a third quarter 2014 net income of $67.8
million, or $0.85 per diluted common share.
Non-GAAP operating income1 for the third quarter of 2015
decreased 28% to $45.9 million, or $0.56 per diluted common share,
compared to third quarter 2014 non-GAAP operating income1 of $64.0
million, or $0.81 per diluted common share.
Highlights for the third quarter of 2015 include:
- Annuity sales (before coinsurance) were
up 70% to $1.83 billion compared to third quarter 2014 annuity
sales of $1.07 billion.
- Investment spread was 2.83% compared to
2.84% for the second quarter of 2015 and 2.82% for the third
quarter of 2014.
- Estimated risk-based capital (RBC)
ratio of 354% at September 30, 2015 compared to 372% at
December 31, 2014 remained above A. M. Best’s rating
threshold.
- Book value per share (excluding
accumulated other comprehensive income) was $21.17 at
September 30, 2015 compared to $18.52 at December 31,
2014.
Third quarter 2015 net income and non-GAAP operating
income1 were decreased by $1.1 million ($0.01 per diluted
common share) and $8.7 million ($0.10 per diluted common share),
respectively, for revisions to assumptions utilized in the
determination of deferred policy acquisition costs, deferred sales
inducements and the liability for future benefits to be paid under
lifetime income benefit riders. Net income and non-GAAP operating
income1 for the third quarter of 2014 were impacted by
similar assumption revisions which increased net income by $23.0
million ($0.29 per diluted common share) and non-GAAP operating
income1 by $20.2 million ($0.26 per diluted common share).
Excluding the effects of these assumption revisions, third
quarter 2015 non-GAAP operating income1 per share of $0.66
increased by 20% compared to third quarter 2014 non-GAAP operating
income1 per share of $0.55.
1 In addition to net income, the Company has consistently
utilized operating income and operating income per common share -
assuming dilution, non-GAAP financial measures commonly used in the
life insurance industry, as economic measures to evaluate its
financial performance. See accompanying tables for reconciliations
of net income to operating income and descriptions of reconciling
items. See Company’s Quarterly Report on Form 10-Q for a more
complete discussion of the reconciling items and their impact on
net income for the periods presented. Because these items fluctuate
from period to period in a manner unrelated to core operations, the
Company believes measures excluding their impact are useful in
analyzing operating trends. The Company believes the combined
presentation and evaluation of operating income together with net
income, provides information that may enhance an investor’s
understanding of its underlying results and profitability.
SUSTAINED SALES MOMENTUM ASSURES A RECORD YEAR
Third quarter sales of $1.8 billion, a record for any single
quarter, were up 70% from the prior year third quarter and were 2%
higher than second quarter 2015 sales. Commenting on sales, John
Matovina, Chief Executive Officer and President, said: "We
sustained our sales momentum from the second quarter bringing our
year-to-date sales to $4.9 billion--just $200 million shy of the
$5.1 billion full year sales record we set in 2011. With October
sales comfortably exceeding $200 million, we know 2015 will be our
best year ever, but have no intention of slowing down or resting on
our accomplishments. Our product and service mix has never been
more competitive, and we expect strong sales in the fourth quarter.
Those sales may get an additional boost from impending changes to
our lifetime income benefit rider. Due to mandatory changes to
mortality rates used to establish regulatory reserves which become
effective industry wide in 2016, benefits in the rider will be
lower for policies written after 2015--an obvious incentive for
agents to complete applications this year."
Turning to the outlook for sales, Matovina added: "Despite some
new competition that surfaced in the third quarter, our attractive
product offerings and unmatched service levels continued to produce
robust sales broadly across our network of distribution partners.
Looking to 2016, we intend to continue to offer competitively
priced products that meet our return objectives and are confident
that our consistent presence and best in class service to agents
and policyholders will continue to favorably differentiate us in
the fixed index annuity market."
