Q3 2019 Earnings Call
Welcome to American equity investment life, holding company third quarter 2019 conference call at this time for opening remarks on introductions I would like to turn the call over to Julie Lafollette ordinator of Investor Relations.
Good morning, and welcome to American equity investment like holding companies conference call to discuss third quarter 2019 earnings our earnings release and financial supplement can be found on our website at www Dot in American Josh equity Dot com.
non-GAAP financial measures discussed on today's call and reconciliations of non-GAAP financial measures to the most comparable GAAP measures can be found in those documents presenting on today's call or John Anatomy, Anna Chief Executive Officer, Ted Johnson, Chief Financial Officer, and Ron Grensteiner, President of American equity investment life Insurance company.
Some of the comments made during this call may contain forward looking statements within the meeting of the private Securities Litigation Reform Act There're a number of risk and uncertainties 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 and her most recent filings with the FCC an audio replay will be made available on our website. Shortly after todays call. It is now my pleasure to introduce John Matovina.
Thank you Julie good morning, everyone and thank you for joining us this morning.
As we reported last night, our third quarter financial results remained strong.
non-GAAP operating income for the quarter was 233 million or $2.54 per share and if you exclude the impact of the revisions to our actuarial assumptions operating income would have been 109 million or $1.19 a share.
Both of those are those are new records for operating income in operating income or operating earnings per share.
Excluding the effect of assumption reviews.
As a reminder of the three key metrics to drive our financial performance are growing our invested assets and policyholder funds under management.
Generating a high level of operating earnings on that growing asset base through investment spread.
And then minimizing impairment losses in our investment portfolio.
So for the third quarter 2019.
We delivered 1% sequential growth and 5% trailing 12 month growth in policyholder funds under management.
On a trailing 12 month basis, we generated a 16.3% non-GAAP operating return on average equity excluding the impact of actuarial assumption reviews.
And our investment impairment losses net of recoveries and after the effects of deferred acquisition costs and income taxes.
We're just 0.1% of average equity.
The growth in policyholder funds under management was driven by 1.2 billion of net sales in the quarter and 4.9 billion of net sales for the trailing 12 months.
Net sales in the quarter were up nearly 31% year over year, but they were down 15% sequentially.
Our policy rates were less attractive in the second half of the third quarter. Following the rate reductions that we made in early August that we talked about on the last call.
You'll hear more about the sales environment and competition from Ron a bit later.
[laughter] investment spread in the quarter increase sequentially with Trendable investment spread.
And the benefit from non Trendable investment spread items up roughly the same amount.
Credible spread benefited from a decline in the cost of money as option costs continued to decline or through our through our rate management.
Ted will have more details on investment spread in his remarks.
Also during the quarter Fitch ratings upgraded their ratings on us and earlier in the year standard and Poor's in A.M. best It at affirmed our ratings.
With the Fitch upgrade we now have an investment grade rating for our holding company senior unsecured debt from each of the rating agencies that rate us.
So I'll be back at the end of the call for some closing remarks, now I'll turn the call over to Ted for additional comments on third quarter financial results.
Thank you John .
As reported yesterday afternoon, we had non-GAAP operating income of 233 million or $2.54 per share for the third quarter of 2019 compared to non-GAAP operating income of 171 million or $1.87 per share for the third quarter of 2018.
Excluding actuarial assumption revisions operating income would have been 109 million or a $1.19 per share for the third quarter of 2019 compared to 90 million or 99 cents per share for the third quarter of 2018.
Third quarter 2019 operating income included a net benefit of 124 million or a $1.35 per share from revisions to actuarial assumptions.
Third quarter 2018 operating income included a net benefit of 81 million or 88 cents per share from revisions to actuarial assumptions.
On a pre tax basis, the third quarter, 2019 revisions and reduce revisions reduced amortization of deferred policy acquisition costs and deferred sales inducements by 473 million.
And increase the liability for future payments under lifetime income benefit riders by 315 million for a net increase and pre tax operating income of $158 million.
Going forward the impact from our revisions to actuarial assumptions on future results is expected to be a small benefit to near term earnings.
