Q3 2020 American Equity Investment Life Holding Co Earnings Call
Ladies and gentlemen, please standby your American equity investment life, holding Companys third quarter 2020 conference call begin momentarily. Thank you for your patience and please standby.
[music].
Good morning, and welcome to American equity investment life, holding Companys conference call to discuss <unk> third quarter 2020 earnings earnings.
Earnings relation release and financial supplement can be found on our website at www Dot American dash equity Dot 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 not Bala, Chief Executive Officer, and Ted Johnson, Chief Financial Officer.
Some of the comments made during this call may contain forward looking statements in 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 FCC.
An audio replay will be made available on our website. Shortly after todays call. It is now my pleasure to introduce and I bought.
Thank you Julie good morning, and thank you for your interest in American equity.
We remain steadfast in our focus on shareholder value and vigilant about realization of value.
Given the events.
Including our board of directors unanimous rejection of an unsolicited offer.
Sure just to offer that significantly undervalued the company.
I think it is important to spend some time outlining.
Three teams on today's call.
[music].
Earlier this week, we posted a video which slide outlining our new business plan, which is dumped E. L 2.0.
It highlights the recent commercial business arrangement with Brookfield asset management as a significant acceleration organic.
I will take some time to be to outline the key elements of that strategy.
[music] second I know this is a historic low point in terms of valuation for the nice sector and therefore be a you'll often oh gosh, but then should also even if opportunistic maybe compelling as a near term trade for some investor.
However, after following a very diligent.
And Ben advice process.
Focusing on off peak, you should eat responsibility among.
American Equity's Board guidance.
Did that that risk adjusted intrinsic value.
The Companys organic business plan it significantly greater.
To further emphasize this point today I.
I intend to outline financial dog in.
Starting in Twentytwenty, one to provide extensive value that would be recognized through the continued execution and scaling.
He he fell 2.0.
Good we've got with the results for the third quarter.
The third quarter of each year tends to be the time, when he and the majority of the life insurance industry unlock actuarial model and assumption.
This refresh it backs balance sheet valuation and the trajectory of future financial results.
Given the unprecedented drop in interest rates this year.
Unexpected continuation of macro economic uncertainty.
We believe it is prudent to swiftly.
Okay and reflect the possibility of it's the speed low interest rate environment for the foreseeable future.
The new reality.
Why did we walk you through the details and impacts.
I would like to highlight that going forward.
We used to you that the guidance.
Got it no interest rate environment, it's a steep.
And grades right only modestly over the next eight yes.
Dan you U.S. Tracy they eventually rising from approximately 70 basis points as of September Thirtyth of this year too.
290 basis points over eight years.
We remain under 200 basis points going forward.
With that context, let.
Let me get into the details of E. L 2.0.
A strategic plan that is specifically geared to this type of interest rate environment.
We are extremely excited to shape outlined going forward.
For those who have been tracking us closely. Thank you for your patience and you may get some repetition from other previously made comment.
[music], we began to implement that strategy in June of this year. After undertaking 100 of view of our cotton business.
Market dynamics and the interest rate environment.
Our strategy focuses on four key pillars.
Go to market.
Investment management.
Capital structure.
And foundational capability.
Let me elaborate on key aspects of each of these pillars.
Go to market.
This area of focus is on how we raised long term line access to a new d. product sales.
We consider a marketing capability and franchise to be a cool competitive strength.
The liabilities the originate result in stable long term attractive funding, which is invested on a spread.
And written about the prudent level of risk capital.
We have become a leading and who went live in the independent marketing organization or I would China overnight 25 year history and get that into a core set of loyal independent producers do a digit age new funding.
Your name and your out.
We are especially focused on growing the loyal producers with $1 million of greater deposits each year.
The <unk> market is dominated by the Dol, Dan Cole sitting organizations controlling around 90% of the 35 billion to 40 billion per year market.
We want to deepen our share of wallet with these wholesaling overnight nation that actually go on to produce it.
And we also want to accelerate our expansion into the bank and broker dealer distribution channel to our Eagle life subsidiary.
Our strategy is to improve sales execution and enhanced producer loyalty.
<unk> products solutions, driven focusing marketing campaign.
Distribution analytics to enhance both sales productivity and producing each month.
And you apply a prospect engagement models like digital that complement.
Compliment traditional physical face to face interaction.
The financial objective about go to market strategy.
Accelerate growth of new business.
And a new funding origination enormous economic environments to levels that bar soap box.
Boss Big sales levels.
And reducing cost of funds from approximately 3.5% to below 3% over time.
For clarity, let me elaborate on the dumb cost of funds.
Cost of bond is a broader economic storm, which reflects the dog food cost or what did you needing the new deep on being on liability, including both the cost of money paid to the mine.
