Company Highlights
- Second quarter 2016 net income of
$14.7 million or $0.18 per diluted common share
- Second quarter 2016 operating
income1 of $50.1 million or $0.60 per diluted common
share
- Second quarter 2016 annuity sales of
$2.1 billion, up 17% from second quarter 2015
- Policyholder funds under management
of $43.6 billion, up 2.6% from March 31, 2016
- Second quarter 2016 investment
spread of 2.62%
- Operating income1
return on average equity1 of 10.1% (trailing
twelve months)
- Estimated risk-based capital (RBC)
ratio of 312% at June 30, 2016 compared to 336% at
December 31, 2015
American Equity Investment Life Holding Company (NYSE: AEL), a
leading issuer of fixed index annuities, today reported second
quarter 2016 net income of $14.7 million, or $0.18 per diluted
common share, compared to net income of $82.8 million, or $1.05 per
diluted common share, for second quarter 2015.
Operating income1 for the second quarter of 2016 was $50.1
million, or $0.60 per diluted common share, compared to $50.9
million, or $0.64 per diluted common share, for second quarter
2015.
SALES EXCEED $2 BILLION FOR THIRD CONSECUTIVE QUARTER
Second quarter sales of $2.1 billion were up 17% from the prior
year second quarter and matched first quarter 2016 sales. Net sales
after coinsurance ceded for the second quarter of 2016 were $1.5
billion, a 13% decrease from $1.7 billion in net sales for the
second quarter of 2015 and an 8% decrease from $1.6 billion in net
sales in the first quarter of 2016.
Commenting on sales, John Matovina, Chief Executive Officer and
President, said: "Our second quarter sales followed a pattern
similar to what we saw in the first quarter. Fixed index annuity
(FIA) sales by broker-dealers and banks for Eagle Life were up
modestly, but increased competition in the independent agent
channel translated into an 11% sequential decrease in sales from
that channel at American Equity Investment Life Insurance Company
(American Equity Life). The overall decrease in FIA sales was
offset by a 43% sequential increase in multi-year rate guaranteed
annuity (MYGA) sales in all channels. We coinsure 80% of the
premiums received from sales of MYGAs and Eagle Life's FIAs which
accounts for the 8% decrease in net sales compared to the first
quarter of 2016."
Matovina continued, "While gross sales in the first half of 2016
were on a record pace, we anticipate moderation of sales in the
second half of the year. FIA sales in July have softened further in
the independent agent channel and we've seen a bit of softening
from banks and broker-dealers. Monthly sales in 2016 peaked in
March and were approximately $500 million in July compared to $644
million in June. Similarly, American Equity Life's pending count
peaked at 6,370 cases in mid-April and was down to approximately
3,500 cases at the end of July. A substantial portion of the sales
and pending count decreases are from the MYGA products which are
not core to American Equity Life but can have a strategic purpose
in Eagle Life. Total MYGA sales in July were $72 million compared
to $138 million in June and a peak of $239 million in April."
Commenting on Eagle Life, Matovina added: "Expansion in the
broker-dealer and bank distribution channels, two channels that
represent a significant growth opportunity for FIA sales, has been
a key initiative for us. This initiative has greater significance
in light of the DOL conflict of interest fiduciary rule which
favors sales of FIAs by broker-dealers and banks and poses
significant challenges to the sales of FIAs by independent
insurance agents. The new DOL rule becomes operational in April
2017 if not otherwise delayed or overturned through litigation. We
formed Eagle Life to pursue these distribution opportunities and
gained meaningful traction in the first half of 2016. Eagle Life
now has selling agreements with 51 distributors, three more
agreements than it had 90 days ago. Eagle Life's FIA sales were
$377 million in the first half of 2016 implying a realistic
opportunity to double its full year 2015 FIA sales of $371
million."
SPREAD DECLINES SLIGHTLY ON LOWER INVESTMENT YIELD
American Equity’s investment spread was 2.62% for the second
quarter of 2016 compared to 2.65% for the first quarter of 2016 and
2.84% for the second quarter of 2015. On a sequential basis, the
average yield on invested assets declined four basis points while
the cost of money declined one basis point.
