American Equity Reports Record Operating Earnings of $29.2 Million or $0.48 Per Diluted Common Share for the Second Quarter 2010
August 5, 2010 by N/A
WEST DES MOINES, Iowa, Aug 04, 2010 (BUSINESS WIRE) — American Equity Investment Life Holding Company /quotes/comstock/13*!ael/quotes/nls/ael (AEL 10.95, +0.13, +1.20%) , a leading underwriter of index and fixed rate annuities, reported record operating income(1) of $29.2 million, or $0.48 per diluted common share for the second quarter of 2010, a 35% increase over 2009 second quarter operating income of $21.6 million, or $0.38 per common diluted share. Highlights for the second quarter and first six months of 2010 include:
— American Equity’s annuity sales (before coinsurance) increased 5% to $1.9 billion for the first six months of 2010 compared to $1.8 billion for the same period in 2009.
— Invested assets at June 30, 2010 increased 21% to $17.3 billion compared to $14.3 billion at June 30, 2009.
— Investment spread on annuity liabilities reached a record 3.23% for the second quarter of 2010 compared to 2.97% for the same period in 2009.
— Book value per share including accumulated other comprehensive income of increased to $15.85 at June 30, 2010 compared to $13.08 at December 31, 2009.
— The Securities and Exchange Commission (“SEC”) declared effective the registration statement for the company’s first registered index annuity to be offered by subsidiary Eagle Life Insurance Company.
Net loss for the second quarter of 2010 was $1.5 million, compared to net income of $9.0 million for the same period in 2009. The net loss for the second quarter of 2010 included $30.5 million for the impact of fair value accounting for index annuity derivatives and embedded derivatives compared to a reduction in net income of $13.9 million for the same period in 2009. The increase in the impact of this item during the second quarter of 2010 reflects a decline from the preceding quarter in the risk-adjusted discount rate utilized in the fair value measurement of index annuity embedded derivative liabilities.
THE DEFEAT OF SEC RULE 151A American Equity’s two-year battle with the SEC over Rule 151A came to a successful conclusion last month when both a federal appellate court and Congress took action to invalidate the Rule. On July 13, 2010 the U.S. Circuit Court of Appeals for the D.C. Circuit granted a vacatur of the Rule in connection with the lawsuit filed by American Equity and other industry representatives challenging the Rule. The Court based its decision on the SEC’s failure to analyze the Rule’s impact on the index annuity market and specifically whether the Rule promoted “efficiency, competition and capital formation” in this market. The vacatur order invalidated the existing Rule but would have left open the possibility of future SEC rulemaking to gain oversight of index annuities. However, shortly after the Court’s order was issued, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law and enacted broad financial reforms including new limitations on the SEC’s power to regulate annuities. These limitations were contained in an amendment to the Act offered by Senator Tom Harkin of Iowa during the joint House-Senate conference deliberations over this law.
Commented David J. Noble Executive Chairman of American Equity: “Senator Harkin, Congressman Leonard Boswell and other members of the Iowa Congressional delegation demonstrated great leadership in securing passage of the Harkin Amendment to the financial reform bill. They clearly recognized that the SEC’s overreach into the life insurance industry would have restricted consumer choice and cost jobs without any meaningful increase in consumer protections already in place at the state level. We are proud to be an Iowa-based company. We are also extremely proud of the leadership role played by American Equity in its advocacy against Rule 151A both in the Court and in the halls of Congress.”
RECORD INVESTMENT SPREAD DESPITE DECLINING NEW MONEY RATES American Equity achieved a record aggregate investment spread (defined as the yield on invested assets over the cost of money on annuity liabilities) of 3.23% for the second quarter of 2010 compared to 2.97% for the same period last year. This improvement was due primarily to a reduction in the cost of money on index annuity liabilities to 2.85% compared to 3.29% for the second quarter of 2009. The increase in investment spread, as well as continued growth in the total invested assets, were the primary factors in achieving record operating earnings for the second quarter of 2010. The 21% growth in total invested assets from June 30, 2009 to June 30 2010 is a direct result of continuing strong sales of American Equity’s products, which exceed $2 billion year to date.
The average yield on invested assets for the second quarter of 2010 was 6.14% compared to 6.28% for the same period last year. During the second quarter of 2010, fixed maturity securities aggregating $1.4 billion were purchased at an average yield of 5.83%, reflecting the low levels of market rates currently available as well as a general tightening of credit spreads. During this period the company also funded $92 million of new commercial mortgage loans at an average yield of 6.71%. Due to the low interest rate environment, calls for redemption of bonds held by the company remained high in the second quarter of 2010, with $1.2 billion in securities called, sold or prepaid with an average yield of 6.02%.
