American Equity Reports First Quarter 2020 Results

2020 MAY 15 (NewsRx) -- By a News Reporter-Staff News Editor at CDC & FDA Daily -- During the first quarter of 2020, American Equity Investment Life Holding Company (NYSE: AEL), a leading issuer of fixed index annuities (FIAs), shifted quickly and effectively to respond to the COVID-19 global pandemic while keeping its employees safe and maintaining its industry leading service.

“I couldn’t be prouder of our leadership team and employees in their response to these unprecedented times,” said Anant Bhalla, Chief Executive Officer. “In March, we moved decisively to first protect our employees and business partners and to pivot our operating platform to continue to provide FIA industry leading levels of service for clients and producers in a prolonged work from home environment. In parallel, we fortressed the life insurance company balance sheets with $1.3 billion of liquidity as of March 31st and a pro forma 396% RBC ratio after reflecting a $200 million capital contribution from the holding company earlier this month.”

American Equity reported first quarter 2020 net income available to common stockholders of $236.3 million, or $2.57 per diluted common share, compared to net loss available to common stockholders of $30.0 million, or $0.33 per diluted common share, for first quarter 2019.

Non-GAAP operating income1 available to common stockholders for the first quarter 2020 was $154.1 million, or $1.67 per diluted common share, compared to non-GAAP operating income1 available to common stockholders of $89.4 million, or $0.97 per diluted common share, for first quarter 2019. On a trailing twelve-month basis, non-GAAP operating return1 on average common stockholders’ equity excluding average AOCI1 was 23.0% based on reported results and 18.8% excluding the impact of annual actuarial revisions in the third quarter of 2019.

The year-over-year increases in quarterly non-GAAP operating income1 available to common stockholders and non-GAAP operating income1 per share available to common stockholders were attributable to lower amortization of deferred policy acquisition costs and deferred sales inducements and an increase in investment spread which benefited from active in-force crediting rate management and non-trendable investment spread items. The benefit from these items was partially offset by a greater increase in the liability for future benefits to be paid for lifetime income benefit riders. The decline in deferred acquisition cost and deferred sales inducement amortization and the increase in the liability for lifetime income benefit riders is consistent with the actuarial revisions made in the third quarter of 2019 and reflect actual experience during the first quarter of 2020. In addition, the company recognized a $31 million, or $0.33 per diluted share, tax benefit in the first quarter of 2020 from tax loss carry back to prior years under the newly enacted CARES Act. INVESTMENT SPREAD DECREASES SEQUENTIALLY ON LOWER YIELD ON INVESTED ASSETS American Equity’s investment spread was 2.64% for the first quarter of 2020 compared to 2.77% for the fourth quarter of 2019 and 2.58% for the first quarter of 2019. On a sequential basis, the average yield on invested assets decreased by 16 basis points while the cost of money fell by 3 basis points.

Average yield on invested assets was 4.36% in the first quarter of 2020 compared to 4.52% in the fourth quarter of 2019. The average yield on invested assets excluding non-trendable items was 4.30% in the first quarter of 2020 compared to 4.39% in the fourth quarter of 2019. The decrease in investment yield was primarily driven by the decline in short term yields on floating rate instruments in the investment portfolio, yields on new money investments, and retention of a higher level of liquidity in the investment portfolios of the life insurance companies.

The aggregate cost of money for annuity liabilities of 1.72% in the first quarter of 2020 was down 3 basis points from 1.75% in the fourth quarter of 2019. The cost of money benefited by 5 basis points from the over hedging of index-linked interest obligations in both quarters.

Commenting on investment spread, Bhalla said: “Excluding non-trendable investment spread items, on a sequential basis, investment yield and investment spread decreased by 9 and 6 basis points respectively. We are actively managing spread to offset lower investment income and increased cost of money. Option costs were flat in the first quarter as the rise in costs of certain options due to the increase in the market implied volatility that was witnessed in March offset the actions we took beginning in January to reduce caps and fixed crediting rates on $29.7 billion of policyholder funds under management in light of declining portfolio yields. Due to the continued elevated levels of market implied volatility since March, which impacts the cost of buying options for certain index strategies, we will begin reducing renewal participation rates on $4.3 billion of policyholder funds starting June 1. We intend to be financially prudent and disciplined in managing in-force and new money cost, while staying true to our core beliefs in always doing the right thing by our clients and producers. Therefore, if market implied volatility levels were to fall back to February levels, we could begin to unwind some of these rate actions in the future.” POLICYHOLDER FUNDS UNDER MANAGEMENT RELATIVELY FLAT ON $705 MILLION OF SALES Policyholder funds under management at March 31, 2020 were $53.3 billion, an $82 million, or 0.2% increase from December 31, 2019. First quarter gross and net sales were $705 million and $687 million, respectively, representing decreases of 43% and 42% from first quarter 2019 sales. On a sequential basis, gross and net sales decreased 23% and 19%, respectively. Compared to the fourth quarter of 2019, gross sales at American Equity Life and Eagle Life declined 23% and 26%, respectively.

Commenting on sales, Bhalla said: “Entering the quarter, we were not the most competitive in either the accumulation or income markets, primarily driven by some competitors who in our view were being aggressive in order to gain market share. With the recent market events, these competitors have lowered their rates to more sustainable levels for them, thereby having bridged the competitive gap in our favor. Our S&P 500 Dividend Aristocrats DRC 5% Excess Return strategies now illustrate particularly well.

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