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American Equity's (AEL) Annuity Product Aids Amid Cost Woes

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American Equity Investment Life Holding Company (AEL - Free Report) is well-poised for growth, driven by strategic partnerships, annuity business, and management of new business and renewal rates.

Zacks Rank & Price Performance

American Equity currently carries a Zacks Rank #3 (Hold). In the past year, the stock has rallied 38.5%, outperforming the industry’s increase of 12.7%.

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Driving Factors

Increase in fees assessed for lifetime income benefit riders, increase in average fees and higher surrender charges continue to contribute to annuity product charges that are one of the important drivers of the company’s revenues. The company expects to focus its efforts for the rest of the year on the fixed index annuity product line and targets sales between $5 and $6 billion in 2021.

It remains focused on executing its earlier announced reinsurance partnerships with Värde Partners and Agam Capital Management, LLC as well as Brookfield Asset Management Inc. to ramp up its growth. These partnerships are expected to benefit the company in a number of ways.  It will free up capital to return to shareholders, redeploy capital into higher yielding alpha generating assets and raise third-party capital into reinsurance vehicles to provide risk capital to back a portion of existing liabilities and future sales of annuity products. Moreover, these are likely to generate sustained, deployable capital for shareholders and significant accretion in return on equity over time.

Given growth in annuity business and increases in average yield earned on average invested assets, investment income is expected to improve despite current low interest rate environment.

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. The insurer anticipates investments spread to rise to its expected levels.

American Equity boasts a strong balance sheet with strong cash balance.

Robust cash flows enable American Equity to undertake shareholder-friendly moves via dividend hikes and share buybacks. Its dividend payments have witnessed a eight-year (2012-2020) CAGR of 9.9%. In October 2020, the company approved a $500 million share repurchase program, which was intended to offset dilution from the issuance of shares to Brookfield and to institute a regular cash return program for shareholders.

However, the company’s expenses escalated over the last several years due to higher insurance policy benefit, policy acquisition costs, and other operating costs and expenses weigh on its margins. American Equity estimates operating costs to trend higher in the coming quarters, as it will build out the necessary infrastructure to continue execution of the ATL 2.0 strategy.

Stocks to Consider

Some better-ranked stocks from the insurance sector include Primerica, Inc. (PRI - Free Report) , Athene Holding Ltd. (ATH - Free Report) and HCI Group, Inc. (HCI - 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.

Primerica’s earnings surpassed estimates in three of the last four quarters, missing the mark on one occasion, the average surprise being 8.11%.

Athene beat estimates in the trailing four quarters by 43.49%, on average.

The bottom line of HCI Group surpassed estimates in three of the last four quarters and missed the mark in the remaining one, the average beat being 42.91%.

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Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

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