Market Overview

American Equity Reports Second Quarter 2018 Results

Share:

Company Highlights

  • Second quarter 2018 net income of $93.9 million or $1.03 per
    diluted common share
  • Second quarter 2018 non-GAAP operating income1 of
    $86.6 million or $0.95 per diluted common share
  • Second quarter 2018 annuity sales of $1.2 billion
  • Policyholder funds under management of $49.9 billion
  • Second quarter 2018 investment spread of 2.64%
  • Estimated risk-based capital ratio of 384% compared to 378% at
    December 31, 2017

American Equity Investment Life Holding Company (NYSE:AEL), a leading
issuer of fixed index annuities, today reported second quarter 2018 net
income of $93.9 million, or $1.03 per diluted common share, compared to
net income of $26.9 million, or $0.30 per diluted common share, for
second quarter 2017.

Non-GAAP operating income1 for the second quarter of 2018 was
$86.6 million, or $0.95 per diluted common share, compared to non-GAAP
operating income1 of $63.7 million, or $0.71 per diluted
common share, for second quarter 2017. On a trailing twelve-month basis,
non-GAAP operating1 return on average equity excluding
average AOCI1 was 15.2% based upon reported results and 14.2%
excluding both the impact of assumption revisions and loss on
extinguishment of debt.

POLICYHOLDER FUNDS UNDER MANAGEMENT UP 1.6% ON $1.2 BILLION OF SALES

Policyholder funds under management at June 30, 2018 were $49.9 billion,
a $787 million or 1.6% increase from March 31, 2018. Second quarter
sales were $1.2 billion before coinsurance ceded and $1.1 billion after
coinsurance ceded. Gross sales and net sales for the quarter increased
2% and 1%, respectively, from second quarter 2017 sales. On a sequential
basis, gross and net sales increased 17% and 14%, respectively.

Total sales by independent agents for American Equity Investment Life
Insurance Company increased 13% sequentially while total sales by
broker-dealers and banks for Eagle Life Insurance Company increased by
$58 million or 34% sequentially, in part due to a $45 million increase
in sales of non-core multi-year fixed rate annuities. Sales of fixed
index annuities (FIAs) were up 13% sequentially to $1.1 billion driven
by the gain in sales for American Equity Life.

Commenting on sales, John Matovina, Chairman and Chief Executive
Officer, said: "We were pleased with our third consecutive sequential
increase in FIA sales and the 14% sequential increase in FIA sales we
experienced in American Equity Life's independent agent channel.
Reflecting the attractiveness of accumulation products in the current
market environment, the Choice Series continues to be our best-selling
product line at American Equity Life with 37% of sales in the second
quarter. In the guaranteed lifetime income space, we are thrilled with
the initial reception of the IncomeShield Series that was introduced to
our independent agents on March 19th. IncomeShield is already our second
best selling product line accounting for 23% of American Equity Life's
sales in June. FIA sales for Eagle Life of $173 million were up $13
million or 8% sequentially and continued the good start we had in the
first quarter."

Commenting on the market environment and the outlook for FIA sales,
Matovina added: "The market in each of our distribution channels
continues to be competitive with a number of competitors raising caps,
participation rates and guaranteed lifetime income. However, our
products remain competitive. In particular, our American Equity Choice
and Eagle Select fixed index annuities offer some of the highest
participation rates in the industry. Guaranteed lifetime income from
IncomeShield is competitive with levels offered by our most important
competitors despite having annual fees which are among the lowest in the
industry. The no fee rider option available with IncomeShield has proven
very attractive to distribution as well."

