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American Equity (AEL) Up 40.5% in a Year: What's Driving It?

Zacks Equity Research
·4 min read

American Equity‘s shares AEL have gained 40.5% in a year against the industry's decline of 8.2%. The Zacks S&P 500 composite has increased 17.3% in the said time frame. With a market capitalization of $2.9 billion, average volume of shares traded in the last three months was 0.8 million.

The company continues to benefit from higher average fees, active management of new business, growth in annuity business and solid capital position.

It has a decent earnings surprise history too. Earnings beat estimates in three of the last four quarters with trailing four-quarter average earnings surprise of 56.31%.

The stock has a VGM Score of B. VGM Score helps identify stocks with the most attractive value and the most promising momentum.

Will the Bull Run Continue?

American Equity has been a top three fixed index annuity producer in the independent agent channel in 19 of the last 20 years.

It has a consistent track record with 18% and 12% compounded annual growth rate in operating income and policyholder funds under management, respectively, in the past 10 years.

American Equity is well-poised to gain from increase in fees assessed for lifetime income benefit riders due to a larger volume of business in force, increase in the average fees and increase in surrender charges which continues to contribute to annuity product charges which is one of the important drivers of the company’s revenue.

Given growth in annuity business and increases in invested assets, investment income is expected to improve despite current low interest rate environment. The metric increased at a five-year (2015-2019) CAGR of 6.4%.

Majority of the company’s income is derived from investment spread, the difference between the earned yield of investments and the liability cost of policies. Net income has been positively impacted by the growth in the volume of business in force and the investment spread earned on that business. Active management of new business and renewal rates as well as opportunistic replacement of lower yielding securities with higher yielding securities will continue to benefit the investment spread in the long term.

American Equity is targeting expansion into the global life and annuity reinsurance and third-party insurance asset management businesses. Thus, it formed a strategic partnership with Varde Partners and Agam Capital Management. This marks a step forward toward executing its AEL 2.0 strategy through this partnership.

American Equity boasts a strong balance sheet with significant financial flexibility. In the second quarter, its debt level reduced 12.1% from 2019-end level. Also, debt-to-capital ratio on Jun 30, 2020 was 10.2 that improved 230 basis points from 2019 end and compared favorably with the industry average of 11.6. It exited the second quarter with total cash and cash equivalents of $2.4 billion, which is sufficient to cover the company’s debt obligations of $0.6 billion.

By virtue of its sound capital and liquidity position, this Zacks Rank #3 (Hold) life insurer is engaged in prudent capital deployment. The company raised its dividend at a six-year (2012-2019) CAGR of 10.4% and currently yields 0.9%.

Furthermore, return on equity (ROE), reflecting the company’s efficient utilization of its shareholders’ funds to generate earnings, has been increasing in the past several years. Its trailing twelve months ROE of 14.2% betters the industry average of 11.7%. Its average operating return on equity is 15% over the past 5 years.

Stocks to Consider

Some better-ranked stocks in the insurance space are Manulife Financial Corp MFC, Fidelity National Financial Inc. FNF and First American Financial Corporation FAF, each presently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Manulife Financial surpassed estimates in two of the last four quarters, the average being 6.79%.

Fidelity National surpassed estimates in each of the last four quarters, the average being 32.13%.

First American Financial surpassed estimates in each of the last four quarters, the average being 20.84%.

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Manulife Financial Corp (MFC) : Free Stock Analysis Report
First American Financial Corporation (FAF) : Free Stock Analysis Report
American Equity Investment Life Holding Company (AEL) : Free Stock Analysis Report
Fidelity National Financial, Inc. (FNF) : Free Stock Analysis Report
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