American Equity Investment Life Holding Co (AEL) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to American Equity Investment Life Holding Company's First-Quarter 2015 Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Julie LaFollette, Director of Investor Relations. You have the floor.

Good morning and welcome to American Equity Investment Life Holding Company's conference call to discuss first-quarter 2015 earnings. Our earnings release and financial supplement can be found on our website at www.american-equity.com.

Presenting on today's call are John Matovina, Chief Executive Officer; Ted Johnson, Chief Financial Officer; and Ron Grensteiner, President of the Life Company.

Some of the comments made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. There are a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied. Factors that could cause the actual results to differ materially are discussed in detail in our most recent filings with the SEC.

An audio replay will be available on our website shortly after today's call. It is now my pleasure to introduce John Matovina.

Thank you, Julie, and good morning everyone. Thank you for joining us this morning.

2015 is off to a great start and indications are this will be the year that our sales break out of that $3.9 billion to $4 billion range they've been in for the last three years.

Our first-quarter sales of $1.3 billion were up 43% from the prior year first-quarter and position us for much higher sales in 2015 than last year. And those first-quarter sales include $122 million from Eagle Life, which surpassed the total sales that Eagle Life had in all of 2014. Ron's remarks will have more details on the sales results and the more favorable competitive environment that contributed to those results.

So in addition to our sales growth in the quarter, we also generated a 32% increase in our operating earnings per share, which were $0.62 per share compared to $0.47 per share a year ago.

On a sequential basis, first-quarter operating earnings were $0.01 less than the $0.63 per share we reported for the fourth quarter of 2014, but $0.04 higher than our estimate of normalized operating earnings last quarter. And you may recall that the fourth quarter operating earnings benefited from some nontrendable bond fee income and we estimated normalized operating earnings were about $0.58 per share.

On a trailing 12 month basis, our operating earnings represent an ROE of 14.66%.

So, now let me turn the call over to Ted for more detailed comments on first-quarter financial results.

Thank you, John.

Our operating income of $48.8 million for the first quarter of 2015 was 30% higher than the first quarter 2014's operating income of $37.5 million. And a small reduction in the diluted share count created the slightly higher percentage increase in the per share results that John just mentioned.

Investment spread for the first quarter was 277 basis points compared to 292 basis points last quarter and 277 basis points for the first quarter of 2014. Spread performance was impacted by average yield on investment, which decreased 21 basis points to 4.74% this quarter from 4.95% last quarter.

More than half of this decrease was due to make-whole consent fees from several bond calls, which together with certain pre-payment income, added 13 basis points to the fourth quarter 2014 average yield on invested assets, compared to just one basis point for such items in the first quarter of 2015.

Adjusting for the effect of these nontrendable items, the average yield on invested assets for the quarter fell by nine basis points from the prior quarter as new premiums and portfolio cash flows were invested at rates below the portfolio rate.

The average yield on fixed-income securities purchased and commercial mortgage loans funded during the first quarter was 3.84%, compared to average yields ranging from 4.14% to 4.27% in the prior year quarter.

The aggregate cost of money for annuity liabilities was 1.97% in the first quarter, compared to [2.03%] in the fourth quarter. This decrease reflected continuing reductions in new money and renewal crediting rates. The benefit from our over-hedging was seven basis points in the first quarter and five basis points in the fourth quarter of last year.

We reduced our new money rates by approximately 20 basis points in early March. We follow industry practice when we implement new money rate decreases, which allows policy holders to receive the older rates for the first policy year for applications that are received prior to the effective date, but fund within a specified time period after the effective date.

So, our March business was a mixture of prior and current new money rates, but the rate decreases are fully operational after March.

We have actively managed our renewal rates for some time now and most of the renewal rate reductions that we initiated in 2014 have been implemented as of the end of the first quarter.

We are initiating additional reductions in 2015, including further adjustments to policies with previous adjustments and initial reductions for policies issued between early October 2011 and early December 2012.

