Q4 2020 American Equity Investment Life Holding Co Earnings Call
[music].
Fourth quarter, 2000, and 'twenty conference call.
At this time for opening remarks and introductions.
And all over to Julie Lafollette for me.
Yes.
Yeah.
Good morning, and welcome to American equity investment life, holding company's conference call to discuss fourth quarter 2020 earnings.
Our earnings release and financial supplement can be found on our website at www Dot and American cash equity dotcom.
Non-GAAP financial measures discussed on today's call and reconciliations for non-GAAP financial measures and the most comparable GAAP measures can be found and those documents.
Presenting on today's call are not Bala Chief Executive Officer, Jim Pam line, and Chief investment Officer of insurance, and Ted Johnson, Chief Financial Officer.
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 and 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 and our most recent filings with the SEC.
An audio replay will be made available on our website. Shortly after today's call and is now my pleasure to introduce and not fallen.
Thank you Julie good morning, and thank you all for your interest and American equity.
We enter 2021 focused on being vigilant about realization of shareholder value.
2021 will be a transition year from the E and 1.0 and strategy to the EUR two point or business model.
It will be the execution, you and we make demonstrable progress with closing of the already announced reinsurance transaction plan and.
And our capital structure pillar.
And stopped all migration to alpha assets.
With investment management partnerships under our investment management pillar.
And share more on these partnerships and a few minutes.
And my time with you. This morning, I'd like to reference <unk> 2.0 business model, which was flywheel of success and I've spoken up and the bonds, including on December nine.
And then share how we are currently working to build and eventually speed up this flywheel to create superior shareholder value.
First the virtuous flywheel builds on and industry, leading and scale annuity funding origination platform.
Second I.
Adding and differentiated investment management capabilities.
And expertise and aligning the annuity liability funding.
With cross sector assets.
In addition, <unk>.
Now gives us a competitive advantage over traditional asset managers and we leverage expertise for.
Both sides of our balance sheet.
And took demonstrable success over time on these first two using our own capital.
We'll attract third party capital to our business and growth feed revenues for <unk>.
These fee revenues will be generated by growing third party assets under management and our investment management partnerships.
And from creation of additional sidecar reinsurance bakers with new equity investors and I could do we've announced to date with Brookfield and Bharti and gum.
These fees will diversify our earnings stream.
For leveraging third party capital will transform <unk> into a more capital light business.
The combination of differentiated investment strategies and.
Increased capital efficiency improves our new deep product competitiveness day.
Thereby enhancing new business growth potential and further strengthening the operating platform.
We believe and in the foreseeable market environment. It is.
And it too for most asset and an intensive and showrooms, including American equity to switch the source of earnings generation from traditional golf and fixed income investing to a blend of cash.
For fixed income and alpha generating private credit and real physical assets and.
And over the next few years migrate to a combination of spread and capital light fee based businesses.
Regarding American equity specific execution.
The fourth quarter and what the stock of the turnaround of the go to market pillar.
Our strategy to enhance our ability to raise long term.
And that is true annuity product sales.
We and our distribution partners consider American equity marketing capabilities and franchise to be co competitive strength.
For liabilities, we originate resulting stable.
Long term attractive funding, which is invested to earn the spread and return on the prudent level of risk appetite.
In the fourth quarter, we introduced ourselves to our markets.
We use the fourth quarter two debt distribution that we are back and and a big week.
Driven by the introduction of competitive three and five year single premium deferred annuity products and.
American equity and Eagle life, we.
We saw a substantial increase in sales with total deposits of one $8 billion.
Doubling from the prior year quarter and up 221% from the third quarter of 2020.
Fixed rate annuities with a major driver of fourth quarter sales increase.
And while fixed index annuities also increased up 23% sequentially.
Total sales at Eagle life went up over six for on a sequential basis.
And for the first time in its history.
Ergo life surpassed American equity life in total sales.
The competitive positioning and we took in the fixed rate annuity market benefited book.
For the fixed index annuity sales and recruiting of new producers.
Our FIA sales in the bank and broker dealer channel increased 76% sequentially.
New representatives appointed with Eagle life during the quarter increased by nearly 1200 to over 9300 and year end.
And while not as dramatic we saw growth in sales and American equity life as well.
Total sales increased 103% from the third quarter, while the fixed index annuity sales declined 16%.
The momentum that began in the fourth quarter has continued into the new year.
Pending applications as of this morning, and American equity was 3198 up from 2000 and 552 and.
Here and and fourth quarter average of 1998.
