Q4 2021 American Equity Investment Life Holding Co Earnings Call

February 18, 2022

Good morning, and welcome to American equity investment Holdings.

Holding company's conference call to discuss fourth quarter and full year 2021.

Our earnings release and financial supplement can be found on our website at www Dot mirror and cash equity dot com non.

non-GAAP financial measures discussed on today's call and reconciliations of non-GAAP financial measures the most comparable.

GAAP measures can be found in those documents or elsewhere on our investor relations portion of our website.

Presenting on today's call are Chief Executive Officer and Ed.

Andre Chief Financial Officer.

Some of our comments will contain forward looking statements indicated by terms such as anticipate assuming aleve cost for KN continue estimate expect forward future goal intend likely look to may need.

On track overtime plan potential project ramp should signal strategy target then to be forward trend will and what our actual results.

Else could differ significantly differ our actual results could significantly differ suture with many risks, including the risk factors in our SEC filings and audio replay will be made available on our website. Shortly after today's call. It's now my pleasure to introduce <unk>.

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

I wanted to share with you about the progress made in each element of the EEO two point and on strategy.

Become what we now refer to internally as the new AE.

In the fourth quarter, we completed the building blocks of the EUR two point of the strategy setting the stage for us to scale in the coming years.

Thereby growing shareholder returns and value returns.

Great into the capital efficient business model.

And more predictable fee like earnings we envisioned as a new eight year.

As a reminder, the <unk>.

Two point on strategy begins with the virtuous flywheel to describe our business.

The virtuous flywheel starts within industry, leading at scale in each year origination platform.

Our fund raising abilities to our industry, leading liability origination platforms.

Allow us to be an investment manager with expertise in both.

The ability driven asset allocation.

And to manage an open architecture investment platform that can source a wide variety of differentiated investment.

Finally, the strategy calls for the Buildout of capital structuring and reinsurance capabilities.

Attract.

Third party risk bearing capital to a business.

Either for access to <unk> at scale liability origination.

For access to both our differentiated asset allocation and attractive cost of funding liabilities truly insurance vehicles.

Our team was extraordinary hard too.

<unk>.

And in 2021, we accomplished all of the business building goals for the past year that we presented to you.

<unk> 2020.

For go to market.

We delivered a complete refresh of our general account product suite.

Regain relevance and growth in our.

Independent marketing organization or IMO distribution channel.

And expanded further into banks and broker dealers through Eagle life.

While adding talent to enhanced product innovation and economics.

We added two new proprietary indices.

<unk> asset shield product and.

We introduced two new products to our lineup.

Shield and flex shield at American equity life.

At Eagle life, we added new client crediting strategy.

And completely refreshed select income focus.

At Eagle life gross income product sales.

In the independent broker dealer channel.

This product either.

Brian candidate for accelerating the growth in new business transferred to reinsurance vehicles to fuel growth of fee line.

Capital efficient earnings in the coming years.

I'll talk more about sales results for the fourth quarter in a bit.

But through the first nine months of 2021, we moved back into the top five for FIA sales in the <unk> channel and we're just shy of the fourth spot for the third quarter sales, while driving higher quality.

Our fixed indexed annuity business.

As measured by conversion.

Traditional spread return on equity or auto E earnings.

To a more capital light return on assets.

Sure.

A mix.

More on this aspect in a few minutes.

Our investment management pillar is built to the point that it will now deliver risk adjusted yielded results as expected and on schedule.

I'll share some more specifics on this before getting into investment results for the quarter.

First in the area of core fixed income the.

The migration of our existing portfolio to Blackrock has gone exceedingly well.

We have in sourced the broader capabilities of Blackrock not only in core fixed income investment management, but also in strategic asset allocation and investment technology and continue to find new ways to partner with Blackrock crew redefined insurance asset management.

Our relationship is much more integrated and interactive in a purely traditional investment management agreement.

In the fourth quarter, Jim have alignment and team delivered successfully as Blackhawk took over management of over $45 billion of assets in October <unk>.

Including seven $6 billion of cash and equivalents.

In the first half of 2022, we expect to move assets to our second partner for core fixed income investments conning asset management, especially focused on our newly formed Bermuda subsidiary.

Migrating our core public fixed income portfolio to Blackrock in Konin will help us attain better net yields in core fixed income, while allowing us to focus in areas, where we can have industry leading expertise.

Private assets derivative trading differentiated strategic asset allocation and asset liability management.

Second in the areas of private asset investing we now have seven fleets of private asset sectors in which we have conviction.

Specifically as a landlord in both single family rental and multifamily apartments.

Residential whole loans for both individuals.

And professional investors.

Infrastructure debt.

Infrastructure equity with the priority around certain sub sectors like energy transition.

Middle market loans to private companies.

<unk> annual recurring revenue based lending to companies in the software technology sector or stop.

As I approach my two year anniversary as CEO at the end of this month.

Im proud of all of the business building efforts, we have accomplished as a team, especially in investment management.

It has allowed us in 2021 to deploy three.

<unk> billion dollars and private assets.

Well above our plan of $1 billion to $2 billion of private assets for the year with expected returns in the five 1% to five 2% range.

In aggregate, we successfully repositioned the portfolio in 2021 with close to $10 billion of new asset purchases.

Resulting in an estimated portfolio yield.

385% at the end of the year.

We are on track to achieve close to or above 4% aggregate portfolio yields in 2022, as we further ramp our allocation in private assets from approximately 15% at year end 2021 to 30% to 40% over time.

With this we will deliver earnings growth.

Allowing shareholders to realize the full potential of differentiated asset management with potentially a lower risk profile than other alternate business models.

Finally in the fourth quarter, we worked with our residential real estate investment asset manager Protium <unk>.

This acquisition of the anchor loans platform.

This was an opportunistic extension of our macro investment pieces in residential real estate.

There is a massive supply demand gap created due to under building.

The great financial crisis over 12 years ago.

Founded in 1998 anchor loans was one of the first institutional lending platforms built to serve the diverse financing needs.

<unk> residential real estate investors.

Over the last two decades anchor loans has grown to become the nations leading capital provider.

Two experienced residential real estate sponsors through a bridge and construction products.

And Cologne, so our professional customer base when 95% of loans has historically been made to establish borrowers who have completed more than 44 zero projects.

This platform serves the need for bridge and construction loan in the residential credit space in which there are limited number of at scale originators with strong credit underwriting culture.

It is a great example of how the capital of Aes.

Coupled with its new DNA for investment business building.

And be supportive of others.

Didn't the Aes ecosystem.

In this case breccia to further expand its asset management business, while sourcing attractive assets for us.

We were able to access residential mortgage loans.

Two on 200 to 300 basis points risk adjusted spread premium.

Public investment grade RMB.

While also providing significant downside protection.

We have an asset sourcing forward flow arrangement with anchor for multiple years.

Yes.

We are actively looking to replicate such inorganic opportunities across all of our target private asset classes.

The goal is to leverage our ability to offer flexible capital solutions.

For opportunities that have the potential for similar risk adjusted returns.

With this transaction, we have demonstrated an ability to move quickly for the right opportunity.

Now we have numerous world class investors, reaching out to us in order back now and be part of the ecosystem as they see the retro flywheel inaction.

We are considering exploring opportunities across real estate.

Infrastructure.

Private credit and specialty finance, where we can commit to $150 million to over $1 billion of investment capital per transaction.

Moving onto our capital structure strategy pillar.

I am pleased to announce that we achieved all of our stated goals in this area in 2021.

I am happy to note that.

We received all necessary regulatory approvals and.

And more importantly has built strong relationships with our regulators.

We will continue to expand and explain the merits of <unk> two point of our business model, especially when it comes to the use of reinsurance.

Strategic differentiator for both risk control and turned white and third party capital to partner with Us.

<unk> the transformation of our business model into a capital light operation as measured by the growth in Ottawa business with the increase in Green short liabilities.

Let me elaborate further in four specific areas of achievement in 2021.

First.

Our reinsurance partnership with Brookfield reinsurance is working well.

This will provide us capital support to grow new business in our core strength of originating long duration.

<unk> index annuities with lifetime income benefits.

And will transform those products.

Our return on equity through spread earnings towards.

To our return on assets through fee business model.

Business ceded to Brookfield reinsurance provides a stable predictable multiyear earnings stream that should trade at a higher multiple for investors than traditional insurance.

The notional value subject to recurring fees.

Under the Brookfield reinsurance agreement grew by $183 million.

A total of $4 $1 billion as of year end 2021.

In 2022.

We expect around one third of new business flow through transform into Ottawa business through growth in Green short liability.

In the coming year, we plan to migrate a majority of new business flow to the auto <unk> site.

The Brookfield reinsurance partnership is a Prime example of this auto.

Ottawa transformation in action.

Second in the fourth quarter, we completed the build out of our reinsurance platform with a life insurer.

Aes re Bermuda effective December 31.

And the transfer of $4 billion of impulse business supported by Proximately $300 billion of capital on a Bermuda regulatory basis.

This accomplishment.

It's significant.

Because it is the first time American equity has established an offshore reinsurance subsidiary.

US on a level playing field.

With many of our largest competitors.

The creation of ADL greed, Bermuda gives our company three important benefits.

One <unk>.

Presence in highly credible offshore regulatory jurisdiction allow for greater asset liability matching flexibility, which will allow us to optimize our investment portfolio to a higher allocation to privately sourced assets.

It will allow us to free up capital at the <unk> subsidiary on in any IC statutory basis, consistent with the more principle based regulatory regime in Bermuda.

And three most importantly, we will dwell up the infrastructure.

Oversight personnel local management finance and the like.

Which can be leveraged to create newer entities similar to ACL re Bermuda.

With which we will attract third party capital.

We expect to set up multiple offshore reinsurance entities, commonly referred to as site cards to invite third party capital to partner with us.

Ian will manage these vehicles controlling the risks involved versus traditional third party reinsurance that is prevalent in the industry.

And on auto AP.

To the creation of site.

We will customize the asset allocation and liability mix to match the risk return appetite for reinsured out equity investors, thereby connecting long term equity capital with long term insurance liabilities.

Third we completed the refinancing of redundant statutory reserves on our lifetime income benefit riders with an explicit fee this quarter.

With the transaction closing retroactive to October one.

With the closing of the refinancing we realized positive capital impact of an estimated 22 points of risk based capital.

And saved approximately.

$9 million per quarter pretax compared to the prior financing arrangement.

The completion of the refinancing did lead to an actuarial.

Assumption division on a GAAP basis, which actually will address it in his remarks.

Finally.

Our strategic cornerstone relationship with Brookfield reinsurance continues to grow stronger.

Brooklyn received formal approval to increase its equity stake in the company in December and subsequently in early January executed on the second tranche of the equity investment in Aes <unk>.

<unk> changing six 775 million shares at $37 in <unk>.

Bringing its ownership to 16% as of the time of the purchase.

With the necessary regulatory approvals completed for Brookfield.

We have restarted our share repurchase program in 2022.

And through February 15th.

<unk> $100 billion worth of shares at an average price of $41 90.

And expect to remain active buyers of our stock in 2022.

We have a strong capital position generated by our reinsurance strategies and business model evolution and substantial cash at the holding company and access to available capital at the holding company.

This will allow us to further scale.

Our allocation into higher returning private assets to grow earnings.

<unk> explore inorganic opportunities to accelerate asset origination, while returning capital to shareholders.

In summary, 15 months ago, we outlined the AED two point of our strategy.

And in 2021.

Have executed all the proof points for the fundamental fundamental building blocks.

The new <unk> is now built and the next few years, our strategic focus is on three key elements.

First.

Scaling our allocation to private assets, including two inorganic block deals.

Second growth.

Growing the amount of reinsured liabilities to <unk>.

<unk> established reinsurance sidecar to grow our earnings.

And finally <unk>.

Writing new business that converts from traditional spread auto model to a fee like Ottaway earnings model truly insurance.

Hence <unk> has established the building blocks to turbocharge, the right kind of growth to be the leading franchise in the asset intensive insurance business.

Going forward, we expect to reap the financial benefits from this further scaling of the strategy.

Yeah.

Moving onto business results for the quarter, we've continued to see positive momentum in both new business sales and investment results.

Sales results were strong and fixed index annuities.

Although total sales of $1.04 billion were down 20% versus the third quarter of 2021.

Sales increased 7% sequentially to $982 million.

We expect this result will be better than the overall market.

For the year, our FIA sales increased 48% to three and a half billion.

Reflecting the success of our go to market initiatives within the context of an improving sales environment.

Total sales of $6 billion for the year, we're at the high end of our guidance.

At American equity life total sales through the Ironwood channel were $828 million in the quarter.

Update fixed and fixed indexed annuity sales increased 11% sequentially to <unk> hundred $6 million.

From $728 million at the refreshed asset she'll Cds continues.

To gain momentum.

Income shield sales rose 7% sequentially.

FIA sales at Eagle life of $176 million.

Represented a 6% decrease versus the third quarter of 2021.

But a 66% increase compared to the year ago quarter.

Although FIA sales at Eagle life, but down sequentially. We continued to see improved income product sales, albeit off a small base I.

Our sales of income select focus.

Sorry about Eagle select focus income.

Up approximately 18% over the third quarter of this year and accounted for about 22% of total FIA sales.

As planned single premium deferred fixed annuity our SPD sales were down eight 9% compared to the third quarter as we cut crediting rates on new business in the quarter in order to focus updated in Eagle life to our core bread and butter long duration FIA products.

We believe these products align well with the transformation of the yen from a spread auto insurer.

More of a fee based auto company with respect to new business.

Investment yields for the quarter were three 8%.

The new money investment yield in the quarter with $3 five 1%, but it is weighed down by the large amount of core fixed income investments.

Made on behalf.

By Blackrock restructuring the portfolio and putting excess cash to work.

However, during the fourth quarter, we invested $2 $3 billion in privately sourced assets at an expected return of 529%.

These investments included $1 $1 billion of short term residential mortgages through our new relationship with anchor.

Excluding notable items associated with actuarial assumption revisions, we reported non-GAAP operating income of $97 $1 million or $1 and <unk> <unk> per share.

Financials benefited from solid investment results with.

I'll turn the call over to Axel.

Thank you enough.

We extend my appreciation to all of you attending this call.

For the fourth quarter of 2021, we reported non-GAAP operating income of $75 8 million or <unk> 81 per diluted common share for.

Financial results for the quarter reflect normal items associated with extra one assumption revisions of $21 $2 million after tax or <unk> 23 per diluted common share.

For the full year 2021, non-GAAP operating income was $295 million or $3 seven a share.

Full year operating results were negatively affected by normal items associated with external assumption revisions totaling $78 million after tax or <unk> 83 per diluted share.

Full year operating results also reflected the high level of liquidity held in the insurance company investment portfolio as a result of Derisking of the investment portfolio in late 2020 and early 2021.

And in anticipation of reinsurance transactions prior to scaling into private assets.

And executing on the migration of core fixed income to Blackrock and colleagues.

As noted at the start of the year due to the sequence of events and ABL exercising prudence to ensure execution certainty 2021 was expected to be a transitional year for financial results.

On a pre tax basis, the effect of the fourth quarter 2000, 22021, actuarial assumption revisions before the change to earnings Petro, resulting from these revisions.

Increased amortization of deferred policy acquisition costs and deferred sales inducements by $16 million.

And increased the liability for future payments under lifetime income benefit riders by $11 million.

For a total decrease in pre tax operating income of $27 million.

The actuarial adjustment to amortization of deferred policy acquisition costs and deferred sales inducements, primarily reflects a $12 million pretax adjustments from the refinancing of redundant reserves effective October one.

While the annual cost of the new financing is less than that of our previous facility. We have increased the size of the facility by adding cohorts look previously included and lengthened the scanner from 12% to 30 years.

This results in a higher present value of the total expense over the life of the agreements nor was expected gross profits and leads to retrospective increase into back amortization rate.

Although model refinements led to an additional $11 million increase in the liability for future payments under lifetime income benefit writers and a $4 million increase in amortization of deferred acquisition and deferred sales inducements cost.

Previously our modeling had assumed that policy holders elected to move from a combination to income on anniversary dates.

We are now assuming the policy orders will relax throughout the calendar year.

Even if the total expected payments are unchanged. The effect is an acceleration of bundled payments and an increase in the present value benefit paid in excess of accounts I E to timing of cash flows changes.

Secondarily, the acceleration of auto payments results in a lower forecast investments spread and gross profits, which resulted in the $4 million increase in back end DSI amortization.

The effect of the model refinement on future earnings is expected to be minimal.

The quarter included $8 million of revenues from reinsurance spending call Brookfield reinsurance relationships up from $7 $6 million in the third quarter.

In the fourth quarter, we ceded $201 million of new slow deposits.

With a notional value of $183 million.

These results in recurring type revenues, which are expected to grow over time as we migrate liabilities to the OE business model.

Average yield on invested assets was 380% in the fourth quarter of 2021 compared to $3 nine 1% in last year's third quarter.

The decrease was attributable to a decline in partnership income more realized income on other fair value assets and higher investment expenses, partially offset by lower cash balances and the ramp up in private assets.

Cash and equivalents in the investment portfolio averaged $4 $8 billion over the fourth quarter down from $7 billion.

Last year's third quarter.

At yearend, we still had $2 6 billion of cash and equivalents in the investment portfolio and are currently down to $1 billion.

At the high end of our target of $500 million to 1 billion in line with our stated target portfolio allocation of 1% to 2% to cash and equivalents.

The aggregate cost of money for annuity liabilities was 161 basis points flat with the third quarter.

The cost of money in the fourth quarter benefited from 14 basis points of hedging gains compared to eight basis points of hedging gains in the third quarter.

The increase in the cost of money, excluding hedging gains reflects an increase in the cost of options in the fourth quarter of 2021 due to changes in volatility and the runoff of lower cost options purchased in the third quarter of 2020.

Yeah.

Couple of options in the fourth quarter of 2021 averaged a 159 basis points compared to 150 basis points in the third quarter.

In January we began to take renewal rate actions that we expect to lower the cost of options by approximately five basis points all else equal.

Investment spread in the fourth quarter was 229 basis points down from 240 basis points for the third quarter.

Excluding prepayment income and hedging gains adjusted spread in the fourth quarter was 203 basis points compared to 220 basis points for the third quarter with the decline, reflecting a more normal level of returns and investment partnerships and other fair value assets compared with a very high returns we saw in the fourth quarter.

In line with yields we would anticipate our investment spread excluding the high levels of prepayment income and hedge gains to rise all else equal now that excess cash has been substantially redeployed and to private assets continues.

Should the yields available towards decrease or the cost of money rise, we have the flexibility to reduce our rates if necessary and could decrease our cost of money by roughly 63 basis points, if we reduce current rates to guaranteed minimums.

Up from 58 basis points, our third quarter call.

Excluding the effect of assumption revisions the liability for guaranteed lifetime income benefit payments increased $56 million. This quarter after net positive experience and adjustments of $7 million relative to our modeled expectations.

The better than expected results, primarily reflected the benefit from higher index credits in the quarter offset in part by lower legislation in certain policy blocks and higher than modeled labor election in certain cohorts.

Excluding the effect of assumption revisions deferred acquisition costs and deferred sales inducement amortization totaled $113 million.

$9 million less than modeled expectation due to the strong index credits in the quarter offset partly by higher than modeled interest margins.

Our modeled expectation for DAC and DSI amortization for the in force block for the first quarter of 2022 is in the $126 million range, reflecting an increase in interest margin relative to our fourth quarter expectations.

Other operating costs and expenses were $66 million in the fourth quarter up from $57 million.

Fourth quarter.

Operating costs in the fourth quarter reflected the expected savings from the completion of our redundant reserve financing.

It also included $7 million of true ups in accruals, primarily due to higher incentive plan expense as we successfully executed two volume strategy.

As we continue to build out our teams with specialized expertise and invest into systems infrastructure and other projects necessary to support our growth as the new ABL, we expect an appropriate level of other operating expenses to run in the $60 million range per quarter for the foreseeable future.

At December 31, cash and equivalents at the holding company.

In excess of targets are approximately $260 million and currently stand at approximately 420 million barrels in excess of talcott.

Yesterday evening, we filed an 8-K with the SEC announcing that we have closed on a $300 million.

Terminal to the holding company.

One is currently undrawn, but represents a significant increase in dry powder to support a robust capital return and growth plans.

The risk based capital ratio at year end for American equity life is estimated in the range of 390% to 400%.

And includes absorbing the effect of approximately 19 points due to the new <unk> form factors.

We estimate significant capital redundancy at the payer level on both <unk> and S&P capital model basis.

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

Thank you as a reminder, that a question you will need to press star one on your telephone to withdraw your question press. The pound key please limit yourself to one question and one follow up and then you may re join the queue. If you have additional questions. Our first question comes from Zynga.

<unk>.

JP Morgan you May proceed with your question.

Hi, Thanks. My first question is for our non on third party capital. So I guess is the intent there to raise capital afford enforce blocks that you already have arguably.

<unk> funded by third party capital so because my understanding is that enforced blocks might be more like Brookfield for maybe you make that trade off between lower dollar, but higher quality earnings on the other hand youbet the block will represent incremental economic CEO and perhaps be more valuable in that respect.

I just wanted to get your thoughts there and I have one follow up thank you.

Hi, Pablo Nice Jr was great question.

Report enforced and new business that will go to site cards, obviously, we think new business being funded by type cars makes us basically capitalize our growth. So we can double tracked growth of new business.

But it is enforced opportunities as well, we put $4 billion in our Bermuda companies from amongst the products and by an equity stake and it give us a call otherwise you'll find enough infrastructure like and at the right new business mix to it.

Got it.

And.

On the new business are part of the third party business right.

I'd be curious to hear your thoughts on your ability to raise liabilities for those vehicles I guess from a distribution and product standpoint.

In the context that I think other companies that have these smaller focused more on institutional businesses was the retail.

Because it's easier to get meaningful amount of the upfront right. So.

Yes, if you think about new business.

To build on year to retail capabilities that may be doing enforce reinsurance or maybe even at the expense of something like PRT. Thank you.

Yes.

What we have built with <unk> two point all in as we scale and deliver financial results.

It's going to make some of our peers.

In the insurance sector Wonder if this should call us up haven't figured out a way to reinsure to us and get access to what we can create so I do think us getting being able to hold sand originates dotcom.

Is definitely on the cards.

Our retail origination of long duration products to our asset allocation is very meaningful.

And we want to grow that support opportunities our bank with a focus on general account annuities.

Does that help answer your prior answers.

Yep ethanol already thank you.

Thank you. Our next question comes from Erik Bass with Autonomous Research you May proceed with your question.

Hi, Thank you first on the expenses can you just provide a little bit more color on what's changed your outlook going forward.

Thank you you are talking about about $10 million higher of run rate expenses and are any of these kind of discrete investments that will eventually fall off.

This is more of a technical rate.

Sure Hi, Eric This is excellent happy to take your question.

Yes look I think we continue we continue to build on our capabilities to support the growth and transformation of the Yale. So we're not completely done yet in terms of hiring of specialized talent that can help that can help us deliver and execute.

And in addition, we will also.

Investing in projects essentially project expenses.

Gets capitalized and expense over time.

So think of it.

Things I think are really those two components as being the main drivers that get us to $2 million to $60 million run rate.

Our interest expense probably accounts for.

$5 million of that $60 million run rates.

On a quarterly basis.

Any kind of guidance.

I'll add a little drag so the answer there, which is how do I think about expenses and it's probably good to hear from me as well actually covered all of the facts.

Look $60 million a year a quarter $2 40, a year.

We look at very focus on bigger greater growth company faster growth company and driving Ottaway module transformation. It is a huge amount of opportunity for us to drive investment returns private asset sourcing capital and building a robust foundation, so that others come to us and say what you've done for AAM do for us.

Like my answer to Pablo earlier, so I'm fine with $60 million a quarter for one very simple reason the context to 42 basis points.

<unk>.

On page 11 of the supplement of my New favorite page, it's got both the iron ore balances and it's about the.

Spread earnings assets over $57 million right to 40, a year on $57 million or 42 basis points.

That's amazing it relative to others in the industry and we price for things to be higher than that and we think of new product pricing that.

That number needs to stay in somewhere in the 40 basis point mid to high 40 basis point, there for frankly, a 60 month, a little higher than 60, I'm finding it but we're going to grow NII and controls $60 million a quarter to expense control Nox reduction because the capabilities, we built will be the scalable more.

That's a very long wordy answer, but hopefully that extra context of capital.

Yes. That's helpful. Thank you and then you mentioned I believe that beyond 2022, you expect or hope that the majority of gross sales will be ceded to third parties.

Can you just help us think about what this means for the trajectory of your spread earnings and do you expect net sales to decline or do you think you have distribution capacity to materially accelerate growth sales such that youre growing key earnings, but also maintaining kind of the level of net sales that goes to your spread based earnings you have today.

And migration to Roy will create what we believe to be a higher multiple earnings stream.

Hey, guys.

And the fact that we don't have to come up with a capital floor and Eric.

But.

The opportunity of the day the short answer to your question, there's plenty of opportunity for us to retain some skin in the game. If you think of these reinsurance deal will probably have to keep 25% on our books and 75% gets reinsurance have skin in the game to maximize the Ottawa feasibly can generate and that way balances should be stay.

Paul.

But the dollars of earnings where the big shift in a different.

Directions will have to see we think the opportunity for us to keep the balance sheet size. When it is and then drive growth through ottaway, our AUR going to way to think about it.

Got it so basically maintaining the spread based earnings once you get to the kind of the target spread and then the growth should come predominantly from the <unk> side of the business.

Correct and the spread earnings are not just from the notional of <unk> debt.

Greenfield return as we get north of 4% ramping up of private assets from 15% to up to 40% of the portfolio.

Got it thank you.

Thank you. Our next question comes from John Barnes with Piper Sandler. Please proceed with your question.

Thank you with the effort on the reinsurance side could you maybe talk about how we should be thinking about the tax rate near term Ed as you look out.

Three point out.

We're not expecting any facts efficiencies from the reinsurance effort for us because we're a U S taxpayer our Bermuda companies the 950 <unk> Electric company meeting.

Taxes, and I should probably stop answering this question because they're more qualified people can mean the road track any follow on your App.

Okay.

You're at 15% allocation on private assets targeting 30% to 40%.

How quickly can you get there.

Maybe.

Sorry about that a little bit thank you.

Hey, John This is Jim Hamel item.

We expect that over a period of two to three years, probably closer to three years.

We can get into that into that targeted range.

Thank you for the answer.

Thank you. Our next question comes from Ryan Krueger with <unk> you May proceed with your question.

Hi, good morning.

On the.

Spreads I think in your DAC model units 240 basis points. Once the excess liquidity was deployed is that still what you would expect in 2022.

Yes, it has to pass the path of interest margin thats embedded in the back models.

We it is very consistent with where we've actually realized spreads so as as noted in.

In the first quarter, we have still been putting cash to work. So there's still a bit of trajectory going up there.

And by the end of the first quarter would be.

We'll be pretty much at the targets in terms of that cash indication.

Which would result in.

<unk>.

Spreads reaching its.

It's near term.

Got it and then.

On the.

The $126 million of DAC DSI.

DSI amortization that you guided to for the first quarter is that.

Would there be any any ramp up after that.

From fully redeploy the excess liquidity or does that largely already reflect that.

That number last year already reflects.

Paul.

Good job.

The ramping up.

Wrapping up it's pretty easy deploying cash and putting it to work.

Got it okay. Thank you.

Thank you. Our next question comes from Mark Hughes You May proceed with your question.

Yes. Thank you good morning.

On the distribution front.

You had talked.

Previously.

$1 billion in new sales being kind of your maximum.

Wouldn't necessarily want to go beyond that for capital reasons.

Phil.

Hey.

Good statement and do you think of $6 billion is a reasonable target for this coming year.

I'm Mark <unk>.

Yes, 6 billion was at the upper end of the range, we set for last year, which was $5 to $6 billion was the range for last year.

I think we're very much focused on.

Is that IAC Sapphire sales were $3 5 billion and we'd look to grow that low to mid single digits and $3 5 billion and control SBA sales.

Don't think of US targeting 6 billion this year.

Backlog capital reasons, it's for auto it conversion reasons, you can't converted <unk> to an auto business you can can mark up five maybe seven on.

On longer FIA into Iowa, and that's our driver.

What is your sense.

Very general question, the rising interest rate environment.

I would do for demand for those.

Out of this year.

Independent agent channel respond to rising interest rates could there be much of a tailwind.

It should be a tailwind for multiple reasons and allow us to make the product.

Relatively more competitive.

Without relying on ramping into private assets because core fixed income delivers returns.

Also what applied once it's certainty of outcome well protected accumulation company, then that converted into protect into certain outcomes, which happened to be retirement income.

One encounter can do many other things over time.

Therefore, rising rates is a meaningful tailwind for us to grow this space and we want to grow the market for this product it beats financial planning needs you can be the financial dignity company. If you don't have people achieved dignity III solutions and that's what I think is done.

Thank you.

Thank you and as a reminder to ask a question you will need to press star one on your telephone. Our next question comes from Pablo singer.

K P. Morgan you May proceed with your question.

Hi, Thank you again, so a question for not.

I guess, if these are simplify what's happening with DLD by FERC to what Youre doing.

Between the investment portfolio and your push into third party capital.

Do you think achieving your end state on the investment side, so call it 30% to 40% and privates in the higher earnings associated with that.

That would be enough to support your.

250 annual buyback commitment.

Our our incremental earnings from other initiatives necessary.

Our support that number on an ongoing basis.

Yes, so the investment income generated by <unk>.

Achieving to me.

Full allocation to private assets of $30 to 40%.

It meaningful I, Bob I mean, we got to investment yields going up from around four this year to meaningfully up there with the application. So that additional earnings that can be redeployed, especially when you don't need earnings for growth with the conversion to auto right.

I think those are the drivers that will make it happen to drive to drive capital return high investment income by growing private.

Artery conversion, meaning you don't need capital for growth.

New business and then obviously the auto in fee earnings as well as our capital light.

Any capital backing them those three drivers for capital return.

Got it.

Maybe a couple of short ones for Apple on the Bermuda Reinsurer was there any capital benefit associated with that what's happened with the I guess, the Vermont captive with labor and so forth.

What are your thoughts on that capital is fungible.

The capital that was released from the library refinancing.

Yeah, Hi, Pavel.

Yes, so the bid the block of business.

This will ensure we talked about in the past how Bermuda as this principle space.

<unk>, which is.

Particularly good for <unk>.

Well matched.

Matched books of business, where you get specifically get.

That benefit embedded into the capital regime.

And so certainly that was a big component of seeding that piece of business Theyre moving moving from the highest Q3 charge in the U S. Two way more principle based version in Bermuda and then of course as we migrated the assets you've got to drop in Q1.

Those two things together resulted in a decrease in required capital.

<unk> impact of that on the on the U S entity, we estimate to be about 48, 42 points 40 to 42 points of impact.

Which you can translate to.

Dollar equivalents.

Of course, it's the impact is on required capital celebrated on available for Hugh.

Pretend that it was all.

Available capital impact as we translate to $460 million of impact.

So that capital within the U S Company, which we can then of course using put to work part of the consumption of capital is to ramp up in private assets.

<unk>.

And then over time of course the ability to.

To take dividends out of the operating company subject towards the usual.

Rules around that.

And then just last one for me just any thoughts on.

<unk> will shake out perspective.

Market to market of <unk>. Thank you.

Similarly on the DTI.

We are obviously doing all of the work and we expect to be talking about that sort of more into second half of this year.

Thank you.

Okay.

Thank you. Our next question comes from Ryan Krueger with <unk> you May proceed with your question.

I guess, there's clearly a lot of moving parts right now so maybe trying.

Trying to boil it down from a higher level thinking about the 11, 14% ROE target can you give any perspective on that.

Were you tender.

As we start out within that target in 2022, and how you think it could progress over the next few years.

While there are a lot of moving parts here right I think we stabilized into trivial thing.

We have to scale private assets as we are doing and will do.

To generate $3 billion to $4 billion this year.

And that will drive NII up say, 4%, Ohio.

We will.

Do more reinsurance transactions are not good.

There was another one this year, but we have discussions and typing in mind, but growing the Brookfield transaction. For example will grow enforce going back at least a part if not more of FIA sales. This year will go down.

And therefore capital consumption will be slow and allowing us to be agreed.

Aggressive in our capital return plan back to help again.

And then finally the.

New business origination is very disciplined.

Market expansion is within managing expenses at the $60 million a quarter level <unk> expense control.

That is really what will drive us to deliver EPS.

And book value growth and then you do the division of those two numbers and appetite.

At the lower end of that range this year and as we execute though as you go to the higher end of that range and maybe even exceed that range over time.

Got it thanks that's helpful.

Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Julie item for any further remarks.

Thank you for your interest in American equity and for participating in today's call should you have any follow up questions. Please feel free to contact us.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

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Rob.

Good morning.

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Welcome to American equity investment life, holding company's fourth quarter 2021 conference call at this time for opening remarks, and introductions I would like to turn.

The call over to Julie I'd event coordinator of Investor Relations.

Good morning, and welcome to American equity investment life, holding company's conference call to discuss fourth quarter and full year 2021.

Our earnings release and financial supplement can be found on our website at www Dot Smith and cash equity dot com non.

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

On today's call are Chief Executive Officer and Ed.

Andre Chief Financial Officer.

Some of our comments will contain forward looking statements indicated by terms such as anticipate assuming aleve comscore can continue estimate expect forward future call intend likely up to may need.

On track overtime plan potential project ramp should signal strategy target then to be forward trend well and what our actual results could significantly differ tissue with many risks, including the risk factors in our SEC filings and audio REIT.

They will be made available on our website shortly after today's call.

My pleasure to introduce <unk>.

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

I wanted to share with you about the progress made in each element of the <unk> two point on strategy as we have become what we now refer to internally as the new <unk>.

In the fourth quarter, we completed the building blocks of the <unk> two point on strategy setting the stage for us to scale in the coming years.

Thereby growing shareholder returns and value returned by migrating to the capital efficient business model.

And more predictable fee like earnings we envision as the new Aes.

As a reminder, the $8 two point on strategy begins with the virtuous flywheel to describe our business.

The virtuous flywheel starts within industry, leading at scale in each year origination platform.

Our fund raising abilities to our industry, leading liability origination platforms.

Allow us to be an investment manager with expertise in both <unk>.

Liability driven asset allocation.

And to manage an open architecture investment platform that can source a wide variety of differentiated investment.

Finally, the strategy calls for the Buildout of capital structuring and reinsurance capabilities.

<unk> attract.

Third party risk bearing capital to our business.

Either for access to <unk> at scale liability origination.

All for access to both our differentiated asset allocation and attractive cost of funding liabilities truly insurance vehicles.

Our team worked extraordinarily hard.

<unk>.

And in 2021, we accomplished all of the business building goals for the past year that we presented to you in October of 2020.

For go to market.

We delivered a complete refresh of our general account product suite.

Regain relevance and growth in our independent marketing organization, our Ironwood distribution channel.

And expanded further into banks and broker dealers to Eagle life.

While adding talent to enhanced product innovation and economics.

We added two new proprietary indices to a refreshed asset shield product.

And introduced two brand new products to our lineup as state Shield and Flex shield at American equity life.

At Eagle life, we added new client crediting strategies.

And completely refreshed select income focus.

At Eagle life gross income product sales.

In the independent broker dealer channel.

This product is a prime candidate for accelerating the growth in new business transferred to reinsurance vehicles to fuel growth of fee light.

Capital efficient earnings in the coming years.

I'll talk more about sales results for the fourth quarter in a bit.

As measured by conversion from traditional spread return on equity.

Our auto E earnings too.

To a more capital light return on assets.

Our OE mix.

Q4 2021 American Equity Investment Life Holding Co Earnings Call

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