Matovina continued: "We have more new product activity on tap for the
third quarter. Fixed index annuities with surrender charge periods
shorter than six year have become popular. Eagle Life recently
introduced a fixed index annuity with a five year surrender charge
period. This product features a 120% annual participation rate on a
volatility controlled excess return index strategy which we expect to be
well received by policyholders purchasing fixed index annuities for
accumulation. Later this quarter, American Equity Life plans to
introduce a new series of non-bonus products focused on accumulation
with a key feature being a participation rate above 100% on the same
volatility controlled excess return index available in the Eagle Life
five year product. In addition, we expect the new American Equity Life
products to have a "first of its kind" crediting strategy based on the
S&P 500 Index. We expect this new strategy to compare favorably to the
monthly point to point strategy that has been popular in fixed index
annuities for more than ten years. These index crediting strategies,
together with our traditional participation rate strategy on the S&P 500
Index, should compete very well with the "hybrid" index/multi-year term
products which certain distributors have focused on."

INVESTMENT SPREAD REBOUNDS LARGELY ON NON-TRENDABLE ITEMS; OUTLOOK
FOR INVESTMENT SPREAD CONTINUES TO IMPROVE

American Equity's investment spread was 2.64% for the second quarter of
2018 compared to 2.54% for the first quarter of 2018 and 2.72% for the
second quarter of 2017. On a sequential basis, the average yield on
invested assets increased by eleven basis points while the cost of money
rose one basis point.

Average yield on invested assets was 4.47% in the second quarter of 2018
compared to 4.36% in the first quarter of 2018. This increase was
primarily attributable to a greater benefit from non-trendable
investment items of 10 basis points including seven basis points from
fee income from bond transactions and prepayment income compared to just
three basis points from such items in the first quarter of 2018. The
average yield on fixed income securities purchased and commercial
mortgage loans funded in the second quarter of 2018 was 4.77% compared
to 4.43% in the first quarter of 2018.

The aggregate cost of money for annuity liabilities of 1.83% in the
second quarter of 2018 was up one basis point from 1.82% in the first
quarter of 2018. The benefit from over hedging index linked interest
obligations was six basis points in the second quarter of 2018 compared
to two basis points in the first quarter of 2018.

Commenting on investment spread, Matovina said: "The sequential increase
in investment spread in the second quarter was primarily attributable to
an eight basis point increase in the benefit from fee income from bond
transactions, prepayment income and over-hedging. Our investment spread
remained under pressure in the second quarter of 2018 primarily due to
the escalation of option costs for certain index strategies in the last
several quarters that is recognized in the cost of money ratably over
the twelve month option period. To counteract this impact, we initiated
renewal rate adjustments on certain in-force policies in March. Further
reductions in renewal rates are currently under consideration. We have
flexibility to reduce our crediting rates and could decrease our cost of
money by approximately 0.59% through further reductions in renewal rates
to guaranteed minimums should the cost of money not return to acceptable
levels."

Matovina went on to say: "Our investment spread should benefit from the
higher yields we have been obtaining on investment securities purchases
and commercial mortgage loan fundings, increases in yields on our
floating rate investments and changes in renewal rates. We are also
looking to improve our investment yield through the opportunistic
replacement of lower yielding securities with higher yielding
securities. During the second quarter, we sold $1.6 billion in book
value of securities with an average yield of 3.12%. While these sales
together with annuity deposits received during the quarter left us with
an excess short-term cash position at June 30, we anticipate we will
pick up incremental investment yield from additional portfolio
realignment once the June 30th excess cash position is invested. The
prospect for higher investment yields is quite good, and we expect our
portfolio yield, excluding non-trendable items, to increase through the
remainder of this year."

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
2018 earnings on Tuesday, August 7, 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
7196667 (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 14,
2018 at 855-859-2056, passcode 7196667 (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

Unaudited (Dollars in thousands, except per share data)

 

Consolidated Statements of Operations

       

Three Months Ended
June 30,

Six Months Ended
June 30,
2018     2017 2018     2017
Revenues:
Premiums and other considerations $ 5,757 $ 7,720 $ 14,810 $ 17,122
Annuity product charges 55,006 48,603 105,729 92,175
Net investment income 533,282 493,489 1,044,066 979,086
Change in fair value of derivatives 132,205 266,820 (318,878 ) 653,353
Net realized gains (losses) on investments, excluding other than
temporary impairment ("OTTI") losses
(38,381 ) 3,873 (38,079 ) 6,211
OTTI losses on investments:
Total OTTI losses (745 ) (1,652 )
Portion of OTTI losses recognized in (from) other comprehensive
income
  (1,651 )   (949 )   (1,651 )   (1,090 )
Net OTTI losses recognized in operations (2,396 ) (949 ) (3,303 ) (1,090 )
Loss on extinguishment of debt       (428 )       (428 )
Total revenues   685,473     819,128     804,345     1,746,429  
 
