American Equity Reports Fourth Quarter and Full Year 2012 Results
Non-GAAP operating income1 for the fourth quarter of 2012 was
Highlights for the fourth quarter of 2012 include:
-
Annuity sales (before coinsurance) for the fourth quarter of 2012 were
$1.07 billion compared to third quarter 2012 annuity sales of$982 million . -
Total invested assets grew to
$27.5 billion (amortized cost basis =$25.1 billion ). - Investment spread for the fourth quarter of 2012 was 2.59% compared to 2.62% for the third quarter of 2012.
-
Risk-based capital (
RBC ) ratio atDecember 31, 2012 remained above target at 332%.
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 Annual Report on Form 10-K 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.
Commenting on results,
SPREAD RESULT IMPACTED BY CASH AND SHORT-TERM INVESTMENTS
American Equity’s investment spread for the fourth quarter of 2012 was 2.59% compared to 2.62% for the third quarter of 2012 and 2.97% for the fourth quarter of 2011. Fourth quarter 2012 investment spread and average yield on invested assets continued to be affected by the impact of high levels of low yielding cash and other short-term investments during the quarter. The average yield on invested assets including the excess cash and other short-term investments balances was 5.03% for the fourth quarter of 2012 compared to 5.17% in the third quarter of 2012 and 5.76% in the fourth quarter of 2011.
The average balance for excess cash and other short-term investments in
the fourth quarter of 2012 was
Average yield on invested assets also continues to decline as proceeds from securities called for redemption and new premiums are invested at rates below the portfolio rate. The average yield on fixed income securities purchased and commercial mortgage loans funded in the fourth quarter of 2012 was 3.65% compared to an average yield of 4.37% for fixed income securities purchased and commercial mortgage loans funded in the first nine months of 2012.
The decrease in investment yield was partially offset by a reduction in the aggregate cost of money on annuity liabilities to 2.44% in the fourth quarter of 2012 compared to 2.55%, in the third quarter of 2012 and 2.79% in the fourth quarter of 2011. The reductions in the cost of money reflects management’s actions to maintain target spreads in the declining investment yield environment by adjusting new money and renewal crediting rates to policyholders.
OUTLOOK
Commenting on the outlook for 2013, Noble said: “Our
sales momentum picked up in the second half of 2012 and we are
optimistic that momentum will carry over to 2013. While the recent stock
market rally is attracting attention and investors funds, we believe
that as more Americans approach and enter retirement, interest in ‘safe
money’ retirement savings and income products will continue to grow,
especially considering the volatility exhibited by the equity markets
over the last decade.”
Noble continued, “American Equity is well positioned to capitalize on
growing demand for guaranteed retirement savings and income products. We
provide the ‘sleep insurance’ of a safe money instrument with guaranteed
returns, yet also offer potential upside participation in stock market
rallies. With attractive products that are right for our times, and the
established strength of an industry leader with over
A.M. BEST AFFIRMS “A- (EXCELLENT)” RATING, STABLE OUTLOOK
In
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 fourth quarter 2012 earnings on
The call may also be accessed by telephone at 866-314-4865, passcode
36024971 (international callers, please dial 1-617-213-8050). An audio
replay will be available via telephone through
ABOUT AMERICAN EQUITY
American Equity Investment Life Holding Company |
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Consolidated Statements of Operations (Unaudited) |
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Three Months Ended | Year Ended | |||||||||||||||||||
December 31, | December 31, | |||||||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||||||
(Dollars in thousands, except per share data) | ||||||||||||||||||||
Revenues: | ||||||||||||||||||||
Traditional life insurance premiums | $ | 3,107 | $ | 2,820 | $ | 12,877 | $ | 12,151 | ||||||||||||
Annuity product charges | 23,830 | 18,930 | 89,006 | 76,189 | ||||||||||||||||
Net investment income | 321,160 | 324,272 | 1,286,923 | 1,218,780 | ||||||||||||||||
Change in fair value of derivatives | (48,266 | ) | 92,269 | 221,138 | (114,728 | ) | ||||||||||||||
Net realized gains (losses) on investments, excluding other than temporary impairment ("OTTI") losses | 1,471 | 698 | (6,454 | ) | (18,641 | ) | ||||||||||||||
OTTI losses on investments: | ||||||||||||||||||||
Total OTTI losses | (3,255 | ) | (9,834 | ) | (5,411 | ) | (20,180 | ) | ||||||||||||
