Company Highlights
- Third quarter 2017 net income of
$57.0 million or $0.63 per diluted common share
- Third quarter 2017 non-GAAP
operating income1 of $87.2 million or $0.96 per
diluted common share
- Third quarter 2017 annuity sales of
$915 million, down 41% from third quarter 2016
- Policyholder funds under management
of $47.6 billion, up 1.5% from June 30, 2017 and 7.1% from
September 30, 2016
- Third quarter 2017 investment spread
of 2.70%
- Estimated risk-based capital ratio
of 375% compared to 342% at December 31, 2016
American Equity Investment Life Holding Company (NYSE: AEL), a
leading issuer of fixed index annuities, today reported third
quarter 2017 net income of $57.0 million, or $0.63 per diluted
common share, compared to net loss of $7.4 million, or $0.09 per
diluted common share, for third quarter 2016.
Non-GAAP operating income1 for the third quarter of 2017 was
$87.2 million, or $0.96 per diluted common share, compared to
non-GAAP operating loss1 of $4.7 million, or $0.05 per diluted
common share, for third quarter 2016. On a trailing twelve month
basis, non-GAAP operating1 return on average equity1 was 13.5%
based upon reported results and 12.3% excluding the impact of
assumption revisions in the third quarter of 2017 and losses on
extinguishment of debt.
Third quarter 2017 net income and non-GAAP operating income1
were positively affected by $39.2 million ($0.44 per diluted common
share) and $34.4 million ($0.38 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 loss and non-GAAP operating
loss1 for the third quarter of 2016 were negatively affected by
$52.9 million ($0.61 per diluted common share) and $52.6 million
($0.60 per diluted common share), respectively, for similar
assumption revisions.
In addition, third quarter 2017 net income and non-GAAP
operating income1 were negatively affected by a $10.8 million
($0.12 per diluted common share) loss on redemption of the 6.625%
Notes due in 2021.
POLICYHOLDER FUNDS UNDER MANAGEMENT UP 1.5% ON $915 MILLION
OF SALES
Policyholder funds under management at September 30, 2017
were $47.6 billion, a $693 million or 1.5% increase from
June 30, 2017. Third quarter sales were $915 million before
coinsurance ceded and $833 million after coinsurance ceded. Gross
sales and net sales for the quarter were down substantially from
third quarter 2016 sales. On a sequential basis, both gross and net
sales declined 22%.
Total sales by independent agents for American Equity Investment
Life Insurance Company (American Equity Life) decreased 22%
sequentially while total sales by broker-dealers and banks for
Eagle Life Insurance Company (Eagle Life) fell by $43 million or
23% sequentially. Sales of fixed index annuities (FIAs) were down
22% sequentially to $872 million with decreases at both Eagle Life
and American Equity Life.
Commenting on sales, John Matovina, Chairman and Chief Executive
Officer, said: "Sales were down substantially on a year-over-year
basis as third quarter 2016 sales benefited from a high level of
multi-year guaranteed annuity (MYGA) sales. The relatively smaller
decline in net sales compared to gross sales reflects both
significantly lower volumes of MYGA products which are
substantially coinsured as well as a reduction in the coinsured
portion of Eagle Life's FIA product sales from 80% to 50%. In July,
we lowered lifetime monthly income benefits on our most popular
guaranteed income products and discontinued offering a "no-fee"
lifetime income rider to recognize lower valuation interest rates
used to compute statutory reserves for policies issued in 2017
compared to policies issued in 2016. We anticipated similar changes
from our competitors which did not materialize, and we began to
experience declining sales levels soon after these changes."
Commenting on the market environment and the outlook for FIA
sales, Matovina added: “We believe low interest rates and the
continuation of the equity bull market are the biggest headwinds
for sales. We continue to see a shift in emphasis on the part of
independent agents from guaranteed income products to accumulation
products focused on upside potential. The market in each of our
distribution channels remained competitive in the third quarter
although we have recently seen downward adjustments in both the
accumulation and guaranteed income spaces by significant
competitors."
Matovina continued: "In September, we raised the income account
value growth rate on our guaranteed income products back to the
levels prevailing before the early July adjustments. In addition,
we raised caps and participation rates on our non-bonus products,
and we now offer some of the highest participation rates in the
market for annual reset fixed indexed annuities. In October, we
introduced a new lifetime income benefit rider for our Foundation
Gold fixed index annuity which now offers highly competitive
monthly income with the lowest fee levels in the market. We also
reintroduced a no-fee lifetime income benefit rider for Foundation
Gold; our previous no-fee rider had been very popular with agents.