The most significant assumption changes where to lapse and utilization assumptions.
We have credible lapse and utilization data based upon a comprehensive experience study spanning over 10 years on our products with lifetime income benefit riders and have experienced lapsation on these policies lower than previously estimated.
Lower lapse assumptions should result in more policyholders being eligible to turn on their lifetime income benefit than previously anticipated and therefore, the need for a greater lifetime income benefit reserve amount.
On the other hand lowered lapsation assumptions results and policies remaining enforce over a longer period of time.
Leading to a greater level of expected gross profits than previously estimated.
This higher level of estimated future gross profits means that we had amortize the deferred acquisition cost and deferred sales inducement assets faster than what our current revised assumptions indicate was necessary.
Our experience study has also indicated that the ultimate utilization of certain lifetime income benefit riders is expected to be less than our prior assumptions and the timing of utilization of lifetime income benefit riders is later than in our prior assumptions.
We have reduced our ultimate utilization assumptions for FY writers from 75% to 60% and for no fee writers from 37.5% to 30% for policies issued in 2014 and prior years.
The net effect of utilization assumption revisions, partially offsets the negative negative effect on the lifetime income benefit reserve from the change in Lapsation assumptions.
We are assuming a 3.8% long term us treasury rate with a mean reversion period of 20 years.
Our long term assumption for aggregate spread is unchanged at 2.6%, which translates to an ultimate discount rate of 2.9%.
Investment spread for the third quarter was 275 basis points up from 263 basis points in the second quarter. As a result of four basis point decline in the cost of money and an eight basis point increase and the average yield on invested assets.
Trendable spread in the third quarter was 260 basis points compared to 254 basis points in the second quarter of this year.
Average yield on invested assets was 4.59% in the third quarter of 2019 compared to 4.51% in the second quarter of 2019.
This increase was attributable to an increase in the benefit from non Trendable investment income items from five basis points in the second quarter 213 basis points in the third quarter. If this year.
Included in non Trendable items. This quarter were 11 basis points from prepayment fees and bond call income and two basis points from accelerated residential mortgage backed security paydowns and other miscellaneous items.
The impact from the decline in short term yields on the 4.8 billion a floating rate instruments and our investment portfolio negatively affected our average yields by two basis points.
The average yield on fixed income securities purchased and commercial mortgage loans funded in the third quarter was 3.3%.
Compared to 4.52% for the first half of the year.
During the quarter, we purchased 1.9 billion a fixed income securities at a rate of 3.21%.
And originated 180 million of commercial mortgage loans at a rate of 4.33%.
A decline in new money yields reflected the general decline in available yields and lower allocations to both asset backed and structured securities as well as greater purchases of lower yielding us treasury treasuries and agencies and meat and municipal securities.
The average yield on fixed income securities purchased and commercial mortgage loans funded in October was 3.59%.
Our expectation in the near term is for new money yields to continue to range from 150 basis points to 200 basis points over the 10 year Treasury yield.
Longer term, we're looking to develop and expand relationships with third parties that can source more higher yielding private asset backed and infrastructure securities for our portfolio.
The aggregate cost of money for annuity liabilities was 184 basis points down four basis points from the second quarter of 2019.
The benefit from over hedging of index linked interest obligations was two basis points in the third quarter compared to four basis points in the second quarter.
We estimate that the trend about cost some money declined by six basis points in the third quarter.
Option costs decreased in the third quarter, reflecting reductions in caps and participation rates on new business from the June and August new money rate changes renewal rate changes initiated in both October of last year and in August of this year and higher volatility.
The trend of declining option costs, which began in December 2018 could extend further as we reduced new money rates last month, and we'll begin reducing renewal rates on 29.7 billion of policyholder funds under management in January 2020.
We expect this latest renewal rate reduction to produce annual savings in the cost of money of 11 basis points on the 29.7 billion and six basis points on our entire in for us when fully implemented over the next 12 to 15 months.
Should the yields available to us decrease for the cost of money rise, we continue to have flexibility to reduce our crediting rates if necessary and could decrease our cost of money by roughly 59 basis points, if we reduce current rates to guaranteed minimums.
