It pays to read the comments of all the sections of this website–this is the area that helps folks to find good clues as to an potential investment.
Over the last many years as coupons tumbled and ‘spreads’ offered by fixed-to-floating rate preferred’s were very meager I have spent little time considering FTF issues. On the other hand a few years ago a limited number of issuer’s began to offer Fixed Rate Reset preferred’s. A FRR issue only has a coupon reset every 5 years and uses the 5 year treasury as the base rate and a spread is added to the 5 year treasury. Typically the ‘spreads’ of these issues are superior to the ‘spreads’ offered in the fixed-to-floating rate issues.
The Fixed-Rate-Reset issue that I find intriguing is the American Equity Investment Life 6.625% perpetual (AEL-B). Being an insurance company the issue is non-cumulative, but qualified. This issue carries a 6.625% fixed rate coupon until 9/1/2025, after which the rate will be reset and then every 5 years on the anniversary date a reset will take place.
The reset ‘spread’ on this issue is 6.297%!!!!. So if we reach 9/1/2025 and interest rates are at current levels the issue would reset to over 9% (6.297% plus 2.91%-the 5 year treasury rate).
So the issue is trading at $23.80 for a current yield of 6.96%. The approximate yield to worst on 9/1/2025 is about 8.4%. All things remaining at today’s level the reset coupon would be 9.2%.
While we obviously can’t see interest rates 3 years out it is reasonable to believe that the company will try to call the issue on 9/1/2025—prior to the reset.
American Equity Investment Life (AEL) is an insurance company primarily dealing in annuities. The preferred issues are rated BB (2 notches under investment grade) by S&P and Fitch.
NOTE–this idea came from the comments section–from Steve if I remember right.
The latest 10-q quarterly report is here.
The company press release on last quarter is here.
This is not a recommendation but an idea for investors to perform due diligence. I will likely buy a starter position in this issue.
American Equity Investment Life, which Tim mentioned on 7/1 has a credit enhancement that is not readily apparent. Early this year Brookfield Asset Management made its second equity investment in AEL, totalling $253 million. Brookfield hereby increased its ownership in AEL from 9.9% to 16%. They now own approximately 15.9 million shares of the company at an average price of just over $37.00. As many of you may know, BAM is a very large asset manager and is known as skilled acquirer of businesses. There senior debt is currently rated Baa1 by Moody’s and the firm’s assets now total just under $400 billion. They have a ‘strategic relationship’ with AEL, and It wouldn’t be a surprise to see an acquisition here at some point in the future. A pretty good partner to have in your corner!
Yes, I saw this in my research into AEL. BAM is very solid and envisioned that they could be an eventual acquirer. Even if they don’t acquire, I don’t see BAM putting money into a risky proposition.
Another one to take a look at is the Raymond James Fin’l 6.375% FTF RJFprB, this used to be TriState Bank which was recently acquired by RJF. Big improvement in credit quality and highly probable that the issue is called on reset date 7/1/26. Currently trading around $25.
Chris – Just curious – Is there a reason other than your expectation of where interest rates will be in 2026 as to why you say RJF-B is “highly probable” to be called on the first reset date?
RJF is rated A- by Fitch and BBB+ by S&P, I don’t think they have any other preferreds outstanding so I would expect them to be able to obtain cheaper financing than this. Still 4 years so a lot could happen.
OK, I was just wondering whether or not there was something having to do with the acquisition and RJF inheriting the preferreds rather than them having issued them originally as RJF that made these highly likely to be called. Apparently not…. I noticed also that Moody’s has RJF rated A3 and S&P has its BBB+ rating listed with positive implications, so the 3 agencies are pretty much in agreement on RJF. However theri ratings are all for RJF’s unsecured debt and none of the 3 seem to rate either of the preferreds directly… Convention would put the preferreds down 2 steps thus making these noncumulatives a solid BBB type credit… Also, coincidentally, right now, 3 month LIBOR plus their plus of 408.8 puts float rate essentially dead on to its going rate of 6.375%. So essentially, regarding being called in ’26, this looks as though its purely a bet on where interest rates might be then. Like you said, a lot could happen.. . ha
I notice that the first call date for RJF-B is 7/1/2024, or 2 years before the float date. If a call is likely, wouldn’t it probably happen then? I think I might like RJF-A a bit better, but I don’t see one as clearly superior to the other.
