American Equity Reports Third Quarter 2020 Results
Company Highlights
-
Third quarter 2020 net income available to common stockholders of
$661.3 million or$7.17 per diluted common share including notable items -
Third quarter 2020 non-GAAP operating loss1 available to common stockholders of
$(249.8) million or$(2.72) per diluted common share including notable items -
Third quarter 2020 non-GAAP operating income available to common shareholders of
$91.1 million or$0.99 per diluted common share excluding notable items - One notable item this quarter, the annual actuarial update, primarily reflective of changes in future expectations regarding low interest rates and option budgets
-
Book value per share excluding accumulated other comprehensive income with and without net impact of accounting for fair value of derivatives and embedded derivatives of
$35.97 and$33.39 , respectively -
Third quarter 2020 annuity sales of
$574 million -
Policyholder funds under management of
$53.0 billion - Third quarter 2020 investment spread of 2.44%
-
Estimated risk-based capital ratio of 382% excluding approximately
$300 million of excess cash at the holding company -
Share repurchase activity to begin following earnings release under the Board’s recent
$500 million authorization
Non-GAAP operating loss1 available to common stockholders for the third quarter 2020 was
Third quarter 2020 net income was positively affected by
The year-over-year decreases in quarterly non-GAAP operating income1 available to common stockholders and non-GAAP operating income1 per share available to common stockholders, excluding the effects from actuarial assumption updates, were primarily attributable to lower investment spread income and a greater increase in the liability for future policy benefits to be paid for lifetime income benefit riders, partially offset by a decline in deferred acquisition cost and deferred sales inducement amortization. Excluding the effects from assumption updates, actual versus modeled experience in the quarter negatively affected amortization of deferred acquisition and sales inducement costs and the increase in the liability for future policy benefits to be paid for lifetime income benefit riders by
INVESTMENT SPREAD INCREASES SEQUENTIALLY ON LOWER COST OF MONEY
American Equity’s investment spread was 2.44% for the third quarter of 2020 compared to 2.39% for the second quarter of 2020 and 2.75% for the third quarter of 2019. On a sequential basis, the average yield on invested assets decreased by 2 basis points while the cost of money fell by 7 basis points.
Average yield on invested assets was 4.10% in the third quarter of 2020 compared to 4.12% in the second quarter of 2020. The decrease in investment yield was primarily driven by the decline in short term yields on floating rate instruments in the investment portfolio and retention of a higher level of liquidity in the investment portfolios of the life insurance companies offset by an increase in prepayment income and improved results from mark-to-market investment partnerships. The average yield on invested assets excluding non-trendable items was 4.00% in the third quarter of 2020 compared to 4.17% in the second quarter of 2020. In our analysis of trendable yield for the second quarter, we have excluded the reduction in effective yield resulting from the mark to market investment partnership losses in addition to prepayment income.
The aggregate cost of money for annuity liabilities of 1.66% in the third quarter of 2020 was down 7 basis points from 1.73% in the second quarter of 2020. The cost of money in the third quarter was positively affected by 3 basis points from over-hedging of index-linked credits compared to 1 basis point of hedge loss in the second quarter.
POLICYHOLDER FUNDS UNDER MANAGEMENT RELATIVELY FLAT ON
Policyholder funds under management at
Commenting on sales,
AMERICAN EQUITY BEGINS IMPLEMENTATION OF AEL 2.0
American Equity recently announced three important strategic partnerships as part of accelerating the implementation of the AEL 2.0 business plan. Each partnership leverages the unique skills of the partners and allows American Equity to use the power of its annuity funding origination capability to enter into unique, differentiated partnerships to unlock shareholder value. These include:
-
A
$100 million growth equity investment in Pretium, a leading alternative asset manager, enabling American Equity to secure unique access to sourcing and servicing of residential real estate assets over their life cycle -
A reinsurance and asset management joint venture with Värde Partners and
Agam Capital Management by ceding a$5 billion in-force block (approximately 10% of in-force) to begin the transformation to a capital-light model while providing access to new markets, specifically the global life and annuity reinsurance and third-party insurance asset management businesses -
A strategic partnership with Brookfield Asset Management to expedite American Equity's transformation to the fee-based capital-light model envisioned in the AEL 2.0 strategy which will include: reinsurance of
$5 billion of existing liabilities and up to an incremental$5 billion of new sales; access to Brookfield investments in targeted asset classes; and a cornerstone investment by Brookfield in which it will acquire up to a 19.9% ownership interest in American Equity subject to a five-year standstill agreement
A video outlining the AEL 2.0 strategy and the Brookfield partnership is available on the Investor Relations page of the Company’s website.