This is up slightly from 58 basis points at the end of the second quarter.
Operating expenses increased 3% sequentially in the quarter.
The sequential increase in operating expenses reflected a 700000 dollar increase in legal consulting and recruitment from fees and 700000 in additional risks charges for excess regulatory reserves ceded to an unaffiliated reinsurer as a result of an increase in the excess regulatory risk.
Ceded.
Our estimated risk based capital ratio at September Thirtyth 2019 is 366.
Paired to Threesixty nine at June Thirtyth and Threesixty at December 31, 2018.
We had a modest increase in adjusted capital in surplus that did not keep pace with the increase in required capital necessary from growth in our business.
Our RBC ratio continues to be negatively impacted by lower statutory net income in 2019 attributable to lower option expiration proceeds and lower index credits.
Net index credits were 0.8% of account value in the first nine months of 2019 compared to 1.4% in the fourth quarter of last year and 3.6% to 5.4% in each of the first three quarters of 2018.
Assuming current equity market levels, we expect option expiration proceeds and index credits to rebound in the fourth quarter.
Although low option expiration proceeds and related index credits can affect statutory capital surplus and risk based capital in the short run over the long run market move movements tend to even out and we expect the policies to perform in line with pricing expectations.
Now I'll turn the call over to Ron to discuss sales marketing and competition.
Thank you to Ed Good morning, everyone. As we reported yesterday third quarter gross and net sales were 1.3 billion and 1.2 billion, respectively, representing increases of 25% and 31% from third quarter 2018 sales.
On a sequential basis gross and net sales decreased 13, and 15% respectively.
In addition to the gain in gross sales the year over year increase in net sales reflects a reduction in the co insurance percentage for Eagle life's reinsured fixed indexed annuity products from 50% to 20% and increased sales of Eagle life's fixed indexed annuities that are not reinsured.
Eagle life sales product mix in the third quarter was more heavily weighted towards multi year guaranteed annuity products, which have a co insurance percentage of 80%, resulting in a larger sequential decline in net sales relative to grow sales.
And the independent agent channel gross sales decreased 13% sequentially driven by reductions we made two crediting rates and guaranteed income at mid June and early August as available yield in the market continued to fall.
The sales environment and the independent agent channel remain competitive during the quarter.
Most competitors lowered crediting rates and guaranteed income throughout the quarter. Although a few continued to hold guaranteed income steady.
Combined sales for asset yield and the choice series, our primary accumulation products for independent agents were 39% of American equity life fixed indexed annuity sales in the third quarter compared to 46% in the second quarter of 2019.
Income shield accounted for 48% of sales in the third quarter compared to 40% of sales in the second quarter of 2019.
Income she'll 10 was the largest or with was the best selling guaranteed lifetime income product in the independent agent channel in the first half of the year.
Despite the changes to guaranteed income we made in August income Shield 10 sales were still up 8% sequentially.
In light of the decline in available yields we implemented further reductions to crediting rates and guaranteed income on October 16.
We lowered annual participation rates on assets.
With the market value adjustment to 25% from 40% previously.
This rate was 54% in January indicating how much yields have deteriorated over the course of the year.
Participation rates on the volatility control dividend aristocrats excess return one and two year strategies are now at 100% and 110% well below the levels at the start of the year.
For guaranteed income, we reduce payout factors for the lifetime income benefit riders available on our guaranteed income products the reductions and payoff actors reduce guaranteed income on our best selling income shield products by roughly 12% following reductions of approximately 6.5% to 7% back in August .
While more conservative when compared to the highest levels of income in the marketplace, we're still higher than several key competitors.
Well absolutely necessary, we believe our reduction in participation rates from the 50% level likely had an outsized effect on our distribution producing a relatively greater drop in sales of our accumulation products this quarter.
Operating half or more of the S&P 500 appreciation with no downside risk was a very appealing offering even against hybrid volatility controlled indexes with higher participation rates.
More recently, we have seen competitors raise participation rates, possibly betting on a continuation of the recent backup and interest rates.