Pending applications book.
Pending applications, when we reported third quarter results stood at 625.
For fixed index annuities, we will shortly launched and revamped assets shield product chassis to appeal to a broader market, adding two new proprietary indices.
The credit Suisse Tech Edge Index, and the Society General sentiment Index. In addition to the existing bank of American destinations index.
And all of which we expect to illustrate extremely well with participation rates debt costs, well within our pricing budgets to meet our target pricing irr's.
With the introduction of these multi asset and disease, we will offer clients.
Berlin.
And then accumulation annuity product.
That covers traditional equity indices as well as multi assets custom indices and focused on U S risk parity global risk control asset allocation and sector specific allegations.
Following last year's refresh us income share.
We are very well situated for income.
The level of income offered to retail clients dominates the market and almost all the important combinations of age and deferral periods and maybe don't we're top three which is key to getting distribution partner the Danish.
I want to highlight management changes, we've made at Eagle life to accomplish our goals.
In September we announced the hiring of Graham day, as President of Eagle life.
Graham has added quickly to his team from other leading annuity and manufacturers, including Greg, Alberta, and head of National accounts, and Brian Albert and head of sales.
Eagle life is a key piece of our expansion into being a scale player in a new channel of distribution.
Ending applications and that this morning at Eagle life for 1213 up from 1067 and E N N and fourth quarter average of 962.
Pending applications when we reported third quarter results were at 975.
Moving on to the investment management pillar in.
In 2021, we intend to focus on ramping up our allocation to alpha assets and.
First for in this area includes our partnership with Brachium announced in the fourth quarter, including and equity investment in the general partner.
With branch and we expect to expand our focus and both in Mendoza.
And and landlord in the residential market.
And each new alpha assets sub sector that we and we expect to partner with a proven industry manager with aligned economic incentive and risk management culture.
This allows <unk> to have an open architecture asset allocation approach versus other insurers that may have a more closed architecture approach to asset allocation.
Our focused expansion sectors include middle market credit real estate infrastructure debt and agricultural loans.
Yesterday, we announced plans to enter the middle market credit space with Adam Street partners.
American equity and Adam St will form a management company joint venture for CT wellbeing, and shorter capital and pushing assets with secured first lien middle market credit.
Our company will initially commit up to $2 billion of investment invested assets to build a joint venture.
And we expect to bring this capital efficient asset product to other insurers as well.
As this venture and other similar ventures and the future gone up third party assets American equity is mix of fee revenues will grow and supporting the migration to a more sustainable higher return business profile.
The capital structure pillar is focused and greater use of reinsurance structuring to both optimize asset allocation for American equity is balance sheet and.
And to enable American equity to free up capital and become a capital light company overtime.
We are working diligently to complete in 'twenty 'twenty, one and.
Now to reinsurance partnership with BARDA and partners and our GAAP capital management, as well as Brookfield asset management and.
And the formation of our own offshore reinsurance platform.
These transactions will enable American equity generate deployable capital in order to pivot towards a greater free cash flow generative and a capital light R. R. O E return on assets business model.
Turning to financial results for the fourth quarter and full year for the fourth quarter of 2020, we reported non-GAAP operating income of $72 million on 77 cents per diluted common share for.
Financial results were significantly affected by excess cash and the portfolio and we reposition nine investment portfolio.
Derisking part of almost $2 billion of structured securities and $2 $4 billion of corporates and the fourth quarter and build cash.
We expect to redeploy by transferring to BARDA and gum and Brookfield reinsurance transactions.
Overall 2021 is a transition year for repositioning a significant portion of our balance sheet and hence a reset year for American equity.
Although this year, we will explain any transaction execution, driven short term or one time notable impacts on financial results.
For full year 2020, we reported non-GAAP operating income of $69 $1 million or 75 per share.
Excluding notable items specifically the one time effect of annual actuarial review and the third quarter and tax benefit from the enactment of cares Act and loss and extinguishment of debt 2020, non-GAAP operating income was $381 $4 million of $4 and 13.
For sure.
With that I'll now turn the call over to Jim Harmon and Island, Chief Investment Officer of insurance, Jim Don and Jeff are on this call for any questions.
Thank you and on.
As part of our ABL to point, our strategy work, we executed a series of trades designed to raise liquidity to fund the BARDA gum, and Brookfield block reinsurance transactions and Derisk the investment portfolio.
As part of this Derisk game, we sold nearly $2 billion and structured securities and an additional $2 $4 billion of corporates, where we generally focused on securities that we believed were at risk of future downgrades.
