May 03, 2018 • 09:00 am ET

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Presentation
Executive
John Michael Matovina

from Ron a bit later.

We had a sequential decrease in investment spread in the first quarter, primarily reflecting a decrease of 14 basis points in the benefit from fee income from bond transactions, prepayment income, and overhedging. Ted will have more details on investment spread in his remarks. And our low level of impairment losses, once again, reflects our continuing commitment to a high-quality investment portfolio.

I'll be back at the end of the call for some closing remarks, but now, let me turn the call over to Ted Johnson for additional comments on first quarter financial results.

Executive
Ted Morris Johnson

Thank you, John. As John said, we had non-GAAP operating income of $77.7 million or $0.85 per share for the first quarter of 2018, compared to a non-GAAP operating income of $59.6 million or $0.66 per share for the first quarter of 2017. Investment spread for the first quarter was 254 basis points, down from (ph) 21 basis points from the fourth quarter of 2017, as a result of an 11 basis point decrease in the average yield on invested assets, and a 10 basis point increase in the cost of money.

Average yield on invested assets was 4.36% in the first quarter compared to 4.47% in the fourth quarter of last year. The decrease in the average yield in the quarter reflected a lower benefit from non-trendable investment income items, which added 3 basis points to the first quarter average yield on invested assets, compared to 11 basis points from such items in the fourth quarter of 2017.

The average yield on fixed income securities purchased and commercial mortgage loans funded in the first quarter was 4.43% compared to 4.27% in the fourth quarter of 2017. The yield on investments purchased or funded in April was 4.71%. With the recent increases in the benchmark 10-year US Treasury rate and rates available to us on the asset classes we have targeted for purchase, we are optimistic that the long trend of declining average yield on invested assets will reverse in the upcoming quarters.

In addition to the uplift in investment yield on new purchases we've received from higher rates, we're also benefitting from the continued deployment of money into asset classes that were not traditionally in our portfolio. We have continued to increase our allocations to asset-backed securities, such as collateralized loan obligations, and are also looking to increase allocations to commercial mortgage loans. We also intend to add infrastructure securities or loans to the portfolio this year, and consistent with our past practice when we diversify into an unfamiliar asset class, have contracted with an experienced manager to assist us with this asset class. We do not expect to take on any material increase in credit risk with this allocation strategy, but there will be a slight increase in investments with an NAIC designation of 3. NAIC 3 investments were 2.9% of fixed maturity securities at March 31, compared to 2.5% at December 31st of last year.

The addition of