SPREAD FLAT ON HIGHER BOND FEE AND PREPAYMENT INCOME
American Equity’s investment spread was essentially flat at
2.83% for the third quarter of 2015 compared to 2.84% for the
second quarter of 2015 as a result of a one basis point increase in
average yield on invested assets and a 2 basis point increase in
the cost of money.
Average yield on invested assets continued to be favorably
impacted by non-trendable items and unfavorably impacted by the
investment of new premiums and portfolio cash flows at rates below
the portfolio rate. Fee income from bond transactions and
prepayment income added 0.14% to the third quarter 2015 average
yield on invested assets compared to 0.07% from such items in the
second quarter of 2015. Adjusting for the effect of non-trendable
items, the average yield on invested assets for the quarter fell by
5 basis points from the prior quarter. The average yield on fixed
income securities purchased and commercial mortgage loans funded in
the third quarter of 2015 was 3.89% compared to 3.73% and 3.84% in
the second and first quarters of 2015 and average yields ranging
from 4.14% - 4.39% in the prior year quarters.
The aggregate cost of money for annuity liabilities increased by
2 basis points to 1.96% in the third quarter of 2015 compared to
1.94% in the second quarter of 2015. This increase reflected
continued reductions in crediting rates but the effect from the
rate reductions was more than offset by a 5 basis point decrease in
the benefit from over hedging the obligations for index linked
interest from 0.07% in the second quarter of 2015 to 0.02% in the
third quarter of 2015.
Commenting on investment spread, John Matovina, said: “The
spread story in the third quarter was more of the same with our
management team working diligently to mitigate the ongoing impact
of a low interest rate environment. Yields on new investments were
up 0.16% from the second quarter and were higher than the first
quarter as well. We captured these higher yields while keeping the
investment portfolio safely within our applicable risk standards.
Nonetheless, the markets are still offering yields below our
portfolio rate and we held more cash and short-term investments
than usual this quarter, both of which put downward pressure on our
investment income and average yield on invested assets. We have
generated additional investment spread through bond fees,
prepayment income and over hedging, but these sources are
opportunistic and we do not consider them core to our investment
spread strategy."
Matovina continued, "We continue to achieve a reported spread of
approximately 2.80% - 2.85% with our adjusted spread at
approximately 2.70% - 2.75%. We are counteracting the impact of
lower investment yields by reducing the rates on our policy
liabilities but the impact on the cost of money from these
reductions is less than the impact on the average yield on invested
assets from investment purchases by a few basis points. We continue
to have flexibility to reduce our crediting rates, if necessary,
and could decrease our cost of money by approximately 0.56% through
further reductions in renewal rates to guaranteed minimums should
the investment yields currently available to us persist. Most
importantly, we intend to maintain our risk discipline in managing
our investment portfolio and not chase higher yields in assets and
asset classes that do not fit our risk profile.”
EQUITY OFFERING PROVIDES CAPITAL TO SUSTAIN GROWTH
The Company's August 2015 equity offering provides capital to
support 2015's substantial increase in sales and the prospect that
elevated sales might extend beyond this year. The Company received
$104.5 million in initial net proceeds from the issuance of 4.3
million shares of its common stock. These proceeds were contributed
to the Company's primary life insurance subsidiary. If needed, the
Company could exercise its rights under two forward sales
agreements and receive $136 million in net proceeds from the
issuance of an additional 5.6 million shares of its common stock.
These forward sales agreements, which have a term of 12 months
ending in August 2016, allow the Company to manage its capital by
matching the timing of the issuance of additional equity with any
need for such capital that might be created by high levels of
sales.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This press release contains forward-looking statements within
the meaning of The Private Securities Litigation Reform Act of
1995. Forward-looking statements relate to future operations,
strategies, financial results or other developments, and are
subject to assumptions, risks and uncertainties. Statements such as
“guidance”, “expect”, “anticipate”, “believe”, “goal”, “objective”,
“target”, “may”, “should”, “estimate”, “projects” or similar words
as well as specific projections of future results qualify as
forward-looking statements. Factors that may cause our actual
results to differ materially from those contemplated by these
forward looking statements can be found in the company’s Form 10-K
filed with the Securities and Exchange Commission. Forward-looking
statements speak only as of the date the statement was made and the
company undertakes no obligation to update such forward-looking
statements. There can be no assurance that other factors not
currently anticipated by the company will not materially and
adversely affect our results of operations. Investors are cautioned
not to place undue reliance on any forward-looking statements made
by us or on our behalf.
