Company Highlights
- Fourth quarter 2017 net income of
$36.8 million or $0.41 per diluted common share; Full
year 2017 net income of $174.6
million or $1.93 per diluted common share
- Fourth quarter 2017 non-GAAP
operating income1 of $74.5 million or $0.82 per
diluted common share; Full year 2017 non-GAAP operating
income1 of $285.1
million or $3.16 per diluted common share
- Fourth quarter 2017 annuity sales of
$1.0 billion
- Policyholder funds under management
of $48.4 billion
- Fourth quarter 2017 investment
spread of 2.75%
- Risk-based capital ratio of 378%
compared to 342% at December 31, 2016
- Annual cash dividend of $0.26 per
share
American Equity Investment Life Holding Company (NYSE: AEL), a
leading issuer of fixed index annuities, today reported fourth
quarter 2017 net income of $36.8 million, or $0.41 per diluted
common share, compared to net income of $120.8 million, or $1.35
per diluted common share, for fourth quarter 2016. For the year
ended December 31, 2017, net income was $174.6 million, or
$1.93 per diluted common share, compared to $83.2 million, or $0.97
per diluted common share, for the year ended December 31,
2016.
Non-GAAP operating income1 for the fourth quarter of 2017 was
$74.5 million, or $0.82 per diluted common share, compared to
non-GAAP operating income1 of $56.0 million, or $0.63 per diluted
common share, for fourth quarter 2016. For the year ended
December 31, 2017, non-GAAP operating
income1 was $285.1 million, or $3.16 per
diluted common share, compared to $122.3 million,
or $1.43 per diluted common share, for the year
ended December 31, 2016. Non-GAAP operating1 return on
average equity excluding average AOCI1 for the year was 14.0% based
upon reported results and 12.9% excluding both the impact of
assumption revisions and losses on extinguishment of debt.
The Tax Cuts and Jobs Act of 2017 ("Tax Reform") was enacted on
December 22, 2017, reducing the statutory federal income tax rate
from 35 percent to 21 percent effective January 1, 2018. The impact
of Tax Reform was a reduction of net income for the quarter of
$35.9 million, or $0.40 per share, due to the rate change on net
deferred tax assets at the time of enactment. The impact of Tax
Reform has been excluded from non-GAAP operating income1.
POLICYHOLDER FUNDS UNDER MANAGEMENT UP 1.6% ON $1.0 BILLION
OF SALES
Policyholder funds under management at December 31, 2017
were $48.4 billion, a $773 million or 1.6% increase from
September 30, 2017. Fourth quarter sales were $1.0 billion
before coinsurance ceded and $883 million after coinsurance ceded.
Gross sales and net sales for the quarter were down 27.4% and
21.6%, respectively, from fourth quarter 2016 sales. However, on a
sequential basis, gross and net sales increased 10.3% and 5.9%,
respectively.
Total sales by independent agents for American Equity Investment
Life Insurance Company increased 2.2% sequentially while total
sales by broker-dealers and banks for Eagle Life Insurance Company
rose by $77 million or 53.1% sequentially. Sales of fixed index
annuities (FIAs) were up 8.4% sequentially to $945 million with the
majority of the increase attributable to sales at Eagle Life.
Commenting on sales, John Matovina, Chairman and Chief Executive
Officer, said: "The sequential increase in FIA sales is only the
second sequential increase we've had in the last eight quarters.
Our sequential sales pattern has largely tracked the industry on a
directional basis with industry sales facing headwinds from the DOL
fiduciary rule, the strong equity market and low interest rates. In
addition, we have dealt with increased competition including a
focus by certain distributors on products featuring complex
"hybrid" market indices. We have avoided these hybrid indices as we
believe they lack the transparency that has been the hallmark of
our safe money insurance products."
