American Equity Reports First Quarter 2016 Results
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% fromMarch 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% atMarch 31, 2016 compared to 336% atDecember 31, 2015 -
Book value per share (excluding accumulated other comprehensive
income) of
$20.74
Operating income1 for the first quarter of 2016 was
The first quarter 2016 net loss was increased by
STRONG SALES DESPITE COMPETITION
First quarter sales of
Commenting on sales,
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
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
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,
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
-
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 atDecember 31, 2015 . -
86% were rated investment grade, down from 95% at
December 31, 2015 .
At
FINAL DOL FIDUCIARY RULE UNEXPECTEDLY ALTERS TREATMENT OF FIXED INDEX ANNUITIES
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
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
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
CONFERENCE CALL
American Equity will hold a conference call to discuss first quarter
2016 earnings on
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
ABOUT AMERICAN EQUITY
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 | ||||||||
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 | ||||||
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
View source version on businesswire.com: http://www.businesswire.com/news/home/20160427006615/en/
Source:
American Equity Investment Life Holding Company
John M.
Matovina, Chief Executive Officer
(515) 457-1813, jmatovina@american-equity.com
or
Ted
M. Johnson, Chief Financial Officer
(515) 457-1980, tjohnson@american-equity.com
or
Debra
J. Richardson, Chief Administrative Officer
(515) 273-3551, drichardson@american-equity.com
or
Julie
L. LaFollette, Director of Investor Relations
(515) 273-3602, jlafollette@american-equity.com