American Equity Investment Life Holding Company (AEL)

AEL 
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American Equity Investment Life Holding (AEL)

Q4 2012 Earnings Call

February 21, 2013 10:00 am ET

Executives

Julie L. LaFollette - Director of Investor Relations

John Michael Matovina - Chief Executive Officer, President, Vice Chairman, Member of Executive Committee, Member of Disclosure Committee and Member of Investment Committee

Ted M. Johnson - Chief Financial Officer, Principal Accounting Officer, Treasurer and Member of Disclosure Committee

Ronald J. Grensteiner - Vice President and President of American Equity Investment Life Insurance Company

Analysts

Randy Binner - FBR Capital Markets & Co., Research Division

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

Paul Sarran - Evercore Partners Inc., Research Division

Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Jeffrey Smith - Eagle Boston Investment Management, Inc.

Richard Lee Todaro - Kennedy Capital Management, Inc.

Edward Shields - Sandler O'Neill + Partners, L.P., Research Division

Presentation

Operator

Welcome to American Equity Investment Life Holding Company's Fourth Quarter 2012 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.

Julie L. LaFollette

Good morning, and welcome to American Equity Investment Life Holding Company's conference call to discuss fourth quarter 2012 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.

John Michael Matovina

Thank you, Julie, and good morning, everyone, and welcome to the call this morning. As we reported yesterday evening, fourth quarter 2012 operating earnings were $30.9 million or $0.47 per diluted share. And that brought the full year earnings to $110 million or $1.69 per share. Also as we acknowledged, the fourth quarter does include about $0.02 a share from an income tax benefit for lower effective tax rate. So excluding that item, we would have had $0.45 per share in the fourth quarter.

Relative to the third quarter, operating income, which -- the comparison there, we're going to exclude that impact of unlocking. So our third quarter earnings excluding unlocking were $27 million, so we're up 14%. Some of that is due to higher spread income, although on a percentage basis, clearly the spread is down a few basis points. It also reflects some lower DAC amortization and some of the tax benefit I just spoke to. Results continue to be held back by the low interest rate environment and the high cash balances in short-term investments that have resulted from calls of government agency securities that we've talked about on previous calls. Also as we've acknowledged, those agency securities have been a cornerstone of the company's investment portfolio dating back to our formation, and through the years, they've provided very acceptable yields that met our spread requirements without risk-based capital charges.

We've gone through several cycles of calls on those securities, and each time, we reinvested a portion of the call redemption proceeds into new callable securities with lower yields than the call securities. And that reinvestment back in the agencies help keep the cash balances low but obviously perpetuated the call risk. And 2012 should mark the turning point in that cycle on the elevated levels of low yielding investments as we had more than $4.3 billion in securities called last year, but we only purchased $660 million of new callable securities.

We ended the year with $2.2 billion in what we'll call excess cash and short-term investments. And as you'll hear in Ted's remarks, those short-term investments include $728 million of callable agency securities that were purchased as substitutes for cash. So if those are called as expected in 2012, we'll need to reinvest those into longer-term securities with higher yields as well. If those don't get called as expected, their yields would increase to a 3.75% to 4% rate on the expiration date -- or expiration of the call date, excuse me. The call exposure for long-term investments in the first quarter of 2013 is only $50 million. So we're anticipating a meaningful reduction in our excess cash and other short-term cash investment or other short-term investment balances in the first quarter. The remainder of the call exposure for long-term investments in 2013 consists of $678 million of securities callable in April. So given the large call exposure in the second quarter, we may see some increase in the excess cash and other short-term investment balance in the second quarter. But then, once that timeframe is behind us, we should return to seeing some meaningful reductions in the -- those balances and getting us back to a fully invested type position by year end.

Our sales pace did pick up a little bit in the fourth quarter, kind of a continuation of the product pricing environment that kind of scripted our way in the third quarter. We also benefited from a new money rate reduction that we implemented in early December. And as usual, Ron's remarks will include commentary about the competitive environment in more details on the sales results. And finally, just to acknowledge that, as we did in the press release, our A.M. Best rating of the A- (Excellent) was affirmed in late January by A.M. Best, and also the stable outlook on the rating was affirmed as well. So with that, I will turn the call over to Ted for some additional comments on the financial results.

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