Q4 2019 Earnings Call
Welcome to American equity investment like holding Companys fourth quarter 2019 conference call.
At this time for opening remarks, it introduction I'd like to turn the call over to Julie Lafollette coordinator Investor Relations.
Good morning, and welcome to American equity investment like holding companies conference call to discuss fourth quarter 2019 earnings our earnings release and financial supplement can be found on our website at www Dot in American Gosh equity Dotcom non-GAAP financial measures discussed on today's call and reconciliations of non-GAAP.
Antrel measures to the most comparable GAAP measures can be found in those documents.
Presenting on today's call or John Madden Arena, Chief Executive Officer, and not Bala CEO elect and president.
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 meaning of the private Securities Litigation Reform Act.
There are number of risks 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 our 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 [laughter]. Thank you Julie good morning, everyone and thank you for joining us on the call. This morning.
Our fourth quarter financial results were very strong helping us achieve another record year for non-GAAP earnings.
Non-GAAP operating income for the quarter was $126 million or $1.37 per share New records for our operating income an operating earnings per share excluding the beneficial effect of assumption revisions, but.
The double digit sequential increases in these results were largely attributable to lower amortization of deferred policy acquisition costs and deferred sales inducements offset partly by a greater increase in the liability for future benefits to be paid for lifetime income benefit riders.
As a reminder, the three key metrics that drive our financial report performance are growing our invested assets in policyholder funds under management.
Generating a high level of operating earnings on the growing asset base through investment spread.
And minimizing impairment losses in our investment portfolio.
So for the fourth quarter 2019, we delivered a half percent sequential growth in 4% annual growth in policyholder funds under management.
On a full year basis generated a 17% non-GAAP operating return on average equity excluding the beneficial impact <unk> actuarial assumption revisions.
And our investment Paramount impairment losses net of recoveries and after the effects of amortization and income taxes were just 0.4% of average equity.
The growth in policyholder funds under management was driven by 844 million of net sales in the quarter at 4.7 billion for the year.
Our policy rates were less attractive in the fourth quarter falling rate reductions in mid October.
You'll hear more about the sales environment and competition from Ron.
Our fourth quarter operating income benefited from an increase in investment spread on both a reported an adjusted basis.
Once again the driver of spread improvement was a decrease in the cost of money.
Resulting from active management of our rates and further declines in option costs.
Ted will have more details on investment spread and operating income in his remarks.
While credit impairments were greater than in recent quarters in part due to the write down of securities of two issuers in the oil and gas sector.
Investment impairments remained relatively low once again, reflecting our continuing commitment to a high quality diversified investment portfolio.
For the full year investment impairment losses were just under 19 million per four basis points on 51 billion of weighted average investments.
One of the highlights for the quarter was the issuance of $400 million of perpetual preferred stock, which is allowing us to redeem 165 million of subordinated debentures that had almost 225 million of net proceeds available for general corporate purposes.
Now I'd like to turn the call over to Ted for additional comments on fourth quarter financial results.
Thank you John.
As reported yesterday afternoon, we had non-GAAP operating income of 126 million or $1.37 per share for the fourth quarter of 2019 compared to $90 million are 99 cents per share for the fourth quarter of 2018.
We had one discrete item this quarter, a 2 million pretax or two cents per share loss from the write off of unamortized debt issue costs for the subordinated debentures that were redeemed with a portion of the proceeds from our perpetual preferred stock issuance.
Investment spread for the fourth quarter was 277 basis points up from 275 basis points in the third quarter as a nine basis point decline in the cost of money offset a seven basis point decrease in the average yield on invested assets.
Trendable spread in the fourth quarter was 263 basis points compared to 260 basis points in the third quarter of 2019.
Average yield on invested assets was for 52 in the fourth quarter of 2019 compared to 459 in the third quarter of 2018.
The decrease was primarily attributable to four basis point reduction in the benefit from non Trendable investment income items and a three basis point reduction from the decline in yields on our floating rate investments.
The average yield on investments acquired in the fourth quarter was 374 compared to 330 in the third quarter.
We purchased 850 million a fixed income securities at a rate of 351 and originated 266 million of commercial mortgage loans at a rate of 397 during the quarter.
The average yield on 330 million a fixed income securities purchased in commercial mortgage loans funded in January was 335.