Speaking about the AEL 2.0 strategy, Bhalla stated: "Each of these commercially attractive partnerships, and the equity investment component of the Brookfield agreement announced last week, are the result of months of discussion and negotiation that commenced in the early spring of this year. They represent major progress on the Investment Management and Capital Structure pillars of our AEL 2.0 strategy by freeing up capital on our balance sheet and providing access to world-class asset management capabilities. These transactions are just the start of evolving AEL into a capital-light and higher sustained ROE company.”
As previously announced on
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 third quarter 2020 earnings on
The call may also be accessed by telephone at 855-865-0606, passcode 9156855 (international callers, please dial 704-859-4382). An audio replay will be available shortly after the call on American Equity'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.
Unaudited (Dollars in thousands, except per share data)
Consolidated Statements of Operations |
||||||||||||||||
|
Three Months Ended
|
|
Nine Months Ended
|
|||||||||||||
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|||||||||
Revenues: |
|
|
|
|
|
|
|
|||||||||
Premiums and other considerations |
$ |
10,407 |
|
|
$ |
5,152 |
|
|
$ |
29,103 |
|
|
$ |
14,688 |
|
|
Annuity product charges |
|
62,277 |
|
|
|
63,647 |
|
|
|
185,264 |
|
|
|
177,313 |
|
|
Net investment income |
|
543,331 |
|
|
|
590,412 |
|
|
|
1,660,353 |
|
|
|
1,719,418 |
|
|
Change in fair value of derivatives |
|
205,011 |
|
|
|
(20,042 |
) |
|
|
(409,201 |
) |
|
|
440,472 |
|
|
Net realized gains (losses) on investments |
|
(22,321 |
) |
|
|
4,328 |
|
|
|
(68,545 |
) |
|
|
(67 |
) |
|
Other than temporary impairment (OTTI) losses on investments: |
|
|
|
|
|
|
|
|||||||||
Total OTTI losses |
|
— |
|
|
|
(101 |
) |
|
|
— |
|
|
|
(1,099 |
) |
|
Portion of OTTI losses recognized from other comprehensive income |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(215 |
) |
|
Net OTTI losses recognized in operations |
|
— |
|
|
|
(101 |
) |
|
|
— |
|
|
|
(1,314 |
) |
|
Loss on extinguishment of debt |
|
— |
|
|
|
— |
|
|
|
(2,024 |
) |
|
|
— |
|
|
Total revenues |
|
798,705 |
|
|
|
643,396 |
|
|
|
1,394,950 |
|
|
|
2,350,510 |
|
|
|
|
|
|
|
|
|
|
|||||||||
Benefits and expenses: |
|
|
|
|
|
|
|
|||||||||
Insurance policy benefits and change in future policy benefits |
|
13,273 |
|
|
|
7,627 |
|
|
|
36,676 |
|
|
|
23,865 |
|
|
Interest sensitive and index product benefits |
|
576,147 |
|
|
|
500,285 |
|
|
|
1,217,358 |
|
|
|
888,062 |
|
|
Amortization of deferred sales inducements |
|
416,983 |
|
|
|
(55,769 |
) |
|
|
415,396 |
|
|
|
(2,675 |
) |
|
Change in fair value of embedded derivatives |
|
(1,732,497 |
) |
|
|
212,278 |
|
|
|
(1,855,623 |
) |
|
|
1,306,163 |
|
|