Commenting on the market environment and the outlook for FIA
sales, Matovina added: "The market in each of our distribution
channels remains competitive. The downward rate adjustments several
competitors made in September and October have largely reversed,
and we have seen additional increases in 2018. However, changes we
made to our products in September and October, gave us sales
momentum, and we continue to be in a strong competitive position
for guaranteed income, caps and participation rates. In March, we
plan to augment that position by introducing a new fixed index
annuity product that focuses on guaranteed lifetime income. We will
have a bonus and non-bonus version of the new product. Each version
will have two fee based options for lifetime income, allowing the
policyholder to decide, at time of purchase, whether to activate
lifetime income after a shorter or longer deferral period, and a no
fee option which will have lower lifetime income than the fee based
options. This product incorporates significant input from our
distribution partners, and we expect it to be well received in the
market as income levels are anticipated to be competitive. We also
intend to continue to emphasize our Choice and Select series of
products for accumulation. 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 well positioned to fully participate in that
growth."
INVESTMENT SPREAD WIDENS ON NON-TRENDABLE ITEMS
American Equity’s investment spread was 2.75% for the fourth
quarter of 2017 compared to 2.70% for the third quarter of 2017 and
2.62% for the fourth quarter of 2016. On a sequential basis, the
average yield on invested assets increased by four basis points
while the cost of money fell by one basis point.
Average yield on invested assets rose to 4.47% for the fourth
quarter of 2017 compared to 4.43% for the third quarter of 2017
reflecting an increase in the benefit from fee income from bond
transactions, prepayment income and other non-trendable investment
income items to twelve basis points in the fourth quarter of 2017
from five basis points in the third quarter of 2017. The average
yield on fixed income securities purchased and commercial mortgage
loans funded in the fourth quarter of 2017 was 4.27% compared to
4.39% in the third quarter of 2017, and 4.03% for the first six
months of 2017.
The aggregate cost of money for annuity liabilities of 1.72% in
the fourth quarter of 2017 was down one basis point from 1.73% in
the third quarter of 2017. The benefit from over hedging the
obligations for index linked interest was eight basis points in the
fourth quarter of 2017 compared to six basis points in the third
quarter of 2017.
Commenting on investment spread, Matovina said: “Fourth quarter
spread results were enhanced by non-trendable items totaling twenty
basis points compared to eleven basis points in the third quarter
of 2017. Our investment spread remains under pressure due to the
investment of portfolio cash flows in instruments with yields below
our portfolio rate. We should benefit from the recent uptick in
benchmark 10-year Treasury rates, and we continue to seek
opportunities to increase the yield on our investment portfolio
while meeting our high credit quality parameters. Alternatively, we
have flexibility to reduce our crediting rates and could decrease
our cost of money by approximately 0.49% through further reductions
in renewal rates to guaranteed minimums should acceptable
investment yields not materialize."
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 fourth
quarter 2017 earnings on Thursday, February 8, 2018 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 9277939 (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 February 15, 2018 at 855-859-2056, passcode 9277939
(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.
Consolidated
Statements of Operations (Unaudited)
Three Months Ended December
31,
Year Ended December 31, 2017
2016 2017 2016 (Dollars in
thousands, except per share data) Revenues: Premiums and
other considerations $ 8,537 $ 12,233 $ 34,228 $ 43,767 Annuity
product charges 56,388 48,275 200,494 173,579 Net investment income
512,709 475,633 1,991,997 1,849,872 Change in fair value of
derivatives 661,993 95,391 1,677,871 164,219 Net realized gains on
investments, excluding other than temporary impairment ("OTTI")
losses 2,719 844 10,509 11,524 OTTI losses on investments: Total
OTTI losses (2,485 ) (10,015 ) (2,758 ) (21,349 ) Portion of OTTI
losses recognized in (from) other comprehensive income (591
) 455 (1,872 ) (1,330 ) Net OTTI losses
recognized in operations (3,076 ) (9,560 ) (4,630 ) (22,679 ) Loss