For 2020, we expect to continue to build out both our internal investment management capabilities and partner with multiple best in class third party managers.
We've recently added a third investment management relationship for private asset backed securities a second relationship for infrastructure debt and we'll be expanding our investment in commercial mortgage loans through our current manager.
We're also looking to expand our exposure to asset classes not traditionally in our portfolio. We expect spreads on non traditional asset classes to be well above the 10 year treasury rate hopefully, helping us achieve the high end of our new money spread expectations of 150 to 200 basis points.
Over the 10 year Treasury yield.
The aggregate cost a money for annuity liabilities was 175 basis points.
Down nine basis points from the third quarter of 2019.
The benefit from over hedging index linked interest obligations was five basis points in the fourth quarter compared to two basis points in the third quarter.
We estimate that the trendable constant money declined by six basis points in the fourth quarter.
Option costs decreased in the fourth quarter, reflecting the actions taken in August and October to reduce caps and participation rates on new and renewal business.
The trend of declining option costs, which began in December 2018 should extend further as we began reducing renewal rates on 29.7 billion a policyholder funds under management last month.
We expect this latest renewal rate reduction to produce annual savings in the cost up money of 11 basis points on the $29.7 billion and six basis points on our entire enforce when fully implemented over the next 12 to 15 months.
Should the yields available to us decrease or the cost of money rise. We continued to have flexibility to reduce our 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 unchanged from the amount we cited in our third quarter call.
As expected the impact from our revisions to actuarial assumptions on future results was a benefit to fourth quarter earnings.
Excluding the effect from assumption revisions on third quarter amounts deferred acquisition cost and deferred sales inducement amortization decreased by 45 million sequentially.
This was partially offset by a 29 million sequential increase in the liability for lifetime income benefit riders.
One of the significant assumption revisions, we made in the third quarter was to lower lapsation assumptions on products with lifetime income benefit riders.
This extended the period of time. These policies are expected to be in force, which resulted in greater estimated gross profits from investment spread.
And lower amortization of the deferred acquisition costs and deferred sales inducement assets.
Lower lapse assumptions, however, produce higher values at the time the lifetime income benefit rider as soon is assumed to be utilized resulting in a larger increase and the liability for the riders.
Now ill turn the call over to run to discuss sales marketing and competition.
Thank you Ted good morning, everyone.
As we reported yesterday fourth quarter gross and net sales were $921 million and 844 million, respectively. Gross and net sales were down approximately 19% from fourth quarter 2018 sales and approximately 30% sequentially.
And the independent agent channel gross sales decreased 27% sequentially.
This was attributable to competitive rate dynamics in the market.
Consistent with our long standing principle of financial discipline and in response to lower investment yields in the third quarter, we meaningfully lowered product rates and guaranteed income levels in the mid October.
The competition did not act in a similar manner. Neither in terms of timing nor nature of their rate actions, which was most impactful on sales of our accumulation products. However, with the uptick in investment yields during the fourth quarter, we increased caps and participation rates on our accumulation products in mid December putting us in a way.
Better competitive position than we were for much of the fourth quarter.
One of our challenges is competing against hybrid index strategies developed exclusively for fixed indexed annuities that illustrate really well. Despite the fact that most would have had relatively poor actual returns over the last few years based on current participation rates.
While our participation rate strategy for the S&P 500 index does not illustrate as well as many of the hybrid index strategies. The S&P 500 index is widely recognized for its long history of actual performance.
Our message of simplicity and product integrity has helped us develop a loyal following within the independent agent channel. This demonstrated by our very high retention rates for our top producers, we continually educate distribution regarding actual versus hypothetical results.
For our part we have been emphasizing the S&P 500 dividend aristocrats daily risk control excess return strategy that doesn't illustrate well and similar to the S&P 500 index. The S&P 500 dividend aristocrats index as a long history of actual performance over 65% of new money.
Into asset yield 10 in the fourth quarter was allocated to dividend aristocrats up from 42% in the third quarter.
Our tolbert decreases and guaranteed income were not widely matched by the marketplace.
We did not increase guaranteed income levels in December as we expect that prescribed valuation interest rates used to compute regulatory reserves for policies issued in 2020 to dropped 50 to 75 basis points compared to the rates for 2019 policies.