There is also RJF-A, which might be better. They’re pretty close. Also, RJF-B is callable in 2024, or 2 years before it floats, a departure from the usual. If a call is likely, wouldn’t it probably happen in 2024?
I went with RJF/PRA a few weeks ago at 3% under Par. Callable 4/2023. The same thought process, Raymond James has not been in the preferred marketplace and can find cheaper sources of funding.
BHF (or is it a NewRez) has a 5 reset at well over the T +6% as I recall…
Another I have my eye on is ATH-C. Spread is 5.97%, rated BBB. Currently trading over par but several weeks ago it went as low as $24.65.
If one notices though resets havent been around too long here stateside, the best resets are the preferreds that were issued in 2020 after covid. Because the yeild on 10 year was almost nonexistent. Therefore the reset adjustment encompasses almost all of the original issuance yield. There are several of these out there. Most of the bank ones trade with that protection in mind and most are still over issuance price. A few of the potentially mangy type insurers that market tends to have a suspicious eye on already are dropping several bucks below $25 now.
The problem with AEL is they sell the same sort of risky annuities as BHF. Basically, if the stock market goes down, AEL’s policy liabilities increase. They do some fancy hedging to mitigate the damage but it’s a very complex product that makes the company’s risk hard to evaluate. As with BHF, reasonable people can disagree about the level of risk.
Exactly, I see them very similar to BHF which I also like in a rising rate environment.
I can’t speak to the overall health of BHF but some of their Structured Index Annuities (and other insurance companies) are based on a multi-leg option/equity strategy. Yes, overall it is complex because there are a number of moving parts. The gist of it is that the options provide the return (or loss) for the annuitant. The insurance company has no risk. Their profits come from keeping the dividends and whatever investments they make with the annuitant’s seed money.
MartinG and I exchanged thoughts on this. AEL has a siginficant amount of business in fixed income products like fixed rate annuities. My hypothesis is that will give their earnings a tailwind in a rising interest rate environment. Naturally, I could be wrong. So this is not a recommenation. I went with issue A for higher capex. Martin has issue B.
Tim I noticed on Google Sheets that ONTRAK has stopped paying dividends.
I sent a note to them and they stated according to artical 8 in the perspectis they can withhold dividends until 1/31/22. I also noted that they have a new CEO. What to do cut my losses, or hold on. 400 shares bought at $25.00
I’d say SPNT-B is the best. BB+ insurance preferred, similar price, the reset spread is 100 bps more and higher current coupon.
It is if one can ignore the historical yearly deflated tire action of the common. Truly a horrible investment and the company near term has lost money. That being said if everything under the hood is actually ok, then I have to agree with you. I actually picked up some shares this week holding my nose. I dont trust these type of insurers but its where the relative value is. Plus as a freebee thrown in this issue is cumulative which is not the norm.
The market always casts a negative eye on these types of insurers. Another one which I recently bought a small amount in too is ARGO-A. It resets in 2025 with 5 yr. Tbill plus 6.7% adjustment and is comfortably under par also. So there are several of these in the insurance world…Too bad it wasnt Allstate, lol.
Yeah, since SPNT common doesn’t pay a divvy I think they had to throw in the cumulative bone. SPNT-B should be trading with duration of about 3 but, the market has it’s own ideas lol. S&P has on negative credit watch due to hedge fund garbage investments and a couple executives leaving, but don’t see any major problems brewing:
In our view, SiriusPoint continues to benefit from a robust capital position. We expect it to remain at the ‘AA’ confidence level, based on our risk-based capital model. From a regulatory perspective, we expect the group’s solvency ratio to remain above 200% over the next two years.
