Shares of American Equity Investment Life Holding have gained 14.5% in a year against the industry’s decline of 15.8%. The Finance sector and the Zacks S&P 500 composite have declined 16.3% and 19.7%, respectively, in the same time frame. With a market capitalization of $4 billion, the average volume of shares traded in the last three months was about 0.7 million.

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

The Zacks Consensus Estimate for AEL’s 2023 earnings suggests growth of 31.3% year over year.

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

Image Source: Zacks Investment Research

Can AEL Retain the Momentum?

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

This leader in the development and sale of fixed index and fixed rate annuity products is expanding into middle-market credit, real estate, infrastructure debt and agricultural loans. This should fuel fixed index annuity product sales.

The majority of American Equity’s income is derived from its investment spread. An improving interest rate environment should add to the upside. Life insurers are direct beneficiaries of an improving interest rate environment. While the Fed has already raised rates seven times in 2022, more are in the horizon this year. At its December meeting, Fed predicted to take the interest rate to 5.1% in 2023 to combat its expected 3.1% inflation.

The execution of the AEL 2.0 strategy remains on track. AEL expects around one-third of the new business flow to convert into the return on asset business through growth in reinsured liabilities. Thus, the insurer believes its mix of fee revenues will support a higher-return business profile.

An improving cash balance and leverage ratio help AEL strengthen its balance sheet. AEL has hiked dividends each year since 2003 when it went public. Its dividend increased at a 20-year CAGR (2003-2022) of 19.6%. Also, in November 2022, AEL’s board approved a $400 million share buyback program in tandem with the AEL 2.0 strategy and has $594 million remaining under authorization.

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

Stocks to Consider

Some better-ranked stocks from the insurance industry are Root, Inc. (ROOT Quick QuoteROOT - Free Report) , Kinsale Capital Group, Inc. (KNSL Quick QuoteKNSL - Free Report) and CNA Financial Corporation (CNA Quick QuoteCNA - Free Report) , each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Root delivered a trailing four-quarter average earnings surprise of 22.44%. In the last six months period, ROOT lost 80.2%.

The Zacks Consensus Estimate for ROOT’s 2023 earnings indicates a year-over-year increase of 23.9%.

Kinsale Capital’s earnings surpassed estimates in each of the last four quarters, the average being 15.16%. In the last six months period, KNSL gained 6.9%.

The Zacks Consensus Estimate for KNSL’s 2023 earnings implies a year-over-year rise of 22.4%.

The Zacks Consensus Estimate for CNA Financial’s 2023 earnings implies a year-over-year rise of 12.5%. In the last six months period, CNA lost 3.6%.

The Zacks Consensus Estimate for CNA’s 2023 earnings has moved 2.5% north in the past 60 days.