Despite the current challenges facing the FIA market, we believe
the long-term outlook for FIA sales remains favorable driven by
well understood demographic factors, and we are positioned well to
fully participate in that growth."
INVESTMENT SPREAD HOLDS STEADY
American Equity’s investment spread was 2.70% for the third
quarter of 2017 compared to 2.72% for the second quarter of 2017
and 2.57% for the third quarter of 2016. On a sequential basis, the
average yield on invested assets declined by two basis points while
the cost of money was unchanged.
Average yield on invested assets fell to 4.43% for the third
quarter of 2017 compared to 4.45% for the second quarter of 2017
reflecting a decline in the benefit from fee income from bond
transactions, prepayment income and other non-trendable investment
income items to five basis points in the third quarter of 2017 from
eight basis points in the second quarter of 2017. The average yield
on fixed income securities purchased and commercial mortgage loans
funded in the third quarter of 2017 was 4.39% compared to 3.96% in
the second quarter of 2017 and 4.13% in the first quarter of
2017.
The aggregate cost of money for annuity liabilities of 1.73% in
the third quarter of 2017 was unchanged from 1.73% in the second
quarter of 2017. The benefit from over hedging the obligations for
index linked interest was six basis points in both the third and
second quarters of 2017.
Commenting on investment spread, Matovina said: “Third quarter
spread results were enhanced by over hedging benefits and fee
income from bond transactions and prepayment income, but, excluding
such items, were stable relative to second quarter results. We are
working diligently to increase the yield on our investment
portfolio and have identified opportunities that meet our high
credit quality parameters. We continue to have flexibility to
reduce our crediting rates, if necessary, and could decrease our
cost of money by approximately 0.47% through further reductions in
renewal rates to guaranteed minimums should the investment yields
currently available to us persist."
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 2017 earnings on Tuesday, November 7, 2017 at 9:00
a.m. CT. 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 97593449 (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 14, 2017 at 855-859-2056, passcode
97593449 (international callers will need to dial
404-537-3406).
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.
1 Use of non-GAAP financial measures is discussed in this
release in the tables that follow the text of the release.
American Equity
Investment Life Holding Company
Consolidated
Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended September
30, September 30, 2017 2016
2017 2016 (Dollars in thousands, except per
share data) Revenues: Premiums and other considerations
$ 8,569 $ 12,731 $ 25,691 $ 31,534 Annuity product charges 51,931
47,675 144,106 125,304 Net investment income 500,202 463,583
1,479,288 1,374,239 Change in fair value of derivatives 362,525
103,794 1,015,878 68,828 Net realized gains on investments,
excluding other than temporary impairment ("OTTI") losses 1,579
5,256 7,790 10,680 OTTI losses on investments: Total OTTI losses
(273 ) (4,554 ) (273 ) (11,334 ) Portion of OTTI losses recognized
in (from) other comprehensive income (191 ) 1,575 (1,281 )
(1,785 ) Net OTTI losses recognized in operations (464 ) (2,979 )
(1,554 ) (13,119 ) Loss on extinguishment of debt (18,389 ) —
(18,817 ) — Total revenues 905,953 630,060
2,652,382 1,597,466
Benefits and
expenses: Insurance policy benefits and change in future policy
benefits 10,823 15,065 32,684 37,567 Interest sensitive and index
product benefits 501,028 278,943 1,392,763 487,735 Amortization of
deferred sales inducements 14,707 69,245 110,727 127,396 Change in
fair value of embedded derivatives 229,702 144,404 628,845 694,564
Interest expense on notes and loan payable 7,597 6,887 23,997
20,649 Interest expense on subordinated debentures 3,502 3,253
10,260 9,627 Amortization of deferred policy acquisition costs
23,023 98,108 162,248 198,486 Other operating costs and expenses
28,782 25,133 82,325 78,786 Total
benefits and expenses 819,164 641,038 2,443,849
1,654,810 Income (loss) before income taxes 86,789
(10,978 ) 208,533 (57,344 ) Income tax expense (benefit) 29,832
(3,558 ) 70,691 (19,791 ) Net income (loss) $ 56,957