While in the near term this maybe a sales headwind for us with respect to policies with lifetime income benefit riders, we expect competitors will ultimately adjust their guaranteed income pricing to recognize this factor, but the timing and size of any such adjustments is unclear at this time.
Turning to pending pending business at American equity life average 2120 applications during the fourth quarter compared to 2685 applications in the third quarter and 2169 applications. When we reported third quarter earnings.
Pending this morning stands at 1433 applications.
Gross FOIA sales at Eagle life decreased 59% sequentially.
Eagle life had a distinguished itself in the bank and broker dealer channels with its emphasis on offering attractive participation rates on the S&P 500 annual point to point strategy.
However, the reductions we made to participation rates in October left us in a less competitive position for much of the quarter.
Pending applications today at Eagle life stand at 125 applications compared to 127 applications. When we reported third quarter earnings and 224 applications a year ago.
The pending count as well off its quarterly low following rate increases we implemented in December similar to that similar to those at American equity life.
A significant initiative for Eagle life in the fourth quarter was the launch of its guaranteed income product the Eagle select income focus.
Distributors have shown substantial interest in several have already agreed to sell the product.
Adding the product the financial institutions platforms is ongoing and we anticipate sales to materialize early in the second quarter.
Guaranteed income and these channels is an emerging growth opportunity as bank and broker dealer guaranteed income sales were 6.8 billion in 2018, and almost certainly increased in 2019.
The no fee guaranteed lifetime income writer available with the Eagle select income focus pioneered by American equity life in the independent agent channel is unique in the bank and broker dealer channels.
To maximize guaranteed lifetime income policyholders may choose a fee based rider, which is competitive with those offered by the leader in these channels.
On our third quarter call, we announced that we had finalized a selling agreement with a very large independent broker dealer.
Onboarding process is going well and we expect to see sales in the near future.
Eagle life is actively prospecting for new accounts, we are in discussions with a number of substantial distributors and feel very good about our opportunities.
The development of our own internal Wholesaling force will be a key to our success.
Beginning this year the majority of our third party wholesaling partners will no longer be allowed to market Eagle life to new accounts.
We believe having multiple parties marketing Eagle life to new accounts unnecessarily models our story.
Going forward account acquisition will be handled almost entirely on an internal basis.
Since American equity is very beginning excellent customer service has been our difference maker.
We felt if our rates and benefits were close to the competition agents would choose us because of our customer service reputation and commitment.
We have received customer service accolades over the years from various independent sources, plus we receive messages regularly from distribution partners and policyholders with excellent service complements weaving receive complements occasionally from envious competitors.
Now, we can add recognition from the world renowned and prestigious JD power organization.
We're very pleased to rank fourth for customer satisfaction, and JD powers 2019 Us life insurance study.
American equity life satisfaction index score outpaced the annuity industry average as well as other leading fixed index annuity carriers.
This is the first year the annuity provider category was included in JD powers overall customer satisfaction index ranking for the US life insurance study a special thank you to all of our home office teammates for making a difference through excellent customer service.
And with that I'll turn the call back to John.
Thank you Ted and Ron we're generally pleased with our fourth quarter and full year results 2019 was an excellent year for American equity.
Even with the fourth quarter slowdown total sales for the year were up nearly 13% was fixed index annuity sales up over 12%.
Policyholder funds under management increased more than 4% and we had record non-GAAP operating earnings of 548 million or for $5 in 97 cents per share.
And if you exclude the impact of unlocking of actuarial assumptions are operating earnings were 424 million or $4.62 per share far surpassing last year's records of 345 million and $3.78 per share.
Our investment spread during the year benefited from our active rate management, and our trendable spread increased each quarter of this year.
Fourth quarter, 2019, Trendable sprit spread at 2.63%.
Was 15 basis points higher than the fourth quarter 2018 level of two point, 48%.
We completed a $400 million public offering or perpetual preferred stock, which increased our balance sheet flexibility and provided us with some incremental capital.
And we found the fourth CEO and the company's history.
On an honor to serve as American Equity's, Chief Executive Officer. These last seven plus years and the hiring of a not Bala ensures that our company will be in good hands for many years to come.
That around American equity for Awhile and had a chance to meet Dave noble or hear from him you likely would have heard Dave say and he said it on many occasions.
Not about the building, it's not about the charter or the policy form it's about the people.
At American equity has some of the very best people in the fixed index annuity business today.