And the additional expenses like the cost of distribution and operating expenses up insurance company.
[noise] investment management enabled us to return on assets to generate adequate spread.
Hi, Mike attractive low cost funding.
Put simply why we seek to reduce the cost of funds and liability.
We Simon dangerously one to achieve a higher return on assets.
Thereby increasing the spread that is doing.
In an environment, where risk free rate of between zero to 1%.
In short our need to invest well better risk adjusted yield than what is available in traditional fixed income securities.
The key to our asset strategy is to discover opportunities to invest in our book producing specialty sub sector.
But contractually strong cash flows.
Like real estate and infrastructure.
One reason that we are so pleased with our partnership with Brookfield is because they're viewed as leader in real estate and infrastructure investing.
We have also been expanding our repertoire of asset classes to residential and agricultural loans as well as other privately source sector in order to have new money yields that de coupled from fuel spread to treasury and.
On the 4% or higher risk adjusted yield.
The Street.
Investment management strategy with C.E.L. Baum bachner ships in which each bowen.
[noise] provides unique access to a specific asset sector.
Nothing in a sustainable supply.
I want to be alternative to traditional fixed income securities.
This may result in solid spread earnings.
Our own E I'm, good even in a sustained low interest rate environment.
He is approaching investment management partnerships not as a simple vendor relationship, but as a potential joint venture all taking equity interest in certain existing acid sourcing platform.
Making these minority investments will help create greater alignment across the insurance and asset management value chain.
And enable us to participate in the economics from scaling up the black on beyond our own initial investment mandate.
Given the negligible an allocation in a 50 plus billion dollar insurance general income to common equity hedge fund private equity investment.
We believe investing approximately 1% of our general account assets.
I think what did you nation lacoon.
Offers significant upside for E M.
We continue to be in active dialogue with mine.
You need to have private.
Privately sold assets, including specialty Finance company.
Hi asset managers in order to build out our streak of both asset strategy.
These discussion on a different stages of development and you can expect us to announce exciting new partnerships on a periodic basis.
You may recall from our second quarter earnings call I highlighted that he would have started to source non qualified mortgages from Brett do you boxes, which is enabling both American equity life.
I'm eager night to launch incredibly attractive single premium deferred annuity or SPD products.
Over the next year or do we.
We expect to originate between 1 billion.
2.25 billion of assets from print to you.
We have just finalized 100 million dollar growth got pretty good growth capital investment in Brett Jim from our general account.
And Brett can grow that platform and $16 billion of assets under management over time, we will participate in its earnings growth I look forward to boxing with non Muslims, indeed in bringing great Jimmy to our string of both strategy.
This demonstrates in action.
E. L 2.0 is building the virtuous flywheel that expands the power of our new deal origination platform.
Capital structure.
The goal of our capital structure improvement plan is to make you need to use of reinsurance.
Anything enabling yeah drew.
Free up capital and become a more capital light company.
Reinsurance allows for the transfer of liabilities to jurisdiction with principle based reserves and capital regime.
A key element of our recently announced partnership with Barbie and Brookfield is the reinsurance of $5 billion of enforced reserves each entity.
These reinsurance transaction enabled us to level, the playing field with several key competitors what domiciled in favorable reviews.
Overtime, we will set up our own reinsurer back, 100% with not only capital to maximize asset liability management or emailing efficiency.
Further we will look to bring in third party capital into our reinsurance Baker, commonly known as sidecar good Don a spread business without all capital at risk that it is our OE business.
And you do a more fee like business back with externally sourced capital.
We we described as an art or eight or return on assets business.
A lot below its foundational capability and is focused on upgrading our operating platform to enhance the digital customer experience.
Create differentiation through data analytics enhance core technology and a 9000.
New investments in this area are likely to be fully self funded through operating expense savings of capital generated through the financial benefits realized by executing the other three pillars.
The virtuous flywheel upbeat E. L 2.0 strategy builds on an industry, leading at scale, a new deal origination platform.
I didn't mean differentiated investment management capability.
Track hurt body capital to the business.
Leveraging this capital withdrawn long even into a more capital light business and.
When a diversified earnings stream.
The combination of differentiated investment strategy.
And increased capital efficiency improves I knew deep product competitiveness.
Thereby enhancing new business growth potential and further strengthening the operating platform.
He has the recent partnership with Brookfield is a clear demonstration of this lively in action.
Converting a spread business.
Into a 90 basis points, but you feel like earnings stream for seven years.
That is capital light Rick.
Return on assets or ROI oriented as a business model.
We believe that in the sustained low interest rate environment, if it any better due to switch the nature of our business from a historically capital intensive spread lending business.
Do a capital light fee based business.
