Company Highlights
- First quarter 2016 net loss of $44.8
million or $0.55 per diluted common share
- First quarter 2016 operating
income1 of $21.0 million or $0.25 per diluted common
share
- DAC unlocking in first quarter 2016
increased the net loss by $28.4 million or $0.35 per diluted common
share and reduced operating income1 by $28.6 million
or $0.35 per diluted common share
- First quarter 2016 annuity sales of
$2.1 billion, up 59% from first quarter 2015
- Policyholder funds under management
of $42.5 billion, up 16.6% from March 31, 2015
- First quarter 2016 investment spread
of 2.65%
- Operating income1
return on average equity1 of 10.6% (trailing
twelve months)
- Estimated risk-based capital (RBC)
ratio of 320% at March 31, 2016 compared to 336% at December 31,
2015
- Book value per share (excluding
accumulated other comprehensive income) of $20.74
American Equity Investment Life Holding Company (NYSE: AEL), a
leading issuer of fixed index annuities, today reported a first
quarter 2016 net loss of $44.8 million, or $0.55 per diluted common
share, compared to net income of $5.9 million, or $0.07 per diluted
common share, for first quarter 2015.
Operating income1 for the first quarter of 2016 was $21.0
million, or $0.25 per diluted common share, compared to $48.8
million, or $0.62 per diluted common share, for first quarter
2015.
The first quarter 2016 net loss was increased by $28.4 million
($0.35 per diluted common share) and first quarter 2016 operating
income1 was decreased by $28.6 million ($0.35 per diluted common
share) for revisions to investment spread assumptions utilized in
the determination of deferred policy acquisition costs and deferred
sales inducements. Excluding the effects of these assumption
revisions, first quarter 2016 operating income1 was $49.6 million,
or $0.60 per diluted common share.
STRONG SALES DESPITE COMPETITION
First quarter sales of $2.1 billion were up 59% from the prior
year first quarter and nearly equaled the single quarter record set
in fourth quarter 2015. Net sales after coinsurance ceded for the
first quarter of 2016 were $1.6 billion, a 35% increase from $1.2
billion in net sales for the first quarter of 2015 and a 16%
decrease from $1.9 billion in net sales in the fourth quarter of
2015.
Commenting on sales, John Matovina, Chief Executive Officer and
President, said: "Our sales for the quarter were strong on both a
gross and net basis. As expected, we experienced more competition
in the independent agent distribution channel for fixed index
annuity products and those sales fell by 20% relative to the fourth
quarter of 2015. However, that decline was substantially offset by
increased sales of multi-year rate guaranteed fixed annuity
products for both American Equity Life and Eagle Life and fixed
index annuities sold by Eagle Life through broker-dealers and
banks. We coinsure 80% of the premiums received from sales of those
products which accounts for the 16% decrease in net sales compared
to the fourth quarter of 2015."
Matovina continued, "A key initiative for us is expanding in the
broker-dealer and bank distribution channels, two channels that
represent a significant growth opportunity for fixed index annuity
sales. We formed Eagle Life to pursue this opportunity and are
starting to show meaningful traction. In this year's first quarter,
Eagle Life sold $416 million, more than double its fourth quarter
2015 sales of $205 million and just $89 million shy of its full
year 2015 sales of $505 million. The majority of the first quarter
increase came from multi-year rate guaranteed annuities. Eagle Life
uses multi-year rate guaranteed annuities to establish new
relationships with financial institutions with the objective of
expanding sales into fixed index annuities once the financial
institution experiences our excellent service culture. That
strategy contributed to a 13% sequential increase in Eagle Life's
fixed index annuity sales to $187 million. But more importantly,
Eagle Life is actively expanding its distribution relationships and
now has selling agreements with 48 distributors. We expect that
several of these distribution relationships will be providing
significant production to Eagle Life by the end of 2016."
SPREAD DECLINES SLIGHTLY ON LOWER INVESTMENT YIELD
American Equity’s investment spread was 2.65% for the first
quarter of 2016 compared to 2.67% for the fourth quarter of 2015
and 2.77% for the first quarter of 2015. On a sequential basis, the
average yield on invested assets declined four basis points while
the cost of money declined two basis points.
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 and high cash balances. Fee income from bond
transactions and prepayment income added 0.08% to first quarter
2016 average yield on invested assets compared to 0.07% from such
items in the fourth quarter of 2015. The average yield on fixed
income securities purchased and commercial mortgage loans funded in
the first quarter of 2016 was 4.14% compared to average yields
ranging from 3.73% - 4.03% in the four quarters of 2015. The
average balance for cash and short-term investments was $807
million during the quarter, compared to $476 million in the fourth
quarter of 2015.
