American Equity Reports Second Quarter 2014 Results
Non-GAAP operating income1 for the second quarter of 2014 was
Highlights for the second quarter of 2014 include:
Annuity sales (before coinsurance) were
$1.04 billioncompared to first quarter 2014 annuity sales of $921 million.
Total invested assets were
$33.1 billion(amortized cost basis = $30.6 billion).
- Investment spread was 2.70% compared to 2.77% for the first quarter of 2014 and 2.70% for the second quarter of 2013.
Estimated risk-based capital (
RBC) ratio at June 30, 2014remained above A. M. Best’s rating threshold at 356% compared to 344% at December 31, 2013.
Book value per share (excluding accumulated other comprehensive
$18.19at June 30, 2014compared to $18.75at December 31, 2013.
1 In addition to net income, we have 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 our financial performance. See accompanying tables for reconciliations of net income to operating income and descriptions of reconciling items. See Company’s Quarterly Report on Form 10-Q for a more complete discussion of the reconciling items and their impact on net income for the periods presented. Because these items fluctuate from period to period in a manner unrelated to core operations, we believe measures excluding their impact are useful in analyzing operating trends. We believe the combined presentation and evaluation of operating income together with net income, provides information that may enhance an investor’s understanding of our underlying results and profitability.
The diluted share count for second quarter 2014 was 79.5 million shares compared to 70.4 million shares for the second quarter of 2013. This increase was attributable to (i) shares issued for retirement of convertible notes and the exercise of stock options and (ii) greater dilution from convertible notes, warrants and stock options because the Company’s common stock price was substantially higher in the second quarter of 2014 compared to the second quarter of 2013.
UPCOMING INITIATIVES EXPECTED TO ENHANCE COMPETITIVE POSITION
Commenting on second quarter results, founder and Executive Chairman
CASH FROM AGENCY CALLS CAUSES TEMPORARY SPREAD DECLINE
American Equity’s investment spread was 2.70% for the second quarter of 2014 compared to 2.77% for the first quarter of 2014. This decrease was primarily due to a 0.12% decrease in the average yield on invested assets, to 4.83% for the second quarter of 2014 from 4.95% for the first quarter of 2014. Much of this decrease was attributable to higher levels of low yielding cash and short-term investments during the quarter which primarily resulted from calls of
The average yield on invested assets continues to be impacted by the investment of new premiums and portfolio cash flows at rates below the portfolio rate. The average yield on fixed income securities purchased and commercial mortgage loans funded in the second quarter of 2014 was 4.15%, compared to an average yield of 4.39% in the first quarter of 2014.
The aggregate cost of money for annuity liabilities was 2.13% in the second quarter of 2014 compared to 2.18% in the first quarter of 2014. This decrease reflected continued reductions in crediting rates and a benefit from hedging the obligations for index linked interest of 0.03%.
Commenting on investment spread,
Matovina continued, “Even after the rate reductions of the past several years, we are encouraged that we still have significant room to reduce crediting rates and maintain our spread. If all fixed rates, caps and participation rates were reduced to guaranteed minimums, our cost of money would decrease by approximately 0.59%. Equally important is our commitment to delivering satisfactory returns to our policyholders. The structure of our products allows policyholders to safely earn equity linked returns while avoiding the risk of direct equity market exposure.”
CONVERTIBLE DEBT RETIREMENT PROGRESSES
During the quarter, the Company further reduced its debt leverage and potential dilution from increases in the Company’s stock price through the retirement of additional convertible notes. The Company has now retired
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
American Equity will hold a conference call to discuss second quarter 2014 earnings on
The call may also be accessed by telephone at 877-703-6105, passcode
68268438 (international callers, please dial 857-244-7304). 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
Consolidated Statements of Operations (Unaudited)
|Three Months Ended||Six Months Ended|
|June 30,||June 30,|
|(Dollars in thousands, except per share data)|
|Premiums and other considerations (a)||$||9,123||$||11,551||$||16,454||$||24,635|
|Annuity product charges||29,247||23,511||54,519||44,992|
|Net investment income||370,882||336,143||740,887||665,833|
|Change in fair value of derivatives||270,883||64,040||319,376||438,002|
|Net realized gains (losses) on investments, excluding other than temporary impairment ("OTTI") losses||(2,230||)||15,689||(2,944||)||26,274|
|OTTI losses on investments:|
|Total OTTI losses||—||(2,775||)||—||(4,964||)|