Our sales occurred before the recent ramp up and interest rates. So our timing was fortuitous.
As of the fourth quarter, the fixed maturity securities portfolio had an average rating of single a minus with almost 97% rated NTIC one or two.
In addition, almost 80% of our commercial mortgage loan portfolio was rated and see them. One at year end with 99, 7% rented either <unk> or <unk>.
All commercial mortgage loans and our portfolio were paid current as of yearend and.
And in the fourth quarter of 2020, there were no additional forbearance is granted.
Back on our first quarter, 'twenty and 'twenty call, we laid out and estimate of our capital sensitivity to a 12 to 18 months adverse recessionary scenario modeled on the Feds CCAR stress test.
Through year end, the portfolio performed better than expectations.
The impact of ratings migrations totaled 23, RBC points compared to the projection of 50, RBC points and that and that 12 to 18 months economic stress scenario.
The impact of credit losses, and impairments was 10 points.
Which compared to our projection of 25 RBC points and the stress scenario.
Following the Derisking activities for the fourth quarter, we would expect our capital sensitivity and and adverse economic environment to be truncated relative to our March 2020 estimates.
Looking forward, we expect to reposition the portfolio starting this year.
And with the completion of the reinsurance transact transactions with Bharti and gum and Brookfield.
AAR will free up capital and then redeploy part of that capital is to support and move into alpha generating assets.
Going forward, we expect to operate at lower invested assets asset leverage than in the past.
With that I'll turn it over to Ted.
Thank you Jim.
As we reported yesterday afternoon operating income for the fourth quarter of 2020 was $72 million or <unk> 70 per share compared to $126 million or $1 37 per share for the fourth quarter of 2019.
Fourth quarter 2019 resolved included a $2 million or two cents per share losses from the write off of unamortized debt issue costs for subordinated debentures that were redeemed during the period.
Average yield on invested assets was $3 88, and the fourth quarter 2020 compared to for 10 and the third quarter of this year.
The decrease was attributable to a 22 basis point reduction from interest forgone due to an increase and the amount of cash held in the quarter cash.
Cash and short term investments and the investment portfolio averaged $4 $4 billion over the fourth quarter up from $1 7 billion and the third quarter.
At year end, we held seven 3 billion and cash and short term investment and the life insurance company portfolios, yielding roughly seven basis points.
The current point and time yield on the portfolio, including excess cash is approximately three 4%.
The pressure on investment spread will continue and the first quarter.
Excluding excess cash and invested assets to be transferred as part of the reinsurance transactions. We estimate the current point and time yield on the investment portfolio to be roughly 4%.
As we expect to close the reinsurance transactions and our after the second quarter starting in March we may part, partially pre and <unk> the assets for the reinsurance transactions, thereby offsetting some cash drag.
We do not expect significant benefit and the first quarter from such pre investing.
On our future quarterly earnings calls, we will call out the effect of excess cash if any related to the reinsurance transactions.
The aggregate cost of money for annuity liabilities was 163 basis points down.
And three basis points from the third quarter of 2020.
Our cost of money and the fourth quarter benefited from one basis point of hedging gains compared to a three basis point gain and the third quarter.
Excluding hedging gains and the decline and the adjusted cost of money reflects a year over year decrease and option costs due to past renewal rate actions.
Reflecting the decline and the portfolio yield investment spread and fell to 225 basis points from 244 basis points and the third quarter.
Excluding non <unk> items adjusted spread and the fourth quarter was 213 basis points compared to 231 basis points and third quarter of 2020.
The average yield on long term investments acquired in the quarter was for four 6% gross of fees compared to $3 $5, 9% growth of fees and the third quarter of the year.
We purchased $152 million of fixed income securities at a rate of 332%.
Originate at a $142 million of commercial mortgage loans at a rate of three six and 7%.
And purchased $224 million of residential mortgage loans at 563% gross of fees.
The cost of options declined slightly to 139 basis points from 142 basis points and the third quarter.
All else equal we would expect to continue to see the cost of money continue to decline throughout most of 2021.
Reflecting lower volatility and the actions taken in June of last year to reduce participation rates on for $3 billion of policyholder funds and S&P annual point to point and monthly average strategies.
The cost of options for the hedge week ended February 9th.
143 basis points.
Should the yields available to us decrease for 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 62 basis points, if we reduce current rates to guaranteed minimums.
Down slightly from the 63 basis points, we cited on our third quarter call.
