W.D.M. firm's CEO talks of annuities, economic growth
July 29, 2011 by Adam Belz
Sixteen years after it was founded, American Equity Investment Life Holding Co. is the second-largest seller of indexed annuities in America, and CEO Wendy Waugaman is bullish about the future.
American Equity will release its second-quarter earnings on Wednesday. Since it hit bottom at $3.19 in March 2009, American Equity’s stock has risen to $11.89 at market’s close on Thursday.
Trained as a lawyer and accountant, Waugaman joined the company in 1999 as general counsel and chief financial officer. She was named CEO in 2009.
The company was founded by Dave Noble in 1995, two months after he stepped down as head of the Statesman Group, which was sold to investors in 1994.
Noble’s new company started with an A-minus rating from insurance ratings agency A.M. Best, based largely on its founder’s reputation in the industry, Waugaman said. The company sold $150 million in annuities in 1997. By 2001, the firm was writing more than $2 billion in new business each year. In 2003 the company went public, a move it had for years prepared for by filing documents with the Securities and Exchange Commission as if it were already public.
The West Des Moines company’s revenue is now $28 billion, and it passed AvivaUSA in the fourth quarter of 2010 in sales of indexed annuities. Only Allianz sells more indexed annuities in the country.
Particularly when the stock market is volatile, fixed annuities are attractive, Waugaman said. They guarantee a certain interest rate each year and do not lose value. A $100,000 American Equity fixed annuity purchased in 1998 would have been worth $160,747 in 2010. The same money invested in a fund that tracks the Standard and Poor’s Index would be worth only $108,789, thanks to market collapses in 2001 and 2008.
Waugaman, a Humboldt native who studied accounting at Drake University and law at Notre Dame University, sat down with The Des Moines Register recently to talk about annuities and her company’s growth.
Q. What’s the outlook for your business?
A. We’re entering an era now where annuities are going to become pretty popular. The federal government and a lot of prominent politicians are really focusing on the issue of retirement income security. … There’s this bill that’s pending in Congress that would require 401(k)s to provide an annuity option to participants and to start thinking about not only how they’re managing their money to a lump sum but how they’re going to pay it out over their lifetimes. If you look at middle-income America, you have to figure out how to make a few hundred thousand dollars last for your retirement years. Given all the votality in the market, low interest rates, to have a product that you can convert into a stream of payments that function like a pension that you know you can’t outlive, there’s a lot of value in that.
Q. OK, what is an indexed annuity?
A. Indexed annuities are an outgrowth of what we would call the traditional fixed-rate annuity market. There’s another universe of variable annuities. Variable annuities, just to oversimplify it, are tax-deferred mutual funds. You’re exposed to the ups and downs of the market, and you can lose some or all of your funds. The other universe is fixed annuities. Fixed annuities say we’re going to treat this like a savings account, and we’re going to add interest every year. Traditional fixed-rate annuities have a stated rate of interest every year, and it’s subject to minimum guarantees. You’re never going to lose money. The worst you can do is zero growth.
Q. How does American Equity make money on annuities?
A. It’s just like a bank. If you go to a bank and you put your money in a savings account, that bank is going to promise you a rate of interest. They’re going to turn around and they’re going to loan it out, and they’re going to earn the difference between what they’re earning on the money they’ve lent and what they’re paying you on that savings account. We refer to that as the spread. Banks call it the interest margin. There aren’t fees.
Q. You’ve hired 80 people in the past six months. What skills are you hiring for?
A. It’s been all across the board. Everywhere from senior management in the actuarial area and in the IT area. We need senior people there. We’ve hired analysts in our investment department, and people who are on the front lines of issuing policies and answering the phones and dealing with the agents. We’ve hired new lawyers. We’ve got a couple new accountants.
Q. Why are you growing faster than other annuity companies?
A. We are going to be the company that provides the best service in the business to the agents and the policyholders. Most of our agents sell for our top competitors also. They will sell for Aviva and Allianz as well as American Equity. We have to compete for them. For instance, we answer the telephones. If you call here as an agent or policyholder, nine times out of 10, you’re going to get a live person.
Q. What do you think about interest rates?
A. They’re scary low. Since we’ve been in this business, people have said, oh, rates can only go up. They’ve only gone down. We would like to see rates gradually tick up, and we would like to see that because it would mean that we could offer higher rates to incoming policyholders. With rates so low, it does two things: It encourages borrowing to a level that’s unhealthy. And it artificially inflates the value of real estate. And then people borrow money at high levels at those inflated values. And that in three sentences is what led to the financial crisis.
Q. What do you read?
A. I look at the Wall Street Journal, I look at a variety of industry publications (including the National Underwriter). I get any number of different reports from trade groups and law firms and lobbyists, so I read those things too. Part of your training as a lawyer is to read a bazillion cases, and be able to zero in on the two or three things in any given case that are really significant to what you care about. That’s how I read most of the things that come across my desk.
