American Equity Investment Life Holding Company (AEL)

AEL 
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American Equity Investment Life Holding Company (AEL)

Q4 2008 Earnings Call Transcript

February 26, 2009 11:00 am ET

Executives

Julie LaFollette – Director, IR

Wendy Carlson – President and CEO

John Matovina – CFO and Vice Chairman

Ron Grensteiner – President of Life Company

Analysts

Randy Binner – FBR Capital Markets

Steven Schwartz – Raymond James & Associates

Paul Sarran – Fox Pitt

Bill Dezellem – Tieton Capital Management

Alex Krutov – Century Atlantic Capital

Greg Eisen – ICM Asset Management

Presentation

Operator

Welcome to the American Equity Investment Life Holding Company’s fourth quarter 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 LaFollette

Good morning and welcome to American Equity Investment Life Holding Company’s conference call to discuss fourth quarter 2008 earnings. Our earnings release and financial supplement can be found on our website at www.american-equity.com. Presenting on today’s call are Wendy Carlson, President and Chief Executive Officer, John Matovina, Chief Financial Officer and Vice Chairman 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 Windy Carlson.

Windy Carlson

Good morning, let me add my welcome to the call today to discuss 4Q08 earnings. I am welcoming you on behalf of the new management team, which – the good news is, is also the old management team of American Equity. Ron and John and I are very excited about our new roles and responsibilities and we are looking forward to having a good ’09 here at American Equity. We had very strong operating results to report for the year of ’08 and good results for the fourth quarter.

Our ’08 year-end operating earnings were $75.2 million, which is a $1.35 per diluted common share. That is a record for America Equity, we have never had annual operating earnings that high. It represents a 16% increase over ’07 operating earnings at $64.9 million, which was a $1.10 per diluted share. Our return on equity of operating earrings was 11.4%. So overall a very good year in terms of operating results in an extremely difficult environment. Our fourth quarter results came in at $15.6 million or $0.29 per diluted common share that is down 8% from the same period in ’07 where our earnings were $17 million although the EPS on a diluted basis was level at $0.29 a share.

Those results are very good and reflect the fundamentals of our spread management that continue to improve throughout the year in the forms of increasing yields and containment of our cost of money. Our year-to-date spread of ’08 was 277 basis points and there again that is a record for American Equity. It compares to 261 basis points a year and that 16 basis point improvement on $14 million of annuity liabilities translated into significant improvement in net operating earnings. In the fourth quarter, we would have had a record quarter of operating earnings, but some increase in DAC and DSI expense due to unlocking and John will speak to that in detail. So, we are very happy with the operating results in a difficult environment.

We do realize that in this time of financial crisis that balance sheet issues are paramount, our book value per share as of December 31 was $9.53 a share that includes a net mark-to-market impact and compares to book value a year ago of $10.94. The mark-to-market effects all are available for sales securities that reflects marks of assets to values, which are in many cases irrationally low in light of the ill-liquidity and disorderly markets that we are operating in.

A certain portion of that mark-to-market has been reflected as an other than temporary impairment that flows through as a realized loss in our income statement. So far we have recognized for the year $65.6 million of other than temporary impairment that is net of the related DAC and tax adjustments. For the fourth quarter we’ve recognized $16.5 million in other than temporary impairments. We reported our GAAP results on a preliminary basis because we continued to evaluate the OTTI rules as they relate to a block of securities, which continue to perform in accordance with the terms and which our analysis is even in a stressed scenario that we will recover all our, substantially all of our principal and interest on those securities.

Yes, the OTTI rules require us to continue to examine whether we should be reflecting a realized loss that flows through not only our balance sheet, but our income statement on those securities, which in our mind reflects more of a problem with the rules than a problem with the security. I think the important take away from that is that our book value per share will remain virtually unchanged regardless of the outcome of that decision. Another important number, a very important number for us is our RBC ratio, which remains steady at 345% at the end of December that is the same level it was at the end of September and represents a good and adequate cushion for us in terms of our capitalization as we look to continued growth in ’09. We do anticipate growth in ’09. It is a very good sales environment.

The demand for our products continues to be very strong. Principal protection is very attractive in today’s market. CD rates on competing bank certificates of deposits are quite low in this environment, which has always been a favorable factor for sales. A number of our competitors have reduced their sales targets, which means that they have unique opportunity for American Equity to pickup market share. It capitalized on all of those favorable trends, we recently introduced a very popular new product that Ron will speak to here in a little bit. SEC Rule 151A was adopted, it doesn’t take effect until 2011, so we anticipate that ’09 and 2010 sales will be unaffected by that rule. In addition to that American Equity and several other carriers have challenged that rule in court that litigation is on a very fast track.

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