American Equity Investment: Sound Financial Standing, Tremendous Growth

The Iowa based annuities and life insurance firm, American Equity Investment Life Holding Co. (AEL) is a holding in the Clear Small Cap Value Portfolio since our purchase on 9/8/06.

Operating within the United States, AEL develops, markets, issues and administers its annuities and life insurance products. The portfolio of products for their annuity business includes fixed rate annuities, index annuities and variable annuities. The insurance portion of AEL provides traditional ordinary and term, universal life, and other interest-sensitive life insurance products.

As a provider of retirement solutions, the company is strict in following a set allocation of its assets, such as investing 93.9% into bonds with the lowest default probability and no exposure at all to junk bonds. AEL also prides itself on adhering to an ethical market code that includes competitiveness and clear and honest explanations of the services that the company provides.

An analysis of AEL fundamentals reveals sound financial standing, as exemplified by the trailing twelve month operating margin of 20.92% relative to the industry average of 13.27%. More impressively, the firm has a one year gross margin of 41.83%, significantly higher than its peer group average of 28.97%. With this performance, the company has earned a one year return on equity [ROE] of 13.55%.

Meanwhile, its tremendous growth can be evidenced in the year over year quarterly revenue growth of a remarkable 88.00%, the second highest in an industry that has a stagnant average of 13.30%. The firm has also posted record income of $75.5 million for 2006, a 76% increase over the previous year.

AEL has a low price to book (P/B) ratio of 1.21 relative to an industry average of 2.60 which points to further growth potential. At the same time, AEL has a price to earnings (P/E) ratio of 10.47 compared to the 12.78 industry average. With these fundamentals and valuation we continue to calculate an undervaluation in the market.

Full Disclosure: American Equity Investment Life Holding Co. [AEL] is a holding in the Clear Small Cap Value portfolio which is offered as a separate account. Mr. Corn is the founder and CEO of Clear Asset Management LLC and owns the stock directly as part of his portfolio holdings.

AEL 1-yr chart:

Comments

[Ulysses Ben...:]

Wow. "AEL also prides itself on adhering to an ethical market code that includes competitiveness and clear and honest explanations of the services that the company provides." American Equity can have as much pride as it wants, but it is hardly adhering to any high ethical standard. AEL is not unlike the old LifeUSA in that it's core equity indexed annuity products are mediocre at best products, unclear to most consumers and sold based on the dial-a-commision concept; that is, the agent sells the highest commission product they can get away with in most cases.

Under new NASD rules, particularly notice 05-50, and an alert:

www.nasd.com/InvestorI...

AELs core products are likely to see a slow down in sales. Further, if the products do in fact need to become SEC/NASD registered products, which is increasingly likely, these products lose much of their profitability due to the fact that they would have to become at least as competitive as variable annuities with living benefits, which currently, equity indexed annuities don't come close to as of yet for performance potential or guarantee return features.

Further, the likelihood of lawsuits against the company grows everyday as consumers realize that they are not making returns exceeding the 10 year treasury with most AEL products, and in many cases are tied into the product via surrender penalties exceeding a decade and annuitization provisions that prohibit movement to a better product in a timely fashion.

Sorry, AEL is a high risk, low return proposition going forward.

Ulysses Benjamin Dover
RealWisconsinNews.com

2007 Apr 05 03:49 PM

[Ulysses Ben...:]

Just wanted to point out...

Backlash Hits
Annuities Tied
To Stock Market
Wave of Lawsuits Take Aim
At Sales Practices, Suitability
Of Equity-Indexed Products
By KELLY GREENE
August 8, 2007; Page D1

Equity-indexed annuities are among the hottest products sold through seminars, infomercials and free-dinner events that target older adults with investment pitches. Now, insurers that sell them are facing growing legal claims from investors and state regulators who allege that the companies or their agents are using deceptive marketing or targeting consumers who are too old to benefit from the products.

FAIR WARNING
Equity-indexed annuities can be complex. Here's what to consider:
• Make sure you understand how gains will be calculated.
• Check for hidden penalties for early withdrawals.
• These annuities may not be suitable for older adults because funds may be locked up for several years.In the biggest such case, the Eighth U.S. Circuit Court of Appeals in St. Louis last month upheld the class-action status of a lawsuit that covers more than 400,000 investors who bought equity-indexed annuities from Allianz Life Insurance Co. of North America, a unit of Munich-based Allianz SE and the top seller of this type of annuity in the U.S. More than a dozen federal lawsuits against a number of insurers also are seeking class-action status in courts across the country. Meanwhile, attorneys general and regulators in Illinois, Minnesota and California are pursuing claims against insurers selling the products.

"Equity-indexed annuities have emerged as the vehicle of choice for unscrupulous insurance agents," says Roxanne Rehm, assistant general counsel for the Florida Department of Financial Services. Older investors, she contends, "don't realize they're long-term investments, and once they realize they can't access the funds, it's usually too late."

For more go to WSJ...

Also, see here in Seattle:
seattletimes.nwsource....

Also, a little history re AEL:

www.consumeraffairs.co...

www.sbd-law.com/CM/Pub...

clearly there's a lot more for anybody who knows how to use Google searches well. Mr. Corn, please do your research next time.

U. Ben Dover

2007 Oct 21 10:55 AM

[Ulysses Ben...:]

AEL at time of article: $13.26
AEL 7-13-08: $7.90

Great pick!!!

2008 Jul 12 08:30 PM