The liability for lifetime income benefit riders increased $79 million this quarter, which included negative experience a $16 million relative to our modeled expectations.
Coming out of the third quarter actuarial assumption review, we said, we had expected for that quarter of $63 million increase and the GAAP liver reserve based on our actuarial models, while actuarial and policyholder experience true ups and added an additional five.
$5 million of reserve increase.
We said that we bought expected plus or minus $10 million would seem reasonable for the fourth quarter of 2020 was a little bit above that range.
Were pluses and minuses and the fourth quarter with the biggest differences due to a $6 million increase from lower than expected decrements on policies with lifetime income benefit riders.
And a $10 million increase as a result of lower caps and par range due to renewal rate changes and policies having to anniversary dates during the quarter.
We will continue to experience the impact from and renewal rate changes made and the second quarter of 2020, and the first and second quarters of this year.
Deferred acquisition cost and deferred sales inducement amortization totaled $113 million.
$16 million less than modeled expectations.
The biggest items driving the positive experience were lower than modeled interest and surrender margins lower than expected utilization of lifetime income benefit riders.
And the second quarter of 2020 renewal rate changes and I spoke about previously.
A benefit on the combined deferred acquisition costs and deferred sales inducement amortization from the second quarter 2020 renewal rate changes was was $10 million.
So effectively offsetting the negative effect and the lifetime income benefit rider reserve.
Other operating cost and expenses increased to 55 million from $43 million and the third quarter.
Notable items not likely to reoccur and the first quarter of 2021, primarily advisory fees related to the unsolicited offer for the company and September.
Total of approximately $3 million with much of the remaining increase associated with the implementation of <unk> two point out.
Post closing and of the announced reinsurance transactions with BARDA com and Brookfield and the creation of the affiliated reinsurance platform.
You would expect the level of other operating costs and expenses to fall and the mid to high $40 million range.
We expect to complete the execution of the already announced accelerated share repurchase program and the first quarter.
Based on current estimates, we expect an additional 520000 shares to be delivered to US and addition to the initial three 5 million shares delivered at the initiation.
Combined with the one 9 million shares we repurchased in the open market prior to the initiation of the ASR program, we will have effectively reduced the share dilution, resulting from the November 30th initial equity investment of nine 1 million shares from Brookfield asset.
Management by approximately two thirds.
Yes.
The risk based capital ratio for American equity life was 372% flat with year end 2019.
Total debt to total capitalization, excluding accumulated other comprehensive income was 12, 2% compared to 17, 7% at year end 2019.
At year end cash and short term investment at the holding company total toll.
<unk> $484 million.
We expect to have over $300 million of cash at the holding company even after buying back additional shares after completion of the existing ASR to fully offset Brookfield issuance related dilution.
We are strongly capitalized as we look to execute a L. Two point all with ample liquidity at the holding company low leverage ratio related relative to our industry peers and robust capitalization at the life company.
Now I'll turn the call over to the operator to begin Q&A.
Thank you.
Jeff a question you will need to press star one on your telephone and to withdraw your question press the pound key.
And my first question will come from the line of Ryan Krueger from K B W. You may begin.
Hi, good morning.
I had a question on the ROE outlook.
I think last quarter, you talked about 11% to 14% intermediate term and the lower end of that being likely in 2021, given the excess liquidity and some of the elevated expenses in 'twenty and 'twenty. One I guess is it reasonable to think that you would probably come in below the 11% to 14 this year, but then migrate back.
Back into it and 2022 one.
Reinsurance transactions are complete.
Hi, Ryan this is Ted.
Yes based upon the liquidity that we're holding right now I would expect that's probably comment a little lower than the low end of that now obviously, the determining backed off all up and where that ends up is going to be dependent on whether or not and then one on the timing of when the reinsurance transactions are executed and whether or not.
We invest any of that liquidity and securities prior to you and the execution.
And Ryan I'll, just add one thing hi, good morning, do what <unk> already said, which is spot on is that we're viewing 2021 or at least the first few quarters of it as a reset year.
And.
And focusing on 'twenty two is probably the right way or do you think of metrics for us.
Yes.
Thanks, and then.
Separately.
I guess, Mike or have not been a focus product and in the past for it seems like they are more of a one now.
I guess, just generally going forward would you expect somewhat of a more balanced mix between between my gut and FIA.
And sales going forward.
I can take that and and Jim can add in.