Portion of OTTI losses recognized from other comprehensive income | (6,132 | ) | (6,451 | ) | (9,521 | ) | (13,796 | ) | ||||||||||||
Net OTTI losses recognized in operations | (9,387 | ) | (16,285 | ) | (14,932 | ) | (33,976 | ) | ||||||||||||
Total revenues | 291,915 | 422,704 | 1,588,558 | 1,139,775 | ||||||||||||||||
Benefits and expenses: | ||||||||||||||||||||
Insurance policy benefits and change in future policy benefits | 1,843 | 1,588 | 8,075 | 7,870 | ||||||||||||||||
Interest sensitive and index product benefits (a) (d) | 290,126 | 154,440 | 818,087 | 775,757 | ||||||||||||||||
Amortization of deferred sales inducements (c) | 36,798 | 48,889 | 87,157 | 71,781 | ||||||||||||||||
Change in fair value of embedded derivatives | (179,379 | ) | 33,031 | 286,899 | (105,194 | ) | ||||||||||||||
Interest expense on notes payable | 7,271 | 7,910 | 28,479 | 31,633 | ||||||||||||||||
Interest expense on subordinated debentures | 3,074 | 3,542 | 13,458 | 13,977 | ||||||||||||||||
Interest expense on amounts due under repurchase agreements | — | 25 | — | 30 | ||||||||||||||||
Amortization of deferred policy acquisition costs (c) | 59,833 | 78,323 | 164,919 | 143,478 | ||||||||||||||||
Other operating costs and expenses (b) (e) | 18,710 | 17,518 | 95,495 | 67,529 | ||||||||||||||||
Total benefits and expenses | 238,276 | 345,266 | 1,502,569 | 1,006,861 | ||||||||||||||||
Income before income taxes | 53,639 | 77,438 | 85,989 | 132,914 | ||||||||||||||||
Income tax expense | 17,242 | 27,739 | 28,191 | 46,666 | ||||||||||||||||
Net income (a) (b) (c) (d) (e) | $ | 36,397 | $ | 49,699 | $ | 57,798 | $ | 86,248 | ||||||||||||
Earnings per common share | $ | 0.58 | $ | 0.83 | $ | 0.94 | $ | 1.45 | ||||||||||||
Earnings per common share - assuming dilution (a) (b) (c) (d) (e) | $ | 0.55 | $ | 0.79 | $ | 0.89 | $ | 1.37 | ||||||||||||
Weighted average common shares outstanding (in thousands): | ||||||||||||||||||||
Earnings per common share | 62,856 | 59,641 | 61,259 | 59,482 | ||||||||||||||||
Earnings per common share - assuming dilution | 65,897 | 63,582 | 65,676 | 63,619 | ||||||||||||||||
Notes for Consolidated Statements of Operations |
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(a) | The year ended December 31, 2011 includes an adjustment recorded in the first quarter 2011 to single premium immediate annuity reserves which reduced interest sensitive and index product benefits by $4.2 million and increased net income and earnings per common share - assuming dilution by $2.7 million and $0.04 per share, respectively. | |||
(b) | Other operating costs and expenses for the three months and year ended December 31, 2012 include $2.0 million and $9.1 million, respectively, of expense related to the impact of the prospective adoption (effective January 1, 2012) of revised accounting guidance for deferred policy acquisition costs. This change, including the impact on related amortization expense, decreased net income for the three months and year ended December 31, 2012 by $1.2 million and $5.8 million, respectively, and decreased earnings per common share - assuming dilution for the three months and year ended December 31, 2012 by $0.02 and $0.09 per share, respectively. | |||
(c) | The year ended December 31, 2012 includes expense from unlocking which reduced amortization of deferred sales inducements by $0.2 million, increased amortization of deferred policy acquisition costs by $3.7 million, and decreased net income and earnings per common share - assuming dilution for the year ended December 31, 2012 by $2.2 million and $0.03 per share, respectively. | |||
The year ended December 31, 2011, includes benefit from unlocking which reduced amortization of deferred sales inducements and amortization of deferred policy acquisition costs by $5.0 million and $9.1 million, respectively, and increased net income and earnings per common share - assuming dilution for the year ended December 31, 2011 by $9.1 million and $0.14 per share, respectively. | ||||
(d) | The year ended December 31, 2012 includes a benefit from the revision of assumptions used in determining reserves held for living income benefit riders consistent with unlocking for deferred policy acquisition costs and deferred sales inducements. The impact decreased interest sensitive and index product benefits for the year ended December 31, 2012 by $2.2 million and increased net income and earnings per common share - assuming dilution for the year ended December 31, 2012 by $1.4 million and $0.02 per share. | |||
(e) | The year ended December 31, 2012 includes expense from recognizing an estimated litigation liability of $17.5 million during the third quarter of 2012, which, after related adjustments to amortization of deferred sales inducements and deferred policy acquisition costs and income taxes, decreased net income and earnings per common share - assuming dilution for the year ended December 31, 2012 by $9.6 million and $0.15 per share. | |||