$ (7,420 ) $ 137,842 $ (37,553 ) Earnings
(loss) per common share $ 0.64 $ (0.09 ) $ 1.55 $ (0.45 ) Earnings
(loss) per common share - assuming dilution $ 0.63 $ (0.09 ) $ 1.53
$ (0.45 ) Weighted average common shares outstanding (in
thousands): Earnings (loss) per common share 89,069 86,262 88,873
83,645 Earnings (loss) per common share - assuming dilution 90,421
87,044 90,171 84,413
American Equity Investment Life Holding
Company
NON-GAAP FINANCIAL MEASURES
In addition to net income (loss), the Company has consistently
utilized non-GAAP operating income (loss) and non-GAAP operating
income (loss) per common share - assuming dilution, non-GAAP
financial measures commonly used in the life insurance industry, as
economic measures to evaluate its financial performance. Non-GAAP
operating income (loss) equals net income (loss) adjusted to
eliminate the impact of items that fluctuate from quarter to
quarter in a manner unrelated to core operations, and the Company
believes measures excluding their impact are useful in analyzing
operating trends. The most significant adjustments to arrive at
non-GAAP operating income (loss) eliminate the impact of fair value
accounting for the Company's fixed index annuity business and are
not economic in nature but rather impact the timing of reported
results. The Company believes the combined presentation and
evaluation of non-GAAP operating income (loss) together with net
income (loss) provides information that may enhance an investor’s
understanding of its underlying results and profitability.
Reconciliation from Net Income (Loss)
to Non-GAAP Operating Income (Loss) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30, 2017
2016 2017 2016 (Dollars in
thousands, except per share data) Net income (loss) $ 56,957 $
(7,420 ) $ 137,842 $ (37,553 ) Adjustments to arrive at non-GAAP
operating income (loss): (a) Net realized investment (gains)
losses, including OTTI (916 ) (1,008 ) (4,417 ) 752 Change in fair
value of derivatives and embedded derivatives - index annuities
47,835 9,400 116,383 160,078 Change in fair value of derivatives -
debt (357 ) (1,049 ) (139 ) 2,483 Litigation reserve — (1,957 ) —
(1,957 ) Income taxes (16,281 ) (2,689 ) (39,127 ) (57,426 )
Non-GAAP operating income (loss) $ 87,238 $ (4,723 ) $
210,542 $ 66,377 Per common share - assuming
dilution: Net income (loss) $ 0.63 $ (0.09 ) $ 1.53 $ (0.45 )
Adjustments to arrive at non-GAAP operating income (loss):
Anti-dilutive effect of net loss — — — 0.01 Net realized investment
(gains) losses, including OTTI (0.01 ) (0.01 ) (0.05 ) 0.01 Change
in fair value of derivatives and embedded derivatives - index
annuities 0.52 0.11 1.29 1.89 Change in fair value of derivatives -
debt — (0.01 ) — 0.03 Litigation reserve — (0.02 ) — (0.02 ) Income
taxes (0.18 ) (0.03 ) (0.44 ) (0.68 ) Non-GAAP operating income
(loss) $ 0.96 $ (0.05 ) $ 2.33 $ 0.79
(a) Adjustments to net income (loss) to arrive at non-GAAP
operating income (loss) are presented net of related adjustments to
amortization of deferred sales inducements (DSI) and deferred
policy acquisition costs (DAC) where applicable.
American Equity Investment Life Holding
Company
NON-GAAP FINANCIAL MEASURES
Average Stockholders' Equity and Return
on Average Equity (Unaudited)
Return on average equity measures how efficiently the Company
generates profits from the resources provided by its net assets.
Return on average equity is calculated by dividing net income and
non-GAAP operating income for the trailing twelve months by average
equity excluding average accumulated other comprehensive income
("AOCI"). The Company excludes AOCI because AOCI fluctuates from
quarter to quarter due to unrealized changes in the fair value of
available for sale investments.
Twelve Months Ended September 30, 2017
(Dollars in thousands) Average Stockholders' Equity
Average equity including average AOCI $ 2,787,765 Average AOCI
(811,644 ) Average equity excluding average AOCI $ 1,976,121
Net income $ 258,638 Non-GAAP operating income 266,509
Return on Average Equity Excluding Average AOCI Net
income 13.09 % Non-GAAP operating income 13.49 %
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American Equity Investment Life Holding CompanySteven D.
Schwartz, 515-273-3763Vice President - Investor
Relationssschwartz@american-equity.com
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