This strategy successfully differentiate our business going forward and fronts bonded to increase shareholder cash distribution and not really.
This brings us to the second theme, but to date, which is a target that measure success and realization of shareholder value.
We believe in year 2.0 will be both growth.
And capital return story.
We intend to execute against the following target.
The first being capital return.
We expect to annually return.
$250 million.
Due to $300 million of capital to shareholders through.
Through migration to a capital light model.
Releasing earnings to shareholders in view of retaining earnings to fund future growth in assets.
Given the acceleration of 802.0 business plan.
We expect this to stock in 2021.
Second.
Return on equity.
We expect to target operating return on equity or are we in the 11.
[music], 14% range over the next few years.
And above 15%, one 5% on average over the long term.
Now turning to results for the third quarter.
Gross sales of $574 million increased 3% compared to the second quarter 2020.
Primarily driven by increased multi year fixed rate annuity sales at Eagle life.
We are starting to turn around the steel battleship with new product introduction and engaging with distributor the new way. Despite the self imposed limitations on face to face interaction with the fees during the current pandemic situation.
In the quarter, we refresh the interim shoe product, making it very competitive.
In September we introduced Eagle guarantee focus.
A new single premium deferred annuity CD that Eagle life.
We had three and five year product and.
And our dog treat for credibility for crediting rate in the marketplace.
At American equity life, we introduce a similar product line a few weeks ago goal the guidance the shield CD.
Our three year product will be here is number two for crediting rate in the independent agent market and we're already seeing strong application flow.
As I previously mentioned, our new residential mortgage loan program fits well with the shorter duration products.
Once again, showing the flywheel in action.
In the third quarter bending application averaged 1083 at American equity life.
And currently stands at 1625.
Bending averaged 100 full application at Eagle and currently stand at 975.
Driven by the new SPD and finance it.
For the quarter, we reported net income of $661 million or $7.17 per diluted common share.
And a non-GAAP operating loss of $250 million on $2.72 per diluted common share.
Both net income and operating income significantly affected by the annual actuarial review.
Dan will walk you through the back of the annual actuarial review on operating results shortly.
We ended the quarter with book value per share.
Excluding accumulated other comprehensive income or or AOCF.
With and without the net impact of accounting for fair value of derivative and embedded derivatives.
$35.97 on just shy of $36.
And $33.39 respectively.
Overtime, we expect our E L 2.0 business plan.
Deliberate on financial metrics outlined.
Just before year end.
And all else being equal to grow book value per share.
With that I'll now turn the call over today.
Thank you and not.
Excluding actuarial assumption updates operating income was $91 million or 99 cents per share for the third quarter of 2020.
Compared to $109 million or a $1.19 per share for the third quarter of 2019.
Third quarter 2020, non-GAAP operating results were negatively affected by $341 million or $3.70 per share from updates to actuarial assumptions.
Third quarter 2019 operating income included a net benefit of $124 million or $1.35 per share from updates to actuarial assumptions.
On a pre tax basis, the effect of the third quarter 2020 update before the change to earnings pattern, resulting from these update increased amortization of deferred policy acquisition costs and deferred sales inducements by 148 million.
And increase the liability for future payments under lifetime income benefit riders by $286 million for a total decrease in pretax operating income of 434 million.
The increases in deferred acquisition costs, and deferred sales inducement amortization as well as the increase and the liability for future payments under lifetime income benefit riders, primarily resulted from changes in assumptions due to the current macro.
Economic environment.
Regarding investments spread.
After money, which we use as the discount rate and our models as well as for Lapsation.
We have updated our assumption for aggregate spread to increase from.
2.4% in the near term to 2.6% at the end of an eight year reversing period with a near term discount rate of 1.6% grading to an ultimate discount rate of 2.1%.
Last year, we had set our long term assumption for aggregate spread at a steady 2.6%.
With the near term discount rate of 1.9% grading twin ultimate discount rate of 2.9% over a 20 year reversing period.
The average yield on invested assets was 4.1% in the third quarter of 2020 compared to 4.12% in the second quarter of 2020.
Excluding prepayment income up 10 basis points in the third quarter and three basis points in the second quarter and eight basis points Mark to market losses on investment partnerships and the second quarter adjusted yield decreased to 4% from four.
0.17%.
The decrease was primarily attributable to a seven basis point decline and the decrease in yield on floating rate investments.
Three basis point reduction from entrust forgone due to the buildup of cash.
And a two basis point reduction from the reversal of accrued interest on certain impaired securities.
A drag on yield from new money investment below the portfolio yield was two basis points in the quarter.
In line with general expectations.
Cash and short term investment and the investment portfolio averaged 1.7 billion over the quarter and stood at 2.2 billion as of September Thirtyth as we build up cash to support the investment management and capital structure pillars of the AG.
