American Equity Investment Life Holding Company (AEL)

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American Equity Investment Life Holding Company (AEL)

Citigroup US Financial Services Conference

March 06, 2013 3:35 pm ET


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


John Michael Matovina

Let's see if we -- are we up here yet? There we go. Well, thank you, and it's certainly our pleasure to be here this afternoon as well. American Equity is somewhat of a unique story. It's formed about 18 years ago by a gentleman by the name of Dave Noble. And forming a new company and all that, he was able to build it right from the beginning. So that's our winning corporate culture that we refer to there. And one of the key aspects of what American Equity delivers to its agents and policyholders is a very high level of service that we think is unmatched in the industry. We have a conservatively managed investment portfolio, which has been a real key to the growth of the company, and a cohesive management team that is operated together, I guess I should get closer to the mic, with a long history of success that dates back to even before American Equity was formed. We've got a simple business. Quite frankly, it's pretty easy to understand. As Eric said, we've got fixed indexed annuities as our principal product line. It's well over 95% of our business, a single, really, source of income, and that's our investment spread. We see the annuity deposits and then invest them in the assets and earn that spread over what we pay the policyholder liabilities. That gets a little complex on the indexed annuity side because we've got to hedge that index risk that we promised to the policyholders, but in reality, it actually is a fairly simple model. And I've got to comment we've got a track record of exceptional growth. You'll see some of those -- some statistics on that a little bit later in the presentation.

Our earnings model is really quite simple. We want to grow assets under management. That's where our distribution and gathering comes in. We want to earn that predictable spread as our biggest source of income, and then we want to make sure that we don't forfeit any of that spread earnings to credit losses or invested assets. We've got, I think, great opportunities for future growth. We sell to the retirement savings market. Everybody knows that America is an aging population, so that, we think, bodes well to continued future growth for American Equity. And despite the recent runup on our stock price, we think we're still quite undervalued relative to the performance that we've had.

So a few quick facts on the company, formed back in 1995, public since 2003. The company actually became operational in November '96, about a year after it was born. We've grown that time our assets under management to over $25 billion invested assets, and all that's been achieved one sale at a time by the independent insurance agents who sell our products, so no growth through acquisition, all internal generation from the agents who represent us who are all independent insurance agents.

Our management team, as I say, dates back to Dave Noble, the founder of the company. Mr. Noble's been active in the life insurance business for some 60 years. Many of our senior management team have been associated with American Equity from the beginning -- or prior to that, The Statesman Group, which was a publicly traded company that Mr. Noble was Chairman and CEO of. And our senior managers have at least 20 years of insurance or other professional experience, so we got an experienced group of people that has worked together for a long time. In addition to that, as a management team, we're relatively young, so a team that you can probably count on to be operating the company into the future.

Our product line, as we've said, now is fixed indexed annuities. We often get questions about indexed annuities relative to equity market investments and are sales going to better when markets are up or down. And quite frankly, that's not necessarily where the real comparison is. Indexed annuities are really safe money alternatives. We compete against other fixed annuities or CD-type products, things where you have principal protection and don't have a risk of loss of principal. So people looking for equity market returns really shouldn't be looking at indexed annuities, but if they're looking for guarantees, safety of principal, returns that can beat CDs or other safe money products, indexed annuities are the right product for that. And you see we've got lots of other features described here. It kind of boils down to, as I said, safety of principal and the guarantees.

Looking at how the product works, which we've got lots of questions on that through the years, and so we brought in this chart here. This is actually one of our annuities of a real life policyholder. The green line there that reaches the highest level was the actual performance of the indexed annuity, so that's the index-linked interest that's been achieved. The light blue line in the middle that goes up by the straight line, that's the guaranteed rate of interest. That's what makes the product and insurance product. You can never do worse than that. And then the red line there is the performance of the S&P 500, and what this shows is that in years where the S&P is negative or goes down, the indexed annuity holds its value. There is the -- in that year, you earn 0 interest on your policy. And then in points in time when the market is going up, the indexed annuity performs in -- I think you see pretty clearly that the rate of growth in the S&P, if you look through, like, 2002 to 2006, is faster than the rate of growth that was experienced by this particular indexed annuity, and that's because you can't get all of the equity market return for having a safety of principal and the guaranty of no loss. So you participate in the market, but you don't have the full exposure and are not going to realize the full benefits of the equity market. But over -- at least this last 12-year period, this particular annuity has performed quite well to what somebody could have achieved by being in the market in that time frame. And actually, this one's -- this product has its anniversary on September 30, so the recent activity in the market will not be reflected in this chart until we get to September of 2013. So all these products, you have to wait until the anniversary to determine what your outcome was for your index credit that particular year.

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