In the spend my pleasure to serve with them for more than 16 years.
And now it's my pleasure to turn our call over two and not for some closing remarks.
Thank you John I'm delighted in order to join the American equity family. Thank you John Field leadership and service to the company and you a warm welcome to me and successes CEO and president.
Today's business day 14 for me at the company. So let me share with you why I chose to come to American equity.
And how I see our future unfolding with more to come on the lapping future calls in forums.
Fundamentally every company has two stories.
The first began external study of market share shifts profitable growth and financial returns for shareholders.
As importantly, betas in internal study, which is much less visible to outsiders.
It is anchored around building the business.
Strengthening its coal process is expanding and retaining quality workforce and having a vending culture.
As someone smarter than me said culture eat strategy for lunch.
No company wins on a sustained basis without being truly successful at both these stories.
While we generally held and talk about the external story as we should on earnings cause the cotton passing the baton from John to me is an opportunity for you to hear about the internal story of American equity.
David No Lou founded this company and after him the team under Wendy Walkmans and John's leadership.
Scale the company to over $50 billion of policyholder funds under management.
While retaining our founding principles around customer focus which had deeply instilled in our people and processes.
This quality is it read Jim industry.
Allow me to elaborate.
American equity has a reputation and its largest distribution channel independent agents of being company, whose products and business practices nevo embarrassed to distribute all.
Paul hooked up honestly holder.
Anyone who interacts with US 600 plus employees.
The majority of whom our frontline focused experiences these values.
Each touch point with the client all producer is a moment of truth.
At American equity wins Hearts, and minds mall and others in our marketplace.
This results in real financial benefits to us.
Because once we get a distribution bhakta, writing up business, we tend to retain a relationship with them.
Even if quarterly sales ebb and flow based on product competitiveness.
They know if they do business with American equity.
Bed owned business will likely never fees reputation risk because of us.
I'll focus on ease of doing business, leveraging new at tools and our people stands out when compared to other insurers.
With either their multiple legacy line that create processing system complexity.
On the corporate focus on asset aggregation Ova customer centricity.
Aasco policyholder, all producer and David Ted you about the American equity way.
This is why we remain goal cadieux full many producers like the 974 produces who've a million dollars plus producers in 2019.
As it prudently run that owned businesses and manage their risks, especially when it comes to volume concentration reputation and customer experience.
All this while truly staying low cost.
The American equity advantage.
This allows us to be financially disciplined by not leading with the richest benefits are the flavor of the quarter General Yeo product designs.
We go to market with products that a simpler to understand and deliver Dan deliver sustainable financial results.
For our investors over the long term across market cycles.
Full multiple macro reasons third diamond market is an attractive growth market for new entrants.
And anyone can by the way into this industry, even deliver near term financial returns with balance sheet optimization.
Frankly began and be will get even better at optimizing our balance sheet with multiple levels over the coming years.
But it is not easy to build a moat around the business.
That deliver sustained positive financial outcomes like the American equity weight.
In terms of the external story, yes, we have a set of challenges with a more competitive marketplace than in the past.
Especially with new entrants with either a different risk appetite.
When it comes to investments and balance sheet optimization.
Our different ridden specials, possibly due to a desire to gain risk diversification from fixed products.
But this is all part of where and how we focus to win in the marketplace.
And the team and I look forward to shedding mall with you in the coming quarters.
The glass is more than half full.
If you view American equity from the viewpoint of being a front line obsessed data rich company.
In addition to being a financially disciplined at scale annuity manufacturer with 640000 policies in force.
As a company, we have the resources and willingness to invest in evolving our capabilities, whether it is in technology investments.
Any other bought off of value chain to further differentiate ourselves to continue to win in our core existing markets.
And expand into meaningful adjacent seats.
On behalf of my colleagues and the entire 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.
Ladies and gentlemen to ask a question you would need to press Star then one when your telephone.
We ask that you limit yourself to one question and one follow up question you may jump back in the queue. If you have additional question.
Again that still want to ask the question.
To withdraw your question Crestor packing.
Please standby, while we compile the can you on a roster.
Our first question comes from the line of Pablo Singzon with JP Morgan Your line is open.
Hi, Thank you John.
It was a pleasure working with you and.
Again, good luck in your retirement.
So.