Average yield on invested assets continued to be unfavorably
impacted by the investment of new premiums and portfolio cash flows
at rates below the portfolio rate and high cash balances. The
average yield on fixed income securities purchased and commercial
mortgage loans funded in the second quarter of 2016 was 3.95%
compared to 4.14% in the first quarter of 2016. Average yields
ranged from 3.73% - 4.03% in the prior year's quarters. The average
balance for cash and short-term investments was $1.1 billion during
the quarter, compared to $807 million in the first quarter of 2016
and $476 million in the fourth quarter of 2015. The unfavorable
impact from the aforementioned items was partially offset by fee
income from bond transactions and prepayment income which added
0.04% to second quarter 2016 average yield on invested assets
compared to 0.08% from such items in the first quarter of 2016.
The aggregate cost of money for annuity liabilities decreased by
one basis point to 1.92% in the second quarter of 2016 compared to
1.93% in the first quarter of 2016. This decrease reflected
continued reductions in crediting rates.
Commenting on investment spread, John Matovina said: “We had
modest spread compression in the second quarter. Similar to the
first quarter, the decrease in the cost of money from reductions in
rates on our policy liabilities was less than the decrease in the
average yield on investments that resulted from the investment of
new premiums and portfolio cash flows in high quality investments
with yields below our portfolio rate and the increase in cash and
short-term investments during the quarter."
Turning to the outlook for investment spread, Matovina added:
"Market conditions changed appreciably at the end of the quarter
following the Brexit vote. Investment yields available since then
have been significantly lower than what we were able to obtain on
investment purchases in the first half of the year. We invested
approximately $875 million in July at a weighted average rate of
3.33%. Investment yields at this level will continue to put
downward pressure on our investment spread and that of our
competitors. We have already observed new money crediting rate and
product term adjustments from several of our competitors and expect
to announce changes to our new money rates and product terms in the
near future. Substantially all of our previous renewal rate
adjustments were implemented by the end of the second quarter and
new adjustments covering $16 - 17 billion of policyholder account
values will begin on September 1, 2016. On an individual policy
basis, the effect of these adjustments on the cost of money ranges
from 0.10% to 0.40%. In addition, there is $7.4 billion of
policyholder account values that will be evaluated for renewal rate
adjustments that would begin on December 6, 2016. These adjustments
are expected to reduce the 0.52% cost of money differential between
existing rates and the guaranteed minimums we had at June 30,
2016.”
PHYSICAL SETTLEMENT OF EQUITY FORWARDS SUPPORTS CAPITAL
ADEQUACY
As previously reported, the Company physically settled its two
equity forward sales agreements on August 1st, and received $134.7
million in net cash proceeds which were contributed to the capital
and surplus of American Equity Life. On a pro forma basis, assuming
the net proceeds were invested in securities with a NAIC 1
designation, the estimated RBC ratio at June 30, 2016 was 328%.
In light of the significant sales in 2015 and the first half of
2016, which were appreciably ahead of plan, during the second
quarter the Company explored a reinsurance transaction with several
potential reinsurance counterparties. Because the Company intended
to partially fund the reinsurance transaction with cash and
short-term investments, the pricing of the proposed transaction was
negatively affected by the declines in investment yields following
the Brexit vote in late June and the Company decided not to proceed
and suspended the proposed transaction. Although the current
outlook for sales has moderated, the Company is considering the
issuance of additional debt within parameters that would not
jeopardize its current ratings from rating agencies. Additional
debt within these parameters would enhance the Company's financial
flexibility and can likely be obtained on attractive terms in the
current interest rate environment.