A portion of the 2015 rate reductions occurred in first-quarter, but the majority will occur on policy anniversary dates over the next 15 months.

Our active management of renewal rates will continue should the low investment yields currently available to us persist. We continue to have flexibility in managing our cost of money and could achieve approximately a 55 basis point decrease in our cost of money from further reductions in renewal rates to guaranteed minimum rates.

Our risk-based capital ratio was 361% at the end of the first quarter. This is down from 372% at the end of the year. We remain comfortably above the 300% threshold for our rating from A.M. Best.

Now I will turn the call over to Ron to talk about sales and production.

Thank you, Ted. Good morning, everyone.

Our policy holders also enjoyed a great first-quarter. Fixed-index annuity policy holders with a policy anniversary in the first quarter earned an average annual index credit of 4.11%. The largest index credit was more than 12%.

Approximately 39% of the annual index credits in the first quarter were 5% or more and approximately 71% of the annual index credits were at least 3%.

This extends the string of better-than-average annual index credits, where the index credit was more than 4%, to 11 quarters. This really confirms the value proposition of our products by helping our FIA policy holders participate in stock market advances with low risk to their fund value. Offering upside potential to our policy holders with low risk and guaranteed income for life are what drives American Equity's success.

So, speaking to that success, in sales and production, sales for the first quarter were $1.32 billion compared to $1.15 billion in the fourth quarter of last year, and $921 million in the first quarter of 2014.

The year-over-year increase in first-quarter sales was 43%. As John mentioned, first-quarter sales included $122 million from Eagle Life and I'll talk more about that in a few minutes.

First-quarter sales benefited from several factors. It starts with the initiatives that we introduced last fall. If you'll remember, we introduced our volatility controlled index, gender-based pay-off factors and our lifetime income benefit rider and commission option U.

And all of these have helped us establish momentum into the first quarter, but really there were probably three key drivers for sales in the first quarter. First, our new business activity began to escalate in February, following our announcement that we were reducing new money rates effective March 3rd.

Our pending count entering March was at 3,800 cases compared to 3,000 cases at the beginning of February, and grew to 4,300 cases by the end of the first quarter.

Pending today is at 5,000. The peak pending count in April was just shy of 5,200 on April 16th. Our pending count one year ago today was about 3,000. So, we're roughly 67% higher than we were a year ago.

The most significant development in the quarter was the withdrawal of a competitor's guaranteed income product. This product has been the source of significant competition and was the second-best selling fixed-index annuity product in the fourth quarter of last year.

It was distributed by a single national marketing organization that has been one of our top five national marketing organizations for several years.

Our lifetime income benefit rider is quite competitive, and hence, we would expect to be a significant beneficiary of the sales that formerly went to the product that was withdrawn.

The marketing organization that distributed the product essentially told their producers that American Equity was the new go-to company for guaranteed income. And as a result, this marketing company is now our top marketing company for the first time and represents 15.5% of our first-quarter sales. In previous years, our top marketing companies were responsible from 10% to 13% of our sales on an annual basis.

Finally, we started off the year with an incentive tied to our Gold Eagle program. Historically, we introduce incentive programs in March or April. This year we really wanted to send a message to our producers that we want to grow our business in 2015, so, we started it in January. And the incentive basically doubles the cash component of our Gold Eagle program, provided they become a Gold Eagle member by the end of May.

Speaking of the Gold Eagle program, our numbers are up here as well. Through the first quarter, we have 1,200 producers qualified or are on time to qualify for the program. That is 31% higher compared to the first quarter of 2014.

An astonishing fact is that this group is responsible for 76% of our first-quarter production. For 2014, our Gold Eagles were responsible for 65% of our total production, an all-time high. It's still too early in the year to see if that 76% will hold, but it is proof that focusing our efforts on our most loyal and highest producers is more effective than spreading ourselves to serve the entire field force.