2.0 strategy.
Our plan is to work our cash holdings down this quarter, but much of this amount as well as new money and liquidations will be invested in highly rated relatively short term public corporates as we prepare for the BARDA Ecomm and Brookfield reinsurance transaction.
The aggregate cost of money for annuity liabilities was 166 basis points down seven basis points from the second quarter of 2020.
The cost of money in the third quarter benefited from three basis points of hedging gains compared to a one basis point loss in the second quarter.
Excluding hedging losses and gains the decline in the adjusted cost of money reflects a year over year decrease and option costs due to past renewal rate action.
Investment spread for the third quarter was 244 basis points.
Rentable spread which we defined as excluding the impact of additional prepayment income the effective hedging gains and losses and other non trendable investment income items was 231 basis points in the third quarter compared to 245 basis points in the second quarter.
[music].
And our analysis of Trendable spreads we have excluded the reduction in effective yield of eight basis points, resulting from mark to market investment partnership losses incurred in the second quarter.
The average yield on investments acquired in the quarter was 3.59% gross of fees compare.
Compared to five 4.58 per site gross of fees in the second quarter of the year.
We purchased 213 million of fixed income securities at a rate of 3.28%.
Originated $37 million of commercial mortgage loans at a rate of 4.48%.
Purchase $24 million of residential mortgage loans at a 5.2% gross of fees.
Reflecting actions taken in June to produce participation rate on four point Threebillion policyholder funds and S&P 500 annual point to point and monthly average strategies as well as a decline in equity market volatility.
The cost of options drop to 142 basis points from 162 basis points in the second quarter.
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 63 basis points, if we reduce current rates to guaranteed minimums.
This is down slightly from the 65 basis points, we cited on our second quarter call.
Excluding the increase resulting from the actuarial assumption update.
Liability for lifetime income benefit riders increased 68 million this quarter, which included negative experience up 5 million relative to our new model expectations.
Negative experience, primarily reflected lower than modeled index credits and a number of other small items, partially offset by lower than modeled utilization.
Excluding the increase resulting from the actuarial assumption updates deferred acquisition costs and deferred sales inducement amortization totaled 138 million.
10 million greater than modeled expectations the.
The biggest items driving the negative experience were higher than modeled interest margins and greater than expected lapsation over the entire book of business.
Impairments totaled $26 million in the quarter.
Mostly reflecting CMB allowances and write downs of 19 million.
Estimated risk based capital as of September Thirtyth was 382% down from 389% at the end of June.
The decrease and the RBC ratio, primarily reflected eight points from ratings migration and two points from investment losses and impairment.
Cash at the holding company was $350 million, including $290 million from our June perpetual preferred offering.
Now I'll turn the call over to the operator to begin QNX.
Thank you.
As a reminder, a question press star 100 cell phone to withdraw your question press the pound.
But yourself to one question and one follow up question and then you may jump back in the queue for additional questions. Please stand by June.
Our first question comes from Pablo Singzon Lynn.
Morgan you May proceed with your question.
Our next question non.
Regarding your goal to reduce the cost of funds might be 50, bips much of that is driven by money versus yields on distribution operating expenses.
Well this will be dictated by the competitive environment.
Hi, Pablo Thanks for the question good to hear once again.
Cost of funds would be primarily driven by product innovation and a good example is our destinations product that we launched in June.
That shows our ability to come with innovative new products indices for everyone on the call destination brings together.
A risk capacity like strategy, where clients can be auctioned between gold interest rate and equity so.
So products like that will be the primary driver of production.
Also optimizing our distribution spend will be the second driver on that.
And then.
Regarding EPS.
Right.
We're not going to.
And section.
But it looked assumes some amount earnings degree degradation as you shift from fee earnings.
So you expect are you to go up or Ross seems like what would be a larger.
Right just think about that piece of the strategy.
Well.
Can you repeat that probably you were breaking up a little bit.
Yes, yes.
Just on the capital structure strategy and without going to specifics here would it be reasonable to assume some amount earnings degradation as you should spread to feed Berman.
Yes, great.
To go up or so it seems like Apple is a large ups. Thank you.
I know you broke out a little bit.
Say the question back and you tell me if I missed any part of it upgrade to give you. The answer we can add on a case or what I heard what as these as part of capital structures strategy as we move to our away business should we expect some earnings denigration.
And then what is the trajectory of guidance on an add on to beyond that let me take the first question Matt.
As we move to an orderly model you can see from our slide.
Slide that we put on the Investor relations website around a week ago earlier this week.
The $5 billion of Brookfield inputs reinsurance demonstrates the spending where we go from and earning a spread based auto eat in the 80 basis point snack area for a sustained period of time, joining 90 basis points.