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 and 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) |
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Three Months | Year Ended | |||||||||||||||||
Ended December 31, | December 31, | |||||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||||
(Dollars in thousands, except per share data) | ||||||||||||||||||
Net income | $ | 36,397 | $ | 49,699 | $ | 57,798 | $ | 86,248 | ||||||||||
Adjustments to arrive at operating income: | ||||||||||||||||||
Net realized investment losses, including OTTI (a) | 2,825 | 5,616 | 8,648 | 18,354 | ||||||||||||||
Change in fair value of derivatives and embedded derivatives (a) | (8,317 | ) | (22,713 | ) | 34,161 | 29,051 | ||||||||||||
Litigation reserve (a) | — | — | 9,580 | — | ||||||||||||||
Operating income (a non-GAAP financial measure) (b) (c) (d) (e) | $ | 30,905 | $ | 32,602 | $ | 110,187 | $ | 133,653 | ||||||||||
Per common share - assuming dilution: | ||||||||||||||||||
Net income | $ | 0.55 | $ | 0.79 | $ | 0.89 | $ | 1.37 | ||||||||||
Adjustments to arrive at operating income: | ||||||||||||||||||
Net realized investment losses, including OTTI | 0.04 | 0.09 | 0.13 | 0.29 | ||||||||||||||
Change in fair value of derivatives and embedded derivatives | (0.12 | ) | (0.36 | ) | 0.52 | 0.46 | ||||||||||||
Litigation reserve | — | — | 0.15 | — | ||||||||||||||
Operating income (a non-GAAP financial measure) (b) (c) (d) (e) | $ | 0.47 | $ | 0.52 | $ | 1.69 | $ | 2.12 | ||||||||||
(a) | Adjustments to net income to arrive at operating income are presented net of related adjustments to amortization of deferred sales inducements (DSI) and deferred policy acquisition costs (DAC) and net of income taxes. | |||
(b) | The three months and year ended December 31, 2012 includes $2.0 million and $9.1 million, respectively, of expense related to the impact of the prospective adoption (effective January 1, 2012) of revised accounting guidance for deferred policy acquisition costs. This change, including the impact on related amortization expense, decreased operating income for the three months and year ended December 31, 2012 by $1.2 and $5.8 million, respectively, and decreased operating income per common share - assuming dilution for the three months and year ended December 31, 2012 by $0.02 and $0.09 per share, respectively. | |||
(c) | The year ended December 31, 2012 includes expense from unlocking which decreased operating income by $6.3 million and operating income per common share - assuming dilution by $0.09 per share. | |||
The year ended December 31, 2011 includes benefit from unlocking which increased operating income by $12.5 million and operating income per common share - assuming dilution by $0.20 per share. | ||||
(d) | The year ended December 31, 2011, includes an adjustment recorded in the first quarter of 2011 to single premium immediate annuity reserves which reduced interest sensitive and index product benefits by $4.2 million, increased net income and operating income by $2.7 million and increased earnings per common share - assuming dilution and operating income per common share - assuming dilution by $0.04 per share. | |||
(e) | The estimated annual effective tax rate applied to operating income for the first nine months of 2012 was 35.3%. The actual final rate for the year was 34.3%. Because the lower rate was applied retroactively to all 2012 income, income tax expense in the fourth quarter of 2012 was reduced by $1.3 million ($0.02 per share) for the portion of the year prior to the fourth quarter. | |||
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 by average equity excluding average accumulated other comprehensive income ("AOCI").
Year Ended December 31, | ||||||||||
2012 | 2011 | |||||||||
Average Stockholders' Equity 1 | ||||||||||
Average equity including average AOCI | $ | 1,564,458 | $ | 1,173,363 | ||||||
Average AOCI | (572,018 | ) | (269,525 | ) | ||||||
Average equity excluding average AOCI | $ | 992,440 | $ | 903,838 | ||||||
Return on Average Equity Excluding Average AOCI | ||||||||||
Net income | 5.82 | % | 9.54 | % | ||||||
Operating income | 11.10 | % | 14.79 | % | ||||||
1 - simple average based on stockholders' equity at beginning and end of each period
Source:
American Equity Investment Life Holding Company
John M.
Matovina, 515-457-1813
Chief Executive Officer
jmatovina@american-equity.com
or
Ted
M. Johnson, 515-457-1980
Chief Financial Officer
tjohnson@american-equity.com
or
Debra
J. Richardson, 515-273-3551
Chief Administrative Officer
drichardson@american-equity.com
or
Julie
L. LaFollette, 515-273-3602
Director of Investor Relations
jlafollette@american-equity.com