New agent recruitment was also up in the first quarter, 2,382 new agents came onboard, compared to 1,326 in the fourth quarter of last year. That's an 80% increase. In 2014, we averaged about 1,500 new agents per quarter.

We really had a great Gold Eagle Producer Forum in March. We have two important events each year where we have the opportunity to see and build relationships with our top producers, our convention in the fall and the Gold Eagle Producer Forum in March.

We had 310 producers in attendance and 37 marketing company representatives. Members of our Chairman's Club shared their successful business strategies and we also had some outside speakers. And, of course, American Equity has an opportunity to get some of our commercials in.

We heard over and over this is one of our best programs yet. And our goal is to retain 70% of the producer attendees as Gold Eagles in 2015. Our retention rate from last year's event was 65%.

Turning to Eagle Life, we had $122 million in the first quarter of this year, compared to $120.5 million for the full-year of 2014. The product mix was roughly 50% FIA business and 50% MYGA business. We did have a MYGA rate special for much of the first quarter and those sales have withered since the rate special ended the end of February.

However, our objective was to use the rate special to establish relationships with two significant financial institutions that we hoped would subsequently begin promoting our FIA products. In our judgment, this effort was successful in that we began receiving FIA sales from one institution in mid-April and we are optimistic that the other relationship will follow with FIA sales as well.

Most of Eagle's first-quarter FIA business did come from a broker-dealer relationship that we have been developing for several years. We are also in the early stages of forming two new wholesaler relationships that have had very good connections with broker-dealers and financial institutions who currently don't have selling agreements with Eagle Life. So, we hope to have more positive news to share with you in the next quarterly call.

And with that, I will turn the call back over to John.

Thank you, Ron and Ted.

Before I make some comments about our thoughts on the outlook for American Equity, I'll make a few comments about the Department of Labor's proposed fiduciary regulation rule. And while it's still very early in the process and too early to speculate on what a final rule might look like, American Equity expects that it will able to adapt to any changes that might be forthcoming in a final rule if one is adopted.

Now because we sell insurance products and not securities products, many aspects of the proposed rule are not applicable to us. Our business has a history of regulation and we have been adapting to changes in the regulatory framework, particularly those regulations involving sales practices, for many years. We see no reason why we will not be able to continue to adapt if required to do so under a new DOL rule.

And thinking bigger picture, the fixed-index annuity products we sell are attractive products that meet the retirement savings and retirement income needs of Americans. We offer principle protection and guaranteed lifetime income that cannot be found in the other products that would come under the proposed rules.

I suppose you can detect the enthusiasm in our voices this morning. We're excited about the outlook for the remainder of this year for American Equity. Certainly while low interest rates remain a headwind to our spread management, we remain proactive in managing our liability rates and naturally our job, though, would be less challenging there if we had some higher rates.

As we said earlier, our annual sales the past three years range from $3.9 billion to $4.2 billion and that was because we remained disciplined in our product terms and pricing and were unwilling to pursue market share at the expense of profitability.

But based on current indications, as you heard from Ron, our patience and discipline in the past three years are being rewarded with higher sales in 2015 and a competitive environment in the independent agent distribution channel is favorable to us, more favorable than it's been in several years.

Certainly competition can surface at any time, but we're not presently aware of any new competitive threats. And in addition to the rosy outlook we have for independent agent distribution, we all at American Equity share Ron's enthusiasm for Eagle Life's prospects.

Now, one natural question when sales are accelerating is do you have the operational capacity handle the higher volume? And the answer is clearly yes. We have handled higher volumes in the past and our 425 plus employees have been up to the task in 2015. They continue to deliver best in class service to our policy holders and independent agents each and every day and I'm confident they will continue to shine in the months and the years ahead.

The second natural question when sales are accelerating is do you have the capital to support the higher sales? And again, the answer is yes. As we said earlier, our risk-based capital ratio was at 361%, comfortably above the 300% threshold for our A.M. Best rating.