Even after these increases however, our dividend aristocrats excess return strategy still illustrated competitively.
Our objective is to highlight this strategy by placing more marketing and educational emphasis on its features and strong performance.
It's a slow process, but we seem to be making headway as roughly 42% of new money into assets yield 10 is currently being allocated to dividend aristocrats compared to 16% in may which is the last month, our S&P 500 participation rate for assets yield 10 was at least 50%.
Put this into perspective, the allocation to the S&P 500 participation rate strategy in assets, you'll 10 as following a 37%.
61% in May.
Turning to pending pending business at American equity life average 2685 applications during the third quarter compared to 3156 applications in the second quarter and 2905, when we reported second quarter earnings.
Pending this morning stands at 2169 applications.
Gross fiats sales at Eagle life decreased 28% sequentially.
Eagle life has distinguished itself in the bank and broker dealer channels with this emphasis on offering attractive participation rates on S&P 500 annual point point strategies.
Given the decline in interest rates, we made some reductions to participation rates during August and October similar to those made on accumulation products at American equity life.
While our parts as well our S&P 500 participation rates are not attractive to distribution at this time, replacing additional emphasis on the dividend aristocrats strategies at Eagle life too.
Our two latest product introductions at Eagle life, the Eagle select focus five and focus seven has been gaining traction with distribution and both include the dividend aristocrats participation rate strategies.
Eagle life will also be rolling out a new guaranteed income product the Eagle select income focus the banks and broker dealers later this month.
This is a significant initiative for Eagle life to capture some guaranteed income market share in these channels.
Last year's guaranteed income sales were 5.8 billion and guaranteed income sales continued to grow this year.
While guaranteed lifetime income has been a focus at American equity life. This is not been the case that Eagle life.
The standard no fee guaranteed lifetime income rider pioneered by American equity life, and the independent agent channel will be unique in the bank and broker dealer channels.
To maximize guaranteed lifetime income policyholders may instead choose a fee based rider, which will be very competitive with those offered by the leader in these channels.
We continue to put significant emphasis on account acquisition.
On our second quarter call, we mentioned that we expected to bring on at least two meaningful accounts by year end.
We have a sell an agreement finalized with won a large independent broker dealer and we expect to see sales early next year. Once the onboarding process is complete and we remain hopeful that we will secure a sell in agreement with the other meaningful independent broker dealer by the year end.
Pending applications today at Eagle life stand at 127 compared to 285 applications. When we reported second quarter earnings and 300 applications a year ago.
And with that I'll turn the call back over to John for closing remarks.
Thank you Ted and Ron.
We certainly are pleased with our third quarter results, which included record operating income on both the reported basis after adjusting for the impact of unlocking.
Our investment spread continues to benefit from active crediting rate management.
Our trendable spread has increased each quarter of this year and third quarter 2019, Trendable spread at 2.6% was 12 basis points higher than the fourth quarter 2018 level of two point, 48%.
Improvement in our investment spread has more than offset the mid single digit growth rate in policyholder funds under management.
Putting that altogether, we estimate that we've increased our trendable operating earnings per share by 22% over the last 12 months to one dollar nine cents per share in the third quarter. This year compared to 89 cents per share in the prior year third quarter.
In addition to spread management key initiatives for the remainder of 2019 in 2020.
We will be to continue to increase our footprint in the bank and broker dealer channels.
Introduce new annuity products that will complement our current product lineup lineup.
And boost our new money yield to enhance our competitive position in the rates and terms, we can offer on our products.
As we've said in past calls our outlook, our long term outlook remains quite favorable due to the growing number of Americans, who will need help with the retirement security.
Well no single investment adequately addresses all retirement RIS annuities can play an important role and addressing guaranteed lifetime income no matter what the market does while also addressing sequence of return risk during retirement.
We believe favorable demographics product evolution and historical favorable results signal significant market share growth potential for fixed index annuities.
So on behalf of the entire American equity team, which now numbers a little more than 600.
Thank you for your time and attention. This morning, we'll now turn the call back over to the operator for questions.