I guess first question I have is for Ted as we think about.
Option costs, if you walk into 2019 was there anything meaningful about the macro environment last year, whether rates or volatility that.
Bring on cost last year, but not but not necessarily recur. This year and also if you could let us know what often cost where in the fourth quarter I think we trended Doug consistently throughout 2019.
I don't know that I can point to anything macro wise for you in regards to the option cost that happened this year that might not happen next year, but certainly around the cost of option the cost of options for American equity life. During the fourth quarter averaged approximately 157 basis points and that.
Compared to 165 basis points in the third quarter.
Okay for the last week.
The cost of options and American equity life was 154 basis points, so a little bit lower than what the average was but still right there around 454.
Okay and that run rate doesn't include the rate actions.
Or maybe just a little bit of the reductions that you began taking in January right. So the yes.
Yes, it does be a very little bit right. It would it would taken place rate actions that started on the 29.7 billion that started in January.
Got it and then next question before you for John So.
It's it's an election year again, this year and there's a chance that this could you share rule will become popular again. So I wanted to ask you to handicap, what could happen either way, but I guess I was wondering if you could speak do you know changes that your distribution partners have implemented in the past couple of years that Mike there plus from them of the rule comes back in this year's reform.
Thanks.
This is a name on general counsel.
The.
Our distribution partners have obviously, just as we have been Ben monitoring the nei transactions what are the CLL started with the fiduciary rule, where the FCC as with Reg VI and we've all been very actively involved in what the FDIC is doing with regard to insurance products in annuities in particular and they have.
Put together changes modest suitability rule, which are going to be adopted by the state and we've been examining that looking at things were going to need to do to change in our.
Processes and procedures will be additional agent oversight, some additional disclosure and we'll be working with our distribution partners on all those things to make sure. We're all in alignment on complying with the requirements of the any icees new model rule.
Okay. Thank you ill re queue.
Okay.
Thank you. Our next question comes from the line of John Barnidge with Piper Sandler Your line is open.
Thank you off and not you've got a background, bringing together private capital asset management capabilities and yields talked about working to increase allocation and private asset backed in infrastructure investing as well as external management in recent quarters could you expand on your view of this and how you see it being implemented thank you.
Hi.
Thanks, John I think Ted covered a little bit opened in his prepared remarks, which is those are all opportunities for us in the future. It's been early on day 14 for me to give you more specifics but.
I think you are reading about exactly the way the team was thinking about it and I intend to double down in their efforts.
Okay and then my follow up question you talked about.
Interest in products that have immediate adjacent see two hcl could you expand on that a little bit and could that include block acquisitions.
I would say, we look at anything and everything that creates value for our shareholders over the long term that being said when I said adjacent sees as referring to the value chain. So if you think of US we're a company that distribution loves to work with.
So and work company that wants to look at optimizing our balance sheet, but it comes investments that comes to capital. So that a lot of things. We can do around those themes were not just a product company, where a client solutions company.
Okay, great. Thanks for the answers.
Thank you.
Our next question comes from Milan, Randy Binner with B. Riley Your line is open.
Yes, Thanks, Hey, John obviously, it's been a pleasure working with you over the years good luck in retirement and not welcome.
As as new CEO I am I just wanted to confirm.
What's the plan as for the extra capital and I think liquidity from the perpetual preferred raise after the sub debt paydowns.
How should we plan on utilizing that and the model would it be down in the insurance companies. It is it liquidity at the Holdco et cetera.
At this point in time, we're holding it at the Holdco as extra liquidity with the opportunity that yes. It could be used for growth capital, yes. It could be used if for some reason we needed to increase our RBC ratio. It represents about 20 points of RBC, but at this point in.
Time, it hasn't been tag for anything specific on it just for general corporate purposes at this time.
And obviously as we go through the year and we analyze strategy and what we're doing well consider the uses of those proceeds it was an opportune time to go to the market and raise the money in that form.
And it gets very favorable treatment, obviously by the rating agencies and so we believed at that point in time, it would be useful to raise a little bit more than what we needed in regards to just redeeming the trust preferred securities.
Right.
Yeah, I agree, but its historically a al. This is the most liquidity you've had the holding company maybe ever right.
Oh, John and I are looking at each other there was a time, where we had we had raised some additional funds and had the holding company and then we did contribute them down at that point in time that was in conjunction with also going back to an a minus rating I believe at that point in time, but we've had some we had liquidity at that point in time.