|Portion of OTTI losses recognized from other comprehensive income||(594||)||—||(1,499||)||(1,048||)|
|Net OTTI losses recognized in operations||(594||)||(2,775||)||(1,499||)||(6,012||)|
|Loss on extinguishment of debt||(6,574||)||(589||)||(10,551||)||(589||)|
|Benefits and expenses:|
|Insurance policy benefits and change in future policy benefits (a)||10,987||13,768||21,082||28,528|
|Interest sensitive and index product benefits (a)||367,774||333,001||684,966||556,171|
|Amortization of deferred sales inducements||55,349||120,536||56,015||149,367|
|Change in fair value of embedded derivatives||80,935||(408,409||)||173,554||(45,137||)|
|Interest expense on notes payable||9,121||6,780||19,385||14,028|
|Interest expense on subordinated debentures||3,024||3,018||6,032||6,027|
|Amortization of deferred policy acquisition costs||67,084||169,270||74,278||215,500|
|Other operating costs and expenses||20,887||24,851||39,972||44,371|
|Total benefits and expenses||615,161||262,815||1,075,284||968,855|
|Income before income taxes||55,576||184,755||40,958||224,280|
|Income tax expense||18,832||64,642||13,967||78,136|
|Earnings per common share||$||0.49||$||1.87||$||0.37||$||2.29|
|Earnings per common share - assuming dilution||$||0.46||$||1.71||$||0.34||$||2.09|
|Weighted average common shares outstanding (in thousands):|
|Earnings per common share||74,461||64,254||73,495||63,787|
|Earnings per common share - assuming dilution||79,518||70,382||79,583||69,882|
(a) The Company made an immaterial correction in the presentation of premiums, insurance policy benefits and change in future policy benefits and interest sensitive and index product benefits related to life contingent immediate annuities. We have revised the 2013 consolidated statement of operations above to be consistent with the 2014 presentation. These changes had no impact on the Company's consolidated balance sheets, net income or stockholders' equity.
NON-GAAP FINANCIAL MEASURES
In addition to net income, we have 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 our financial performance. Operating income equals net income adjusted to eliminate the impact of net realized gains and losses on investments including net OTTI losses recognized in operations, fair value changes in derivatives and embedded derivatives, loss on extinguishment of debt and changes in litigation reserves. Because these items fluctuate from quarter to quarter in a manner unrelated to core operations, we believe measures excluding their impact are useful in analyzing operating trends. We believe the combined presentation and evaluation of operating income together with net income provides information that may enhance an investor’s understanding of our underlying results and profitability.
Reconciliation from Net Income to Operating Income (Unaudited)
Three Months Ended
Six Months Ended
|(Dollars in thousands, except per share data)|
|Adjustments to arrive at operating income: (a)|
|Net realized investment (gains) losses, including OTTI||1,361||(3,574||)||1,925||(6,378||)|
|Change in fair value of derivatives and embedded derivatives - index annuities||(4,115||)||(81,351||)||39,593||(70,378||)|
|Change in fair value of derivatives and embedded derivatives - debt||(1,053||)||(3,302||)||456||(4,038||)|
|Extinguishment of debt||5,518||345||7,912||345|
|Operating income (a non-GAAP financial measure)||$||38,455||$||30,262||$||75,961||$||63,726|
|Per common share - assuming dilution:|
|Adjustments to arrive at operating income:|
|Net realized investment (gains) losses, including OTTI||0.01||(0.05||)||0.02||(0.09||)|
|Change in fair value of derivatives and embedded derivatives - index annuities||(0.05||)||(1.15||)||0.50||(1.00||)|
|Change in fair value of derivatives and embedded derivatives - debt||(0.01||)||(0.05||)||—||(0.06||)|
|Extinguishment of debt||0.07||—||0.10||—|
|Operating income (a non-GAAP financial measure)||$||0.48||$||0.43||$||0.95||$||0.91|
(a) Adjustments to net income to arrive at operating income are presented net of income taxes and where applicable, are net of related adjustments to amortization of deferred sales inducements (DSI) and deferred policy acquisition costs (DAC).
NON-GAAP FINANCIAL MEASURES
Average Stockholders' Equity and Return on Average Equity
Return on equity measures how efficiently we generate profits from the resources provided by our net assets. Return on equity is calculated by dividing net income and operating income for the trailing twelve months by average equity excluding average accumulated other comprehensive income ("AOCI").
|Twelve Months Ended|
|June 30, 2014|
|(Dollars in thousands)|
|Average Stockholders' Equity 1|
|Average equity including average AOCI||$||1,677,943|
|Average equity excluding average AOCI||$||1,277,767|
|Return on Average Equity Excluding Average AOCI|
1 - simple average based on stockholders' equity at beginning and end of the twelve month period.
American Equity Investment Life Holding Company
John M. Matovina, 515-457-1813
Chief Executive Officer
Ted M. Johnson, 515-457-1980
Chief Financial Officer
Debra J. Richardson, 515-273-3551
Chief Administrative Officer
Julie L. LaFollette, 515-273-3602
Director of Investor Relations