Thank you Sir as a reminder to ask a question you would need to press star one on your telephone.
To withdraw your question press the pound.
Due to the essence of time, we ask that you. Please limit yourself to one question and one follow up.
Please standby were compiled documenting roster.
Our first question comes from Ryan Krueger from KBW. Please go ahead.
Hi, Thanks. Good morning first question on the dollar nine of trend.
That you cited in the third quarter.
I guess.
To that as a good starting point going forward and.
Does it.
Incorporate.
The benefits from the to near term earnings that you cited from the assumption review.
Yeah.
First of all we don't give guidance going forward.
On the dollar nine.
For that that doesn't take into corp. any future benefit.
That you were referring to.
The dollar nine was merely are.
Reported number adjusted for unlocking and backing out the six points of non Trendable.
Investment spread and applying an estimated deck and tax effect to it.
Got it I guess this may put in a different way if I back out all the DAC amortization and other assumption.
Packs it looked like the K factor was in like the 49% range is that was there anything unusual in that or.
Because that's a bit lower than it had been previously or do you feel like thats, a fairly decent indication now.
It's a little bit lower because of higher AGP versus EGPC for the quarter.
There was some of that impact.
Okay, and then just last one.
Seemed like on on you were highlighting that your products are generally still still pretty competitive. Despite some of the key actions taken by your by your peers, but the pending count is down quite a bit. So just hoping for some more color there and if you think thats, partially just representative of the overall market coming down.
Well. This is Ron every time rates reduced reduce there's kind of a pause or a slowdown in sales and.
Going forward I think we have to except that this could potentially be the norm.
With this low rate environment and.
You just have to keep going you account can't stop just because rates are low doesn't mean that.
There is no longer a need for guaranteed income or principal protection and those types of things so.
We just.
We keep on going forward and except that this might be the new norm.
Got it thank you.
Thank you.
Our next question comes from Pablo Singzon from JP Morgan. Please go ahead.
Hi, first question is for Ted So the assumption review impacts are positive for opportunities with negative on GAAP income can you just discuss the difference in there.
I mean, the difference there is going to be the impact of applying fair value accounting or Fas 133 to that.
To those calculations.
Got it. So this is just.
I guess lower risk free rates increased.
Liability and therefore have a negative impact on GAAP income right thats starting to some of it.
I mean, certainly thats going to be part of it I think theres other factors too.
Okay.
And then the second question is for John So.
Seems like he has been more active than its competitors in managing down the cost us money on enforce policycenter and there is some past.
Is there anything different about your current diesel for ambitions versus your sort of historical approach and have your actions had any this impact whether on your distribution relationships are your policyholders.
I Wouldnt say, our our pace of activity crediting rate management has changed.
In the last several years.
We have we have cycles that we we look at things with the policies have now been.
Theres, some pretty large groups of policies that.
Get looked at once a year.
Sometimes is not right on top of each other you know like every 12 months, maybe maybe there is a three month lag but.
And the one thing we continue to do is.
Remained committed to.
Not adjusting renewal rates for the first three years on policies. So when policies hit their fourth year, We then do and evaluation as to whether rate adjustment as appropriate or not.
Okay I'll repeat it.
Sorry go ahead is going to say that the second part of your question was that we had any pushback from agents are policyholders and we have not.
Okay, perfect I'm going to re queue. Thank you.
Thank you.
Our next question comes from Alex Scott from Goldman Sachs. Please go ahead.
Thanks for taking the question.
So I just wanted to talk about the review a little bit and I guess, the assumption that to 60 of spread will remain constant.
I think back over your results over the last several years I mean, they've been fairly resilient, but I mean low interest rates have impacted the spread over over time.
I think there's a time, where you're earning some it closer to 85% to 3% spread on some of your product right.
So I guess just in light of how much rates have come down I would just be interested the here whats different this time around the did it will be flat.
As opposed to your actually having some of the the pressure hitting the bottom line.
I mean, certainly one of the big things that we've seen a certainly the drop in option costs and certainly that drop an option costs is from.
Yeah.
No.