But I would say over the last several years, we've kind of gone over the hump of.
No outpacing our capital in regards to production because we've gotten to that critical mass and I've said before we have enough.
Based upon where normalized statutory earnings are.
Current base of assets should produce and liabilities should be able to allow us to sell between four and a half of $5 billion of business.
Yes, I mean, that's what I was given the competition in the market. It would seem that you're not going to be capital consumptive from a sales perspective. So I guess, we'll stay tuned for the the use of the capital but can we can we entertain the idea that some of that could be returned to shareholders.
I mean that its general corporate bareboat rule it out although it out exactly what's going to say, it's hot rolled out, but it's it's for general corporate purposes, and that would be up potential yes, I, just adding I think it's early days, but do not ready conclusions on that we've got strategies to grow our business to look at other thing than investments like we mentioned so you always have to look at.
While capital consumptive, those could be relative to organically growing the business or returning to shareholders.
Alright, great. Thanks.
Thank you.
Next question comes from the line of market.
On Trust your line is open.
Yes. Thank you very much good morning, congratulations to both an anthem John.
The run the pending count. This morning that 14, 33 looks like that I've got this write about half of where it was on the call last year.
That kind of reflects the current competitive dynamic I know you adjusted.
Pricing in the late in the quarter, but does this reflect kind of.
Youre state of competitiveness versus peers.
Yeah. The competition has been has been pretty tough.
Got new entrants into markets.
Theres, some pretty high rates, both and participation rates and gaps.
And and rates in general are coming down in the marketplace. You know all during 2019 and still pretty low today, So I think.
All those things are impacting.
Our pending count, although we are seeing.
Starting to get some lift now are submitted applications are up our pending count is going up always slower than I like it too but it is.
Incoming phone calls and our marketing department are up.
From where they've been in December and January so.
We're moving into right direction currently.
And then the John the you you all talked about the use of illustrations of the I recall correctly looking theres, some regulatory dynamic maybe potential restrictions around the use of illustrations is that.
Not the case is there any potential for relief on that front.
Rene probably a little more current on that that is a topic thats been in debate discussion on the regulatory size with the with the industry weighing in right. The any ideas and looking at the illustration model rule and has been having a working group that's been focused on that for some time.
But they haven't come to any conclusions about what's going to be required to illustrate in terms of.
Index.
Length of time that it's exists into its component. So that's still under review at DNA IC.
Thank you.
Thank you.
Our next question comes from the line of Alex Scott with Goldman Sachs. Your line is open.
Hey, good morning.
Congrats John welcome Anon.
First question I had.
Just on the on the DAC.
It looks like there's a pretty significant move up in the in the GAAP earnings power here associate with the actuarial review and how much stack the size being amortized.
I just wanted to get your thoughts around.
How should we view this I mean is it economic.
I know a cash flow in the statutory entities is a little tough to define because you're not necessarily looking to send money up to the holding company, but could you help us think through I does the actuarial review help capital generation in the operating companies on a statutory basis at all.
On a statutory basis no I mean, the assumption review and the changes are really a noncash change not at a cash changes so that assumption review doesn't affect statutory and the generation of regulatory capital within the statutory operating subsidiaries.
Got it okay.
Okay.
My second one is I guess, maybe for a nod more on go forward strategy.
I'm thinking through what you're saying around pricing in the release and the prescribed valuation.
For interest rates in some of the statutory pressures.
There's a lot of supply of capital.
Out there for for reinsurance was just interested if there'll be any change in thinking around whether you'll want to be using your capital to fund new business as opposed to maybe using more flow reinsurance or even reinsuring back book to.
No.
To optimize and streamline the balance sheet.
Hi, Alex.
All those.
Levers what has surprised us to see in terms of impact I would say our focus is.
On how to continue to deliver solid double digit returns, but you see us doing the best use of our capital is to invest in our business and grow it further because we can deliver those returns and Cree ingredients to that returns is what we're doing the asset site. So we're keenly looking at what we do in investments.
Can you do the good work the team has started and get more efficient with the capital side in order to deliver the products to grow.
I would prioritize it that way.
Got you okay. Thanks.
Thank you.
As a reminder, ladies and gentlemen that star one asked a question.