In response to the low rate environment for new investments, American Equity announced a reduction in certain crediting rates on new annuity liabilities, including fixed rates as well as index cap and participation rates. This rate cut was effective July 20, 2010 and applies only to applications for new policies received after that date. Renewal rates on existing annuity liabilities remain unchanged at present.
RISK BASED CAPITAL CLIMBS TO 375% American Equity’s estimated risk based capital ratio (“RBC”) at June 30, 2010 was 375%, compared to 337% at December 31, 2009. This increase is driven by strong statutory earnings which in turn result in a higher level of regulatory capital and surplus. The increase in the Company’s RBC ratio reinforces management’s belief that its capital is more than adequate to support current and near term sales growth at anticipated levels. Management regularly reviews capital adequacy and will remain opportunistic in seeking new capital should sales increase faster than expected.
AT-THE-MARKET OFFERING CANCELLED Effective August 4, 2010, the company terminated its at-the-market offering of its common stock. In light of the increase in its RBC ratio as discussed above, the company determined that it does not want to issue common equity at recent market prices and the program is too costly to maintain for an indefinite period. Since the beginning of the program on August 20, 2009, the company has issued 132,300 shares of common stock and received $1.1 million in gross proceeds from such sales.
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 2010 earnings on Thursday, August 5, 2010, at 10 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 800-573-4842, passcode 41099854 (international callers, please dial 617-224-4327). An audio replay will be available shortly after the call on AEL’s web site. An audio replay will also be available via telephone through August 26, 2010 by calling 888-286-8010, passcode 34054633 (international callers will need to dial 617-801-6888).
ABOUT AMERICAN EQUITY American Equity Investment Life Holding Company, through its wholly-owned operating subsidiaries, is a full service underwriter of fixed annuity and life insurance products, with a primary emphasis on the sale of index and fixed rate index annuities. The company’s headquarters are located at 6000 Westown Parkway, West Des Moines, Iowa, 50266. The mailing address of the company is: P.O. Box 71216, Des Moines, Iowa 50325.
(1) In addition to net income (loss), American Equity has consistently utilized operating income, a non-GAAP financial measure commonly used in the life insurance industry, as an economic measure to evaluate its financial performance. See accompanying tables for the reconciliation of net income (loss) to operating income and a description of reconciling items.
American Equity Investment Life Holding Company ——————————————————————— Net Income (Loss)/Operating Income (Unaudited) ——————————————————————— Three Months Ended Six Months Ended June 30, June 30, ——————————- ——————————- 2010 2009 2010 2009 ——– ——- ——– ——- (Dollars in thousands, except per share data) Revenues: Traditional life and accident and health insurance premiums $ 2,643 $ 2,867 $ 5,930 $ 6,353 Annuity product charges 18,617 16,615 34,135 31,666 Net investment income 254,845 226,803 497,755 447,457 Change in fair value of derivatives (208,737 ) 30,494 (126,722 ) (13,329 ) Net realized gains on investments, excluding other than 1,063 4,317 10,966 5,077 temporary impairment (“OTTI”) losses OTTI losses on investments: Total OTTI losses (1,603 ) (22,061 ) (14,187 ) (77,452 ) Portion of OTTI losses recognized in other comprehensive income 785 16,418 10,146 58,371 ——– ——- ——– ——- (818 ) (5,643 ) (4,041 ) (19,081 ) Net OTTI losses recognized in operations Gain (loss) on retirement of debt (292 ) 3,098 (292 ) 3,098 ——– — ——- ——– — ——- Total revenues 67,321 278,551 417,731 461,241 ——– ——- ——– ——- Benefits and expenses: Insurance policy benefits and change in future policy benefits 2,169 1,974 4,501 4,173 Interest sensitive and index product benefits 228,818 71,977 425,687 131,740 Amortization of deferred sales inducements 3,243 12,184 16,332 25,895 Change in fair value of embedded derivatives (190,211 ) 140,716 (126,336 ) 154,899 