Well sevena.
What it will do is give us a more stable earnings stream, which is a higher hourly because is baked into your equity earnings staffing that we need to pick up but it will be for a finite period of time seven yes.
Sequel origination machine that we have that in the leading platform will have to keep originating because that earnings stream drops off in seven years.
So from a dollar incense perspective.
Absolutely, earning maybe agree then roughly in the same ZIP code and from this illustration the idle fleet significantly higher because it's not easy but the earnings is only for seven years.
Got it thanks a lot.
Thank you. Our next question comes from Erik bass with.
Research you May proceed with your question.
Hi, Thank you. So I think it's a free up close to 700 million of capital from the two reinsurance transactions that you are now those.
Hoping you could talk a little bit about how you're thinking about redeploying. This capital I'm, assuming that's part of the driver of the capital return you talked about for 2021.
Hi, Eric Yes, I touched on here, yes.
Yes, part of the capital freed up is it part of accelerating the return.
Targets to 2021, so almost pretty immediate as you know, we've also announced a buyback program right away, which we intend to start at the end of this call or shortly thereafter.
And the capital of the 700 billion freed up I think a victory with debt at it.
First of all we live in a pretty uncertain Diamond COVID-19 in the environment right now and lived through a credit cycle, which is unprecedented so it's good to have more capital on hand.
Already the excess cash at the holding company, which is around 300 million is spoken for the buyback program and financial flexibility even before the Brookfield proceeds come in we're starting to buy back stock. So thats one.
You'll always be prudent with the use of capital if you think about stakeholders.
Second is historically, we have refund we funded growth with earnings and not distributed capital now you hear us talking about returning to $50 million to $200 million.
And then thirdly, as we invest in Alpha asset strategy. The return on that capital is significantly high and therefore, all in capital for the right Alpha strategies is very important to fully distributed all out so thats, what thats, how I think about the capital freed up within a sustained ongoing capital return program, which frankly.
Not that to 50 to 300, and we look to grow that number over time at probably a Boston based in the <unk>.
Earnings growth.
Got it thank you and just to clarify on the buyback. So the 500 million I think initially you are capped at repurchasing the $9 million or so shares you're issuing to Brookfield, but once they get approval for.
Their stake to increase than is the intention to utilize more of that buyback authorization next year.
That's correct, we intend to aim to fully offset any dilution from issuing new shares to Brookfield.
Got it and one more I mean, you've talked about wanting to use more flow reinsurance on an ongoing basis to generate more if the the fee like income and move to an ROI model. How do you think about the level of sales that you want to retain overtime and its how're you arriving at that target.
Yeah, It's a great question it.
I mean in the CRC from eight months Weve outlined a fairly ambitious strategy so a bit early to say.
Yes, I'll get or how much to offload to retain and how much do so thats. Your question catch a fundamental question of how much to be a sustainable I believe in this with our own capital and migrate to an orderly business I think the two part on say, we don't think it has to be only through reinsurance to Ted Bundy setting up our.
On being shorter maybe invite dynetek body capital is a way for us to bridge that and I think overtime, you will see us use more and more toward body capital without actually having to reach out to Ted Bundy, because we control the returns that you want to add anything to that.
Eric I think that's going to be points in time that will weigh and balance when it makes sense to grow our own business versus reinsurer or two depending on the terms that were able to negotiate with reinsurance counterparties. So I think that will ebb and flow to depending on what market terms are and what we see as may be attractive.
Our OE business to keep on our books versus eating off.
Got it okay right now third.
Third party reinsurance is kind of a tactical lever until you have your own capability and then that would be I guess the primary reinsurance vehicle you'd use your own but then you could tactically use third party reinsurance if it made sense.
That's a very good way to think about it and we think why the two strategic partnerships to be done a little more strategic and tactical is because of great alignment, we have a profit for them beyond our own business right in that bar date that last fall, we have an economic interest in the platform and 20% interest in it. So we continue to benefit from that.
And in the case of Brookfield, we manage counterparty risk in a very elegant manner with alignment with Brookfield, having an equity investment in us why we buy we fit the reinsured the life company. So we really like economic alignment speed.
Specialty so that did counterparty risk mitigation with the reinsurer and there is no leak economics in the value chain and then comes to asset management team and.
But I think a big important piece that are not there before to you was that the creation of our own platform offshore and the ability to bring in other third cap any third party capital ourselves to be able to put up a risk capital to support business too.
Got it thank you very much.
Thank you our next question.
Comes from.
John Barton I understand that you.
Proceed with your question.
Just a.
On the ROI, we target that reported or are we already see I.
It'd be operating IRO, we exit RCR.
