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Home » American Equity Investment Life Holding (AEL) Q4 2019 Earnings Call Transcript – Motley Fool
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American Equity Investment Life Holding (AEL) Q4 2019 Earnings Call Transcript – Motley Fool

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American Equity Investment Life Holding (NYSE:AEL)
Q4 2019 Earnings Call
Feb 13, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to American Equity Investment Life Holding Company’s fourth-quarter 2019 conference call. At this time, for opening remarks and introductions, I would like to turn the call over to Julie LaFollette, coordinator of investor relations.

Julie LaFolletteCoordinator of Investor Relations

Good morning. And welcome to American Equity Investment Life Holding Company’s conference call to discuss fourth-quarter 2019 earnings. Our earnings release and financial supplement can be found on our website at www.american-equity.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 are John Matovina, chief executive officer; Anant Bhalla, CEO-elect and president; 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 meaning of the Private Securities Litigation Reform Act. There are a 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 in our most recent filings with the SEC.

An audio replay will be made available on our website shortly after today’s call. It is now my pleasure to introduce John Matovina. 

John MatovinaChief Executive Officer

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 operating income and operating earnings per share, excluding the beneficial effect of assumption revisions. 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 writers. As a reminder, the three key metrics that drive our financial performance are growing our invested assets and 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 of 2019, we delivered 0.5% sequential growth and 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 of actuarial assumption revisions. And our investment 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 and $4.7 billion for the year.

Our policy rates were less attractive in the fourth quarter, following 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 and 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 writedown 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 or 4 basis points and $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 and have almost $225 million of net proceeds available for general corporate purposes.

Now I would like to turn the call over to Ted for additional comments on fourth-quarter financial results.

Ted JohnsonChief Financial Officer

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. And compared to $90 million or $0.99 per share for the fourth quarter of 2018. We had one discrete item this quarter, a $2 million pre-tax or $0.02 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 9-basis-point decline in the cost of money offset a 7-basis-point decrease in the average yield on invested assets. Trend able 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 $4.52 in the fourth quarter of 2019, compared to $4.59 in the third quarter of 2019. The decrease was primarily attributable to 4-basis-point reduction in the benefit from nontrendable investment income items and a 3-basis-point reduction from the decline in yields on our floating rate investments.

The average yield on investments acquired in the fourth quarter was $3.74, compared to $3.30 in the third quarter. We purchased $850 million of fixed income securities at a rate of $3.51 and originated $266 million of commercial mortgage loans at a rate of $3.97 during the quarter. The average yield on $330 million of fixed income securities purchased and commercial mortgage loans funded in January was $3.35. 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 will 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 nontraditional 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 of money for annuity liabilities was 175 basis points, down 9 basis points from the third quarter of 2019. We the benefit from over hedging index-linked interest obligations was 5 basis points in the fourth quarter, compared to 2 basis points in the third quarter. We estimate that the trend able cost of money declined by 6 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 of policyholder funds under management last month. 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 6 basis points on our entire in force when fully implemented over the next 12 to 15 months. Should the yields available to us decrease or the cost of money rise, we continue 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 costs 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 writers.

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 writer is assumed to be utilized, resulting in a larger increase in the liability for the writers. Now I will turn the call over to Ron to discuss sales, marketing and competition.

Ron GrensteinerPresident of American Equity Investment Life Insurance Company

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.

In 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 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 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 does illustrate well.

And similar to the S&P 500 index, the S&P 500 Dividend Aristocrats index has the long history of actual performance. Over 65% of new money into AssetShield 10 in the fourth quarter was allocated to dividend Aristocrats, up from 42% in the third quarter. Our October decreases in guaranteed income were not widely matched by the marketplace. We did not increase guaranteed income levels in December as we expect the prescribed valuation interest rates used to compute regulatory reserves for policies issued in 2020 to drop 50 to 75 basis points compared to the rates for 2019 policies.