Interest expense on notes payable |
|
6,388 |
|
|
|
6,382 |
|
|
|
19,161 |
|
|
|
19,141 |
|
|
Interest expense on subordinated debentures |
|
1,323 |
|
|
|
3,968 |
|
|
|
4,232 |
|
|
|
12,113 |
|
|
Amortization of deferred policy acquisition costs |
|
622,596 |
|
|
|
(120,934 |
) |
|
|
623,409 |
|
|
|
(45,856 |
) |
|
Other operating costs and expenses |
|
42,738 |
|
|
|
38,554 |
|
|
|
128,315 |
|
|
|
114,959 |
|
|
Total benefits and expenses |
|
(53,049 |
) |
|
|
592,391 |
|
|
|
588,924 |
|
|
|
2,315,772 |
|
|
Income before income taxes |
|
851,754 |
|
|
|
51,005 |
|
|
|
806,026 |
|
|
|
34,738 |
|
|
Income tax expense |
|
184,554 |
|
|
|
13,645 |
|
|
|
143,308 |
|
|
|
8,798 |
|
|
Net income |
|
667,200 |
|
|
|
37,360 |
|
|
|
662,718 |
|
|
|
25,940 |
|
|
Less: Preferred stock dividends |
|
5,950 |
|
|
|
— |
|
|
|
18,511 |
|
|
|
— |
|
|
Net income available to common stockholders |
$ |
661,250 |
|
|
$ |
37,360 |
|
|
$ |
644,207 |
|
|
$ |
25,940 |
|
|
|
|
|
|
|
|
|
|
|||||||||
Earnings per common share |
$ |
7.20 |
|
|
$ |
0.41 |
|
|
$ |
7.02 |
|
|
$ |
0.28 |
|
|
Earnings per common share - assuming dilution |
$ |
7.17 |
|
|
$ |
0.41 |
|
|
$ |
7.00 |
|
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
|||||||||
Weighted average common shares outstanding (in thousands): |
|
|
|
|
|
|
|
|||||||||
Earnings per common share |
|
91,861 |
|
|
|
91,252 |
|
|
|
91,770 |
|
|
|
91,081 |
|
|
Earnings per common share - assuming dilution |
|
92,163 |
|
|
|
91,711 |
|
|
|
92,071 |
|
|
|
91,748 |
|
Unaudited (Dollars in thousands, except per share data)
NON-GAAP FINANCIAL MEASURES
In addition to net income available to common stockholders, we have consistently utilized non-GAAP operating income (loss) available to common stockholders and non-GAAP operating income (loss) available to common stockholders per common share - assuming dilution, non-GAAP financial measures commonly used in the life insurance industry, as economic measures to evaluate our financial performance. Non-GAAP operating income (loss) available to common stockholders equals net income available to common stockholders adjusted to eliminate the impact of items that fluctuate from quarter to quarter in a manner unrelated to core operations, and we believe measures excluding their impact are useful in analyzing operating trends. The most significant adjustments to arrive at non-GAAP operating income (loss) available to common stockholders eliminate the impact of fair value accounting for our fixed index annuity business. These adjustments are not economic in nature but rather impact the timing of reported results. We believe the combined presentation and evaluation of non-GAAP operating income (loss) available to common stockholders together with net income available to common stockholders provides information that may enhance an investor’s understanding of our underlying results and profitability.
