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For Immediate Release. Chicago, IL — August equiyy, — Zacks. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Athene Holding Ltd. Today, Zacks is promoting its »Buy» stock recommendations.
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At this time for opening remarks and introductions, I would like to turn the call over to Julie LaFollette, Coordinator of Investor Relations. Good morning and welcome to American Equity Investment Life Holding Company’s conference call to discuss third quarter earnings. Our earnings release and financial supplement can be found on our website at www. 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 risk and uncertainties that could cause actual results to differ materially from those expressed or implied.
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At this time for opening remarks and introductions, I would like to turn the call over to Julie LaFollette, Coordinator of Investor Relations. Good morning and welcome to American Equity Investment Life Holding Company’s conference call to discuss third quarter earnings.
Our earnings release and financial supplement can be found on our website at www. 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 risk and qeuity 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 made available on our website shortly after today’s. It is now my pleasure to introduce John Matovina. Thank you, Julie. Good morning, everyone, and thank you for joining us this morning. Our core third quarter financial results remains strong and continued the solid trend we saw in the first half of the year. Our ongoing investment realignment program had a modest impact on third quarter results but should build over time.
So as a reminder, the three key metrics that drive our financial performance are growing our invested athene vs american equity investments and policyholder funds under management, generating a high level of operating earnings on the growing asset base through investment spread, and then minimizing impairment losses in our investment portfolio.
For the third quarter ofwe delivered 1. On ivnestments trailing months basis, generated a The income Shield 10 guaranteed lifetime income product, launched in March, has been a success. And following up on that, in October we launched the AssetShield, a new accumulation product in the independent agent channel and we also raised payouts on guaranteed income products.
You’ll hear more about the sales environment and competition from, Ron. While the sequential increase in investment spread in the third quarter primarily reflected an increase of two basis points in the benefit from non-trendable investment income and overhedging, we also realized some benefit from the higher yields on our invested assets.
We expect to realize additional benefit from the realignment investmentw invested assets in future quarters. The cost of options continued increase in the quarter and we implemented additional renewal rate actions in early October to supplement the changes we made in March. Ted will have more details on investment spread in his remarks.
Substantially all of the realized losses on investments recognized in the third quarter were interest rate related losses on securities sold early in the fourth quarter as part of our program to opportunistically replace lower yielding securities with higher yielding securities.
Our low level of investment impairment losses once again reflects our equiyt commitment to a high quality investment portfolio. I’ll be back at the end of the call for some closing remarks. Now I’d like to turn it over to Ted for some additional comments on third quarter financial results. Thank you, John. The third quarter unlocking of deferred policy acquisition costs and deferred sales inducement assumptions was primarily driven by higher than modeled account values and a decrease in lapse rate assumptions, which translate to increased projections of expected gross profits in future periods.
These were partially offset by 5 to 10 basis athebe decreases in our projections for future investment spread. Throughwe expect weighted average spread to be roughly consistent with the adjusted spread equityy in the third quarter and then grade back to an ultimate spread of basis points by The decrease in the liability for future payments under lifetime income benefit riders was also driven by greater than modeled account values.
This benefit was partially offset by a reduction in the expected growth rate of account values given the reductions in caps, participation rates and crediting that we have implemented over the last 12 months. Investment spread for the third quarter was basis points, investmfnts 3 basis points from the second quarter of as a result of a 7 basis point increase in the average yield on invested assets compared to a 4 basis point increase in the cost of money.
Trendable spread in the third quarter was basis points compared to basis points in the second quarter. Average yield on invested assets was 4. The increase in the average yield in the quarter reflected a benefit from non-trendable investment income items of 11 basis points compared to 10 basis points in the second quarter.
Yield in the second quarter included 7 basis points from fee income from bond transactions and prepayment income inevstments 3 basis points from the acceleration of RMBS pay. The average yield invextments fixed income securities purchased and commercial mortgage loans funded in the third quarter was 4. The yield on investments purchased or funded in October was 4.
As can be seen in this quarter’s results, we have benefited from the deployment of money into asset classes not traditionally in our vw. We have continued the higher allocations to asset-backed securities such as collateralized loan obligations and continue to look equuity increasing allocations to commercial mortgage loans.
We have not taken on any material increase in credit risk with this allocation strategy. As we’ve mentioned on our last invesyments quarterly calls, we are looking to improve our investment yield through the opportunistic replacement of lower yielding securities with higher yielding securities.
These impairments should be recovered from the higher yield on securities acquired with the proceeds from the sales in less than two years. We intend to continue to explore additional opportunities for portfolio realignment. However, we are uncertain if there will be any additional transactions in The addition of CLOs and certain commercial mortgage loans to our portfolio has positioned us to have a portion of the portfolio benefit from increases in short-term interest rates.