While in the near term, this may be a sales headwind for us with respect to policies with lifetime income benefit writers, 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 business at American Equity Life averaged 2,120 applications during the fourth quarter, compared to 2,685 applications in the third quarter and 2,169 applications when we reported third-quarter earnings. Pending this morning stands at 1,433 applications. Gross FIA sales at Eagle Life decreased 59% sequentially.

Eagle Life had 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. Spending applications today at Eagle Life stands at 125 applications, compared to 127 applications when we reported third-quarter earnings and 224 applications a year ago. The pending count is well off its quarterly low following rate increases we implemented in December, 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, and several have already agreed to sell the product. Adding the product to financial institutions platforms is ongoing, and we anticipate sales to materialize early in the second quarter. Guaranteed income in 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 rider 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 writer, 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, the 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’s 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 received messages regularly from distribution partners and policyholders with excellent service complements.

We even received complements occasionally from NVS competitors. Now we can add recognition from the world-renowned and prestigious J.D. Power organization. We are very pleased to rank fourth for customer satisfaction in J.D.

Power’s 2019 U.S. life insurance study. American Equity Life, satisfaction Index score outpaced the annuity industry average, as well as other leading fixed indexed annuity carriers. This is the first year the annuity provider category was included in J.D. Power’s overall customer satisfaction index ranking for the U.S.

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 will turn the call back to John.

John MatovinaChief Executive Officer

Thank you, Ted and Ron. We are 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%, with fixed indexed 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 $5.97 per share. And if you exclude the impact of unlocking of actuarial assumptions, our operating earnings were $424 million or $4.62 per share, far surpassing last year’s record of $345 million and $3.78 per share. Our investment spread during the year benefited from our active rate management and our trend able spread increased each quarter of this year. Fourth-quarter 2019 trend able spread at 2.63% was 15 basis points higher than the fourth-quarter 2018 level of 2.48%.

We completed a $400 million public offering of perpetual preferred restock, which increased our balance sheet flexibility and provided us with some incremental capital. And we found the fourth CEO in the company’s history. It’s been an honor to serve as American Equity’s chief executive officer these last seven-plus years. And the hiring of Anant Bhalla ensures that our company will be in good hands for many years to come.

Now if you’ve been around American Equity for a while 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, it’s not about the building. It’s not about the charter or the policy form, it’s about the people. And American Equity has some of the very best people in the fixed index annuity business today.

And it’s been my pleasure to serve with them for more than 16 years. And now it’s my pleasure to turn our call over to Anant for some closing remarks. 

Anant BhallaChief Executive Officer and President

Thank you, John. I’m delighted and honored to join the American Equity family. Thank you, John, for your leadership and service to the company and your warm welcome to me as successor CEO and president. Today is 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 in the latter in future calls in forums.

Fundamentally, every company has two stories. The first being an external story of market share shift, profitable growth and financial returns for shareholders. As importantly, there is an internal story, which is much less visible to outsiders. It is anchored around building the business, strengthening its core processes, expanding and retaining a quality workforce and having a winning culture.

As someone smarter than me said, culture eats strategy for lunch. No company wins on a sustained basis without being truly successful at both these stories. While we generally hear and talk about the external story as we should, on earnings calls, the current passing of the baton from John to me is an opportunity for you to hear about the internal story of American Equity. David Noble founded this company and after him, the team under Wendy Waugaman’s 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 are deeply instilled in our people and processes. This quality is a rare gem in our industry. Allow me to elaborate. American Equity has a reputation in its largest distribution channel, independent agents of being a company whose products and business practices never embarrassed the distributor or hurt a policyholder.

Anyone who interacts with our 600-plus employees the majority of whom are front line focused experiences these values. Each touch point with a client or producer is a moment of truth where American Equity wins hearts and minds more than others in our marketplace. This results in real financial benefits to us because once we get a distribution partner writing our 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.