We have a follow up question from Milan, Pablo with JP Morgan Your line is open.
Hi, Thanks for taking my follow up so Ron just on the.
Lower statutory valuation rate for 2020 I was wondering if the industry had gone through something similar in media in recent years.
And if yes is it why you're expecting other companies to move to where you are and guaranteed income. So you know it seems like funding cuts for or not it seems attending constant pretty low and then I'm assuming along that's from the guaranteed income product.
Pablo This is Ted I'll answer that we certainly have gone through this before what they always the unknown is is who's going to make the first move and who is going to reduce rates on that because of the lower valuation rate so with a little bit of a timing exercise we typically I.
I think.
A few years back when we went through this we saw maybe a little bit of delayed response from our competitors.
It wasn't something that happened right away in January it was a few months into the year and John as waving even maybe even farther than a few months into the year. So we're going to be cautiously watching that and see what kind of reaction, we see from our competitors but.
Again, it's a timing exercise and it's a wait and see to see how competition is going to react.
This is John this is the this is the third experienced that there were entering the third experience of this type in the last.
All 567 years, and then Ted's right. The first time, we were well ahead of it and the competition Didnt follow on until May or June.
Last time, I don't think that for the size of the rate CIT rate decrease was as much so.
Probably where orders many changes this to me as a pretty sizeable decrease in valuation rates for single year. We're we're off when looking at 25 basis points is kind of the movement maybe 50.
And the dilemma for everybody is you don't know what the final number is until you get to June Thirtyth.
But yet lies readthrough retroactively to the first to the year So all right.
And so I would it be fair to say just based on a previous expense. It doesnt seem like potential third party solutions like maybe reinsurance would be a full offset.
Whatever statutory screen you will expect from 2020, I guess just based on how companies have acted before.
I don't think it's going to be up fall off side. I mean, you can have offset but not a full offset to the impact okay and companies already have that baked into their current pricing. So have a companies already doing something to offset that strain or the that amount that happens that increase in reserve.
The question is that just means theyre going to see more off but that doesn't necessarily.
Ill.
Whether how that's going to ultimately impact them on pricing, whether or not they can hold rates or need to lower rates. I think is also going to be factored on where are they going to take more risk on the asset side in our yield are they going to have a lower I R. R.
How are they going to adjust those items in the competitive marketplace.
I think what I would add and it's not.
Going out into the ninth is that we have our income products price for current markets. We can say that for all our competitors. We feel good about repriced our products for current market realities. When it comes to what we can earn and we look to win in the marketplace with other things, we do to differentiate ourselves.
That makes sense.
My last question for you so.
I think your senior perspective, as when you convert to yield and having worked for a competitor that essentially trying to grow in yields and market right. Now. So I guess is as you look at your current product and distribution channel strategy and maybe your has there might be brought but where do you keep potential changes. This to me. It seems like El strategy has worked very well than traditional agency, but I guess how would you.
If we should be different for banks and brokers. So just I guess, where larger annuity companies have historically operated.
At the risk of being a bit Corning I think the Eagle consortium.
Okay.
Thats a.
Thing, we go through the bank and broker dealer channel and we.
We have a loyal following an independent agent.
As that channels evolving we will help them evolve.
And be that with them.
We don't have to be deep in every relationship, but we are deepening Betty many relationships and the bank in Brooklyn, Let's base. The company has a good strategy. It's beginning to work in the last few years and was this double down on that but are you going to be we wanted to our strategic talk process around that before we do it and I as I said earlier investment yield and the right capital makes backing that.
It's critical to win because that is a more product competitive market.
Okay that makes sense. Thank you.
Thank you.
Next question comes from the line of Jamie English Philo Smith Your line is open.
Hi, good morning.
John appreciate your on the value.
Great here and not look forward to working with you.
I Wonder if you could you could extend will further on your your comments a second ago about the banks broker dealer channel.
The.
So two things one is what did how do you feel that the current competitive environment and is there something you can maybe we'll be doing differently from a product point of view going forward too.
Prove or add to your market share there.
Well this is Ron.
We're really really optimistic about our new income product at Eagle life. It's the income market is is is gaining momentum there it's virtually untapped at the moment.
The product that we're introducing is gonna be the most competitive in the marketplace ahead of the current leader if they turn on income at age 71, or before which is really the sweet spot for income.