Our current capital projections show that our risk-based capital ratio would only be slightly below the 300% threshold at the end of a third projection year if our sales were $6 billion in the first year of the projection period and increased 10% per year in projection years two and three.

However, as we've said on previous occasions as well, we're also looking for a ratings upgrade from Standard & Poors and that is likely to move the bar higher to something in the 325% to 350% range based upon S&P's capital model and ratings criteria.

So, while there's no immediate need for additional capital, should sales growth continue to accelerate to levels that cannot be supported by internal capital generation, we would intend to obtain capital from external sources to facilitate such growth.

That completes our prepared remarks. We'd be happy to entertain any questions.

(Operator Instructions).

Mark Hughes, SunTrust.

You had referred to your, had talked about normalized earnings last quarter a $0.58 number. Is there some reason not to think that $0.62 is a decent normalized number?

The normalization in Q4 was the high level of bond pre-payment income which was not present in Q1 2015.

So, you benefitted from a little over-hedging perhaps? But other than that, nothing unusual.

Right.

The Eagle Life, the $122 million in sales, roughly 10% of your total, what was the distribution, or how many organizations accounted for that? I think you mentioned the important broker-dealer relationship. Is that largely just one or two relationships that are accounting for that? And then how meaningful could this other institution be that started to send you business in mid-April?

This is Ron. Of that Eagle Life business, there was two significant banks that were responsible for nearly all of the MYGA business and MYGA business was half, roughly, of that $120 some million.

And then the broker-dealer, the significant broker-dealer that we have was responsible for the vast majority, if not all, of that FIA business, which is the other half of that production in the first quarter.

The new relationships that are coming on, we're very excited about. We have a new wholesaler that has a very good reputation with some pretty significant institutions, more in the life insurance side, but they have plenty of annuity experience and FIA experience, and that's the best part is that they like FIAs more than MYGAs.

So, we're excited about that relationship. And the other wholesaler has existing relationships with a significant bank that we hope to get rolling here in the second quarter and show some results in the second quarter. So, we're excited about Eagle Life's prospects, both for increased sales and broadening our distribution.

You had, in times past, given sort of annualized projections on Eagle Life. Any updated thoughts what that could be this year?

Probably no update. I think last comments, trying to remember what we did say, but $500 million is a number that comes to mind. And, of course, we were 25% of that in Q1, although some of that came from, or half of it came from the MYGA business which is not repeating, is not operational or coming in at this point in time. But $500 million still sounds like a pretty good number for this year.

On the DOL issue, just to refresh me, what percent of your sales are in qualified accounts, IRA accounts?

Low 70% ish. 70% last year, 71.5% first-quarter this year is in qualified type accounts.

You made a good case that your business model should be able to endure, but if fiduciary rules are required or if your NMOs have to be considered fiduciaries, what do you think that means to their business model? Is that possible and how challenging would that be for those organizations?

That's the first time in any conversations over the last week or two I've heard the NMOs brought up, Mark. But offhand, I guess I kind of see them out of the loop. They don't have any connection to the individual policy holders. I don't want to describe them as conduits, but perhaps, they're a wholesaler in between us and the writing agents.

I think they might adopt a business model that says, that provides assistance to the agents who are writing for them. Whatever compliance obligations they have going forward and, so they might distinguish themselves in the marketplace, is we're equipped. We can offer this service that another NMO might not be doing.

But I think in terms of their incurring incremental cost obligations, that's a little surprising to me off the top of my head.

How about the agents themselves? Maybe better phrased that way, if the agents have to act as fiduciaries, what does it mean for their business model?

It's just way too early to speculate on that. At least what I've seen of the rule, and the proposal, it's long on concepts and short on details. So, I just really wouldn't want to speculate on what the outcome is particularly since we're still a long ways away from the end of the comment period and whatever might emanate after that.