Their own business will likely never face reputation risk because of us. Our focus on ease of doing business, leveraging newer tools and our people stands out when compared to other insurers with either their multiple legacy lines that create process and system complexity or a corporate focus on asset aggregation over customer centricity. Ask a policyholder or producer and they will tell you about the American Equity way. This is why we remain a core carrier for many producers like the 974 producers who are $1 million-plus producers in 2019 as they prudently run their own businesses and manage their risks, especially when it comes to volume concentration, reputation and customer experience.

All this, while truly staying low-cost is the American Equity advantage. This allows us to be financially disciplined by not leading with the richest benefits or the flavor of the quarter or year product designs. We go to market with products that are simpler to understand and then deliver sustainable financial results for our investors over the long term across market cycles. For multiple macro reasons, the retirement market is an attractive growth market for new entrants.

And anyone can buy their way into this industry even deliver near-term financial returns with balance sheet optimization. Frankly, we can and we will get even better optimizing our balance sheet with multiple levels over the coming years. But it is not easy to build a moat around the business that delivers sustained positive financial outcomes like the American Equity way. In terms of the external story, yes, we have our 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 or different return thresholds, 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 sharing more 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 640,000 policies in force. As a company, we have the resources and willingness to invest in evolving our capabilities, whether it is in technology investments or any other part of our value chain to further differentiate ourselves to continue to win in our core existing markets and expand into meaningful adjacencies.

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. 

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from the line of Pablo Singzon with JP Morgan. Your line is open.

Pablo SingzonJ.P. Morgan — Analyst

Hi. Thank you, John. It was a pleasure working with you. And again, good luck on your retirement.

So I guess, the first question I have is for Ted. As we think about option costs that you lock in through 2019. Was there anything meaningful about the macro environment last year, whether rates or volatility that helped bring on costs last year, but not might necessarily recur this year? And also, if you could let us know what option costs were in the fourth quarter? I think we trended down consistently throughout 2019.

Ted JohnsonChief Financial Officer

I don’t know that I can point to anything macro wise for you in regards to the option costs that happened this year that might not happen next year. But certainly, around the cost of options, the cost of options for American Equity Life during the fourth quarter averaged approximately 157 basis points. And that’s compared to 165 basis points in the third quarter. For the last week, the cost of options in American Equity Life was 154 basis points.

So a little bit lower than what the average was still right there, around 154. 

Pablo SingzonJ.P. Morgan — Analyst

And that’s the run rate doesn’t include the rate actions you or maybe just a little bit of the rate actions that you began taking in January, right?

Ted JohnsonChief Financial Officer

Yeah. It would just be a very little bit, right? It would take in place rate actions that started on the $29.7 billion that started in January.

Pablo SingzonJ.P. Morgan — Analyst

Got it. And then next question before I queue. So John, so it’s an election year again this year, and there’s a chance that the city fair rule will become topical again. So I want to ask you to handicap what could happen either way.

But I guess, I was wondering if you could speak to changes that your distribution partners have implemented in the past couple of years that might better position them if the rule comes back in its original form. 

Renee MontzGeneral Counsel

This is Renee Montz, general counsel. Our distribution partners have, obviously, just as we have been, been monitoring the NAICs actions what are the DOL started with the fiduciary rule or the SEC is with REG BI. And we’ve all been very actively involved in what the NAIC is doing with regard to insurance products and annuities, in particular. And they have put together changes to the modest suitability rule, which are going to be adopted by the states, and we’ve been examining that and looking at things we’re going to need to do to change in our processes and procedures.

There will be additional agent oversight, some additional disclosure, and we’ll be working with our distribution partners on of all those things to make sure we’re all in alignment on complying with the requirements of the NAICs new model rule. 

Pablo SingzonJ.P. Morgan — Analyst

OK. Thank you, Renee.

Operator

Thank you. Our next question comes from the line of John Barnidge with Piper Sandler. Your line is open.

John BarnidgePiper Sandler — Analyst

Thank you. Anant, you’ve got a background bringing together private capital and asset management capabilities. And AEL’s talked about working to increase allocation in private asset-backed and infrastructure investing, as well as external management in recent quarters. Could you expound on your view of this and how you see it being implemented? 