And Mike is where our single premiums preferred units were a good way for us to reintroduce them to the market. We think it's compelling price to our pricing. We're trying and we are focused on fixed index annuities and you would see the rest of the year, Australia, focusing and a fixed index annuity side given the pending numbers I gave earlier you can see were pretty robust.
And the first quarter as well.
Second quarter onwards, you'll probably see us pivoting much more towards fixed index annuities as new product introductions coming to market and I guess and shield.
Got it thank you.
Yeah.
And once again that started one for questions.
And also as a reminder, please limit yourself to one question and one follow up.
Our next question will come from the line of puzzles things on from J P. Morgan.
Hi, good morning.
Hi, My first question is and.
Thinking about the next several years how much are for your portfolio do you intend to allocate the alpha generating assets I think you know most insurers tend to allocate somewhere between 3% to 5% and then I'll leave it is your thinking that you'll end up with a similar advocate for longer term.
Hi, Pablo good morning.
John.
And.
I think the definition of alpha generating is very important in this case.
We believe where we are in the markets right now and this is informed by leading partners as well.
She allocating to traditional private equity hedge funds and publicly traded equities is more risky and so our allocation there is basically zero net zero.
So the definition of alpha generating from our point of view is.
Stable cash flow like traditional.
Fixed income investing but in private markets and middle market credit for example is announced by generating its non equity.
And this broader definition of alpha generating debt is basically anything that is not CUSIP and public markets because anything that is accused stepped and public markets and grinding towards and a world of excess supply and excess demand for bonds is training to us.
Very low yields.
So if you look at private credit.
Real estate with contractual cash flows our infrastructure debt all of those are always going to have the flavor of a more traditional fixed assets, which may have a residual equity sleeve as you structured it for capital efficiency. That's one important point as we think of that will probably put around five to 10 per cent of the portfolio and and progressive.
And each year and ultimately as a target asset allocation.
These private assets would be between 20% to 30% and the portfolio.
Understood. Thanks, and on and then the follow up question I had just regarding your are your aspiration to grow to the mid teens longer term.
I know, it's early days, but I was wondering if it's possible to give us a rough indication of how much of that expansion will be driven by higher earnings.
<unk> for lower capital base to weather through buybacks are leaning to third party capital. Thanks.
I'll start with the others can chime in I think probably you bring up a very important point there are a few drivers of our high Roe overtime.
First of all.
One thing that we're very proud of this year, which may go on and noticed is that the assets average of our business has gone down meaningfully and if you do the math and page nine and page one of the supplement you will see that asset leverage has gone down on a GAAP basis from like 18 times to 12, and a half times, so it's actually and.
Applying to alpha assets, which create greater earnings primarily driver will be earnings and I would say the three drivers of better ROE expansion first and fastest investment income growing.
Second fee income Thats non equity related because its fee income from like the asset management venture the reinsurance growing and so those are two and the numerator of Iot.
And then finally equity will go down as we redeploy and more of that cash earnings back and.
Our ongoing share repurchase programs for capital return programs might be out like.
Two the items growth a numerator one item reduces the denominator has been returning cash to shareholders.
Okay. Thanks for that.
Sure.
Thank you. Our next question comes from the line of nine miner and beer.
You may begin.
Hi, it's for its Randy Benner.
No.
And the question just now.
The pending counts you mentioned currently on the call I think it was kind of running something like <unk>.
And 3500.
And at a L. And then like that 200 and Eagle life or are those the right number and just generally for penguins.
And then this morning, Randy Hi, and happy New year, and nice to hear your voice again.
And with this morning, Hi, I would expect that as we pivot from SBA Tomorrow.
And sorry for everyone else for trying jargon and to you, but it would be somewhat fixed index annuities and spending will probably trend down a little bit is that a high point is probably the way I'd put it.
Yeah. So.
I just wanted to confirm those numbers, so that would be the highest and history I guess I'm curious just kind of.
Can you characterize a little bit more.
Where you're sitting kind of from a market competition perspective to get those numbers and just confirm that you know from an operational perspective, you're absorbing all of that volume well just kind of curious how the sales and operations organization is is.
Is is.
Dealing with that kind of flow.
It's a great question, it's nuanced and on the point, it's allowed us to actually understand our operational capabilities. The strength, if you recall and with our fourth pillar of our foundational capabilities.
And our strategy was foundational capabilities and then it's been a great test case for us to realize all of these operations and it's doing great and you get pushed a bit.
And make us realize where we need to make investments and our business a year or two years from now, yes, and we will be bolstering, what we do and operations, but it's done well, it's held up well to answer your question.