From what we've seen in higher volatility and also our rate actions and we still do you have quite a bit of cushion in Roe.
Going into the future also to be able to.
Adjust our rates.
And again.
We're not giving future guidance is based upon this to 60. This is where our assumption is that as that today.
Okay, but it is the assumption are you than any gpus, and and I guess, where you price in new business because if your price in new business at at least to 60.
And that.
Your assumption it plays out than I would think spreads would remain flat or even go up which I think is different than than where the street anyways estimated your spread to go currently.
Well the to 60, those with pricing and this is John the pricing of new business would not.
Influence what sitting in the model today. The model is the only the policies that are there.
The.
The new business pricing.
But pan I don't know the spread numbers, but they probably havent changed a lot now overall the with the change in the mix of business that spread number is going to change over time as.
As we called out before we have higher spread requirements for bonus products than we do for non bonus products.
But but I don't think the new business pricing is necessarily going to habit.
An influence on that the 260, which is just really the in force book.
Yes, no I guess the point I was making is that if the in force book is there any to 60 in the new pricing is there any to six years something higher.
If I aligned my model with with your model I think that should suggest that spreads are actually increasing over time.
Despite despite rate.
Do I have that right.
Our model that we're recording here is just on the historical book.
You are also factored into your as what happens with future business that goes on.
What we're quoting here, giving you the assumptions is purely on the historical book of business.
Understood.
Sure at an AD and as we add new products on then the mix that product mix and those those spread targets on assumptions for those will affect what the aggregate.
Gross spread which were referring to how it changes over time.
Got it okay. Thank you.
Thank you.
Our next question comes from Eric Boss from Autonomous Research. Please go ahead.
Hi, Thank you.
Just a big benefit this quarter was obviously the lower cost of money and if I'm hearing you right. It sounds like you view this as a sustainable level given the drop in option costs should we think of this is kind of a base level and then the actions that you're taking on renewal crediting.
Rate actions could bring it down further I think you said kind of six basis points from the January actions going forward is that the right way to think about it.
All else being equal, but obviously what happens in the market going forward is going to affect what both cost of options if theres some change in volatility.
Then that is going to change what we've experienced in the lower cost of options that we've seen over the past three quarters.
Got it and that makes sense, but you are Conrad with your statement that our op. Our renewal rate crediting adjustment is going to continue to bring that cost of options down and obviously, we're doing that because of the low lower yields that we're seeing available out there to invest so as some of the portfolio roles over.
Over that's currently in there, we're going to need to probably invest at a lower rate and so that those renewal crediting actions that we're putting in place as to offset.
Those drops in yields.
Got it. Thank you and then just one question on the assumption review I think you also mentioned you maintain.
The same level of assumed index credits going forward.
Correct.
How do you think of that given some of the actions that Ron talked about on pricing in terms of bringing down participation rates.
We maintain the spread but not the level of what the cost of money associated or the index card the crediting too.
In the model that does great up over time.
As Doug.
So the yield so.
So the yield on costs of options are grading up over a 20 year mean reversion period.
And Rons comments were reflective to new business not not the assumption reviews, so clearly new but new business being issued at lower rates.
That.
We'll have a story on that next year at this time so to speak.
Got it okay. Thank you to where things look like that.
Yes makes sense. Thanks.
Thank you. My next question comes from John NATO from GBS. Please go ahead.
Hi, good morning.
I'm I'm curious on the reduction in option costs.
I think.
Maybe a few quarters ago, you were talking about option costs in the range, maybe a 190 basis point something like that.
I think were down in the range currently or at least recently more like 160.
Give or take I'm just curious.
Of that reduction in option cost how much of that.
Is specifically related to the actions you've taken.
In terms of.
In terms of the reduction to participation rate cap cetera, and how much of that is just market factors.
So you're right option costs last year averaged around 100 in.
91 basis points. The most recent quarter that was down to 165 basis points in the quarter before that that was 176.
Our renewal crediting rate actions, probably account from for about 15 to 17 basis points of that.
Gotcha.
Okay. That's very helpful. Thank you.
And then Justin just bigger picture question for John .
