Apr 30, 2015
Executives
Julie LaFollette – Director-Investor Relations John Matovina – Chief Executive Officer Ted Johnson – Chief Financial Officer Ron Grensteiner – President-Life Company
Analysts
Mark Hughes – SunTrust Steven Schwartz – Raymond James
Operator
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.
Julie LaFollette
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 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.
John Matovina
Thank you, Julie. Good morning, everyone.
Thank you for joining this morning. 2015 is off to a great start and indications are, this will be the year that our sales breakout of that $3.9 billion to $4 billion range they’ve been in for the last three years.
Our first quarter sales $1.3 billion were up 43% from the prior year first quarter and position us for much higher sales in 2015 and last year. And those first quarter sales include a $122 million from Eagle Life, which surpassed the total sales that Eagle Life had in all 2014.
Ron’s remarks will have more details in the sales results and the more favorable competitive environment that contributed 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 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 estimated normalized operating earnings last quarter and you may recall that the fourth quarter operating earnings benefited from some non-trendable 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.
Ted Johnson
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 investments, which decreased 21 basis point 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 prepayment 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 non-trendable 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 security 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 quarters.
The aggregate cost of money for annuity liability 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 point 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 allow 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 reduction occurred in first quarter, but the majority will occur on policy anniversary dates over the next 15 month. Our active management of renewal rates will continue to the low in investment yields currently available to us persists.
We continue to have flexibility in managing our cost of money and could achieve approximately 55 basis point decrease in our cost of money, from further reductions in renewal rates to guarantee 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.
Ron Grensteiner
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% through 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 fun value, offering upside potential to our policy holders with low risk and guaranteed income for life are what drives the 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 is 43%.
As John mentioned first quarter sales included a $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 remember, we introduced our volatility controlled index, gender based payout factors, and our lifetime income benefit rider and commission option U, and all of these have helped us establish momentum in into the first quarter, but really there were probably three key drivers for sales in the first quarter. At first, our new business activity began to escalate in February, following our announcement that we were reducing new money rates effective March 3, 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 $5200 on April 16.
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 our competitors’ guaranteed income product. Now 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 formally went to product that was withdrawn.
The marketing organization that distributed the product essentially told their producers that American Equity was a 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 your Gold Eagle program.
Historically, we introduced 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 proved that focusing our efforts on our most loyal and highest producers is more excessive [ph] than spreading ourselves to serve the entire field course. New agent requirement was also up in the first quarter.
2,382 new agents came on board, 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 we have the opportunity to see and build relationships with our top producers, our convention in the fall and 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 a $120.5 million for the full year of 2014. The product mix was roughly 50% FIA business and 50% MIGA business, we did have a MIGA rate special for much of the first quarter and no sales have weathered since the rate special end at the end of February.
However, our objective was to use the rate special to establish relationships with few significant financial institutions that we hope would subsequently begin promoting our FIA products. In our judgment, this effort was successful and that we begin 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 have 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.
John Matovina
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 be able to adapt any changes that might be forthcoming in a final rule, if one is adopted. And 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’ll not be able to continue to adapt if required to do so under our 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 are for principal protection and guarantee life time income that cannot be found in the other products that we come under the proposed rules.
I suppose you can detect the enthusiasm in our voices this morning that we are excited about the outlook for the remainder of this year for American equity. So while low interest rates remain a headwind to our spread management, we remain pro active in managing our liability rates and naturally our job that would be less challenging there, if we have 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 remain disciplined in our product terms and pricing and we’re unwilling to pursue market share at the expense of profitability. But based on current indications as you heard from Ron, our patience [ph] discipline in the past three years are being rewarded with higher sales in 2015 and a competitive environment in the Independent Asian distribution channel is favorable to us, more favorable than it has banyan in several years.
Certainly competition can surface in 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 to 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 for 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 projection shows that our risk-based capital ratio would only be slightly below the 300% threshold at end of a third year projection – 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 said on previous occasions as well, we’re also looking for our ratings upgrade from Standard and Poor’s and that is likely to move the bar higher to something in the 325% to 350% range, based upon S&Ps capital model and ratings criteria.
So while there is 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
[Operator Instructions] Our first question for the day comes from the line of Mark Hughes from SunTrust. Your line is open.
Mark Hughes
Thank you very much, good morning.
John Matovina
Good morning, Mark.
Ted Johnson
Good morning.
Mark Hughes
You had referred to your – talk about normalized earnings last quarter is $0.58 number, is there some reason not to think that $0.62 is a decent normalized number?
Ted Johnson
Yes, I mean, the normalization in Q1 or Q4 was the high level of bond prepayment income, which was not present in Q1 2015.
Mark Hughes
Right, do you benefit from a little over hedging perhaps, but other than that nothing unusual?
Ted Johnson
Right.
Mark Hughes
The Eagle Life is $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’s started this is a new business in mid-April.
Ron Grensteiner
This is Ron. Of that Eagle Life business there was two significant banks that were responsible for nearly all of the MIGA business.
And MIGA business was half roughly of that $120 some million. And then the broker dealer, this is a 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 a life insurance side, but they have funny annuity experience and FIA experience – and that’s the best part of that they like FIA is more than MIGA’s. So we’re excited about that relationship.
And the other wholesaler has existing relationships with the 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.
Mark Hughes
In times past given certain annualized projects on Eagle Life, any updated thoughts that there could be this year?
