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American Equity (AEL) Up 15% in a Year: Will the Rally Last?

Shares of American Equity Investment Life Holding AEL have rallied 15% in a year against the industry’s decline of 11.2%. The Finance sector and the Zacks S&P 500 composite have declined 9.5% and 15.1%, respectively, in the same time frame. With a market capitalization of $3.5 billion, the average volume of shares traded in the last three months was about 0.6 million.

The increasing popularity of index products in the market, focus on expansion into new verticals, solid balance sheet and effective capital continue to drive this Zacks Rank #3 (Hold) leader in the development and sale of fixed index and fixed rate annuity products.

American Equity has a decent track record of beating earnings estimates in two of the last four quarters while missing in the other two quarters, with the average beat being 9.45%.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Can AEL Retain the Momentum?

The Zacks Consensus Estimate for AEL’s 2022 earnings has moved 4.5% north in the past 30 days, reflecting analyst optimism.

Per the U.S. Census Bureau, Americans aged 65 and older will represent 20% of the total population by 2030. American Equity’s compelling portfolio of fixed index and fixed rate annuity products, guarantying principal protection, coupled with competitive rates of credited interest, tax-deferred growth, guaranteed lifetime income and alternative payout options poise it to benefit from this demography.

The company remains focused on expanding into middle-market credit, real estate, infrastructure debt and agricultural loans that in turn should drive fixed index annuity product sales beyon-d $6 billion in 2022 higher.

The majority of American Equity’s income is derived from investment spread. An improving interest rate environment should add to the upside. Life insurers are direct beneficiaries of an improving interest rate environment. This year, the Fed has already raised rates six times.

American Equity has been working diligently toward executing its AEL 2.0 strategy. The company expects around one-third of the new business flow to convert into the ROA  business through growth in reinsured liabilities. Thus, the insurer believes its mix of fee revenues will support a higher-return business profile.

An improving cash balance and leverage ratio help AEL strengthen its balance sheet. AEL has hiked dividends each year since 2003 when it went public. Its dividend increased at a 19-year CAGR (2012-2021) of 20.8%. In November 2022, AEL’s board approved a $400 million share buyback program in tandem with the AEL 2.0 strategy and has $594 million remaining under authorization.

AEL generated an average operating return on equity of 15% over the past years, in line with its long-term goal.  The life insurer targets ROE between 11% and 14% over the next few years.

The Zacks Consensus Estimate for American Equity’s 2022 and 2023 earnings suggests growth of 0.5% and 29.3% year over year, respectively.

Stocks to Consider

Some better-ranked stocks from the property and casualty insurance industry are MGIC Investment Corporation MTG, Radian Group Inc. RDN and Kinsale Capital Group KNSL, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The bottom line of MGIC Investment surpassed estimates in each of the last four quarters, the average being 36.34%. Year to date, the insurer has lost 7.1%.

The Zacks Consensus Estimate for MTG’s 2022 earnings indicates a year-over-year increase of 49.7%. The expected long-term earnings growth rate is pegged at 5%.

Radian delivered a trailing four-quarter average earnings surprise of 45.10%. Year to date, RDN has lost 9%.

The Zacks Consensus Estimate for Radian’s 2022 earnings indicates a year-over-year increase of 49.5%. The expected long-term earnings growth rate is pegged at 5%.

Kinsale’s earnings surpassed estimates in each of the last four quarters, the average being 15.16%. Year to date, KNSL has lost 29.4%.

The Zacks Consensus Estimate for KNSL’s 2022 and 2023 earnings indicates a year-over-year increase of 27.3% and 21.9%, respectively.

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Radian Group Inc. (RDN) : Free Stock Analysis Report

American Equity Investment Life Holding Company (AEL) : Free Stock Analysis Report

Kinsale Capital Group, Inc. (KNSL) : Free Stock Analysis Report

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