Interest expense on notes payable 4,673 3,642 9,324 7,918 Interest expense on subordinated debentures 3,716 4,029 7,401 8,237 Interest expense on amounts due under repurchase agreements – 2 – 244 Amortization of deferred policy acquisition costs 917 13,266 28,185 47,910 Other operating costs and expenses 16,702 16,880 32,687 31,344 ——– ——- ——– ——- Total benefits and expenses 70,027 264,670 397,781 412,360 ——– ——- ——– ——- Income (loss) before income taxes (2,706 ) 13,881 19,950 48,881 Income tax expense (benefit) (1,202 ) 4,869 6,569 13,394 ——– — ——- ——– ——- Net income (loss) (1,504 ) 9,012 13,381 35,487 Net realized gains and net OTTI losses on investments, net of offsets 11 141 (2,358 ) (537 ) Convertible debt retirement, net of income taxes 171 (1,520 ) 171 (1,520 ) Net effect of derivatives and other index annuity, net of offsets 30,530 13,946 43,797 11,481 ——– ——- ——– ——- Operating income (a) $ 29,208 $ 21,579 $ 54,991 $ 44,911 == ======== == ======= == ======== == ======= Earnings (loss) per common share $ (0.03 ) $ 0.16 $ 0.23 $ 0.66 Earnings (loss) per common share – assuming dilution $ (0.03 ) $ 0.16 $ 0.23 $ 0.63 Operating income per common share (a) $ 0.50 $ 0.39 $ 0.94 $ 0.83 Operating income per common share – assuming dilution (a) $ 0.48 $ 0.38 $ 0.90 $ 0.80 Weighted average common shares outstanding (in thousands): Earnings per common share 58,427 55,336 58,326 54,157 Earnings per common share – assuming dilution 61,592 58,105 61,365 56,909
American Equity Investment Life Holding Company ————————————————————————————– Operating Income Three months ended June 30, 2010 (Unaudited) —————————————————————- Adjustments ———————————– Realized Gains Derivatives and Convertible and Other Operating As Reported Debt Index Annuity Income (a) ——————- ————— —————— ————– (Dollars in thousands, except per share data) Revenues: Traditional life and accident and health insurance premiums $ 2,643 $ – $ – $ 2,643 Annuity product charges 18,617 – – 18,617 Net investment income 254,845 – – 254,845 Change in fair value of derivatives (208,737 ) – 300,043 91,306 Net realized gains on investments, excluding other than – – temporary impairment (“OTTI”) losses 1,063 (1,063 ) Net OTTI losses recognized in operations (818 ) 818 – – Gain (loss) on retirement of debt (292 ) 292 – – ——– – —— ——- ——- Total revenues 67,321 47 300,043 367,411 Benefits and expenses: Insurance policy benefits and change in future policy benefits 2,169 – – 2,169 Interest sensitive and index product benefits 228,818 – (4,487 ) 224,331 Amortization of deferred sales inducements 3,243 (208 ) 21,468 24,503 Change in fair value of embedded derivatives (190,211 ) – 190,211 – Interest expense on notes payable 4,673 – – 4,673 Interest expense on subordinated debentures 3,716 – – 3,716 Amortization of deferred policy acquisition costs 917 (55 ) 45,555 46,417 Other operating costs and expenses 16,702 – – 16,702 ——– —— ——- ——- Total benefits and expenses 70,027 (263 ) 252,747 322,511 ——– —— – ——- ——- Income (loss) before income taxes (2,706 ) 310 47,296 44,900 Income tax expense (benefit) (1,202 ) 128 16,766 15,692 ——– – —— ——- ——- Net income (loss) $ (1,504 ) $ 182 $ 30,530 $ 29,208 ======= ======== = ===== ====== ==== ======= ===== ======= Earnings (loss) per common share $ (0.03 ) $ 0.50 Earnings (loss) per common share – assuming dilution $ (0.03 ) $ 0.48
(a) In addition to net income (loss), we have consistently utilized operating income, operating income per common share 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 (loss) adjusted to eliminate the impact of net realized gains and losses on investments including net OTTI losses recognized in operations, gain (loss) on retirement of debt and fair value changes in derivatives and embedded derivatives. 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.
SOURCE: American Equity Investment Life Holding Company
American Equity Investment Life Holding Company Wendy C. Waugaman, 515-457-1824 Chief Executive Officer wcwaugaman@american-equity.com or John M. Matovina, 515-457-1813 Chief Financial Officer jmatovina@american-equity.com or Julie L. LaFollette, 515-273-3602 Director of Investor Relations jlafollette@american-equity.com or Debra J. Richardson, 515-273-3551 Executive Vice President drichardson@american-equity.com