730Cap:
A couple executives leaving? It was the CEO and COO who were the rats fleeing a sinking ship. The common is down to $5.40/share. It is a small-cap company.
Also must mention that SPNT+B was published as a BUY last Summer from the Seeking Alpha Group that shall not be named….when SPNT+B was trading at $28.19!
Those guys wouldn’t know “margin of safety” it it came up and bit them in the buttocks.
I would rather play with fire than buy this preferred. Better places to put preferred dollars today.
Okay lol. I guess you are smarter than S&P.
I wouldn’t own the common and seems like they are cleaning up the executive suite after this thing was stitched together a couple years ago. But they have Financial Strength rating of A- from AM Best/ S&P/ Fitch and the preferreds are still rated BB+ Don’t see this trading much worse than preferreds from Argo, Enstar etc
730Cap:
Good. Then you should keep buying the preferreds of micro cap insurance companies as we head into what could be a nasty recession. Different opinions is of course what makes a market.
Let’s just say I have done quite well betting against SPNT.
You can’t say you weren’t warned!
“ It was the CEO and COO who were the rats fleeing a sinking ship.”
I’d say more like they were fired and replaced by the person who’s essentially created the company, Dan Loeb. He’s a pretty successful private equity fund manager.
The common stock price decline is much greater than the book value decline. The book value is what protects the policyholders and ultimately the debt/bonds. Income for insurance companies is highly variable and not a good measure of safety.
Landlord:
The problem is that Dan Loeb hasn’t been too successful lately managing the float of SPNT. The company had a $200+ million investment loss from Loeb’s Third Point “Enhanced” Fund during 1Q 2022. This fund is almost entirely comprised of investment dollars from SPNT.
Third Point Enhanced Fund was invested in dramatically overvalued technology and fintech stocks that got crushed. Not exactly the best place to put SPNT’s investment dollars, wouldn’t you agree? If one had known about SPNT’s exposure here, betting against the company during 2022 was an easy call. Short sellers obviously cleaned up.
The now departed CEO spent part of the May conference call bad-mouthing the fund, which was fully justified. Thank goodness he was smart enough to pull $450+ million of SPNT’s investments out of that Loeb fund during 4Q 2021. Of course, now he’s gone as I’m sure Loeb isn’t happy about the redemptions.
“The net investment loss of $205 million is the main driver of our overall results this quarter. This is very disappointing given the progress we’ve made in our underwriting results and the steps that we are taking to address this pressing issue. The return is primarily due to negative returns for the long fundamental equities in the Third Point Enhanced fund, with the traction led by growth-oriented positions in the enterprise technology and financial sector.
Repositioning our investment portfolio for stable and sustainable returns remains an ongoing and key priority for us. As we reported last quarter, we amended our investment management agreement with Third Point LLP at the end of 2021 and are aggressively reallocating capital to eliminate the extreme levels of investment volatility that we have experienced over the last year.
We redeemed $100 million from the Third Point Enhanced fund during the quarter, following $450 million of redemptions in the fourth quarter of 2021. We intend to execute on further withdrawals from TP in the coming quarter and continue the redemption of funds.”
Not sure what this all means going forward for SPNT, but good luck to all.
What, you aren’t buying Conifer? ;o)
That one is getting hammered. They have filed an S-1 to issue new debt to buy back all of their current preferreds. I don’t know enough about how all of these things are done to know if that means they already have financing lined up or not. But if they did, they are trading way below par now and we are about a year out from the maturity date.
It is an absolutely crap company with bad financials, but looks like it could survive long enough to buy back the preferreds if you like to gamble. Too risky for my blood.
And that reminds me of a question I had. Are companies bound by the use of proceeds sections they put in documents like an S-1? That would be good to know when timing investments.
