Business Wire | Aug 5, 2020 04:16PM EDT

American Equity Reports Second Quarter 2020 Results

Aug. 05, 2020

WEST DES MOINES, Iowa--(BUSINESS WIRE)--Aug. 05, 2020--American Equity Investment Life Holding Company (NYSE: AEL), a leading issuer of fixed index annuities (FIAs) today reported second quarter 2020 net loss available to common stockholders of $253.4 million, or $(2.76) per diluted common share, compared to net income available to common stockholders of $18.6 million, or $0.20 per diluted common share, for second quarter 2019.

Non-GAAP operating income1 available to common stockholders for the second quarter 2020 was $93.1 million, or $1.01 per diluted common share, compared to non-GAAP operating income1 available to common stockholders of $99.6 million, or $1.09 per diluted common share, for second quarter 2019. On a trailing twelve-month basis, non-GAAP operating return1 on average common stockholders' equity excluding average AOCI1 was 23.8% based on reported results and 19.4% excluding the impact of annual actuarial revisions in the third quarter of 2019. 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 were attributable to lower investment spread income and a greater increase in the liability for future benefits to be paid for lifetime income benefit riders, partially offset by a decline in deferred acquisition cost and deferred sales inducement amortization. While the amortization of deferred acquisition costs and deferred sales inducements was consistent with the actuarial revisions made in the third quarter of 2019, the increase in the liability for lifetime income benefit riders was higher, primarily due to the relatively low level of index credits, renewal rate management activity, and somewhat higher lifetime income benefit rider utilization - reflecting the original quarterly sales patterns in certain cohorts.

INVESTMENT SPREAD DECREASES SEQUENTIALLY ON LOWER YIELD ON INVESTED ASSETS

American Equity's investment spread was 2.39% for the second quarter of 2020 compared to 2.64% for the first quarter of 2020 and 2.63% for the second quarter of 2019. On a sequential basis, the average yield on invested assets decreased by 24 basis points while the cost of money increased by 1 basis point.

Average yield on invested assets was 4.12% in the second quarter of 2020 compared to 4.36% in the first 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, retention of a higher level of liquidity in the investment portfolios of the life insurance companies, mark to market losses on investment partnerships, and lower prepayment and bond fee income. The average yield on invested assets excluding non-trendable items was 4.17% in the second quarter of 2020 compared to 4.30% in the first quarter of 2020. In our analysis of trendable yield this 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 1.73% in the second quarter of 2020 was up 1 basis point from 1.72% in the first quarter of 2020. The cost of money in the second quarter was negatively affected by 1 basis point of hedging loss driven by minimal over-hedging gains and the 2 basis point cost of an index credit macro-hedge compared to 5 basis points of gains from the over-hedging of index-linked credits in the first quarter.

POLICYHOLDER FUNDS UNDER MANAGEMENT RELATIVELY FLAT ON $559 MILLION OF SALES

Policyholder funds under management at June 30, 2020 were $53.1 billion, a $203 million, or 0.4% decrease from March 31, 2020. Second quarter gross and net sales were $559 million and $553 million, respectively, representing decreases of 63% and 61% from second quarter 2019 sales. On a sequential basis, gross and net sales decreased 21% and 20%, respectively. Compared to the first quarter of 2020, gross sales at American Equity Life and Eagle Life declined 18% and 34%, respectively.

Commenting on sales, Anant Bhalla, Chief Executive Officer, said: "Given the prudence of limiting face to face meetings and increased social distancing to limit the spread of COVID-19, sales pipelines for us and for our industry have slowed. We are using this time of slower new business activity to identify where we need to retool and modernize our company and to embark on the reinvigoration of our strategic focus to dominate the retail annuity businesses in which we participate. As a first step in this direction, in late June, American Equity Life launched the Destinations 9 & 10 fixed index annuity, which includes the Destinations index we co-developed and co-branded with Bank of America, to the independent agent channel. This is a rules-based, multi-asset sector index strategy that combines three well established, transparent assets - low volatility S&P500 equities, 10-year US treasury bonds and gold using two time-tested investment principles - risk parity and momentum. While sales activity may remain subdued until the COVID-19 situation improves or new ways of engaging in new business activity emerge, we believe this and other product refresh plans over the coming few months will lay the groundwork for sustained sales success in 2021."

Commenting further, Bhalla said: "During the quarter, we implemented a decision to move entirely to an employee wholesaler model at Eagle Life for both the bank and broker-dealer channels. With some new talent hires made and more expected over the coming few months, we expect 2021 to be the first year of meaningful sales growth at Eagle Life and pave the way for it to be as impactful for us in the future as is the independent agent channel today."

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 2020 earnings on Thursday, August 6, 2020 at 10:00 a.m. CT. 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 855-865-0606, passcode 1372736 (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 August 13, 2020 at 855-859-2056, passcode 1372736 (international callers will need to dial 404-537-3406).

ABOUT AMERICAN EQUITY

American Equity Investment Life Holding Company, through its wholly-owned subsidiaries, is a leading issuer of fixed index annuities through independent agents, banks and broker-dealers. American Equity Investment Life Holding Company, a New York Stock Exchange listed company (NYSE: AEL), is headquartered in West Des Moines, Iowa. For more information, please visit www.american-equity.com.