And it's been a great test case for us to see both how we engage with the market, bringing new producers.
To hit new highs and is off to the races. So that we can actually do which very few companies do John.
And I need to channels, and then figure out other avenues for growth.
Yeah.
And then just can you characterize kind of where you're fitting in.
You know versus other competitors in the market and you obviously were very competitive at the end of last year can you give us any color of kind of where you're fitting and against key competitors, so far and 2021.
We probably fit into and the first quartile is the way to think about it and then we'd probably be within the first half by the end of this year at the end of this quarter, we're going to take some rate action on the Expedia side. We have this accumulation product coming out early next week actually launches Monday. So we're.
John from first quartile to middle of the pack by the end of the quarter.
We're still price margin and returns.
It turns and we've got the assets and the balance sheet and the returns and the balance sheet to make that works you know and as long as your asset returns and mid threes were meeting our product pricing return hurdles, which are like and the 10 per cent area Unlevered non.
Not to steal Jim's done day, but if you have any more questions I'm sure drink and Jim can add in.
I'll leave it there on the on the product stuff. Thanks, so much for the answers.
Thank you Randy.
Okay.
And our next question.
Erik bass.
And this research.
And again.
Hi, good morning, Thank you and non U.
Your comments on focusing on 2022, I think make a lot of sense given all the moving pieces near term and share.
Our expectation that you'll be at Pall.
Call it a normalized level of cash and expense since by the end of 2021, and then probably also executed some meaningful capital management by that time, so that you'll enter 'twenty two.
More of a normal run rate for earnings.
Hi, Eric Yes, you got it spot on right.
Great.
And then you also commented obviously part of the longer term strategy is to increase the level of fee income for Aes <unk> and we've got good line of sight into the ceding commission and you'll be getting from Brookfield, but can you help us think about maybe the initial level of fee income do you expect from BARDA com and the asset management partnerships, you've announced if and how you see that.
Building overtime.
It's a fair question and I probably sequence. It this way too early to give you any exact views on that other than the fact that as we.
Other than the fact like the answer is giving Pablo earlier about ROE improvement overtime, right and how earnings change the first driver of earnings growth will be.
Actual spread income and alpha assets.
Because of higher yields so sustaining for and growing from 4% yields.
The second part will be actually constantly and returning capital to shareholders from the earnings net of cash generative and some of the capital that's freed up.
And which will then impact the denominator of all of these calculations and then the third part of it will be the ramping up of fee income and you mentioned reinsurance deal fee income will be greater than asset management fee income as you know it takes time to ramp it up so like and the kids from a Brookfield transaction you can see we have 90 basis points between E and M fees and.
Insurance fees.
Those kind of transactions like we did with Brookfield, obviously, a more substantial you'll get 90 basis points of assets transferred and and when we do asset management deal I think it is fair to say you should expect us to earn from that asset management scheme, which is the current driver here.
A round.
Double digit basis points on other People's money.
And we make insurance capital efficient products available for them and grow that so that's a slower ramp I think thats, a multiyear ramp, but its a demonstrable ramp with differentiated asset classes.
Let me pause there because that was a mouthful.
The three drivers makes sense, and then kind of my sequencing it out and if not I'm happy to add onto it because they didn't do about throw them out from there.
No I think that makes sense.
One to clarify on the asset management deal he talked about earning a double digit basis points on other people's money and so to clarify does that mean, you're not earning any investment on the capital you're putting and but it's.
Yes.
Platform and growers and takes on other kind of third party money that that's where you know and I'm going from no no.
And that's a great question and glad you asked to clarify and we make it on our own too.
And that's how you can look at returns on a gross and net basis. So yes, we are and Rev share or economics and event shows on our own money too, but it really is additive to us.
If I go through the contract right.
And it comes through and high yield net of fees and the first driver you return capital and the second driver when you have other people.
Assets, which is not any 1.0 I've got third party asset and we're making.
Fees on that and net additive.
Got it that's helpful and I can just sneak in one other I think the protium acquisitions done in the general account is that where you expect most of the asset management partners set or would you hold any of them at the holding company and so you don't have to go through a dividend process to get the income out.
We'll probably do more of the latter and we don't have to and equity and on the partnership's direct and partnership and the Adam St Partnership, which we haven't talked too much and written about a very different construct ones and equity investment approach and one day Adam St. John is building, something together and maybe equity and the future.
Right now it's more P&L oriented.
That does not need equity, we expect our blueprint to be that we're not really making that many equity investments only a lot of them are going to be forms of revenue shares a b and I was sharing arrangements.