CONFERENCE CALL
American Equity will hold a conference call to discuss third
quarter 2015 earnings on Thursday, November 5, 2015, at 9:00 a.m.
CST. The conference call will be webcast live on the Internet.
Investors and interested parties who wish to listen to the call on
the Internet may do so at www.american-equity.com.
The call may also be accessed by telephone at 855-865-0606,
passcode 56483898 (international callers, please dial
704-859-4382). An audio replay will be available shortly after the
call on AEL’s website. An audio replay will also be available via
telephone through November 12, 2015 at 855-859-2056, passcode
56483898 (international callers will need to dial
407-537-3406).
ABOUT AMERICAN EQUITY
American Equity Investment Life Holding Company, through its
wholly-owned operating subsidiaries, issues fixed annuity and life
insurance products, with a primary emphasis on the sale of fixed
index and fixed rate annuities. American Equity Investment Life
Holding Company, a New York Stock Exchange Listed company (NYSE:
AEL), is headquartered in West Des Moines, Iowa. For more
information, please visit www.american-equity.com.
American Equity
Investment Life Holding Company
Consolidated
Statements of Operations (Unaudited)
Three Months Ended Nine
Months Ended September 30, September 30,
2015 2014 2015
2014 (Dollars in thousands, except per share data)
Revenues: Premiums and other considerations $ 8,335 $ 6,043
$ 25,369 $ 22,497 Annuity product charges 37,975 31,958 99,066
86,477 Net investment income 436,085 386,931 1,253,930 1,127,818
Change in fair value of derivatives (351,360 ) 39,218 (405,484 )
358,594 Net realized gains (losses) on investments, excluding other
than temporary impairment ("OTTI") losses 1,159 (3,190 ) 10,362
(6,134 ) OTTI losses on investments: Total OTTI losses (10,000 ) —
(10,132 ) — Portion of OTTI losses recognized from other
comprehensive income 4,771 (564 ) 3,943
(2,063 ) Net OTTI losses recognized in operations
(5,229 ) (564 ) (6,189 ) (2,063 ) Loss on extinguishment of debt
— — — (10,551 )
Total revenues 126,965 460,396
977,054 1,576,638
Benefits and
expenses: Insurance policy benefits and change in future policy
benefits 10,959 9,109 32,629 30,191 Interest sensitive and index
product benefits 213,465 429,415 802,431 1,114,381 Amortization of
deferred sales inducements 65,807 40,661 152,278 96,676 Change in
fair value of embedded derivatives (414,724 ) (195,206 ) (583,112 )
(21,652 ) Interest expense on notes payable 7,283 8,741 21,976
28,126 Interest expense on subordinated debentures 3,075 3,044
9,138 9,076 Amortization of deferred policy acquisition costs
67,885 39,671 186,871 113,949 Other operating costs and expenses
24,497 20,616 70,487
60,588 Total benefits and expenses (21,753 )
356,051 692,698 1,431,335
Income before income taxes 148,718 104,345 284,356 145,303 Income
tax expense 51,412 36,530 98,302
50,497 Net income $ 97,306 $ 67,815
$ 186,054 $ 94,806 Earnings per common
share $ 1.22 $ 0.90 $ 2.39 $ 1.28 Earnings per common share -
assuming dilution $ 1.19 $ 0.85 $ 2.33 $ 1.19 Weighted
average common shares outstanding (in thousands): Earnings per
common share 79,676 75,083 77,995 74,030 Earnings per common share
- assuming dilution 81,559 79,467 79,977 79,477
American Equity Investment Life Holding
Company
NON-GAAP FINANCIAL MEASURES
In addition to net income, the Company has consistently utilized
operating income and operating income per common share - assuming
dilution, non-GAAP financial measures commonly used in the life
insurance industry, as economic measures to evaluate its financial
performance. Operating income equals net income adjusted to
eliminate the impact of net realized gains and losses on
investments including net OTTI losses recognized in operations,
fair value changes in derivatives and embedded derivatives, loss on
extinguishment of debt and changes in litigation reserves. Because
these items fluctuate from quarter to quarter in a manner unrelated
to core operations, the Company believes measures excluding their
impact are useful in analyzing operating trends. The Company
believes the combined presentation and evaluation of operating
income together with net income provides information that may
enhance an investor’s understanding of our underlying results and
profitability.
