American Equity’s Fourth-Quarter Profit Rises Despite Being Under-Hedged
February 18, 2014 by Fran Matso Lysiak
WEST DES MOINES, Iowa – American Equity Investment Life Holding Co.’s fourth-quarter net income rose but an under-hedged outcome in the final quarter of 2013 was partly magnified by strong equity market returns, according to the company’s chief executive officer.
The Iowa-based American Equity is a top underwriter and seller of indexed and fixed annuities in the United States.
Fourth-quarter net income jumped 40.2% to nearly $51 million. Profit, however, included $4.2 million in expenses from recognizing an increase in an estimated class-action litigation reserve based on developments in the claim process for settling the litigation and third-party costs.
The quarter’s net income and non-GAAP operating income included $4.7 million in surrender charges deducted from the California policyholders surrendering their policies as a condition of receiving certain benefits in settling the national class-action lawsuit. This impact, after related adjustments and income taxes, boosted net income by $1.9 million, American Equity said.
Full-year net income for American Equity (NYSE: AEL) increased sharply to $253.3 million from $57.8 million in 2012.
American Equity Investment Life, a unit of American Equity Investment Life Holding Co., was third in total third-quarter 2013 sales of indexed annuities in the United States, with sales of $1 billion, according to Wink Inc. (Best’s News Service, Nov. 21, 2013)
American Equity’s investment spread of 2.73% in the fourth quarter decreased slightly from 2.8% in the third quarter as spread performance was impacted by the average yield on invested assets, which declined 0.05% when compared to the third quarter due to the investment of new premiums and portfolio cash flows at rates below the portfolio rate.
“In today’s low rate environment, we expect the portfolio yield to be under pressure from lower reinvestment rates and have been reducing crediting rates as appropriate to manage our investment spread,” said John Matovina, chief executive officer and president in a statement. However, in the fourth quarter, the company’s hedging results negated the benefit obtained from reducing crediting rates, he said.
“As we caution regularly, our challenge with hedging index-linked interest for our fixed index annuities is estimating policyholder behavior in order to match the volume of hedges to the policy obligations,” Matovina said.
“2013 was a year during which we delivered 14% growth in assets under management, sustained a double-digit return on average equity, and increased the cushion to our targeted regulatory capital ratio,” said David J. Noble, founder and executive chairman, in a statement.
Total revenues for 2013 increased to $2.6 billion from $1.6 billion.
“We believe the investment spread will expand in 2014. AEL continues to have several ways to address investment spread compression,” wrote equity analysts with Sandler O’Neill, in a research note. “AEL has the ability to lower crediting rates to their policy minimums. Given sales trends in recent years, we expect that more policies will be reset in the second quarter than in the first quarter, so investment spread expansion should gain momentum in the second half of the year.”
At end of trading Feb. 14, American Equity Investment Life Holding Co.’s stock was at $20.56 a share, up 0.64% from the previous close.
American Equity Investment Life Insurance Co. currently has a Best’s Financial Strength Rating of A- (Excellent).
(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)