Is there is there any thing that you can offer in terms of an update around the search process.
Timing.
Candidate interest.
In terms of your successor.
Well, Yes Britain. The answer is the short answer is no I.
I think you can appreciate the confidential nature of the process. So no I don't if I wasn't I wasn't asking you to NIM.
Well, but but not but even even anything said mites gets people speculating and may not I will tell you that the board the board through its committee has been active actively engaged with the executive search firm selected by the by the board to work on the assignment.
In the process to identify interview on a point a successor has been ongoing and the board still anticipates being in a position to name a successor by the end of the year.
That I appreciate that I've got I've got just one more as it relates to sales volumes and maybe capital.
Ron I think in your prepared remarks or maybe in response to a question earlier indicated maybe this is the new norm.
In terms of sales volumes at least you have to be prepared for the possibility that it is.
If it is in fact, the new norm.
Obviously production levels are significantly below what you can fund.
Via your statutory earnings.
How long would you need to see.
Sales volumes at a level that the low that.
Capacity.
Before you might.
Look at other alternatives for deploying.
Capital otherwise not used to fund growth.
Well, let me make one clarifying comment first though when I talk about this may be the new norm I'm not talking about sales levels I'm talking about the interest rate environment that we're dealing with.
So gotcha I need to make that point of clarification before they answer the rest of the question.
That's helpful. Thank you Ron.
Thank you.
Our next question comes from John Barnidge from Sandler O'neil. Please go ahead.
Thanks, and I got disconnected earlier, so I apologize if im asking the question someone asked earlier.
Surrender activity was 1.54% in the quarter on beginning period assets.
Does that seem like a reasonable run rate to assume.
I mean.
In this low rate environment and certainly.
Absent probably.
Increases significant increases in rates.
It seems if you look over back over the past few quarters, that's probably a good place to start.
Okay, and then operating expenses does the number.
38, five I know you guys called out some things.
Someone onetime in nature, but how should we be thinking of a run rate for that.
Thank you.
Im certainly I think you saw this quarter what impact. It is one is you have to factor in the increase amount of excess reserves ceded under our reinsurance agreement.
Do you need to factor in that and what that grows to cut that the driver of that line item.
The other things that impacted the item.
You know I mean that was another 700000 for other miscellaneous consulting and legal exhibitor.
From quarter to quarter, we typically.
Those items, they might go up or down but.
That run rate, where we're at right now is you know.
Within within a half a million or 700000 is probably a decent run rate.
Thank you for the answer.
Yeah.
Thank you.
As a reminder to ask a question you need to press star one on your telephone so withdraw your question press the pound key.
Our next question comes from Tableau Singsong from JP Morgan. Please go ahead.
Hi, Thanks for taking my follow up question, so maybe for pet or just as you explore increasing allocations to private investments what kind of uplifts are you expecting on the investment yield side and I guess, what would be the corresponding impact on capital and also what's your view on your potential long term allocation there.
This is Jeff I.
I think.
Uplift is going to be hard hard to give guidance on because it's going to be all spread related but we do anticipate.
Some of these private assets getting spreads on the higher end or above those range targets that we provided so there is going to be lift.
To the portfolio.
The the long term allocations are still still kind of working through.
Those numbers.
We continue to run all of our liquidity testing to make sure that we feel internally we have enough.
Liquid assets available to meet the policyholder obligations.
But on the on the longer term I think private securities between private corporates and private ABS and other private.
Assets could be 15, 20% of the portfolio longer term, we're probably halfway there now so we have some flexibility to to add some more illiquid assets to the portfolio that can get some lift but not.
Cause us.
Constrains in terms of our our risk profile.
Got it and then the second question is for Ron.
Im curious if you have a view and how large the current market for guaranteed products isn't the Bakken broker dealer shot. So obviously as you pointed out stuff.
It wasn't that hasn't been the traditional market for that channel, but those years like is there and then for CDC and ask you about expanding there maybe you could describe your strategy are you looking at certain distribution partners or.
Will it be more broad based on some sort of.
Overall the partners you have now.