Got it. Thank you I appreciate the comments.
And in <unk> next question and complain a wound burden from credit Suisse.
Good.
Hi, good morning.
Do you still feel comfortable with targeted capital return of 250 to 300 million in 'twenty and 'twenty one and.
And I think that was above the buybacks required to offset the Brookfield deal.
Yes, hi, good morning.
Got it.
I mean, well know with the with the reinsurance transactions that we're executing and along with where we want to hold capital and remember and normal normal times, we would all want to hold capital around a 400% RBC or in excess of that so when we look at that and the reinsurance transaction and certainly we believe that.
This year potentially we should be able to return that $2 50 to 300 above the buybacks and then as we go forward and as and not talked about that.
Creation of the ABL to point, our model and the fee revenue generation et cetera, we believe that point and increase our cash generation profile to be able to hit those targets as we go forward.
Yeah.
Ted covered if you think of it for cash we have at the holding company is plentiful for us to offset and Brookfield dilution as well as meet the targets we had for the year. So we only have the cash we need to put to work.
Got it that makes sense and then could you just talk about the expected a L. Two pointed out and implementation costs, especially in 'twenty and 'twenty, one I mean, I know the cost for a little bit higher and for can you just.
And you can give us maybe some idea.
Yeah.
On the nature of the cost I mean, the nature of the classes.
For the level.
Yeah, so for 'twenty.
Certainly as we go through 2021 here, we're going to see potentially elevated expenses we were at.
And $55 million of operating expenses, what we indicated is.
All forward basis.
The transactions, we probably would be somewhere in that mid forty's range to high Forty's range, but I would say, we're going to see expenses, we called out 3 million and this quarter. So you are still in the low fifties for.
Operating expenses as we go forward through 2021, which really represents additional expenses net were incurring for advisory fees.
Related to the transactions and the other work that's been doing now you know the other part and we talk about run rate and the reason why the run rate we are quoting that 45.
Or higher for DS is certainly staffing and creating the infrastructure for AGL to point out what's different and what was there for agi one point at all but we have factored that into our modeling and our expense structure. When we're quoting what ROE and we think we're going to be able to hit and the future.
Got it and and then a question and one more could you just provided and the outlook for 'twenty and 'twenty, one 'twenty and 'twenty two sales and.
And if the sales were very strong and the fourth quarter, just and and you talked about some of the trends for this early this year, but just any thoughts on that.
And the outlook.
Well.
And historically, we don't give any outlook on sales beyond holding the pending numbers that we currently have and I think are not touched on those and the numbers and also talked about.
Potentially how we would over the year move away from maybe the higher levels of sales to SBA multiyear products to more of the fixed indexed annuity products.
Got it thank you.
And our next question and I'll come from the line and Mark Hughes from choice.
Good.
Mark Your line is the independent agent channel.
Yes, and you can you hear me.
Yes, Mark we can hear you.
On the independent agent channel can you talk about.
And how they're operating with the still presumably some co.
<unk> related restrictions and what's the.
And you might say capacity utilization on the on the channel just in general.
Are they back up and going or still at reduced capacity.
Hi, Mark it's or not.
The channel is fairly active.
And we've all adapted and this new way of working.
Which is largely remark.
We're not actively in the market face to face, we're putting helped first and that point of view and.
And that channel.
But its functional and it's doing well and it's easier to sell SPD and also as a product when you don't have face to face interaction with a client when youre not doing and the way they go to market and a lot of them have seminars dinners.
But I would say.
The channel activity is good.
Partners are helping the producers and the agents.
And how to sell and more importantly, I think the kind of products, we have with the product refresh we are launching no income shield for example got refreshed.
And Thats doing well and actually income Sheila is one of the products Thats reinsured for Brookfield. So it is good we've got that working well.
Assets, you revamp will make it a very simple compelling proposition, we're applying our accumulation.
And can grow that and we had some additional product ideas and mine working with distribution and we think are going to.
David things forward.
No one knows what the new normal is working and it's working fine.
On future deals, where you've got the other asset managers or potential reinsurance deals is there.
Anything unique about these transactions that contributes to the cash drag that future deals also have.
And kind of periods, where you've got the buildup of capital.
Related to the cash drag the asset managers are net.
Those are not those transactions aren't going to create cash drag for us.
The cash drag it's much more related to reinsurance transactions and if we would do another reinsurance transaction outside of the ones. We bought it and it wasn't transfer of securities are and was a transfer of cash yes, we could see cash built up but really our current cash that we have on the balance sheet and specifically.