1 Use of non-GAAP financial measures is discussed in this release in the tables that follow the text of the release.

American Equity Investment Life Holding Company Unaudited (Dollars in thousands, except per share data)

Consolidated Statements of Operations

Three Months Ended Six Months Ended June 30, June 30,

2020 2019 2020 2019

Revenues:

Premiums and other $ 11,032 $ 4,126 $ 18,696 $ 9,536 considerations

Annuity product charges 63,438 60,700 122,987 113,666

Net investment income 543,704 570,568 1,117,022 1,129,006

Change in fair value of 327,662 76,045 (614,212 ) 460,514 derivatives

Net realized gains (25,888 ) (3,832 ) (46,224 ) (4,395 )(losses) on investments

Other than temporaryimpairment (OTTI) losses on investments:

Total OTTI losses - (998 ) - (998 )

Portion of OTTI lossesrecognized from other - (215 ) - (215 )comprehensive income

Net OTTI losses - (1,213 ) - (1,213 )recognized in operations

Loss on extinguishment - - (2,024 ) - of debt

Total revenues 919,948 706,394 596,245 1,707,114



Benefits and expenses:

Insurance policybenefits and change in 13,331 6,939 23,403 16,238 future policy benefits

Interest sensitive and 240,992 251,103 641,211 387,777 index product benefits

Amortization of deferred (75,178 ) 19,785 (1,587 ) 53,094 sales inducements

Change in fair value of 1,126,935 327,562 (123,126 ) 1,093,885 embedded derivatives

Interest expense on 6,388 6,380 12,773 12,759 notes payable

Interest expense on 1,321 4,057 2,909 8,145 subordinated debentures

Amortization of deferred (119,889 ) 29,946 813 75,078 policy acquisition costs

Other operating costs 41,951 37,426 85,577 76,405 and expenses

Total benefits and 1,235,851 683,198 641,973 1,723,381 expenses

Income (loss) before (315,903 ) 23,196 (45,728 ) (16,267 )income taxes

Income tax expense (68,474 ) 4,606 (41,246 ) (4,847 )(benefit)

Net income (loss) (247,429 ) 18,590 (4,482 ) (11,420 )

Less: Preferred stock 5,950 - 12,561 - dividends

Net income (loss)available to common $ (253,379 ) $ 18,590 $ (17,043 ) $ (11,420 )stockholders



Earnings (loss) per $ (2.76 ) $ 0.20 $ (0.19 ) $ (0.13 )common share

Earnings (loss) percommon share - assuming $ (2.76 ) $ 0.20 $ (0.19 ) $ (0.13 )dilution



Weighted average commonshares outstanding (in thousands):

Earnings (loss) per 91,803 91,103 91,724 90,994 common share

Earnings (loss) percommon share - assuming 92,027 91,785 92,024 91,765 dilution

American Equity Investment Life Holding Company Unaudited (Dollars in thousands, except per share data)

NON-GAAP FINANCIAL MEASURES

In addition to net income (loss) available to common stockholders, we have consistently utilized non-GAAP operating income available to common stockholders and non-GAAP operating income 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 available to common stockholders equals net income (loss) 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 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 available to common stockholders together with net income (loss) available to common stockholders provides information that may enhance an investor's understanding of our underlying results and profitability.

Reconciliation from Net Income (Loss) Available to Common Stockholders toNon-GAAP Operating Income Available to Common Stockholders

Three Months Ended Six Months Ended June 30, June 30,

2020 2019 2020 2019

Net income (loss)available to common $ (253,379 ) $ 18,590 $ (17,043 ) $ (11,420 )stockholders

Adjustments to arrive atnon-GAAP operating income available tocommon stockholders: (a)

Net realized gains/losses on financial 18,492 2,625 34,841 2,930 assets, including creditlosses

Change in fair value ofderivatives and embedded 423,590 99,868 303,136 250,812 derivatives - fixedindex annuities

Change in fair value ofderivatives - interest - 854 (848 ) 1,490 rate caps and swap

Income taxes (95,599 ) (22,346 ) (72,897 ) (54,819 )

Non-GAAP operatingincome available to $ 93,104 $ 99,591 $ 247,189 $ 188,993 common stockholders



Per common share - assuming dilution:

Net income (loss)available to common $ (2.76 ) $ 0.20 $ (0.19 ) $ (0.13 )stockholders

Adjustments to arrive atnon-GAAP operating income available tocommon stockholders:

Anti-dilutive effect of 0.01 - - 0.01 net loss

Net realized gains/losses on financial 0.20 0.03 0.38 0.03 assets, including creditlosses

Change in fair value ofderivatives and embedded 4.60 1.09 3.30 2.73 derivatives - fixedindex annuities

Change in fair value ofderivatives - interest - 0.01 (0.01 ) 0.02 rate caps and swap

Income taxes (1.04 ) (0.24 ) (0.79 ) (0.60 )

Non-GAAP operatingincome available to $ 1.01 $ 1.09 $ 2.69 $ 2.06 common stockholders

Adjustments to net income (loss) available to common stockholders to(a) arrive at non-GAAP operating income 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 (loss) 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

June 30, 2020

Average Common Stockholders' Equity Excluding Average AOCI

Average total stockholders' equity $ 4,279,767

Average equity available to preferred stockholders (350,000 )

Average AOCI (1,384,912 )

Average common stockholders' equity excluding average AOCI $ 2,544,855



Net income available to common stockholders $ 240,467

Non-GAAP operating income available to common stockholders $ 606,379



Return on Average Common Stockholders' Equity Excluding Average AOCI

Net income available to common stockholders 9.45 %

Non-GAAP operating income available to common stockholders 23.83 %

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CONTACT: Steven Schwartz | Head of Investor Relations American Equity Investment Life Holding Company(r) 515-273-3763 | sschwartz@american-equity.com