Anant BhallaChief Executive Officer and President

All right. Thanks, John. I think Ted covered a little bit of it in his prepared remarks, which is, those are all opportunities for us in the future, and it’s a bit early on day 14 for me to give you more specifics. But I think you’re reading about it exactly the way the team was thinking about it, and I intend to double down in their efforts.

John BarnidgePiper Sandler — Analyst

OK. And then my follow-up question, you talked about interest in products that have immediate adjacency to AEL. Could you expound on that a little bit? And could that include block acquisitions? 

Anant BhallaChief Executive Officer and President

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 adjacencies, I was referring to the value chain. So if you think about, we’re a company that distribution loves to work with. And we’re a company that wants to look at optimizing our balance sheet when it comes to investments, when it comes to capital.

So there are a lot of things we can do around those themes. We’re not just a product company, we’re a client solutions company. 

John BarnidgePiper Sandler — Analyst

Great. Thanks for the answers.

Operator

Thank you. Our next question comes from the line of Randy Binner with B. Riley. Your line is open.

Randy BinnerB. Riley FBR — Analyst

Yeah, thanks. Hey, John. Obviously, it’s been a pleasure working with you over the years, good luck in your retirement and, Anant, welcome as new CEO. I just wanted to confirm what the plan is for the extra capital and I think liquidity from the perpetual preferred raise after the sub-debt pay downs? How should we plan on utilizing that in the model? Would it be down in the insurance companies? Is it liquidity at the Holdco, etc.?

Ted JohnsonChief Financial Officer

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 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 a tagged for anything specific.

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, we’ll 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 gives very favorable treatment, obviously, by the rating agencies.

And so we believe 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. 

Randy BinnerB. Riley FBR — Analyst

Right. I mean, I agree. But it’s historically, AEL, this is the most liquidity you’ve had the holding company maybe ever, right?

Ted JohnsonChief Financial Officer

John and I are looking at each other. There was a time where we had raised some additional funds and have at 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- rating. I believe at that point in time.

But we’ve 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 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, our current base of assets should produce and liabilities should be able to allow us to sell between $4.5 billion and $5 billion of business. 

Randy BinnerB. Riley FBR — Analyst

Yeah. 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 use of the capital. But can we entertain the idea that some of it could be returned to shareholders? 

Ted JohnsonChief Financial Officer

I mean, its general corporate purpose —

John MatovinaChief Executive Officer

Don’t rule it out.

Ted JohnsonChief Financial Officer

Don’t rule it out, exactly, that’s what I was going to say. It’s not ruled out, but it’s for general corporate purposes, and that would be a potential.

Randy BinnerB. Riley FBR — Analyst

Yeah, I will just add in. I think its early days took up any conclusions on that. We bought strategies to grow our business, to look at other things and investments like we mentioned. So you always have to look at how capital consumptive those could be relative to organically growing the business or returning to shareholders. 

Great. Thanks.

Operator

Thank you. Our next question comes from the line of Mark Hughes with SunTrust. Your line is open.

Mark HughesSunTrust Robinson Humphrey — Analyst

Yeah, thank you very much. Good morning. And congratulations to you both, Anant and John. On the pending count this morning, the 1,433 looks like that’s if I’ve got this right, about half of where it was on the call last year.

Do you think that kind of reflects the current competitive dynamic? I know you had adjusted some pricing late in the quarter. But does this reflect kind of your state of competitiveness versus peers? 

John MatovinaChief Executive Officer

Yeah, the competition has been pretty tough. We’ve got new entrants in the market. There’s some pretty high rates, both in participation rates and caps, and rates in general are coming down in the marketplace all during 2019 and still pretty low today. So I think all those things are impacting our pending count.

Although we are starting to get some lift now, our submitted applications are up, our pending count is going up, always slower than I like it to, 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 in the right direction currently. 