The aggregate cost of money for annuity liabilities decreased by
two basis points to 1.93% in the first quarter of 2016 compared to
1.95% in the fourth quarter of 2016. This decrease reflected
continued reductions in crediting rates.
Commenting on investment spread, John Matovina said: “Low
interest rates continue to pressure our investment spread. 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 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 0.52% 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.”
BOND PORTFOLIO: HIGH CREDIT QUALITY AND MANAGEABLE TROUBLED
SECTOR EXPOSURE
The credit quality of the Company's bond portfolio remains high
with 96.2% of its fixed maturity securities at March 31, 2016 rated
investment grade by nationally recognized statistical rating
organizations. This represents a modest decrease from 96.5%
investment grade securities at December 31, 2015 which is largely
attributable to securities in the energy, metals and mining
sectors. As expected, several of the securities owned by the
Company in these sectors were downgraded in the first quarter and
the Company estimates that these downgrades reduced its RBC ratio
by five percentage points. At March 31, 2016, the Company's
exposure to securities in the energy, metals and mining sectors is
summarized as follows:
- Fair value of $3.1 billion and an
unrealized loss of $227 million compared to fair value of $2.9
billion and an unrealized loss of $336 million at December 31,
2015.
- 86% were rated investment grade, down
from 95% at December 31, 2015.
At March 31, 2016, the Company's Watch List of securities deemed
at risk for a future other than temporary impairment assessment
included securities of ten issuers with a fair value of $82.4
million and an unrealized loss of $39.9 million. This unrealized
loss represents less than 2% of the Company's consolidated
stockholder's equity and its statutory capital and surplus at March
31, 2016.
FINAL DOL FIDUCIARY RULE UNEXPECTEDLY ALTERS TREATMENT OF
FIXED INDEX ANNUITIES
The Department of Labor (DOL) issued its final conflict of
interest fiduciary rule and related prohibited transaction
exemptions (PTEs) earlier this month. Unexpectedly, fixed index
annuities were included with securities products in the more
onerous Best Interest Contract Exemption (BICE) rather than PTE
84-24.
Commenting on the DOL fiduciary rule, Matovina said: "We are
disappointed with the final rule. Over the last two years, industry
representatives met with the DOL to discuss the structure, benefits
and distribution of fixed index annuities. The last minute change
without the opportunity to make comment is contrary to the rule
making process government agencies are expected to follow. Fixed
index annuities are treated in a way that cannot be justified as
merely a means of minimizing conflicts and the rule disregards
their status under federal securities and state insurance laws. The
conflicts associated with commission sales of all fixed annuities
are identical, yet fixed index annuities are denied treatment under
PTE 84-24 which is available to other fixed annuity products. Most
importantly, the final PTEs will limit access to a fixed annuity
insurance product that more and more Americans find to be the right
solution for their retirement savings and retirement income
needs."
The Company's observations based on its analysis of the final
rule and related PTEs on the sale of fixed index annuities are as
follows:
- There are numerous obstacles to
complying with BICE for the independent agent distribution channel.
BICE was not drafted to be workable for independent agent
distribution of fixed index annuities. If BICE becomes operational
for fixed index annuities, the Company may partially mitigate the
disruptive impact on sales and growth in policyholder funds under
management by updating and expanding its menu of traditional
declared rate annuities that offer lifetime income riders and other
features retirees find attractive. These products will meet PTE
84-24's definition of a Fixed Rate Annuity Contract.
- BICE is more workable for sales of
fixed index annuities through broker-dealers and banks and poses a
smaller threat to sales of fixed index annuities in those
distribution channels. The Company anticipates that many
broker-dealers and banks will continue to sell the product although
some may seek changes in compensation and /or product design to
meet their compliance obligations.
- The Company is aware of several parties
considering litigation options and strategies. The Company would
not be surprised if multiple lawsuits are filed on procedural and
substantive matters.
CAPITAL ADEQUACY: PHYSICAL SETTLEMENT OF EQUITY FORWARDS AND
REINSURANCE SOLUTIONS ANTICIPATED
Net sales in 2015 were 10% ahead of the sales level contemplated
in the Company's capital planning at the time of its 2015 equity
offering and net sales for 2016 may exceed the level contemplated
last summer. The Company intends to physically settle its two
equity forward sales agreements later this year. Physical
settlement of these agreements would generate approximately $135
million in net proceeds and the Company would issue approximately
5.6 million shares of its common stock. On a pro forma basis,
assuming the net proceeds were invested in securities with a NAIC 1
designation, the estimated RBC ratio at March 31, 2016 would be
337%.