If it's after age 71, then we're not the highest so that by itself. When we hear all the time that you got to be higher up the totem pole should be meaningful.
To Eagle life as that product gains acceptance in the banks and broker dealers and gets launched for sale.
And to add to Ron's pointed to non.
The other way be differentiated the ease of doing business with us. So when you talk to distribution, but can you talk about integrating with that technology tuck where people go into annuity exchanges or things like that that's where we can differentiate being a nimble focused company.
Integrating into that technology, so its product, but it's also that such an experience that we can deliver.
Yeah.
Do you do you think that the bank and broker dealer market.
Yes, yes, it's more competitive than a ones same.
What do you what do you think we are here.
Well I think it's more competitive than the independent agent channel, but I'm not sure that it's gotten more competitive than in the last.
Six months or or quarter whatever it is this the they do pay a lot more attention to participation rates in the bank in the bank channel.
You got to be you really have to sharpen our pencils there when we set rates because it is that the bandwidth is narrow in that channel compared to the independent agent channel when you're setting rates and we're not we're actually it's been pretty decent shape.
Sure as far as our rates at Eagle life, when we look at our annual point to point participation rate, we're not far off I'm.
From some of our current competitors.
So and I think that's evidenced in that.
Our pending count is growing there a little bit faster than it is that at American equity.
Okay, great. Thanks, Good luck.
Thank you well follow up question from Alex Scott Goldman Sachs. Your line is open.
Hey, Thanks for taking the follow up I was just interested in the crediting rate actions, you're taking in and if you've seen any early results.
Give you an indication of how.
Yes, surrenders Lapsation, all will trend as a result to sum up.
We havent David from the current crediting rate action.
Certainly maybe we should talk about a historic I would not that when we look at the historic ones that we've done even we did want an August et cetera, we haven't said it seen any real impact to that for increase surrenders.
On policies and it's way too early to see the most recent adjustment that we made but I wouldn't be surprised to see any significant increase in surrenders based upon the rate adjustments that were putting in place on the 29.7 billion.
Certainly the size there is the of the rate adjustments so in terms of the.
The the measure for the what the policyholders fees is not a lot different than what the what those experiences bent over the last number of years, we wheat, we don't Gal Jim on rate adjustments, we we make modest rate adjustments, but we've done it over a period of time and certainly the experience would say that.
That approach is not generated any abnormal changes in policyholder behavior.
Okay. Thank you.
Thank you.
We have a follow up from Pablo.
Things all with JP Morgan Your line is open.
Hi, Thanks again.
Ron banking broker focused insurers have been trying to grow and I am most for some time already and I guess near approach has been just not exclusive product payoffs at some of the larger agencies. I was wondering if that has had any impact with all your market share or health space linear I am apartments or lost sales.
Maybe some of historical partners, but being sales elsewhere.
Not anymore than than typical I, what it has had.
Some effect I guess is that there's some new entrants in the marketplace that we havent really competed with before they're not proprietary type products, but.
They're offering rates that are way above the market. You know for example, equitable life in casualty has got an S&P 500.
Annual point to point strategy, that's got a par rate of 55%.
No were 4%.
And we have NASA out there that you know a new entrant to our market to that has an S&P 500 annual point to point of 50. So you know we scratch our heads and say my gosh.
No, that's a pretty big gap, where the investing.
Are they doing that.
On that in one thing to around and John is we and known in the marketplace for our rate integrity and let me elaborate what we mean my that and drawing John Please jump in when we offer you a rate we don't change it next year or the or after that it stays for awhile.
Let's see what the new entrance to so Thats I think there's a core part of distribution that loves that and we'll always stay with us and that by the bunch of distribution that care less about that and maybe they'll go with someone else.
And that's honestly the reality of business.
That's a message that we talk about a lot when we when we go out and visit with our animal partners and agents, we talk about that rate integrity.
In a non tad it in his comments that were not going to embarrass their brand or ours by.
You know setting rates that we can't sustain a for the next few years and and so we try to remind them of that every time we can.
Alright, Thanks for your answers guys.
Thank you.
As shown any further questions I will now like to turn the call back over to Julie for closing remarks.
Thank you for your interest in American equity and for participating in today's call should you have any follow up questions. Please feel free to contact us.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect everyone have a wonderful day.
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