Thank you Pablo it'll be more broad based as we looked at the statistics and the bank channel in particular, the uptake for guaranteed income.
Is around 20 or 25% so that is 20 or 25% of the time when they buy fixed indexed annuity. It has some type of guaranteed income.
Sure attached to it.
So as the bank channel continues to grow.
This year, it's on pace to be somewhere in the neighborhood of $8 billion.
By a premium and now you take 20% to 25% of 8 billion effects to be a big number. So our strategy is to take our expertise that we have and guaranteed income at American equity life transferred over to Eagle life.
And hopefully capture some of that market share 100 million hair, a couple of hundred million there can add significant success to Eagle life.
Fronted income.
Got it and then my last question is fair for Ted.
Just wanted to did lapse and utilization assumptions can you give us an update on where your where you've been running historically versus your assumptions and.
Related to that I guess can you talk about your approach to unlocking those assumptions more broadly I know your reference a study, but maybe if you speak about specific factors that inform your decision to unlock and how you start bounce attention between along today and the potential for negative surprises for though in the future.
As a lot Pablo.
Well, let's go back over the assumptions first of all we did a detailed experienced study of again expand over the 10 years. In addition to that we did engage a consultant to review our study and compare that against industry data of others in the industry and validated where our experience was that compared to.
The industry, certainly I think on a utilization utilization that's going to differ by company, depending on the product and.
How it was sold et cetera, and when when we look at utilization and you look at utilization for those cohorts and I said, if we reduce it for policies issued 2014 in prior and when we look at utilization across.
Those policies the utilization for any one year kind of ranges from 10% to 23% with the majority of them.
More in the 15 or below in utilization, so very low so it's going to take a significant.
The increase in utilization to get up to our 60% ultimate for those and again, we left or our utilization assumption assumptions higher for policies sold after 2014, and so we're still holding the 75% and 37 and half percent, whether it's a fee or.
No fee rider on and even in those older policies, where I mentioned, we have one cohort with about 20% to 23% utilization that would be a cohort that has our richest benefit rider in it and that 23% is still quite low so based upon all that data that's how we validated our.
And how we were looking at it when we were doing our assumption changes in regards to lapses, we've been watching lapses be low for a long period of time.
We've looked at that and really made the determination. It was the point in time too.
Reduce our lapse assumptions, which obviously had offsetting effects on whether it was a liberal reserve or for DAC.
Got it and if you'll allow Liam.
I asked a lot, but as you look at the pre 2014 block right. It seems like if we believe if the trends sustain there. It seems like there's still some margin that you can essentially monetize at some point.
Theres like what does your expected your agent for that.
Overall block of policies and maybe if you could talk about an average age and we can surf maybe a vital in math on when we can people's are dying off and so far just.
Just broadly like how much more.
For years do you have in that block and I guess, if you could start to think about that's versus your assumptions.
I don't have that average age you know of part of the average duration hub that for to give you that when you look at average ages and you look across those blocks for the weighted average age of the policyholders.
Some of those blocks some of those other blocks. The average age is above 70, when you get closer to 2014, they might be right around 69 or that so even the weighted average age is it's fairly high for those blocks, but I don't have.
Some of that at the tip of my tongue right now to be able to give you.
Okay. Thank you.
Thank you. Our next question comes from Alex Scott from Goldman Sachs. Please go ahead.
Hey, Thanks for taking my follow up.
Yes, I was just wondering on the 260 spread assumption in back if you give us has to be it ought to that.
Whether it's like a bit per five bips through something like that and then the only reason I'm asking Harper.
Relatively high DAC balance I, just want to understand if thinking through changes to that is something I should consider if it's just not material.
We don't have a sensitivity to give on that obviously, when we update and do our 10-K and well have our table or information in there that will do sensitivities on our assumptions on the key assumptions.
Gotcha, Okay. Thank you.
Thank you.
I show no further questions in the queue at this time I'd like to turn the call over to Julie Lafollette coordinator of Investor Relations for closing remarks.
Thank you for your interest in American equity and for participating on today's call should you have any follow up questions. Please feel free to contact us.
Okay.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.