Three-month LIBOR was fairly stable in the second and third quarters, limiting the incremental benefit from the floating rate portfolio in the third quarter. However, the three-month LIBOR rate has increased since the end of the third quarter and we will benefit if this recent increases sustained. The aggregate cost of money for annuity liabilities was wmerican points, up 4 basis points from the second quarter of The benefit from over hedging index-linked interest obligations was 7 basis points in the third quarter compared to 6 basis points in the second quarter.
The 5 basis point increase in the cost of money excluding over-hedging benefits primarily reflects the escalation of option costs for certain index strategies in the last several quarters that is recognized in the cost of money ratably over the month option period.
Investtments these actions helped to mitigate the escalation in the cost of options, we have not seen the 6 basis point decrease in the cost of options we had expected.
One trend affecting quarterly spread comparisons is a change in the product mix away from bonus products to non-bonus products, which include the American Equity Choice and AssetShield and Eagle Select products. Non-bonus products have a lower spread requirement but similar returns to compare to bonus products, which translates into a higher cost of money for non bonus products.
The estimated impact from this change on the third quarter athene vs american equity investments spread outcome was modest at 1 basis point, similar to the impact in the second quarter. We continue to have flexibility to reduce our crediting rates amegican necessary and could decrease our cost of money by approximately 65 basis points, if we reduce current rates to guaranteed minimums. This is up from 59 basis points at the end of June.
Thank you, Ted. Good morning. We again saw a number of competitors raising caps, participation rates, crediting rates and income. Our higher new money investment yields allowed us to take several actions late in the third quarter and early in the fourth quarter to enhance our competitiveness.
We enhanced our competitive position in accumulation products with the introduction of the AssetShield Series on October 9. While it’s similar to the Choice Series, AssetShield is for equlty accumulation and a lifetime income benefit rider is not available. Our participation rates on the Dividend Aristocrats are very competitive with the participation rates currently being offered by the JPMorgan Mozaic II index and Nationwide New Heights, currently the best-selling accumulation series in the independent channel without requiring a three-year strategy term, an asset fee or linkage to a non-transparent complex multi-asset index.
AssetSheild also features better liquidity options when offered with the Choice. Guaranteed lifetime income has been a significant focus for us through the years, and we are thrilled with the acceptance of the IncomeShield series by our independent agents. We improved the competitive position of the IncomeShield and our other guaranteed income products by increasing payout factors on October 9.
Turning to pending, pending business at American Equity Life averaged 2, applications during the third quarter and was 2, at the end of September atjene to 2, applications, when we reported second quarter earnings. The introduction of the AssetShield and increase in payout factors for IncomeShield and our other guaranteed income products has already had a positive effect on sales. Pending applications stand at 2, as of this morning compared to 2, on October 9 when AssetsSheild hit the market and payout factor increases became effective.
One atehne ago pending was 2, The number of submitted applications has been increasing as. For the five weeks ending October 12, submitted apps at American Equity Life averaged per week. We’ve received more than applications in each of the three weeks following the October 9 product actions.
Our weekly submitted application count has not been above since the week of May 14 through the Last week, we received submitted applications and for the AssetShield and Choice combined, we received applications, a record for us in the accumulation space.
We also received applications for IncomeShield, also a weekly record for that product. Hurricane Michael may have had some effect as well as some of Eagle Life’s — since some of Eagle Life’s largest distribution relationships are based in the Southeast.
Pending at Eagle Life stands at applications today compared to when we reported second quarter earnings. During the third anerican, Eagle Life added one of the 15 largest banks based on assets as a distributor, we have begun to see new applications from its representatives and expect this to be a key account for Eagle Life in We’re also in the process of hiring three additional employee wholesalers, which will bring our total to six.
These wholesalers will support some of our third-party wholesalers, as well as build out our direct wholesale model as we gain approval in more financial institutions. Thank you, Ted and Ron. We are pleased with our third quarter operating earnings results, higher new money investment yields combined with our investment realignment strategy should lead to a higher effective portfolio yield.
Now rising option cost do remain a challenge, but we continue to reduce rates in response and we have ample room to lower our caps participation rates and crediting rates on our in-force business if necessary.
We took advantage of our higher new money investment yields to enhance our competitive position in the market, the improvements we made in AssetShield compared to Choice are significant and have been well received by our independent agent distribution. As of last Friday, we had already received AssetShield applications, even though the product has been available for less than a month. The increase in payout factors for IncomeShield is resonating as.
IncomeShield applications hit a new weekly record last week. Before we move to question and answer, I’d like to advise everyone that we will not be commenting on or answering any questions about market rumors or a potential transaction. One constant in American Equity’s year history has been the extraordinary commitment and dedication to providing superior customer service our employees demonstrate each and every day.
On behalf of the amerucan American Equity team, thank you for your time and attention this morning. We’ll now turn the call back to the operator for questions.
Thank you, sir. Please go ahead. Hi, good morning. Aerican my first question is, how are you thinking about the trade-off between sales and profitability as you try to match competition in more attractive products? Are you still able to maintain your new business IRRs and how much of that are you willing to give up to stay competitive?
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