Mark HughesSunTrust Robinson Humphrey — Analyst

And then John, you already talked about the use of illustrations, and if I recall correctly, listen, there’s 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? 

John MatovinaChief Executive Officer

Renee will probably be a little more current on that. That is a topic that’s been in debate discussion on the regulatory side with the industry weighing in.

Renee MontzGeneral Counsel

Right. The NAIC has been 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, its existence or its components. So that’s still under review at the NAIC. 

Mark HughesSunTrust Robinson Humphrey — Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Alex Scott with Goldman Sachs. 

Alex ScottGoldman Sachs — Analyst

Hey, congrats, John, welcome. Anant, first question I had, just on the DAC. I mean, it looks like there’s a pretty significant move up in the GAAP earnings power here associated with the actuarial review? And how much DAC DSI is being amortized. I just wanted to get your thoughts around, how should we view this? I mean, is it economic? I know cash flow in the statutory entities is a little defined because you’re not necessarily looking to send money up to the holding company, but could you help us think through, like, does the actuarial review help capital generation and the operating companies on a statutory basis at all?

John MatovinaChief Executive Officer

On a statutory basis, no. I mean, the assumption review and the changes are really a noncash change, not a cash change. And so that assumption review doesn’t affect statutory and the generation of regulatory capital within the statutory operating subsidiaries. 

Alex ScottGoldman Sachs — Analyst

Got it, OK. My second one is, I guess, maybe for Anant, 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 and some of statutory pressures. There’s a lot of supply of capital out there for reinsurance.

I was just interested if there will 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 look to optimize and streamline the balance sheet. 

Anant BhallaChief Executive Officer and President

Alex, all of the levers, one has to pride to see in terms of impact, I would say, our focus is on how to continue to deliver solid double-digit returns, which you see us doing. So the best use of our capital is to invest in our business and grow it further because we can deliver those returns and key ingredients to that return is what we do in the asset side. So we are keenly looking at what we do in investments, continue to 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. 

Alex ScottGoldman Sachs — Analyst

OK, thanks.

Operator

Thank you. [Operator instructions] We have a follow-up question from the line of Pablo with JP Morgan. Your line is open.

Pablo SingzonJ.P. Morgan — Analyst

Hi, thanks for taking my call. So Ron, just on the lower statutory valuation rate for 2020. I was wondering if the industry had gone through something similar in maybe in recent years. And if you ask, is it why you’re expecting other companies to move to where you are in guaranteed income? So it seems like spending cuts or nothing that pending cost or are pretty low, and I’m assuming a lot of that’s from the guaranteed income product.

Ted JohnsonChief Financial Officer

Pablo, this is Ted. I’ll answer this. We certainly have gone through this before. What they always the unknown is who’s going to make the first move and whose going to reduce rates because of the lower valuation rate.

So with a little bit of a timing exercise, we typically, 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 is waiving 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. 

John MatovinaChief Executive Officer

This is John. This is the third experience that we’re entering the third experience of this type in the last of five, six, seven years. And Ted’s right. The first time we were well ahead of it and the competition didn’t follow-on until May or June.

Last time, I don’t think that the size of the rate decrease was as much. So they probably weren’t as many changes. This to me is a pretty sizable decrease in valuation rates for a single year where we’re often 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 30.

But yeah, it applies retroactively to the first of the year.

Pablo SingzonJ.P. Morgan — Analyst

All right. And John, would it be fair to say just based on our previous experience, it doesn’t seem like potential third-party solutions like maybe reinsurance would be a full offset to whatever statutory strain you will expect from 2020? I guess, just based on how companies have acted before.

John MatovinaChief Executive Officer

I don’t think it’s going to be a full offset. I mean, you can have offset, but not a full offset to the impact. And companies already have that baked into their current pricing. So if a company is already doing something to offset that strain or that amount that happens, that increase in reserve the question is, that just means they’re going to see more off, but they’re necessarily whether that’s going to ultimately impact them on pricing, whether or not they can hold rates or need to lower rates.