On an equity which is excellent.
Okay great.
And then on the premium steak I believe the steak increases once you hit that 2.25 billion of.
Yes, the cap our investments deployed how much additional scale you get that at that point.
The additional stake that we get would be 1.9%.
Okay, great. Thank you for your answers.
Thank you our next question.
And it comes from Ryan Krueger with KBW you May proceed with your.
Question.
Hi, Thanks, Good morning, I was hoping that you could provide more detail on it.
How you and the board determined that you believe your company is worth significantly more than the dollar offer.
[music].
Hi, Ryan good to hear from you.
Sure we're happy.
Hi, happy to do so.
I, probably would give you a multipart onsale.
The first being the board process and the real careful review around it. So the bottom line is that the offer that we received.
And that would then publicly made available ALLETE on October Onest.
It significantly inadequate relative to the value realization from execution of our Standalone plan or the 2.0.
That is the core basis for the rejection.
D. also was very carefully reviewed by the board with input and analysis from financial and legal advisors. As we noted in our press release, but I'd highlight but others, who may have not branded the time JP Morgan Morgan Stanley and Skadden opened numerous board meeting over the Isix be week period ended.
With the lens of fiduciary duty and the best interest of shareholders.
Now all the offers made an opportunistic time as I mentioned in my prepared remarks with the industry trading at all time lows.
And it did put significantly undervalued the company when compared to the value realization from the for shareholders by the organic flat.
The boat decision with unanimous.
And we and I as a member of the board can also speak as we strongly believe we are doing the right thing for all shareholders at the execution.
The business plan drives up value.
And frankly.
Always we didn't have the option to contemplate a change of control that at a higher price at the right time.
When executing 2.0, which is a metric and red Dawn driven business strategy.
As you can see the target outlined today with starting Twentytwenty one.
Create significant value for shareholders. These capital return target, including the cash return.
Is north of 10% of our current market cap.
Which is enviable any company.
Even on in the nice set.
On the PNC sectors in insurance.
And therefore with strong conviction and believe we stand firmly behind us executing our plan when obviously when a public company in a very keenly abandoned advisor about fiduciary duty.
And we'll be open minded about thing, but they didnt know better plan in front of US at this point then executing what we've outlined.
Hopefully Ryan that give you a sense and I'm happy to take any more questions you have on that or others.
Thank you.
Different question.
I guess, just given that you have quite a number of moving parts right now.
Kind of transactions and earnings and I appreciate the ROI target.
Though it is it is relatively wide for next year can you give us any sense of is there any directional sense and 11% to 14%. How we should think about kind of where you started out in 2021.
Well I.
I think in 2021, obviously, there's a lot of timing that's going to happen related to execution of transactions et cetera. So I think we'll probably be on the lower end of the 11.
On that part, but obviously there is a lot of moving parts to that but as you know we.
We certainly you know what's going to impact is what is the execution of those transactions and the timing and the mix of investments and cash that we transfer at that point in time, which will impact our are we once those are done.
Brian deck covered it I just add one thing and we're really excited about our string of both asset management strategy I.
I mean, just shedding Bret Kim with you is great but.
As we added more of that.
And move to the Ottaway strategy, so a sustainable auto OEM model had been shorter with new and differentiated asset strategy.
That is going to see us increased investment.
Yield.
From the 4% area, because it's going to be in the 4%, but just sub 4% area.
As we do a transmission, we're doing a significant portfolio migration.
With the reinsurance, Steve and bringing on the new asset strategy. So off a $50 billion, we're going to be migrating and $15 billion of at 20% to 30% of the portfolio in the next 12 months.
Okay, let.
They would be some noise to that from that as Dave just mentioned and then after that we think the earnings power and the gas distribution. Our this business it.
Better than any out.
Getting back to the virtuous flywheel and the value of the origination platform.
What is scale in this business.
In the industry.
Is both having the ability to originate.
Capital and putting assets under management at site and then have steel we have that and vehicle. We are turning it to our advantage, which is why you see these partnerships, where we can be picky about the right partners today to generate this high return business portion with it but it may take us a few isn't because a few years to get there.
Got it thank you very much.
Thank you. Our next question comes from Mark Hughes. The Truth you May proceed with your question.
Yes. Thank you good morning.
The benefit of your investment to move these firms that are helping you to source your investment.
Earl.
Earl string of pearls strategy.
How much do you benefit by making your own.
Contribution your own investment.
Oh enhances your access to investment.
I'm just I'm interested in your.
The fact that you're taking a piece of these these relationships.
Just to make sure I answer the question a piece of the equity of the relationships.
Correct that's right.
Right.
Yes.
Multitude of benefits from that are maybe highlight two or three.
The first is take Brett came as an example.
