American Equity Investment Life Holding Company (NYSE: AEL), a leading underwriter of index and fixed rate annuities, today reported third quarter 2012 operating income 1 of $22.2 million, or $0.34 per diluted common share, compared to third quarter 2011 operating income of $41.5 million, or $0.67 per diluted common share. Operating income for the third quarter of 2012 was impacted by revisions to assumptions utilized in the determination of deferred policy acquisition costs, deferred sales inducements and the liability for future benefits to be paid under the living income benefit rider which reduced operating income by $4.9 million or $0.07 per diluted common share. Operating income for the third quarter of 2011 was impacted by similar assumption revisions which increased operating income by $12.5 million or $0.20 per diluted common share.
Highlights for the third quarter of 2012 include:
- Annuity sales for the third quarter of 2012 were $982 million (before coinsurance) compared to second quarter 2012 annuity sales of $917 million (before coinsurance).
- Total invested assets grew to $26.0 billion (amortized cost basis = $23.4 billion).
- Investment spread for the third quarter of 2012 was 2.62% compared to 2.70% for the second quarter of 2012.
- Estimated risk-based capital (RBC) ratio at September 30, 2012 based upon trailing twelve months annuity sales remained above target at 336%.
SPREAD RESULT IMPACTED BY CASH
American Equity’s investment spread for the third quarter of 2012 continued to be affected by the impact of holding excess cash during the quarter. The average excess cash balance for the third quarter of 2012 was $1.7 billion compared to $1.4 billion and $759 million for the second and first quarters of 2012. The foregone investment income from holding such excess cash balance is estimated at 0.29% for the third quarter of 2012 compared to 0.27% and 0.14% for the second and first quarters of 2012. The excess cash balance is primarily attributable to calls of U.S. Government agency and other securities which totaled $3.8 billion in the first nine months of 2012 with an average yield of 5.31%. The high level of excess cash may persist for several more quarters as the Company holds $932 million of U.S. Government agency securities with coupon rates of 4.00% or higher that are expected to be called in the fourth quarter of 2012 and another $949 million of such securities that are callable in the first six months of 2013.