on extinguishment of debt — —
(18,817 ) — Total revenues 1,239,270
622,816 3,891,652 2,220,282
Benefits and expenses: Insurance policy
benefits and change in future policy benefits 10,535 14,916 43,219
52,483 Interest sensitive and index product benefits 630,905
237,737 2,023,668 725,472 Amortization of deferred sales
inducements 65,885 123,770 176,612 251,166 Change in fair value of
embedded derivatives 290,890 (151,099 ) 919,735 543,465 Interest
expense on notes and loan payable 6,371 7,599 30,368 28,248
Interest expense on subordinated debentures 3,864 3,331 14,124
12,958 Amortization of deferred policy acquisition costs 93,716
175,526 255,964 374,012 Other operating costs and expenses
29,366 23,445 111,691
102,231 Total benefits and expenses 1,131,532
435,225 3,575,381 2,090,035
Income before income taxes 107,738 187,591 316,271 130,247
Income tax expense 70,935 66,795
141,626 47,004 Net income $ 36,803 $
120,796 $ 174,645 $ 83,243 Earnings per
common share $ 0.41 $ 1.37 $ 1.96 $ 0.98 Earnings per common share
- assuming dilution $ 0.41 $ 1.35 $ 1.93 $ 0.97 Weighted
average common shares outstanding (in thousands): Earnings per
common share 89,308 88,211 88,982 84,793 Earnings per common share
- assuming dilution 90,727 89,178 90,311 85,605
NON-GAAP FINANCIAL MEASURES
In addition to net income, the Company has consistently utilized
non-GAAP operating income and non-GAAP 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. Non-GAAP operating income
equals net income 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
eliminate the impact of fair value accounting for the Company's
fixed index annuity business and the impact of the Tax
Cuts and Jobs Act of 2017 ("Tax Reform"). The
adjustment related to fair value accounting for the Company's fixed
index annuity business is not economic in nature but rather
impacts the timing of reported results. The Company believes the
combined presentation and evaluation of non-GAAP operating income
together with net income provides information that may enhance an
investor’s understanding of its underlying results and
profitability.
Reconciliation
from Net Income to Non-GAAP Operating Income
(Unaudited)
Three Months Ended December
31, Year Ended December 31, 2017
2016 2017 2016
(Dollars in thousands, except per share data) Net income (b)
$ 36,803 $ 120,796 $ 174,645 $ 83,243 Adjustments to arrive at
non-GAAP operating income: (a) Net realized investment (gains)
losses, including OTTI (676 ) 6,436 (5,093 ) 7,188 Change in fair
value of derivatives and embedded derivatives - fixed index
annuities 5,463 (103,444 ) 121,846 56,634 Change in fair value of
derivatives - debt (1,085 ) (3,748 ) (1,224 ) (1,265 ) Litigation
reserve — — — (1,957 ) Income taxes (b) 34,003
35,927 (5,124 ) (21,499 ) Non-GAAP operating
income $ 74,508 $ 55,967 $ 285,050 $ 122,344
Per common share - assuming dilution: Net income $
0.41 $ 1.35 $ 1.93 $ 0.97 Adjustments to arrive at non-GAAP
operating income: Net realized investment (gains) losses, including
OTTI (0.01 ) 0.07 (0.05 ) 0.08 Change in fair value of derivatives
and embedded derivatives - fixed index annuities 0.06 (1.16 ) 1.35
0.66 Change in fair value of derivatives - debt (0.01 ) (0.04 )
(0.01 ) (0.01 ) Litigation reserve — — — (0.02 ) Income taxes
0.37 0.41 (0.06 ) (0.25 )
Non-GAAP operating income $ 0.82 $ 0.63 $ 3.16
$ 1.43
(a) Adjustments to net income to arrive at
non-GAAP operating income are presented net of related adjustments
to amortization of deferred sales inducements (DSI) and deferred
policy acquisition costs (DAC) where applicable.
(b) Net income for the three months and
year ended December 31, 2017 includes income tax expense related to
the revaluation of our deferred tax assets and liabilities using
the new enacted federal tax rate resulting from Tax Reform. The
change in the federal income tax rate decreased net income and
earnings per common share-assuming dilution by $35.9 million and
$0.40 per share, respectively. The impact of Tax Reform has been
excluded from non-GAAP operating income.
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 December 31, 2017
(Dollars in thousands) Average Stockholders' Equity
Average equity including average AOCI 2,570,876 Average AOCI
(532,283 ) Average equity excluding average AOCI $ 2,038,593
Net income $ 174,645 Non-GAAP operating income 285,050
Return on Average Equity Excluding Average AOCI Net
income 8.57 % Non-GAAP operating income 13.98 %
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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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