$16 billion of asset management.
What class team.
They buy a visionary found with a proven track record over a decade.
That platform and 16 billion of AUM it's.
It's got a complete ecosystem in real estate.
Single family rental business and resi loans, not just sourcing the loans through deep haven, but servicing the loans.
Lean and then walking them out when.
Things don't go as well it happens it investments you don't know what has a 1.0 batting average and so that complete ecosystem.
Beyond even residential assets is $16 billion we.
We will grow from a 1 billion dollar mandate to 2.25 billion. So even when we get to 2.25 billion.
Were not more than 15% or so 20% of their assets over time.
That last from grows we get information into that business by having a seat at the table.
Im on the board.
In being in constant dialogue, where then onto a vendor so the information value of knowing what's happening in a specialty sub sector.
On trumps the financial that.
You add to that the platform scale.
And we help at scale by bringing long term funding to it.
And Thats, what I and shown on slide, but if you got to outage nation platform that by call. It the flywheel our strategy.
Now, we make our share of that entire black on the economic so both the information value and the financial leverage we get from it.
It's helpful. And this is the third point is additive to our auto Avon because if we had.
A minority interest in the teens in terms of percentage in a platform that 16 billion in his own its spots to be 2030, 40 50 billion over time.
That's an additional fee income coming to us.
Our founding of that investment capital EPS growth capital that's additive.
Through our own honing our earnings expand as these platform earnings expansion.
As is the example up our asset management joint venture.
Good morning.
Hopefully that gives you a holistic enough on so happy to pick up on.
Thanks, Martin in your Ah, Yes. Please.
I'd say, mark remember to win with BARDA and the structure. They are scaling that can happen within the reinsurance platform and that we are in partnership with our day on the management of those assets and our sharing and the economic success of that at that joint venture together as scale.
On the liability side within their reinsurance platform with other books of business separate from what we have seen it to them.
Thank you for that and then Ted on the you'd mentioned Lapsation rig about persistency of Europe.
Policyholders when you went through this study.
In review the assumptions.
The observations.
About the.
A policyholder behavior.
Per system.
Persistency has changed over time I think you mentioned this quarter. It was maybe lapsation was little higher any comment on that would be helpful.
So the lapsation assumptions that we changed we're on we're to going into two different ways.
If it was a policy that has a lifetime income benefit rider.
We slightly reduced lapsation, we're seeing persistent feed continue to be very very strong with lifetime income benefit rider policies.
And so we adjusted Lapsation down slightly on those now doing that that has an impact on the EPS LP reserve about increased slightly in regards to policies with out the lifetime income benefit rider, we increased lapsation slightly on those.
We saw a little bit arsene based upon our experience study.
Lapsation come in a little bit above what our original assumption was our assumption from last year and so we moved that up slightly so higher persistency with lifetime income benefit rider business, and we fall a little bit increase lapsation on business without a writer.
[laughter].
Thank you.
Thank you. Our next question comes from Tom Gallagher with Evercore. You May proceed with your question.
Good morning, a not just a follow.
Follow up question on the rejection of the takeout offer.
I hear you on the sector trading at a big discount to historical averages.
But I think this is mainly due to interest rates being historically low and.
The fed intends to keep interest rates low for another two to three years. So with that in mind. My question is assuming sector valuations remained depressed in rates remain low for the next two to three years.
How do you think how long do you think it will take a L 2.0.
To get your stock north of the $36 per share offer do you think that's a legitimate scenario that you see playing out if we remain in kind of a similar.
Macroeconomic scenario.
Hi, Tom good to hear your wife.
The short answer yes, we do see it playing out.
The and I'll go back to the call basis for that rejection.
$36 to offer.
Was the value even on a present value basis.
All the yen 2.0 clients. If you look at on the probability is going to.
BD a value.
Our plan they far exceed what was a potential non binding offer.
And the reason for that is multifold, but I'll give you a view.
First of all the asset strategies, we are talking about de coupled from fuels spread to treasuries, Jason pointed real estate investments.
Minimum cap rates in September is for real estate investments.
When we are doing resi loans. They did this spread to treasury when it starts to decouple, you sort of had a minimum rates of three and a half full 5% in resi loans.
So you start to now have a portfolio that can as you transition to add for assets.
But it added E plus 250 300 area not just a D plus 150, 175 or 200, because you're solving for investment grade corporate bonds when.
When we look at the real estate sector and infrastructure sectors.
In real estate, we have worked over the last six seven months.
On the what this team started a few years ago to start to explore with black Knight and found specialty sub sectors, where we actually have conviction that cap rates are going to hold in into the 4% to 6% range area.
Which means in a low interest rate environment, our asset strategy basically is going from being a capital.