Benefits and expenses:
Insurance policy benefits and change in future policy benefits 9,276 9,986 21,370 21,861
Interest sensitive and index product benefits 427,951 472,596 942,046 891,735
Amortization of deferred sales inducements 78,112 33,695 178,535 96,020
Change in fair value of embedded derivatives (101,949 ) 174,973 (969,181 ) 399,143
Interest expense on notes and loan payable 6,374 8,678 12,746 16,400
Interest expense on subordinated debentures 3,878 3,422 7,508 6,758
Amortization of deferred policy acquisition costs 115,049 49,547 255,688 139,225
Other operating costs and expenses   32,540     25,964     63,780     53,543  
Total benefits and expenses   571,231     778,861     512,492     1,624,685  
Income before income taxes 114,242 40,267 291,853 121,744
Income tax expense   20,339     13,321     56,988     40,859  
Net income $ 93,903   $ 26,946   $ 234,865   $ 80,885  
 
Earnings per common share $ 1.04 $ 0.30 $ 2.60 $ 0.91
Earnings per common share - assuming dilution $ 1.03 $ 0.30 $ 2.58 $ 0.90
 
Weighted average common shares outstanding (in thousands):
Earnings per common share 90,327 88,897 90,173 88,773
Earnings per common share - assuming dilution 91,271 90,112 91,206 90,045
 

American Equity Investment Life Holding Company
Unaudited (Dollars
in thousands, except per share data)

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. These adjustments 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
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

       
Three Months Ended
June 30,
Six Months Ended
June 30,
2018     2017 2018     2017
Net income $ 93,903 $ 26,946 $ 234,865 $ 80,885
Adjustments to arrive at non-GAAP operating income: (a)
Net realized investment (gains) losses, including OTTI 25,624 (1,559 ) 25,647 (3,501 )
Change in fair value of derivatives and embedded derivatives - fixed
index annuities
(30,094 ) 57,571 (108,912 ) 68,548
Change in fair value of derivatives - debt (739 ) 465 (2,571 ) 218
Income taxes   (2,046 )   (19,741 )   15,313     (22,846 )
Non-GAAP operating income $ 86,648   $ 63,682   $ 164,342   $ 123,304  
 
Per common share - assuming dilution:
Net income $ 1.03 $ 0.30 $ 2.58 $ 0.90
Adjustments to arrive at non-GAAP operating income:
Net realized investment (gains) losses, including OTTI 0.28 (0.02 ) 0.28 (0.04 )
Change in fair value of derivatives and embedded derivatives - fixed
index annuities
(0.33 ) 0.64 (1.19 ) 0.76
Change in fair value of derivatives - debt (0.01 ) 0.01 (0.03 )
Income taxes   (0.02 )   (0.22 )   0.16     (0.25 )
Non-GAAP operating income $ 0.95   $ 0.71   $ 1.80   $ 1.37  
 
(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.
 

American Equity Investment Life Holding Company
Unaudited (Dollars
in thousands)

NON-GAAP FINANCIAL MEASURES

Average Stockholders' Equity and Return on
Average Equity

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
June 30, 2018
Average Stockholders' Equity
Average equity including average AOCI $ 2,539,117
Average AOCI   (395,264 )
Average equity excluding average AOCI $ 2,143,853  
 
Net income $ 328,625
Non-GAAP operating income 326,088
 
Return on Average Equity Excluding Average AOCI
Net income 15.33 %
Non-GAAP operating income 15.21 %
 

View Comments and Join the Discussion!