<unk> two a couple of reinsurance transactions that we're currently working on.
Yeah, and I'd, just add and Mark is that we feel very good about actually the strengthening of the balance sheet every day and.
And maybe we did last year.
And the fact that the asset leverage is down and financial leverage and down from 17, 7% to 12, 2%.
And the beverages down from 18 times around 12 times, a 12 to 13 times and.
So our cash drag is actually.
Part of implementing a new business model and Thats actually less risky.
And with the balance sheet being strong and capitalizations being at the highest levels and our history and staying in those levels and.
And on a go forward basis allows us to execute so we really view the cash impact from holding liquidity.
To be transitional in nature related to the two reinsurance transactions because we are transforming 20 per cent of the balance sheet and these reinsurance transactions and the rest of the balance sheet moving to wherever you're going having derisked out of it is good to be smart if you couldn't be smart and Lucky we'll take it and I think our timing was really good the team did a.
Good job, Jeff Jim Toga.
On de risking.
Some of the structured securities and frankly, it's better because and worked out for this part of being Lucky rates are up 40 basis points.
And the last one month, so it's actually been good to be and cash, but it will be a short term impact on results and we expect first quarter to be impacted by that because we have more cash and first quarter and then we add on average and the automotive.
And the long answer to your very simple question I apologize for that but happy to take any further.
And off on it.
Detail. Thank you.
Okay.
Especially on comes from Ryan and John Barnidge Piper Sandler.
Thank you and good morning apologies.
Apologies if I missed it in your prepared remarks, but what was the yield on securities purchased during the quarter.
Okay.
Sure.
Hi market Ted.
And I said those are from and my remarks.
The average yield on investments acquired this quarter was for 46 gross of fees.
And that was compared to three and that was compared to $3 59.
Last quarter.
Thank you very much and then.
And maybe as part of <unk> two point out have you looked into building maybe like a third party claims and policy administration platform that could generate additional servicing revenue.
You hang out and our strategy session.
Yes.
No I guess I haven't for there are questions though.
Youre asking exactly the right questions I think it's an element of that foundational capability pillar and the fourth pillar.
This year, we're really focused on investment management and capital structure and you're spot on right, but it's too early to talk about that fourth pillar and and what that could be but as I said I think you are hanging out and a strategy session. So jokes apart.
That is that's a stretch it's doable, but it will require some investment that is not reflected and anything we've shared with you and sort of upside over the long term.
We certainly recognize that there is an opportunity and the marketplace out there to do that but it's not.
That's not on our near term plan, but certainly it is something we are looking at long term.
Great. Thank you for your answers and best of luck.
Thank you and our last question will be from Pavel those things on from J P. Morgan you may begin.
Hi, Thanks for taking my follow up so.
And Pat I, just wanted to follow up on your capital deployment comments. So to your point if he considered and next maybe two to three years.
And your capital deployment is already covered by their interest transactions and be a book Apple and the balance sheet.
And what point, though do you need to start, allowing more earnings and support capital deployment and I guess related to that how should we think about the quantum of burn and can you just reported feels and buybacks and the context of that question is that I think in the past most of our excess capital was used to fund sales.
Hi, Pablo happy to take the follow on yes, so youre spot on right, we expect to free up capital and I go back to my the three building blocks and I started our articulated earlier question earnings will go up as investment income goes up with alpha assets being a greater proportion of debt investment portfolio.
And if it goes up from 10% per share to 20, 15% to 20% next year and 25% to 30% the following year.
Earnings will growth those earnings, including our reinsurance platform that created so that and.
A lot of the learnings are coming out and the reinsurance platform, we'll be able to be returned to shareholders.
<unk> capital freed up.
And we'll then fee income from investment management partnerships or our transaction that we talk about.
It will be we will not need capital to fund growth.
We will speak more than sales sufficient to fund growth the devil will be and the details and we worked through all the execution, but I think they'll be priority order that I. Just gave you with the existing capital we free up that goes back to shareholders and then with the growth of the earnings and sustainable earnings including out and the reinsurance platform and then.
And management partnerships will be free cash flow to shareholders.
Thanks, John.
And he did.
Not showing any further questions.
And to turn the call back over to speakers for any closing remarks.
Thank you for your interest and American equity and for participating in today's call should you have any follow up questions. Please feel free to contact us.
Ladies and gentlemen.
Today's conference call. Thank you participating.
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