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 second
quarter 2016 earnings on Thursday, August 4, 2016 at 8:00 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 47042857 (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 August 11, 2016 at 855-859-2056, passcode
47042857 (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 Six Months
Ended June 30, June 30, 2016
2015 2016 2015 (Dollars in
thousands, except per share data) Revenues: Premiums and
other considerations $ 11,458 $ 10,037 $ 18,803 $ 17,034 Annuity
product charges 41,124 32,409 77,629 61,091 Net investment income
459,830 418,176 910,656 817,845 Change in fair value of derivatives
39,099 (23,024 ) (34,966 ) (54,124 ) Net realized gains (losses) on
investments, excluding other than temporary impairment ("OTTI")
losses 2,737 4,324 5,424 9,203 OTTI losses on investments: Total
OTTI losses (762 ) — (6,780 ) (132 ) Portion of OTTI losses
recognized in (from) other comprehensive income (3,684 )
(828 ) (3,360 ) (828 ) Net OTTI losses
recognized in operations (4,446 ) (828 )
(10,140 ) (960 ) Total revenues 549,802
441,094 967,406 850,089
Benefits and expenses: Insurance policy benefits and change
in future policy benefits 13,393 12,450 22,502 21,670 Interest
sensitive and index product benefits 111,121 306,141 208,792
588,966 Amortization of deferred sales inducements 30,672 75,518
58,151 86,471 Change in fair value of embedded derivatives 284,303
(219,601 ) 550,160 (168,388 ) Interest expense on notes payable
6,882 7,354 13,762 14,693 Interest expense on subordinated
debentures 3,206 3,047 6,374 6,063 Amortization of deferred policy
acquisition costs 50,665 104,700 100,378 118,986 Other operating
costs and expenses 26,823 24,868
53,653 45,990 Total benefits and expenses
527,065 314,477 1,013,772
714,451 Income (loss) before income taxes 22,737
126,617 (46,366 ) 135,638 Income tax expense (benefit) 8,029
43,772 (16,233 ) 46,890
Net income (loss) $ 14,708 $ 82,845 $ (30,133 ) $
88,748 Earnings (loss) per common share $ 0.18 $ 1.07
$ (0.37 ) $ 1.15 Earnings (loss) per common share - assuming
dilution $ 0.18 $ 1.05 $ (0.37 ) $ 1.12 Weighted average
common shares outstanding (in thousands): Earnings (loss) per
common share 82,517 77,237 82,323 77,140 Earnings (loss) per common
share - assuming dilution 83,184 79,227 83,073 79,173
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
most significant adjustments to arrive at operating income
eliminate the impact of fair value accounting for our fixed index
annuity business and are not economic in nature but rather impact
the timing of reported results. 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 Six Months
Ended June 30, June 30, 2016
2015 2016 2015 (Dollars in
thousands, except per share data) Net income (loss) $ 14,708 $
82,845 $ (30,133 ) $ 88,748 Adjustments to arrive at operating
income: (a) Net realized investment (gains) losses, including OTTI
605 (2,556 ) 1,760 (5,377 ) Change in fair value of derivatives and
embedded derivatives - index annuities 53,129 (44,403 ) 150,678
22,133 Change in fair value of derivatives and embedded derivatives
- debt 768 (1,670 ) 3,532 171 Income taxes (19,108 )
16,729 (54,737 ) (5,912 ) Operating income (a
non-GAAP financial measure) $ 50,102 $ 50,945 $
71,100 $ 99,763 Per common share - assuming
dilution: Net income (loss) $ 0.18 $ 1.05 $ (0.37 ) $ 1.12
Adjustments to arrive at operating income: Anti-dilutive effect of
net loss — — 0.01 — Net realized investment (gains) losses,
including OTTI — (0.04 ) 0.02 (0.07 ) Change in fair value of
derivatives and embedded derivatives - index annuities 0.64 (0.56 )
1.81 0.28 Change in fair value of derivatives and embedded
derivatives - debt 0.01 (0.02 ) 0.04 — Income taxes (0.23 )
0.21 (0.65 ) (0.07 ) Operating income
(a non-GAAP financial measure) $ 0.60 $ 0.64 $ 0.86
$ 1.26
(a) Adjustments to net income (loss) to arrive at operating
income are presented net of related adjustments to amortization of
deferred sales inducements (DSI) and deferred policy acquisition
costs (DAC) where applicable.
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 June 30, 2016
(Dollars in thousands)
Average Stockholders' Equity
2
Average equity including average AOCI $ 2,300,794 Average AOCI
(641,006 ) Average equity excluding average AOCI $ 1,659,788
Net income $ 100,949 Operating income 167,157
Return on Average Equity Excluding Average AOCI Net income
6.08 % Operating income 10.07 %
2 - 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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American Equity Investment Life Holding CompanySteven
Schwartz, 515-273-3763Vice President – Investor
Relationssschwartz@american-equity.com
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