John Matovina
Probably no update, I think, the last comment now I'm trying to remember what we did say, but $500 million in a number that comes to mind and of course we were 25% of that in Q1, although some of that came from the MIGA business or half of that came from MIGA 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.
Mark Hughes
Right. On the DLL [ph] issue, just to refresh me, what percent of your sales are in qualified account, IRA accounts?
Ted Johnson
Low 70%-ish, 70% last year, 71.5% first quarter of this year is in qualified type accounts, yes.
Mark Hughes
Right. What – and you made a good case that your business model should be able to endure but as fiduciary rules are required if you are in [indiscernible] or 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?
John Matovina
That’s the first time in any conversations over the last week or two, I’ve heard the in the most broader 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, they’re merely in that, I don’t want to described as can’t do it, perhaps there are wholesaler in between us and the writing agents.
Mark Hughes
Right. Yes.
John Matovina
So I think the kind of the – they might adopt the business model that says – that provides assistants to the agents who are writing for them.
Mark Hughes
[Indiscernible]
John Matovina
With whatever compliance obligations they have going forward and so they might distinguish themselves in the market places, we’re equipped, we can offer the service that another animal 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 head.
Mark Hughes
Right. How about the agents themselves maybe better phrase that way if the agents have to act as fiduciaries what is the mean for their business model.
John Matovina
It’s just way too early to speculate on that. At least what I’ve seen as 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 common period and whatever might M&A-ed to after that.
Mark Hughes
And then the final question on that, your level of the compensation that you paid to those producing agents, is there any vulnerability [ph] there, by some measures your commissions at least what you pay upfront, may look a little higher than others?
John Matovina
Again, you 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.
Mark Hughes
Right, okay. Thank you.
Operator
Thank you. Our next question are in the queue is from the line of Randy Binner from FBR Capital Markets.
Your line is open.
Unidentified Analyst
Hi guys, good morning. This is Alex [indiscernible] on for Randy Binner.
First if you could touch on the competitive environment that you said was pretty favorable beginning of March. Can you provide some additional color on competition here, it’s understating [indiscernible] just pointing back as [indiscernible] pressure and [indiscernible] is side lined for reserving reasons, is this consistent with what you’re hearing and seeing in the market?
Ron Grensteiner
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 pay out 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 there are more hunker down phase and it goes to John’s comments that he said today, and as well as in the press release, we’ve struck to our pricing discipline in the last several years and feel that our current pricing parameters are intact.
And so we don’t feel compelled that 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.
Unidentified Analyst
Yes, thanks. That’s helpful.
John Matovina
Ron, commented security benefit withdraw in the product from the market is by for 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.
Unidentified Analyst
Right. Okay thanks, that’s helpful.
And you seeing any competitors kind of fill the gap here, or is that wide open market share for your grab?
John Matovina
I’d like to think it’s based on what other companies are doing, we seem to be the company 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.
Unidentified Analyst
Okay, thanks. And then if we could just touch on the investments spread quickly, in the past we focused on 280 basis point spread, but obviously within challenging investment environment, do you think that goal is too realistic for the year?
And obviously you have some labor room on guaranteeing minimums but how should we think about the spread going forward?
John Matovina
Well, this is John, that you know the comments that I made at the conclusion there about the low interest rate environment, our headwinds that spread were, when we were talking about $280 [ph] last year, the investment team was investing money at that $414 to $425 [ph] range and in Q1 we were at $384 [ph]. So there is pressure there and the ability to move rates that fast is to keep with that is challenging.
So yes, getting to the $280 at the moment with investing money at $385 is more challenging. And the ability to what we have last capacity to reduce rates we are going to be prudent in doing that not we’ve got reputation to deal with two in terms of our policy holders.
And so while rate adjustments will continue, they may not happen at a pace fast enough to deal what is happening on the re-investment side. Fortunately the new money side does look good in terms of what rates we were paying there.
So we don’t see it necessarily any threat to the $289 in terms of where new money is at.
Unidentified Analyst
Okay, great thanks guys.
Operator
Thank you. Our next questioner in the queue is from the line of Steven Schwatz from Raymond James.
Your line is open.
Steven Schwartz
Yes, hi guys good morning. I got draft so, I don’t want to go over something that may have gone over.
But did anybody ask Ron of the $5,000 pending that you have out there. How much this is, is the old new money rate?
John Matovina
Now this is John, Steven. There is none.
Steven Schwartz
Okay, it’s fine, okay.
Ron Grensteiner
Yes, Ted I think Ted’s comments that already get the prior rate the policies had to fund by the end of March.
Steven Schwartz
Okay.
Ron Grensteiner
And Ted’s comment was the new rates were fully operational now than they were fully operational now, than they were fully operational on April 1, because of the – as I say that that the rate lock are look backs those are kind of the industry terms in that, was for our four-week period in the month of March.
Steven Schwartz
Okay, all right. And then I’m assuming the anomaly that’s being reference here is the Advisors Excel?
Ron Grensteiner
Yes.
Steven Schwartz
Okay, yes, they are big. All right.
Okay, I’m good. I just wanted to make sure I understood depending thing.
Thanks.
Operator
Thank you. [Operator Instructions] And it looks like that’s all the questions that we have today.
So I’d like to turn the call back over to Ms. LaFollette for closing remarks.
Julie LaFollette
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.
Operator
Ladies and gentlemen, thank you again for your participation in today’s conference. This now concludes the program, and you may all disconnect your telephone line.
Everyone have a great day.