I think it’s also going to be factored on where they’re going to take more risk on the asset side and earn more yield? Are they going to have a lower IRR? How are they going to adjust those items in the competitive marketplace? 

I think what I would add in is I was going to add in as an answer is that we have our income products price for current markets. We can’t say that for all our competitors. We feel good where we priced 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 differentiate ourselves.

Pablo SingzonJ.P. Morgan — Analyst

Yeah, that makes sense. And Ron, my last question’s for you. So I’m curious to hear your perspective as the new Government revealed and having worked for a competitor that essentially is trying to grow in the ELS market right now. So I guess, as you look at your current product and the distribution channel strategy and maybe your answer might be broad, but where do you see potential changes.

To me, it seems like AEL strategy has worked very well in traditional agency, but I guess, how would your approach would be different for banks and brokers, which just, I guess, where larger annuity companies have historically operated. 

Anant BhallaChief Executive Officer and President

At a risk of being a bit corny, I think the Eagle can soar. Meaning, that’s a company we go to the bank and broker-dealer channel. And we have a loyal following an independent agents. As that channel is evolving, we will help them evolve and be there with them.

We don’t have to be deep in every relationship, but we are deep in very many relationships. And the bank and broker-dealer space, the company has a good strategy. It’s beginning to work in the last few years, and we’ll just double down on that, but we’re going to be — we want to do a strategic thought process around that before we do it. And as I said earlier, investment yield and the right capital mix backing that is critical to win because that is a more product competitive market. 

Pablo SingzonJ.P. Morgan — Analyst

OK, that makes sense. Thank you.

Operator

Thank you. Our next question comes from the line of Jamie Inglis with Phil Smith. Your line is open.

James InglisAnalyst

Hey, good morning. John, I appreciate all the values that help create here and now look forward to working with you. I wonder if you could extend a little further on your comments a second ago about the bank and broker-dealer channel. I mean, the — and so two things.

One is, how do you feel about the current competitive environment? And is there something you can and maybe will be doing differently from a product point of view going forward to improve or add to your market share there? 

Ron GrensteinerPresident of American Equity Investment Life Insurance Company

Well, this is Ron. We’re really, really optimistic about our new income product at Eagle Life. The income market is gaining momentum there. It’s virtually untapped at the moment.

The product that we’re introducing is going to 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 to total pool should be meaningful to Eagle life as that product gains acceptance in the banks and broker-dealers and gets launched for sale. 

Anant BhallaChief Executive Officer and President

And to add to Ron’s point, it’s Anant. The other way we differentiate is the ease of doing business with us. So when you talk to distribution partner, you talk about integrating with their technology. You talk about people going to annuity exchanges or things like that.

That’s where we can differentiate being a nimble, focused company, integrating into that technology. So it’s product, but it’s also that such an experience that we can deliver. 

James InglisAnalyst

Do you think that the bank and broker-dealer market is more competitive than it was same, what do you think we are here? 

Ron GrensteinerPresident of American Equity Investment Life Insurance Company

Well, I think it’s more competitive than the independent agent channel, but I’m not sure that it’s gotten more competitive. And in the last six months or quarter or whatever. And it’s just the they do pay a lot more attention to participation rates in the bank channel, you really have to sharpen our pencils there when we set rates because it is the bandwidth is narrow in that channel compared to the independent agent channel. When you’re setting rates.

And we’re actually is in pretty decent shape for as far as our rates at Eagle Life. When we look at our annual point to point, participation rate. We’re not far off from some of our current competitors. And I think that’s evidenced in that.

Our pending count is growing there a little bit faster than it is at American Equity. 

James InglisAnalyst

Great. Thanks. Good luck.

Operator

Thank you. We have a follow-up question from Alex Scott, Goldman Sachs. Your line is open.

Alex ScottGoldman Sachs — Analyst

Hey, thanks for taking the follow-up. I was just interested in the crediting rate action you’re taking? And if you’ve seen any early results that give you an indication of how surrenders lapsation will trend as a result of some of that?

