American Equity Reports Fourth Quarter and Full Year 2016 Results

Investment Weekly News

By a News Reporter-Staff News Editor at Investment Weekly News -- American Equity Investment Life Holding Company (NYSE: AEL), a leading issuer of fixed index annuities, reported fourth quarter 2016 net income of $120.8 million, or $1.35 per diluted common share, compared to net income of $33.8 million, or $0.40 per diluted common share, for fourth quarter 2015. For the year ended December 31, 2016, net income was $83.2 million, or $0.97 per diluted common share, compared to $219.8 million, or $2.72 per diluted common share, for the year ended December 31, 2015.

Non-GAAP operating income1 for the fourth quarter of 2016 was $56.0 million, or $0.63 per diluted common share, compared to non-GAAP operating income1 of $50.1 million, or $0.60 per diluted common share, for fourth quarter 2015. For the year ended December 31, 2016, non-GAAP operating income1 was $122.3 million, or $1.43 per diluted common share, compared to $195.8 million, or $2.42 per diluted common share, for the year ended December 31, 2015.

Fourth quarter 2016 operating expenses benefited from a $2.3 million reduction in an accrual for potential guarantee fund assessments. On an after tax basis, both net income and non-GAAP operating income1 benefited by approximately $1.5 million, or $0.02 per share, for this item. POLICYHOLDER FUNDS UNDER MANAGEMENT UP 1.7% ON $1.4 BILLION OF SALES Policyholder funds under management at December 31, 2016 were $45.2 billion, a $743 million or 1.7% increase from the end of the third quarter. Fourth quarter sales were $1.4 billion before coinsurance ceded and $1.1 billion after coinsurance ceded. Gross sales and net sales for the quarter were down substantially from the record quarterly sales posted in fourth quarter of 2015. On a sequential basis, gross sales were down 10% with net sales flat.

Commenting on sales, John Matovina, Chief Executive Officer and President, said: "While we are proud to report record full year sales of $7.1 billion for 2016, slightly surpassing our previous record set in 2015, we acknowledge that the new record was achieved on the strength of strong sales in the first half of the year and an abnormally high volume of sales from multi-year rate guaranteed annuity (MYGA) products. Although our gross sales continued to slow in the fourth quarter of 2016, our net sales were essentially flat on a sequential basis and we grew invested assets and policyholder funds under management. Total sales by independent agents for American Equity Investment Life Insurance Company (American Equity Life) declined 1% sequentially while total sales by broker-dealers and banks for Eagle Life declined by $138 million or 40% sequentially. Sales of fixed index annuities (FIAs) were down 5.5% sequentially to $1.2 billion with all of the decrease attributable to reduced sales for Eagle Life."

Commenting on the competitive environment, Matovina added: "Competition in both of our distribution channels has been escalating and we've seen rates from several of our competitors that are appreciably above where they were a year ago, even though investment yields are only modestly higher than a year ago. We also suspect that actions to conform to the pending Department of Labor (DOL) conflict of interest fiduciary rule may be distracting from marketing activities and playing a role in lower sales. In some cases, registered representatives may be positioning money away from annuities and into managed money in anticipation of the fiduciary rule. While the ability to counteract the DOL fiduciary rule behavior is outside of our control, we regularly evaluate our product terms and positioning and have several initiatives in development that will make us more competitive and may be introduced to the market during the next 90 -120 days."

Matovina continued: "The outlook for FIA sales for 2017 remains favorable driven by well understood demographic factors and the potential for further increases in interest rates. However, sales of FIAs by independent agents may come under pressure later this year if the DOL fiduciary rule is not delayed or overturned through litigation. While the DOL's recently proposed Best Interest Contract Exemption for Insurance Intermediaries (the IMO Exemption) could facilitate continued sales of FIAs subject to the fiduciary rule by independent insurance agents, we believe the proposed requirements may arbitrarily and unnecessarily prevent some highly qualified insurance intermediaries from obtaining Financial Institution status and even if the proposed exemption is finalized prior to April 2017, the eligible insurance intermediaries may not have sufficient time to meet the proposed requirements. Regardless of how this situation resolves itself, we will be introducing several traditional fixed rate annuities with a competitive lifetime income benefit rider to the market early next month. We believe these products offer safety of principal and guaranteed lifetime income desired by retirement account holders, while qualifying for distribution under the less onerous PTE 84-24 exemption." INVESTMENT SPREAD STABILIZES AS CASH BALANCE NORMALIZES American Equity's investment spread was 2.62% for the fourth quarter of 2016 compared to 2.57% for the third quarter of 2016 and 2.67% for the fourth quarter of 2015. On a sequential basis, the average yield on invested assets increased approximately one basis point while the cost of money declined four basis points.

Average yield on invested assets continued to be unfavorably 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 fourth quarter of 2016 was 3.71% compared to 3.31%, 3.95% and 4.14%, respectively, in the third, second and first quarters of 2016. However, the unfavorable impact from new money investment yields was offset by fee income from bond transactions and prepayment income which added seven basis points to the fourth quarter average yield on invested assets compared to four basis points in the third quarter 2016 and a reduction in the average balance for cash and short-term investments. The average balance for cash and short-term investments was $307 million in the fourth quarter compared to $1.2 billion in the third quarter 2016.

The aggregate cost of money for annuity liabilities decreased by four basis points to 1.85% in the fourth quarter of 2016 compared to 1.89% in the third quarter of 2016. This decrease reflected continued reductions in crediting rates. The benefit from over hedging the obligations for index linked interest was two basis points for both the fourth and third quarters of 2016.

Keywords for this news article include: Finance and Investment, Investment and Finance, American Equity Investment Life Holding Company.