The Company's capital planning in conjunction with the 2015
equity offering included two alternatives for maintaining adequate
regulatory capital should sales growth outpace the capital
generated by the initial net proceeds from the equity offering and
the net proceeds available from the forward sales agreements. And
while the recently issued DOL conflict of interest fiduciary rule
makes the 2017 sales outlook uncertain, it would not be prudent for
the Company to manage its regulatory capital assuming the current
level of sales is significantly disrupted by the DOL rule. The two
alternatives for regulatory capital include reinsurance solutions
and issuing additional debt. The Company will be exploring
reinsurance solutions with several potential reinsurance
counterparties. However, there is no assurance that reinsurance
discussions will produce a reinsurance solution on terms acceptable
to the Company. In the absence of a reinsurance solution, the
Company would consider raising capital through the issuance of
additional debt within parameters that would not jeopardize the
Company's current ratings from rating agencies.
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 first
quarter 2016 earnings on Thursday, April 28, at 9:00 a.m. CDT. 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 89115706 (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 May 5, 2016 at 855-859-2056, passcode 89115706
(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.
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 March 31, 2016
2015 (Dollars in thousands, except per share
data) Revenues: Premiums and other considerations $
7,345 $ 6,997 Annuity product charges 36,505 28,682 Net investment
income 450,826 399,669 Change in fair value of derivatives (74,065
) (31,100 ) Net realized gains (losses) on investments, excluding
other than temporary impairment ("OTTI") losses 2,687 4,879 OTTI
losses on investments: Total OTTI losses (6,018 ) (132 ) Portion of
OTTI losses recognized in (from) other comprehensive income 324
— Net OTTI losses recognized in operations (5,694 )
(132 ) Total revenues 417,604 408,995
Benefits and expenses: Insurance policy benefits and change
in future policy benefits 9,109 9,220 Interest sensitive and index
product benefits 97,671 282,825 Amortization of deferred sales
inducements 27,479 10,953 Change in fair value of embedded
derivatives 265,857 51,213 Interest expense on notes payable 6,880
7,339 Interest expense on subordinated debentures 3,168 3,016
Amortization of deferred policy acquisition costs 49,713 14,286
Other operating costs and expenses 26,830 21,122
Total benefits and expenses 486,707 399,974 Income
(loss) before income taxes (69,103 ) 9,021 Income tax expense
(benefit) (24,262 ) 3,118 Net income (loss) $ (44,841 ) $
5,903 Earnings (loss) per common share $ (0.55 ) $
0.08 Earnings (loss) per common share - assuming dilution $ (0.55 )
$ 0.07 Weighted average common shares outstanding (in
thousands): Earnings (loss) per common share 82,129 77,042 Earnings
(loss) per common share - assuming dilution 82,961 79,118
American Equity Investment Life Holding
Company
NON-GAAP FINANCIAL MEASURES
In addition to net income (loss), 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 (loss)
adjusted to eliminate the impact of items that 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 and the combined presentation and
evaluation of operating income 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 Operating Income (Unaudited)
Three Months Ended March 31, 2016
2015 (Dollars in thousands, except per share
data) Net income (loss) $ (44,841 ) $ 5,903 Adjustments to
arrive at operating income: (a) Net realized investment (gains)
losses, including OTTI 745 (1,819 ) Change in fair value of
derivatives and embedded derivatives - index annuities 63,477
43,657 Change in fair value of derivatives and embedded derivatives
- debt 1,617 1,077 Operating income (a non-GAAP
financial measure) $ 20,998 $ 48,818 Per
common share - assuming dilution: Net income (loss) $ (0.55 ) $
0.07 Adjustments to arrive at operating income: Anti-dilutive
effect of net loss 0.01 — Net realized investment (gains) losses,
including OTTI 0.01 (0.02 ) Change in fair value of derivatives and
embedded derivatives - index annuities 0.76 0.55 Change in fair
value of derivatives and embedded derivatives - debt 0.02
0.02 Operating income (a non-GAAP financial measure) $ 0.25
$ 0.62 (a) Adjustments to net income
(loss) 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 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
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 March 31, 2016 (Dollars
in thousands) Average Stockholders' Equity 1
Average equity including average AOCI $ 2,294,688 Average AOCI
(711,929 ) Average equity excluding average AOCI $ 1,582,759
Net income $ 169,086 Operating income 168,000
Return on Average Equity Excluding Average AOCI Net income
10.68 % Operating income 10.61 %
1 - The net proceeds received from the Company's 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 the Company 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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version on businesswire.com: http://www.businesswire.com/news/home/20160427006615/en/
American Equity Investment Life Holding CompanyJohn M.
Matovina, Chief Executive Officer(515) 457-1813,
jmatovina@american-equity.comorTed M. Johnson, Chief Financial
Officer(515) 457-1980, tjohnson@american-equity.comorDebra
J. Richardson, Chief Administrative Officer(515) 273-3551,
drichardson@american-equity.comorJulie L. LaFollette, Director
of Investor Relations(515) 273-3602,
jlafollette@american-equity.com
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