By preferred, you’re referring to the baby bond note, not preferred, CNFRL as per the S-1
Yeah I misspoke, CNFRL the note. I have been trying to learn a little about what each of these filing documents are and how the process works and the S-1 someone linked here kicked me off.
If they are bound by the “use of proceeds” section then just using this one for an example, there would be a few bucks if you were quick enough to get in at the proper time. Not sure how all of that timing plays out though, or if it is even practical to bird dog filings like that. I think the S-1 gets filed and there is maybe some back and forth before it is approved. I am not sure at what point they normally have funding firmly lined up etc…
There are a lot of questions like that for someone like me who has never been in finance. But I would like to learn more about the process.
It is my understanding that what is said in Use Of Proceeds for a preliminary prospectus does not necessarily set in stone what an issuer will do with proceeds… Usually there’s some vagueness offering them a potential out anyway. However, there are consequences in a way if they do not follow thru.. For example, the rating agencies, if rated, take into account with potentially negative consequences if the new issue ends up increasing debt levels should they not follow thru instead of being net neutral if they do… Also, in a way, Mr. Market has a memory too, although normally a very short one…. In theory issuers who constantly do not use proceeds as intended will likely end up paying a higher relative price in the future as a penalty. And BTW, interesting question whether or not notification via S-1 goes by any different rules vs prospectuses announced via 424 or 425 type listings regarding Use Of Proceeds language….. I have no clue.
Conifer Holdings is bound by the terms of the 6.75% unsecured note to pay back investors in full by the maturity date which is 9/21/23. The alternative would be a financial default which (imo) is very unlikely
If you pull up the latest 10-Q filing for Conifer and go to page 13 you’ll see a summary of their assets (~173M) and liabilities (~40M) of which the unsecured notes make up 23M of the total. Barring some unforeseen catastrophic event, there is little reason to believe the note holders won’t be paid back in full . https://d18rn0p25nwr6d.cloudfront.net/CIK-0001502292/a3b720c1-9ae7-4051-93ea-2259ff34e0a7.pdf
The notes are thinly traded, averaging less than 1000 shares per day during the past six week sell off…and while there is some risk involved, anyone willing to hold on through maturity should be rewarded with a roughly 12% capital appreciation at current prices as well as 7.7% yield.
Insurers rarely go bankrupt and if perennial dog and SEC bad boy Atlas Financial Holdings was able to refinance their notes, Conifer Holdings with a much better balance sheet and no spots on their payment record should be able to muddle through. I’m a cautious buyer at these prices.
I bought more SPNT-B when it dropped. Currently, my total position, relatively small, has some unrealized loss, with earlier lot realized gain mixed with later lot of unrealized gain. I just did a chart comparison of ALE vs SPNT. ALE seems better. Then, this is NOT a valid test, because ALE common pays dividends vs no dividend for SPNT. In this choppy market, cash seems king IMHO. BTW, I notice very thin trade on OXLCN with its relatively generous coupon 7.125%. The issuer seems to stay firm with small incremental gain daily. I intend to sell its earlier coupons and replace them with this one, probably considered perpetual with later call date. I am not sure that this could be another PRIF-K (7%). If so, that was not be a good move.
Tim, thanks for your keen eyes and mind ALWAYS. All my best.
Another very similar preferred to look at is Argo-A. 7% perpetual non-cumulative. It also has a BB credit rating and AM Best gives both companies an A- for financial strength (Argo – “very strong balance sheet, adequate operating performance…AEL – adequate balance sheet, strong operating performance”)
Argo RESETS off the 5yr, +6.712% beginning 9/15/25
I own very small positions in both.
I am also long AEL-B and ARGO-A. For another reset w/BB rating I’ll throw in the Edison bond desk preferred as the same category – cusip: 281020AS6 – but the spread over T5 is only 4.69%. Still, I found it compelling at $830.