Business, that's that's originating spread earnings just purely on corporate bond spreads largely due investing in real estate, where we've got a more sustainable way to have keep us to 50 and 300.
Is one the second part, which I think you elegantly putting in your research piece over the last few weeks.
Is that don't add scale origination platform that we have 10 attract reinsurers altered party capital to both the platform ended investment strategies that do valuations than the public markets Trade Act, which means we can do reinsurance transaction and.
Unlocked value and transforming to an auto aid business.
As attractive levels and return capital to shareholders. So we think both of those dynamics make it very interesting for this company to return to 50 to 300 million of capital to shareholders. Each year and then you tell me a phone that does that and at the high end are really where that should trade over time.
Time, especially if it grows its cash EBITDA.
I was the long onto your question, Tom We're hoping to give you a few runs in the fire.
No that was helpful or not.
Just to be clear again that 250 to 300 million.
You expect to get there with than three.
Three years.
No we expect that mix, we expect that next year 21, and then overtime and 21.
And that'll be a run rate and you would expect to grow off of that correct.
Got you and then just one quick follow up if I could the.
Just looking at your interest rate assumption I would agree that the tenure treasury assumption to call. It around true that you're moving toward would make you.
Put you on probably the most conservative level in the industry.
However, the new money yield assumption of 260 basis points of credit spread would put you at the most aggressive and on on assume credit spreads.
I guess my question is if you're planning on.
Pivoting to this capital light business model.
To get that kind of credit spread that's going to in turn carry much higher C asset charges I presume.
Which would be in contrast to the capital light business model. So how do you view that trade off.
Yes, the trade off is the capital charges will go up but we're looking to have we looking to structure, our alpha assets in a manner, that's pretty consistent to what a lot of up years of diamond industry. Therefore, we should.
Had a capital charge our investment return.
Over the higher capital charge is still good age and that we can return to earnings to shareholders.
Not using lean shows pickup Brookfield example, whatever we translate to the reinsurance that no longer our own capital.
That those are the two levers that allow us to have higher investment yields while not becoming capital intensive the absolute dollar the units many high that you'd be cool capital investment in a very short period of time.
And you can use other peoples capital for it.
Gotcha. Thank you.
Thank you. Our next question comes from Dan Bergman with Citi. You May proceed with your question.
Thanks, Doug Good morning, I guess somewhat related to Tom's question, but just in terms. They fell 2.0 strategy. One aspect is lifting the yield on new investment. They did buy the asset management partnership asset classes, just given public market valuations of annuity companies are currently depressed at least partly due to the risk credit deterioration.
Just wanted to see if you could give any more color on how you're thinking of the impact of this strategy on your overall credit risk and wonder whether there is any trade off between you know potentially higher risk, assuming there's no free money or some offset to achieving that higher yield and the better profitability and growth in it. It allows any kind of big picture thoughts would be great.
Great question, Jeff Miller ends in our Chief investment Officer take that gets on the call.
Thanks, or not I think as we look from a macro from a high level approach to our strategy.
It's more about reallocating risk in the portfolio rather than in an increasing risk.
Public corporates have predominantly been a key piece of our strategy at over 60% of the portfolio.
Going more into private private type credits, where you have more structure around the underlying recovery value or get to the table more quickly will be part of this strategy and there's ways that we can.
Partner with key folks in the in the market to help us get access to those quality transactions. So I look at it and it's kind of a continuation of what we've tried to do over the last couple of years is going into and Weve message this going into less liquid assets, but having more structure around those assets typically on a public security if its.
500 to a 1 billion dollar.
Issue issue size, you are not going to have much credibility at the table to try and have discussions with management when you're in a private transaction smaller club transactions.
With partners, who are very strategic about the alignment of their interest to the issuers. It does create much less risk in the portfolio and much more stability and that's kind of where we look at the credit risk. When you look at real estate risk and some of the real asset focus that we're driving toward longer term or.
Around residential real estate. These are very capital efficient asset classes that do give you a premium yield for what you can get to some problem public rated securities in the in the corporate or in the structured asset market and from that standpoint, I think we can get some lift with being very capital efficient with the types of.
The assets that we select as we move forward as we strategically aligned with these.
Keith Third party partners.
Got it that's very helpful. Thanks.
Just one quick clarification question I apologize if you already said this but the 250 to 300 million annual guidance that you gave earlier was that just for share repurchases are kind of total capital return, including common dividends.
That's the amount of capital that we're going to return to shareholders in some form.
And that our annual run rate, whether that's going to be in a special dividend or share repurchase et cetera.
Got it perfect. Thanks.
Thank you.
Im not showing any further questions at this time I would now like to turn the call back over to Julie Lafollette Bernie further loans.
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.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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