Reconciliation from Net Income Available to Common Stockholders to Non-GAAP Operating Income (Loss) Available to Common Stockholders |
||||||||||||||||
|
Three Months Ended
|
|
Nine Months Ended
|
|||||||||||||
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|||||||||
Net income available to common stockholders |
$ |
661,250 |
|
|
$ |
37,360 |
|
|
$ |
644,207 |
|
|
$ |
25,940 |
|
|
Adjustments to arrive at non-GAAP operating income (loss) available to common stockholders: (a) |
|
|
|
|
|
|
|
|||||||||
Net realized gains/losses on financial assets, including credit losses |
|
15,145 |
|
|
|
(3,175 |
) |
|
|
49,986 |
|
|
|
(245 |
) |
|
Change in fair value of derivatives and embedded derivatives - fixed index annuities |
|
(1,176,909 |
) |
|
|
250,186 |
|
|
|
(873,773 |
) |
|
|
500,998 |
|
|
Change in fair value of derivatives - interest rate caps and swap |
|
— |
|
|
|
(76 |
) |
|
|
(848 |
) |
|
|
1,414 |
|
|
Income taxes |
|
250,701 |
|
|
|
(50,940 |
) |
|
|
177,804 |
|
|
|
(105,759 |
) |
|
Non-GAAP operating income (loss) available to common stockholders |
$ |
(249,813 |
) |
|
$ |
233,355 |
|
|
$ |
(2,624 |
) |
|
$ |
422,348 |
|
|
|
|
|
|
|
|
|
|
|||||||||
Per common share - assuming dilution: |
|
|
|
|
|
|
|
|||||||||
Net income available to common stockholders |
$ |
7.17 |
|
|
$ |
0.41 |
|
|
$ |
7.00 |
|
|
$ |
0.28 |
|
|
Adjustments to arrive at non-GAAP operating income (loss) available to common stockholders: |
|
|
|
|
|
|
|
|||||||||
Anti-dilutive effect of operating loss |
|
0.01 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Net realized gains/losses on financial assets, including credit losses |
|
0.16 |
|
|
|
(0.04 |
) |
|
|
0.54 |
|
|
|
— |
|
|
Change in fair value of derivatives and embedded derivatives - fixed index annuities |
|
(12.77 |
) |
|
|
2.73 |
|
|
|
(9.49 |
) |
|
|
5.46 |
|
|
Change in fair value of derivatives - interest rate caps and swap |
|
— |
|
|
|
— |
|
|
|
(0.01 |
) |
|
|
0.01 |
|
|
Income taxes |
|
2.71 |
|
|
|
(0.56 |
) |
|
|
1.93 |
|
|
|
(1.15 |
) |
|
Non-GAAP operating income (loss) available to common stockholders |
$ |
(2.72 |
) |
|
$ |
2.54 |
|
|
$ |
(0.03 |
) |
|
$ |
4.60 |
|
(a) |
Adjustments to net income available to common stockholders to arrive at non-GAAP operating income (loss) available to common stockholders are presented net of related adjustments to amortization of deferred sales inducements and deferred policy acquisition costs where applicable. |
NON-GAAP FINANCIAL MEASURES
Average Common Stockholders' Equity and Return on Average Common Stockholders' Equity
Return on average common stockholders' equity measures how efficiently we generate profits from the resources provided by our net assets. Return on average common stockholders' equity and non-GAAP operating return on average common stockholders' equity are calculated by dividing net income available to common stockholders and non-GAAP operating income available to common stockholders, respectively, for the trailing twelve months by average total stockholders' equity excluding average equity available to preferred stockholders and average accumulated other comprehensive income (AOCI). We exclude AOCI because AOCI fluctuates from quarter to quarter due to unrealized changes in the fair value of available for sale investments.
|
Twelve Months Ended |
|||
|
|
|||
Average Common Stockholders' Equity Excluding Average AOCI |
|
|||
Average total stockholders' equity |
$ |
5,122,725 |
|
|
Average equity available to preferred stockholders |
|
(350,000 |
) |
|
Average AOCI |
|
(1,875,770 |
) |
|
Average common stockholders' equity excluding average AOCI |
$ |
2,896,955 |
|
|
|
|
|||
Net income available to common stockholders |
$ |
864,357 |
|
|
Non-GAAP operating income available to common stockholders |
$ |
123,211 |
|
|
|
|
|||
Return on Average Common Stockholders' Equity Excluding Average AOCI |
|
|||
Net income available to common stockholders |
|
29.84 |
% |
|
Non-GAAP operating income available to common stockholders |
|
4.25 |
% |
View source version on businesswire.com: https://www.businesswire.com/news/home/20201029006060/en/
American Equity Investment Life Holding Company®
515-273-3763 | sschwartz@american-equity.com
Source: