Q2 2021 American Equity Investment Life Holding Co Earnings Call

August 6, 2021

[music].

Welcome to the American equity investment life, holding company second quarter, 2021 conference call.

At this time for opening remarks, and introductions I would like to turn the call over to Julie Lafollette coordinator of Investor Relations.

Good morning, and welcome to American equity investment life, holding company's conference call to discuss second quarter 2021 earnings our earnings release and financial supplement can be found on our website at www Dot American cash equity dot com non.

Non-GAAP financial measures discussed on today's call and reconciliations of non-GAAP financial measures for the most comparable GAAP measures can be found in those documents or elsewhere on our investor relations portion of our website for.

Presenting on presenting on today's call are not viola, Chief Executive Officer, and interim Chief Financial Officer, and Jim Hamilton, Chief Investment Officer.

Some of our comments will contain forward looking statements.

Indicated by terms such as anticipate assuming believe continue to estimate expect forward future intend likely look to may need overtime planned potential project should strategy target trends will and would.

Our actual results could significantly differ due to many risks.

Including those.

The risk factors in our SEC filings and audio replay will be made available on our website. Shortly after todays call. It is now my pleasure to introduce of not volatile.

Thank you Julie good morning, and thank you all for your interest in American equity.

Before we speak about second quarter results.

I want to provide you with 3 strategy execution updates.

First we reached agreement with Brookfield on the reinsurance contract that covers book a portion of our in force and new business flow.

We have filed the agreement with our regulator for approval.

We look forward to receiving regulatory approval and closing on the reinsurance treaty.

Shortly after we would expect the second anticipated equity investment from Brookfield to be completed.

Second we have completed our share repurchase of 9.1 million shares since starting our buyback in the fourth quarter of last year.

It's fully offset the impact of shares issued to brokerage.

The total buyback included repurchases of 3 million shares in the second quarter for $95.1 million.

Additionally for the first time in our company's history in the second quarter, we started leveraging our asset management partnerships to invest in single family rental homes.

And middle market loans.

<unk> with ramping towards the E L..2 point on asset allocation strategy.

During the quarter, we invested in 933 single family rental homes.

ADL will indirectly be the landlord to residential rent does with partners, who manage the property through acquisition renovation leasing and sale in focus metropolitan areas.

Were the trends of wage growth and rental growth dynamics are robust.

During the quarter, we allocated $104 million to middle market loans.

We expect middle market credit to be an important piece of the <unk> 2 point of investment strategy.

Finally, we continued the revitalization of our go to market strategy pillar, which has historically been an industry leading at scale of new defunding of origination platform.

This platform slowed down in recent years and 1 of the focus areas in my first year as CEO was to revive sales by refreshing our product mix and how we go to market.

Go to market has been trending upwards since the fourth quarter of last year.

Preliminary estimates indicate that the second quarter of 2021 will mark the third straight quarter in which the company increased its fixed index annuity our FIA market share.

At American equity life, FIA sales were driven by the new competitive indices, we introduced 2 asset shield back in February.

At Eagle life, the increase in FIA sales was driven by new relationships.

On new income product and an increase in our employee wholesaler force.

In addition on July 21st.

We announced to our independent agent distribution the introduction of a new product is state shield.

The <unk> is an expansion of our income offerings in the non guaranteed income space.

This sub segment of the market is of $4 billion per year product space historically dominated by 2 of our competitors.

The <unk> has received strong support from key distribution partners and we look forward to growing sales in the coming quarters.

We are committed to continue to introduce new products as we move through the year 2.0 transformation, which will help us compete effectively and grow our share of the annuity market.

Moving on to business results for the second quarter.

Total sales of 1.2 billion were down sequentially as expected book.

The all time record, we set of $2.4 billion.

In the first quarter of this year.

As we discussed on the last call. We are focused on our fixed index annuity products.

For the second quarter.

<unk> sales increased 33% sequentially to $887 million.

As I said earlier, we believe this will be the third quarter in a row in which <unk> market share increased.

Clearly the changes that we've made in our go to market franchise over the last year are resonating with distribution.

At American equity life fixed index annuity sales increased 36%.

$2.703 million.

From $517 million sequentially.

As the refreshed asset shield Cds continued to see increased momentum led by a sequential 206% increase in asset shale deposits.

In the quarter the 3 proprietary indices, we introduced 2 asset shield as part of our February refresh.

The credit Suisse debt edge index the.

The Society Generale global sentiment index.

And the bank of America destinations index.

Counted for.

77% of second quarter as of Q deposits.

FIA sales at Eagle life of $185 million.

Represented a 24% increase versus the first quarter of 2021.

And of 155% increase compared to the year ago quarter.

On new Eagle select income focus GAAP.

<unk> retirement income product accounted for roughly half of the sequential quarterly increase.

The Eagle life team is increasing our presence within distribution partners by updating our FIA product shelf and increasing our sales force head count while raising the quality of talent.

In addition, we are leveraging relationships with advisers and our distribution partners centers of influence uncovered through multi of fixed rate of annuities to migrate towards fixed index annuity.

As we indicated on past calls.

The plan has been to re engage with distribution with the simpler multi of fixed rate annuity product. During COVID-19, and then pivot to driving growth through a revamped fixed index annuity product portfolio.

We are beginning to see a plan bear results.

As the financial planning needs of Americans evolve.

American equity is focused on providing our clients the dignity of of paycheck for life.

I believe our commitment to the core mission statement will become recognized and appreciated in the market over time.

This will help grow ADL in both our channels and open up other market access opportunities for us in the future.

At this time I would also like to take a moment and share with you the conclusions of our corporate governance projects undertaken by our board of directors.

Earlier this year, our board retained nationally recognized expertise.

To review its structure and operations.

To advise it on governance practices.

The board has completed its review and is implementing changes.

To refresh our corporate governance in line with best practices and to advance our strategic evolution.

The board has set a new target size of 7 to 9 directors plus the CEO.

Has set a new director retirement age at 75 years.

And has modified the membership and structure of its committees.

Importantly on this front.

Our audit committee will exercise increased risk management oversight.

The nominating and governance and nominating and corporate governance Committee.

We will have an expanded role in director compensation.

Selection and skills training.

The compensation Committee will have a deeper role in executive talent development and succession planning.

We believe these changes will make our board even more effective in driving stakeholder value realization and in playing at the essential role in the successful transformation of the company.

Now I'll turn the call over to Jim Hamel Island, our Chief investment Officer before I come back to cover our financial results.

Thank you <unk>.

The capital markets showed strong performance in the rest of our portfolio performed as expected in the quarter.

The overall credit quality remained strong with an overall rating of single a minus for long term investments.

The net unrealized gain position improved by $1.2 billion in.

In the quarter ending at $4.8 billion.

The strong bid for assets combined with low treasury yields continues to make the investment environment challenging, but we are finding good opportunities.

We used the strong bid to continue to reduce exposure to higher risk positions and structured assets in select sub sectors that have the potential for future deterioration.

There were minimal credit losses on the quarter and the performance of our commercial loan portfolio remained strong with no new delinquencies or forbearance is granted.

From a liquidity standpoint, we continue to hold cash in excess of target levels and what's needed to fund the reinsurance transactions.

At June 30, we held $10 billion of cash and equivalents in the insurance company portfolios.

As of not will discuss in a moment the average level of cash and equivalents increased in the second quarter.

The current point in time yield on the portfolio, including excess cash is still approximately 3.3%. So the pressure on investment spread will continue into the third quarter.

After completion of reinsurance transactions and the redeployment of the remaining cash in excess of our target we estimate the yield on our investment portfolio would still have been approximately 4%.

With regards to redeployment, we expect to have substantially redeployed excess cash that's not expected to be used on the reinsurance transactions by year end.

We are taking solid steps on the execution of our strategy to add $1 billion to $2 billion on privately sourced assets. This year growing to a pace of 5% or greater of the portfolio on each subsequent year to achieve on allocation of 30% of are greater in privately sourced.

Assets.

Year to date, we have allocated approximately $800 million to privately sourced assets, including residential mortgage loans single family rental homes commercial mortgage in the agricultural loans and middle market loans.

Traditional fixed income securities continue to be part of our strategy to deploy excess cash.

Our focus on the traditional strategy has been strong investment grade credits and the public corporate and municipal sectors.

For the second quarter of 2021 the.

The expected return on long term investments acquired net of third party investment management fees was approximately $4.1 5%.

Compared to 3.7% of 4% in the first quarter.

We purchased $1.1 billion of long term fixed income securities at a rate of 3.3% and $569 million of privately source assets at unexpected return of 567% the.

Privately sourced assets include the ongoing origination of.

Commercial mortgage and agricultural loans as well as residential mortgage loans.

Consistent with our long term plans, we added privately sourced assets in new asset classes for the company, which consisted of residential real estate investments and the investment in a joint venture debt is sourcing middle market loans at attractive investment yields.

With that I'll turn it back to announce.

Thanks, Jim.

Now turning to financial results.

For the second quarter of 2021, we reported non-GAAP operating income of $93.93.8 million or <unk> 98 per diluted common share.

Compared to $93.1 million.

$1 <unk> per share for the second quarter of 2020.

Results were negatively affected by the transition of the effects I've mentioned, both today as well in the past.

In particular the effect of.

Of cash in the portfolio in excess of target range and the level of operating expenses.

However, strong index credits in the quarter boosted operating earnings through both of lower than expected increase in reserve for guaranteed lifetime income benefits and lower than modeled amortization of deferred acquisition and deferred sales inducement costs.

Average yield on invested assets was 351% in the second quarter of 2021 compared to 358% for this year's first quarter.

The decrease was primarily attributed to attributable to a 7 basis point reduction from interest foregone due to an increase in the average amount of cash held during the quarter.

Cash and equivalents in the investment portfolio average $10 billion over the second quarter up from $8.6 billion for this year's first quarter.

Partnership income and other investments accounted for at fair value contributed an additional 1 basis points to yield compared to the prior quarter and 8 basis points on an absolute basis.

The aggregate cost of money for annuity liabilities was 156 basis points down 2 basis points from the first quarter of this year.

The cost of money in the second quarter benefited from 4 basis points of hedging gains compared to 2 basis points of gains in the first quarter.

Investment spread in the second quarter was 195 basis points down 5 basis points from the first quarter.

Excluding non tradable items adjusted spread in the quarter.

Was 181 basis points compared to 187 basis points for the first quarter.

In line with yield.

We would anticipate on investment spread to rise back to expected levels. Once the reinsurance transactions are completed and the excess cash is redeployed.

The cost of options was up slightly to 147 basis points from 145 basis points in the first quarter of 2020, primarily reflecting an increase in the cost of <unk> options hedging on monthly point to point strategies due to the decrease in.

Volatility over the quarter.

Monthly point to point remains our largest hedge strategy at just over 25% of notional.

All else equal we expect to see the cost of money remained relatively stable over the remainder of the year.

Should the yields available to us decrease of the cost of money rise.

We have the flexibility to reduce our rates if necessary and could decrease our cost of money by roughly 58 basis points, if we reduce current rates to guaranteed minimums.

This is up slightly from 57 basis points, we cited on our first quarter call.

The liability for lifetime income benefit riders increased $34 million of this quarter after net positive experience and adjustment of $29 million relative to our modeled expectation.

The better than expected results, primarily reflected the benefit from historically high equity index credits in the quarter as well as positive renewal premium experience.

Deferred acquisition cost and deferred sales inducement amortization totaled $101 million.

$31 million less than modeled expectations due to lower than modeled investment spread and benefit from high level of equity index credits.

Other operating costs and expenses increased to $65 million for.

$56 million in the first quarter.

Operating costs in the second quarter included $5 million of expense associated with talent transition.

Post refinancing on existing AG 33, redundant reserve financing facility later this year.

We still expect operating expenses to settle in the high $40 million per quarter area.

As we become a new ABL.

We will invest in upgrading our infrastructure and our intent is to quantify this investment spend for you in the future.

Total debt.

Total capitalization, excluding accumulated other comprehensive income of the quarter end was 11, 9% compared to 12, 2% at year end and 14, 7% in last year's comparable quarter.

At June 30, cash and equivalents at the holding company were in excess of our target by $330 million.

Finally, we have $236 million of share repurchase authorization remaining under the current plan approved by the <unk> Board of directors in October 2020.

Once the Brookfield for May is approved we expect to actively repurchase more shares to both offset any dilution from future acquisitions to Brookfield and to start on our plan of regularly returning capital to shareholders.

Now I'll turn the call over to the operator to begin Q&A.

Kathy I would like to ask a question at this time.

Star then the number 1 on your telephone keypad.

Please be reminded to keep your questions to 1 question and a follow up if you would like to ask additional questions you will need to get back into the queue.

We will pause for just a moment to compile the Q&A roster.

And of your first question comes from the line of Walmart.

The credit Suisse.

Okay. Good.

Can you just walk us through the mechanics of hitting.

Hitting the 2021 share repurchase target of 250, the 300 million ex the ban to loosen.

We were definitely happy to see that you guys definitely finally offset the.

The first deal but.

I'm just trying to think through all of the second second deal of law will play out.

Sure.

Nice to hear your voice.

Hey, thanks for.

The here for me.

And as I noted earlier, we've completed our share repurchase of the $9.1 million range, which fully offsets. The first tranche Brookfield is awaiting the formal approval from the insurance regulators, it's really their filing and therefore, we are currently paused on share repurchases to avoid the current holdings from exceeding 99% of.

After that for me approval is received we expect to retire older share through share repurchase or are the mean and then start of regular capital returns the Chilean function of timing of intent has not changed.

On the 250 million ports of offsetting the dilution and we are of the cash at the holding company as you can see the put back the work.

Got it I guess my question is just kind of on timing just because it seems like it.

Just thinking about how long, it's going to take the kind of process. The form and then I'm just you know what what.

The good quarterly run rate of buyback is the kind of achieve that goal.

Yes, I'd, rather not speculate on mechanics of capital return, but needless to say we are hopeful that for me is in the foreseeable future and then it's really a function of execution on your point is a spot on question, which is that if you are out of the market in the third quarter can you get it all done in the fourth quarter and Thats.

Really what we're thinking about.

Okay does it does it seem feasible right now to get to get it done on the fourth quarter.

There are means to do it but I don't want to commit to it but I would say my intent does not change our intent is not change, but they are a better means to get it done in the fourth quarter of needed yet.

Got it I guess the other question if I can share with another 1 just the $65 million of expenses was definitely a bit high.

I know you called out kind of the $5 million on talent transition could you maybe specify the other kind of notables in there and just kind of talk about the timing to getting back to the high forties.

Sure.

So if you if you back out what you just mentioned you're right. So the path back to the high forties Israeli around our refinancing of our 833.

Redundant reserve financing, we expect to complete that this year and that will get us back to the high 40 of the other parts of the doesn't get you fully back to the high forty's, but the other parts of the onesie twosies going through like as we're standing up new operations, we acquired a new team we are building out things and in the investment structuring area. So.

We really see those things getting done on <unk>.

On to find the investment spend next day, but that's what gets us back there.

Have you guys quantified the redundant reserve financing costs.

We have but we're in a competitive negotiation so I'd rather not show my hand of the new for you.

The good balance.

It would be fair to say if you took the last quarter's <unk>.

The expense number.

And you took out the financing cost we will clearly be in the range of just asked about which is the high forties.

Okay got it.

And your next question comes from the line of Erik bass.

Panama's research.

Hi, Thank you on the higher index credit for a nice tailwind in this quarter on that seem likely to continue the skipping more markets are so was hoping you could talk about what this could mean for your go forward earnings and capital.

I can start and I'd love to ask Steven to add in.

He has been looking at this for a long time, Eric by the way good morning.

The morning.

Good morning, the high index credit this quarter were very strong with the point I would highlight is that 25% of our book is these monthly point to point of <unk> options and those kicked in meaningfully for the first time. This quarter. There was a little amount of them in April in the last quarter, but not much.

The land so if markets are sustained at current levels. We should continue to see monthly point to point to kick in because thats 1 of the market dropped. It takes 12 months really to curious of the start to get payoffs. The market fell last March and April now this March and April there for those options start to kick off and those of of what over $200 million of index credit for us.

A lot of value from that index credit coming through.

And that should continue Stephen might into adding hi, Eric This is Steven Schwartz head of Investor Relations and non is right. If you wanted to take a look at the big difference between the index credits in our account roll forward versus the versus the first quarter of this year, it's really coming from from monthly point to point and that kicking in.

Whereas the the first quarter of last year, which was terrible for the markets ex Covid developed has run off.

That's where that is coming from the question of of what reserves of <unk> should look like yes, given current equity markets. We could we should continue to see a benefit all else equal.

On the cabbie, the caveat that because of course, all else equal the third quarters coming up the third quarter unlock is coming up and patterns will undoubtedly change.

The the level of equity index credits.

Should be of positive.

For the unlock but there are obviously.

Dozens of other assumptions that go into that so with that caveat yes.

You would see what you were suggesting but the but the unlock has is there.

And just to give you.

The place to point to in our financial supplement on page 10.

I am putting on my CFO hat Eric the.

You see index credits over then you can.

They were $777 million net $200 million of plots of <unk> mangum on benefit in that so.

Got it thank you and I guess in addition to the amortization benefits do also think of it when Youre building account value with the higher index credits that all else equal should be a tailwind and then I think for your RBC calculation.

The index credits factor in to that so it's I believe of benefit to the RBC ratio as well for higher.

Yes, Hi, it's Steven again, yes.

On both first the question with regards to lever, yes, our policyholder funds under management because of the strong equity index credits.

Our better than modeled that as a positive.

Going forward for the increased level of reserve as well again with the caveat of the unlocking and potential actuarial assumption revisions in the third quarter.

Yes index credits as well or as we've talked about in the past.

Do affect statutory results and strong strong index credits to benefit statutory income.

Thank you and then.

And your net.

And your next question comes from the line of Pablo I'm sorry.

Sorry, Pablo Thank you John from J P. Morgan.

Hi, Good morning can you talk about how fast you can revert to a portfolio yield of 4% from where you are now I guess that for the reinsurance deal close it.

It seems like reinsurance will use of a decent amount of excess cash, but as you had mentioned the knot.

Yet the reposition some of the cash of the investments, which are presumably might take some time so.

Any color you can provide there thanks.

Sure. Paul This is Jim Thanks for the question.

Our moved into the CIO role earlier this year on 1 of the first things on non asked me to do is to take a fresh look at our investment process, particularly focused around creating a process that is resilient.

For the market cycles, particularly in down cycles.

In terms of capital efficiency, we're working through that process. As you know we did a lot of risk Derisking late last year. Some more on the first part of this year as.

As we work through the process, we expect to put.

Substantially all of our excess cash to work over the next 6 months.

Got it.

And then second question for me different topic. So can you provide a bit more detail on.

For more detail on the EG 30 from your sort of financing.

Is the objective to get a lower rate or to reduce the magnitude of the pressure is being financed in the interior reinsurer of setting up for their part in your <unk> strategy.

Hi, Pavel is of Great question.

It's not to get more financing was to optimize the rate of get to a more market rate and we have the markets moved in the favor of insurers and we want to get that right, but I think it's a good opportunity for me to sort of take this time and talk to you about credit how do we think about.

How do we think about the reinsurance company and so we there is also of advantage to capital efficiency with both with the repurchase of private invested assets and benefiting from tighter <unk> M with the captive reinsurer and so that will provide us the flexibility.

Moving forward in addition to the better rate.

Got it thank you.

If you would like to ask a question simply press Star then the number 1 on your telephone keypad.

We will pause for just a moment to compile the Q&A roster.

And your next question comes from the line of John Barnidge from Piper Sandler.

Thank you very much most of my questions have been answered, but I was curious is that the drop in the for Q3, Q21 of our <unk> 'twenty, 1, whereas the reinsurance transactions.

Clothes that it would seem certain maybe elevated expenses the leak into 'twenty 2.

Hi, John.

While we would expect the full benefit from the age of 33 reinsurance transaction to really come in 'twenty 2 because we're later in the year I sort of quantified for Wilma.

The question of where that's on a quarterly run rate basis, I don't really thinks that this is the function of let me, let me sort of lay outside of our prioritization right.

Yes.

These transactions take time to do our prioritization clearly has been to complete the negotiation on contracting on Brookfield, which we finished that in June with the regulator, we need to get the Brookfield for me Don in the form of <unk> done, which is the reinsurance transaction that is Paramount and then the reinsurance financing those to where our priority.

Transactions.

And then we go with really our captive reinsurer to the regulator. So I don't see any real risk subject to all of us regulatory approval, which I am not going to comment on the regulators but.

That gets done this quarter early next quarter.

Okay. Thank you best of luck in the quarter ahead.

Thanks.

If you would like to ask the question simply press Star then the number 1 on your telephone keypad.

And your next question comes from the lineup Alright Goodbye.

Hi, Thank you for taking the follow up on that.

You just heard US part of it I guess with the timing of the Brookfield in the right way transactions and then how are you thinking about the BARDA.

The deal on the potential timing there.

Hi, Eric I'm glad you got back in the queue, Sir your questions on interest rate thanks for coming back.

I think <unk> got the you've got the sequencing right.

The <unk>.

All aspects of it for me for me.

That is really of cornerstone strategic partnership we want to consummate we're very happy with the way it's come together I really wanted to share with you all the economics of it and how we think about it on the cash economics basis, but I need to get the regulatory transaction closed.

Then we've got the redundant reserve financing and re read and in terms of BARDA the way out of it put it at.

We are yet to finalize the final terms of debt transaction with BARDA in the gum and expect to update you on that post the completion of the first 3.

But it does not get in the way of us getting fully invested.

For the next 6 months like Jim mentioned, the after closing both Brookfield and re because our reinvestment plans on our contingent on that.

And we will always be vigilant on shareholder value realization what is important for shareholder value realization is brookfield.

32 refinancing and re why it is literally it's important but it's the first 3 are paramount.

Got it but I guess to be conservative at this point.

Probably not assume that the.

Kind of the 5 billion reinsurance.

The agreement with them occurs in the second half of the year on the debt capital becomes available.

That's a fair assumption to make that as a very fair assumption to make but I would say that really frees up capital for us as well.

You may ask life. So the reason for that is because with Gregory we get.

And the more <unk> friendly jurisdictions, so our CRE capital on our non MBA business, which is the high risk C. III capital charge would be lower in a jurisdiction, where you got the benefit for Allen.

So from a capital release point of view, we have many alternates in placed and BARDA in the aggregate el benefit of or the I am focused with this leadership team to creating sustainable recurring revenue streams. So that we can shift towards ROE a variety of was not quite variety of gone we're not quarterback the release capital, but it didn't create the revenue stream like Brookfield data doesn't related revenue.

Streamline alternative assets too and Thats, what we wanted to.

Hopefully that gives you the right color.

Yes, that's very helpful. Thank you and then just lastly.

On a Nokia can answer this but you now have the final agreement for the Brookfield on the transaction are there any material changes in this versus the initial agreement in principle that we've seen.

What I would tell you we were very pleasantly surprised with the final term and you would you will really like them when we share them with you, especially as we bring in new business flow in the totality of the agreement.

They're a great partner, we look forward to doing many things of them over the years.

Great. Thank you.

Okay.

Your next question comes from the line of Pablo <unk> from J P. Morgan.

Hi, Thanks for taking my follow ups. So Brookfield has spun off Brookfield reader the shareholders something that at the time, but in the past that the other businesses.

From having a public currency and I guess being able to raise capital directly with the structural change of any implications for your reinsurance relationship with them.

The short answer Pablos known for.

<unk> has the question is probably best directed at them, but I would tell you ban re versus Bam is virtually the same thing boundary share of the exchangeable into Bam at any point so the.

And what's most interesting to us for this partnership is that a source of permanent capital with their balance sheet is invested in this and that's very important as we think of permanent re sidecar vehicles. We're looking for permanent capital, we're looking to really cut out the sponsor based bottle where sponsors raised fund.

The net from Lps and funds and the net capital goes into the insurance vehicles, but it's not permanent capital R.

Our model is take long term funding liabilities with permanent equity capital and be the asset allocator of the brains of the ILM machine that bringing those liabilities and assets together with differentiated asset allocation to the private assets that we are going into that is the Brookfield is a great example of what <unk> point of view.

B through the reinsurance transaction, we did with them.

And we are about input on perfect Sir.

We are open architecture for investments, which completely differentiate us from every other sponsor based insurer.

Got it.

And then on non from your comments it seems like the for me approval process and the reinsurance review those are completely separate.

But I guess based on your comments do you expect to get approval for both in short order.

What whats the basis for the outlook just given the I guess for me is the Brookfield process and it seems like that's entirely separate from the reinsurance agreement you probably of Iowa.

Yes, it's a great question, we would view the 2 of those together for May inform the because none of the for me makes them an affiliate the form D is therefore, the required so it's sort of together.

What makes us confident of rounded as well reach material agreement amongst us the parties. We've got it in front of our regulator, we have positive momentum in dialogue with the regulator I can't comment on the for me at Brookfield process, but we're well aware of how it's playing out we're really waiting for the hearing date. Once we have of hearing date, we could be more definitive EBIT.

Late <unk> early for Q, but all signs of big signal 2 around that late securely for Q is just a question of getting a hearing done and hopefully getting approval on it.

Got it.

The outcome, but that's the way I would guide you.

Understood and then last 1 for me.

Some of the companies have given the expected impact of <unk> changes I was wondering if you could provide similar information for thank you.

Sure. This is Jim we have taken a look at that then.

Our early estimates would be around a 20 point impact of RBC for that.

Thank you.

At this time there are no further questions I would now like to turn the call back over to Julie Lafollette for closing remarks.

Thank you for your interest in American equity and for participating in today's call.

Have any follow up questions. Please feel free to contact us.

This does conclude today's conference call. Thank you for your participation you may now disconnect.

Okay.

[music].

Yeah.

[music].

Yes.

[music].

Welcome to the American equity investment life, holding company second quarter, 2021 conference call.

At this time for opening remarks, and introductions I would like to turn the call over seas, Julie Lafollette coordinator of Investor Relations.

Presenting on presenting on today's call are not Bala, Chief Executive Officer, and interim Chief Financial Officer, and Jim Hamilton, Chief Investment Officer.

Some of our comments will contain forward looking statements into.

Indicated by terms such as anticipate assuming believe continue to estimate expect forward future intend likely look to may need overtime plan potential project should strategy target trends will and would.

Our actual results could significantly different due to many risks.

Including those the.

The risk factors in our SEC filings and audio replay will be made available on the website. Shortly after todays call. It is now my pleasure to introduce non volatile.

Thank you Julie good morning, and thank you all for your interest in American equity.

Before we speak about second quarter results.

I want to provide you with 3 strategy execution updates.

First we reached agreement with Brookfield on the reinsurance contract that covers book a portion of our in force and new business flow.

We have filed the agreement with our regulator for approval.

We look forward to receiving regulatory approval and closing on the reinsurance treaty.

Shortly after we would expect the second anticipated equity investment from Brookfield to be completed.

Second we have completed on share repurchase of 9.1 million shares since stocking of buyback in the fourth quarter of last year.

This fully offset the impact of shares issued to brokerage.

The total buyback included repurchases of 3 million shares in the second quarter for $95.1 million.

Additionally for the first time in our company's history in the second quarter, we started leveraging on asset management partnerships to investing.

Single family rental homes.

And middle market loans.

Consistent with ramping towards the E L..2 point on asset allocation strategy.

During the quarter.

We invested in 933 single family rental homes.

<unk> will indirectly be the landlord to residential rent does with partners, who manage the property through acquisition.

Innovation leasing and sale in focus metropolitan areas.

For the trends of wage growth and rental growth dynamics are robust.

During the quarter, we allocated $104 million to middle market loans.

We expect middle market credit to be an important piece of the ABL to point of investment strategy.

Finally, we continued the revitalization of our go to market strategy pillar, which has historically been an industry leading.

At scale on.

New defunding of origination platform.

This platform slowed down in recent years and 1 of the focus areas in my first year as CEO was to revive sales by refreshing our product mix and how we go to market.

Go to market has been trending upward since the fourth quarter of last year.

Preliminary estimates indicate that the second quarter of 2021 will mark the trough.

Third straight quarter in which the company increased its fixed index annuity our FIA market share.

At American equity life.

Sales were driven by the new competitive indices, we introduced 2 asset shield back in February.

At Eagle life, the increase in FIA sales was driven by new relationships.

The new income product and an increase in our employee wholesaler force.

In addition on July 21st we announced to our independent agent distribution and the introduction of of new product estate shield the.

<unk> is an expansion of our income offerings in the non guaranteed income space.

This sub segment of the market is of $4 billion per year product space historically dominated by 2 of our competitors.

The <unk> has received strong support from key distribution partners and we look forward to growing sales in the coming quarters.

We are committed to continue to introduce new products as we move through the year of 2.0 transformation, which will help us compete effectively and grow our share of the annuity market.

Moving on to business results for the second quarter.

Total sales of 1.2 billion were down sequentially as expected versus the all time record, we set of $2.4 billion.

In the first quarter of this year.

As we discussed on the last call. We are focused on our fixed index annuity products.

For the second quarter.

<unk> sales increased 33% sequentially to $887 million.

As I said earlier, we believe this will be the third quarter in a row in which FIA market share increased.

Clearly the changes that we've made in our go to market franchise over the last year are resonating with distribution.

At American equity life fixed index annuity sales increased 36%.

$2.703 million.

From $517 million sequentially.

As the refreshed asset shield Cds continued to see increased momentum led by a sequential 206% increase in asset chill deposits.

In the quarter the 3 proprietary indices, we introduced 2 asset shield as part of our February refresh.

The credit Suisse debt edge index the.

The Society Generale global sentiment index.

And the bank of America destinations of index.

Counted for.

77% of second quarter asset Q deposits.

FIA sales at Eagle life of $185 million.

It represented a 24% increase versus the first quarter of 2021.

On a 155% increase compared to the year ago quarter.

On new Eagle select income focus GAAP.

<unk> retirement income product accounted for roughly half of the sequential quarterly increase.

The Eagle life team is increasing our presence within distribution partners by updating our FIA product shelf.

On increasing our sales force head count, while raising the quality of talent.

In addition, we're leveraging relationships with advisers and our distribution partners centers of influence uncovered through multi of fixed rate of annuities to migrate towards fixed index annuities.

As we indicated on past calls.

Our plan has been to re engage with distribution with a simpler multi of fixed rate annuity product. During COVID-19, and then pivot to driving growth through a revamped fixed index annuity product portfolio.

We are beginning to see a plan bad results.

As the financial planning needs of Americans evolve.

American equity is focused on providing our clients the dignity of of paycheck for life.

I believe our commitment to the core mission statement will become recognized and appreciated in the market over time.

This will help grow aes in both our channels and open up other market access opportunities for us in the future.

At this time I would also like to take a moment and share with you the conclusions of our corporate governance projects undertaken by our board of directors.

Earlier this year, our board retained nationally recognized expertise to review its structure and operations.

On to advise it on governance practices.

The board has completed its review and is implementing changes.

To refresh our corporate governance in line with best practices and to advance our strategic evolution.

The board has set a new target size of 7 to 9 directors plus the CEO.

Has set a new director retirement age at 75 years.

And has modified the membership and structure of its committees.

Importantly on this front.

Our audit committee will exercise increased risk management oversight.

The nominating and governance and nominating and corporate governance Committee.

We will have an expanded role in director compensation.

Selection and skills training.

The compensation Committee will have a deeper role in executive talent development and succession planning.

We believe these changes will make our board even more effective in driving stakeholder value realization and in playing at the essential role in the successful transformation of the company.

Now I'll turn the call over to Jim Hamel Island, our Chief investment Officer before I come back to cover our financial results.

Thank you and on.

Capital markets showed strong performance in the rest of our portfolio performed as expected in the quarter the <unk>.

Overall credit quality remained strong with an overall rating of single a minus for long term investments for.

The net unrealized gain position improved by $1.2 billion in the quarter ending at $4.8 billion.

The strong bid for assets combined with low treasury yields continues to make the investment environment challenging, but we are finding good opportunities.

We used the strong bid to continue to reduce exposure to higher risk positions and structured assets in select sub sectors that have the potential for future deterioration.

There were minimal credit losses on the quarter and the performance of our commercial loan portfolio remained strong with no new delinquencies or forbearance is granted.

From a liquidity standpoint, we continue to hold cash in excess of target levels and what's needed to fund the reinsurance transactions.

At June 30, we held $10 billion of cash and equivalents in the insurance company portfolios.

As the not will discuss in a moment the average level of cash and equivalents increased in the second quarter.

The current point in time yield on the portfolio, including excess cash is still approximately 3.3%. So the pressure on investment spread will continue into the third quarter.

After completion of reinsurance transactions and the redeployment of remaining cash in excess of our target we estimate the yield on our investment portfolio would still have been approximately 4%.

With regards to redeployment, we expect to have substantially redeployed excess cash.

Not expected to be used on the reinsurance transactions by year end.

We are taking solid steps in the execution of our strategy to add $1 billion to $2 billion in privately sourced assets. This year growing to a pace of 5% or greater of the portfolio on each subsequent year to achieve an allocation of 30% or greater and privately sourced.

Assets Yeah.

The traditional fixed income securities continue to be part of our strategy to deploy excess cash.

Our focus on the traditional strategy has been strong investment grade credits and the public corporate and municipal sectors.

For the second quarter of 2021.

The expected return on long term investments acquired net of third party investment management fees was approximately $4.1 5%.

Compared to the $3, 7% to 4% in the first quarter.

We purchased $1.1 billion of long term fixed income securities at a rate of 3.3% and $569 million of privately source assets and unexpected return of 567%.

The privately sourced assets include the ongoing origination of commercial mortgage and agricultural loans as well as residential mortgage loans.

Consistent with our long term plans, we added privately sourced assets in new asset classes for the company, which consisted of residential real estate investments and the investment in a joint venture that is sourcing middle market loans at attractive investment yields.

That I will turn it back to <unk>.

Thanks, Jim.

Now turning to financial results.

For the second quarter of 2021, we reported non-GAAP operating income of $93.93.8 million or <unk> 98 cents per diluted common share compared to $93.1 million.

The $1 <unk> per share for the second quarter of 2020.

Results were negatively affected by the transition of the effects I've mentioned, both today as well in the past in particular the effect of cash in the portfolio in excess of target range and the level of operating expenses.

However, strong index credits in the quarter boosted operating earnings through both of lower than expected increase in reserve for guaranteed lifetime income benefits.

And lower than modeled amortization of deferred acquisition and deferred sales inducement costs.

Average yield on invested assets was 351% in the second quarter of 2021 compared to 358% for this year's first quarter.

The decrease was primarily attributed to attributable to a 7 basis point reduction from interest foregone due to an increase in the average amount of cash held during the quarter.

Cash and equivalents in the investment portfolio average $10 billion over the second quarter up from $8.6 billion for this year's first quarter.

Partnership income and other investments accounted for net fair value contributed an additional 1 basis points to yield compared to the prior quarter and 8 basis points on an absolute basis.