Final question on that, your level of compensation that you paid to those producing agents, is there any vulnerability there that you're, by some measures your commissions, at least what you pay up front, may look a little higher than others?

Again, you've got a regular proposal that's long on concepts and short on details and one of the big questions is what do they mean by reasonable compensation in the proposed rule. And nobody has that answer yet.

[Randy Binner], FBR Capital Markets.

This is Alex Combs on for Randy Binner.

First, if you could touch on the competitive environment that you said was pretty favorably at the beginning of March. Could you provide some additional color on competition here? I understand that Allianz is pulling back because of [Sultancy-2] pressure and Sec-Ben is sidelined for reserving reasons. Is this consistent with what you're hearing and seeing in the market?

Well, what we've seen so far is that many of our competitors seem to be adjusting their lifetime income benefit rider provisions, whether it's lower roll up rates or lower payout factors. Some companies are reducing commissions a bit. Some are reducing some of their premium bonuses.

So, we don't really see anybody being particularly aggressive in the first quarter or even today. It seems like they're more in hunker down phase. And this goes to John's comments, that he said today as well as in the press release, we've stuck to our pricing discipline the last several years and feel that our current pricing parameters are intact.

So, we don't feel compelled, at this point anyway, to make any changes. We think we're good. So, that makes us the company that is looking for the business and has some of the best policy features.

Ron commented Security Benefit withdrawing the product from the market is by far the, a big, big factor. And the comment from that distributor that American Equity is the go-to company for lifetime income is certainly playing out in our favor.

Right. Thanks, that's helpful. And are you seeing any competitors kind of fill the gap here, or is it wide open market share for you to grab?

That's a good question. I'd like to think it's based on what the other companies are doing. We seem to be the companies that are out looking for the business.

I just don't hear much from other companies, at least at this moment. They could be in their laboratories working up something good here in the second quarter, but we just haven't seen it.

And if we could just touch on the investments very quickly. In the past, we focused on a 280 basis point spread. But obviously with a challenging investment environment, do you think that that goal is still realistic for the year? And obviously you have some wiggle room on the guaranteed minimums, but how should we think about the spread going forward?

This is John. The comments that I made at the conclusion there about the low interest rate environment, our headwinds to spread, when we were talking about 280 last year, the investment team was investing money at that 414 to 425 range. And in Q1, we're at 384. So, there's pressure there and the ability to move rates that fast is, or to keep up with that, is challenging.

So, yet getting to the 280 at the moment with investing money at 385, is more challenging. And the ability, while we have lots of capacity to reduce rates, we're going to be prudent in doing that. We've got reputation to deal with too in terms of our policy holders. So, while rate adjustments will continue, they may not happen at a pace fast enough to deal with what's happening on the reinvestment side.

Fortunately, the new money side does look good in terms of what rates we're paying there. So, we don't see it necessarily any threat to the 280 in terms of where new money's at.

Steven Schwartz, Raymond James & Associates.

Did anybody ask, Ron, of the 5,000 pending that you have out there, how much of this is the old new money rate, do you know?

None.

This is John, Steven, there's none.

Oh, there's none. Okay.

I think Ted's comment said, in order to get the prior rate, the policies had to fund by the end of March. And Ted's comment was the new rates were fully operational now and they were fully operational on April 1st because, as I say, the rate lock or look back, those are kind of the industry terms on that, was for a four week period in the month of March.

Okay. And then, I'm assuming the NMO that's being referenced here is Advisor's Excel?

Yes.

Okay, they're big. I'm good. I just wanted to make sure I understood the pending thing. Thanks.

(Operator Instructions).

And it looks like those are all the questions that we have for today. So, I'd like to turn the call back over to Ms. LaFollette for closing remarks.

Thank you for your interest in American Equity and for participating in today's call. Should you have any follow-up questions, please feel free to contact us.

Ladies and gentleman, thank you again for your participation in today's conference. This now concludes the program and you may all disconnect your telephone lines. Everyone have a great day.