Reconciliation
from Net Income to Operating Income (Unaudited)
Three Months Ended
Nine Months Ended September 30, September 30,
2015 2014 2015
2014 (Dollars in thousands, except per share data)
Net income $ 97,306 $ 67,815 $ 186,054 $ 94,806 Adjustments to
arrive at operating income: (a) Net realized investment (gains)
losses, including OTTI 1,639 1,551 (1,829 ) 3,476 Change in fair
value of derivatives and embedded derivatives - index annuities
(54,535 ) (4,957 ) (40,152 ) 34,636 Change in fair value of
derivatives and embedded derivatives - debt 1,506 (427 ) 1,606 29
Litigation reserve — — — (916 ) Extinguishment of debt —
— — 7,912
Operating income (a non-GAAP financial measure) $ 45,916 $
63,982 $ 145,679 $ 139,943 Per common
share - assuming dilution: Net income $ 1.19 $ 0.85 $ 2.33 $ 1.19
Adjustments to arrive at operating income: Net realized investment
(gains) losses, including OTTI 0.02 0.02 (0.03 ) 0.04 Change in
fair value of derivatives and embedded derivatives - index
annuities (0.67 ) (0.06 ) (0.50 ) 0.44 Change in fair value of
derivatives and embedded derivatives - debt 0.02 — 0.02 —
Litigation reserve — — — (0.01 ) Extinguishment of debt —
— — 0.10 Operating
income (a non-GAAP financial measure) $ 0.56 $ 0.81 $
1.82 $ 1.76
(a) Adjustments to net income to arrive at operating income are
presented net of income taxes and where applicable, are net of
related adjustments to amortization of deferred sales inducements
(DSI) and deferred policy acquisition costs (DAC).
NON-GAAP FINANCIAL MEASURES
Average Stockholders' Equity and Return
on Average Equity (Unaudited)
Return on equity measures how efficiently we generate profits
from the resources provided by our net assets. Return on equity is
calculated by dividing net income and operating income for the
trailing twelve months by average equity excluding average
accumulated other comprehensive income ("AOCI").
Twelve Months Ended
September 30, 2015 (Dollars in thousands) Average
Stockholders' Equity 1 Average equity including average
AOCI $ 2,024,565 Average AOCI (486,243 ) Average equity
excluding average AOCI $ 1,538,322 Net income $
217,271 Operating income 196,382
Return on Average Equity
Excluding Average AOCI Net income 14.12 % Operating income
12.77 %
1 - The net proceeds received from our public offering of common
stock in August 2015 are included in the computations of average
stockholders' equity on a weighted average basis based upon the
number of days they were available to us in the twelve month
period. The weighted average amount is added to the simple average
of (a) stockholders' equity at the beginning of the twelve month
period and (b) stockholders' equity at the end of the twelve month
period excluding the net proceeds received from the public stock
offering in August 2015.
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American Equity Investment Life Holding CompanyJohn M.
Matovina, 515-457-1813Chief Executive
Officerjmatovina@american-equity.comorTed M. Johnson,
515-457-1980Chief Financial
Officertjohnson@american-equity.comorDebra J. Richardson,
515-273-3551Chief Administrative
Officerdrichardson@american-equity.comorJulie L. LaFollette,
515-273-3602Director of Investor
Relationsjlafollette@american-equity.com
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