Ted JohnsonChief Financial Officer

We haven’t — from the current crediting rate action, certainly, maybe you should talk about historic. I would not — when we look at the historic ones that we’ve done, even we did one in August, etc. We haven’t seen any real impact to that for increased surrenders. On policies and its way too early to see the most recent adjustment that we made.

But I would be surprised to see any significant increase in surrenders. Based upon the rate adjustments that we’re putting in place on the $29.7 billion. 

John MatovinaChief Executive Officer

Yeah, certainly. The size of the rate adjustments in terms of the measure for what the policyholder sees is not a lot different than what the experience has been over the last number of years. We don’t gouge them on rate adjustments, we make modest rate adjustments that we’ve done it over a period of time. And certainly, the experience would say that that approach has not generated any abnormal changes in policyholder behavior. 

Alex ScottGoldman Sachs — Analyst

OK, thank you.

Operator

Thank you. And we have a follow-up from Pablo Singzon with JP Morgan. Your line is open.

Pablo SingzonJ.P. Morgan — Analyst

Hi. Thanks again. So Ron, bank- and broker-focused insurers have been trying to grow in IMOs for some time already. And I guess, their approach has been to set exclusive product tie ups with some of the larger agencies.

I was wondering if that has had any impact at all on your market share of shelf space with your IMO partners or lost sales, maybe some of the historical partners but being sales elsewhere. 

Ron GrensteinerPresident of American Equity Investment Life Insurance Company

Not any more than typical. What it has had some effect, I guess, is that there’s some new entrants in the marketplace. That we haven’t really competed with before. They’re not proprietary type products.

But they’re offering rates that are way above the market. For example, equitable life and Casualty has got an S&P 500 annual point-to-point strategy that’s got a par rate of 55%. Now we’re 4%. And we have NASA out there that a new entry to our market, too, it has an S&P 500 annual point to point of 50.

So we scratch our heads and say, my gosh, that’s a pretty big gap. 

John MatovinaChief Executive Officer

Where are they investing in? 

Ron GrensteinerPresident of American Equity Investment Life Insurance Company

How are they doing that? 

Ted JohnsonChief Financial Officer

And I’ll add in one thing to Ron and John is, we are known in the marketplace. For our rate integrity. And let me elaborate what we mean by that and Ron and John, please jump in. When we offer you a rate, we don’t change it next year or the year after that, it stays for a while.

Let’s see what the new entrants do. So I think there’s a core part of distribution that loves that, and we’ll always stay with us and there’s other parts of distribution that care less about that, and maybe they’ll go with someone else. And that’s honestly the reality of business. It’s a message that we talk about a lot when we go out and visit with our NMO partners and agents, we talk about that rate integrity.

And Anant had it in his comments that we’re not going to embarrass their brand or ours by setting rates that we can’t sustain for the next few years. And so we try to remind them of that every time we can. 

Pablo SingzonJ.P. Morgan — Analyst

All right. Thanks for your interest, guys.

Operator

Thank you. I’m not showing any further questions. I would now like to turn the call back over to Julie for closing remarks. 

Julie LaFolletteCoordinator of Investor Relations

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. 

Operator

[Operator signoff]

Duration: 54 minutes

Call participants:

Julie LaFolletteCoordinator of Investor Relations

John MatovinaChief Executive Officer

Ted JohnsonChief Financial Officer

Ron GrensteinerPresident of American Equity Investment Life Insurance Company

Anant BhallaChief Executive Officer and President

Pablo SingzonJ.P. Morgan — Analyst

Renee MontzGeneral Counsel

John BarnidgePiper Sandler — Analyst

Randy BinnerB. Riley FBR — Analyst

Mark HughesSunTrust Robinson Humphrey — Analyst

Alex ScottGoldman Sachs — Analyst

James InglisAnalyst

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Source: Google Insurane

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