Q1 2022 American Equity Investment Life Holding Co Earnings Call
Welcome to American equity investment life, holding company's first quarter 2022 conference call at this time for opening remarks, and introductions I would like to turn the call over to Julie Hayden coordinator of Investor Relations Ma'am. Please go ahead.
Thank you.
And welcome to American equity investment life, holding company's conference call to discuss first quarter 2022 earnings.
Earnings release financial supplement can be found on our website at www Dot American equity Dot com.
non-GAAP financial measures.
Discussed on today's call and reconciliations of non-GAAP financial measures.
Terrible GAAP measures can be found in those documents or elsewhere on our investor relations portion of our website.
Presenting on today's call are not bottler, Chief Executive Officer, and Andre Chief Financial Officer.
Some of our comments will contain forward looking statements, which refer or relate to future results many of which we have identified in our earnings release.
Actual results could differ.
Secondly differ due to many risks, including the risk factors in our SEC filings.
Audio replay will be made available on our website. Shortly after todays call. It is now my pleasure to introduce not fallen.
Thanks, Julie good morning, and welcome to American equity investment life, holding company's conference call to discuss first quarter 2022 earnings.
Our earnings release and financial supplement can be found on our website.
non-GAAP financial measures that Julie mentioned.
We're gonna be covering are already.
Absolutely we have some forward looking statements as Julie covered so with that behind us, let's get into really talking about <unk>.
How we think about the quarter.
And the go forward results.
As I completed my two year anniversary as CEO . This past quarter I'm pleased to see that we have achieved three core strategic outcomes.
But we've executed on all the critical building blocks that will unlock shareholder value.
From the a two point or business model across the strategy pillars, we outlined specifically go to market investment management and capital structure.
Over the next eight to 12 quarters, we expect to complete our scaling up in private assets.
And bringing in third party capital.
To realize the full potential of.
My great into our capital efficient business model that delivered the sustained superior Roe for our shareholders.
Second we delivered meaningful shareholder value creation, most notably in terms of more than doubling our market cap.
Between March 31, 2020, and March 31 2022.
Additionally, there is growing conviction among most investors in valuing American equity based on a sum of parts metric.
That includes our investment spread earnings powered by private assets are on traditional auto business.
And the fee generating capital light business model.
On the spread earnings side, we continue to scale in private assets towards that overall goal of 30% to 40% asset allocation.
<unk> our allocation.
215, 4% at the end of the quarter compared to 14, 7% at the end of last quarter.
We have strong affirmation from E business partner stakeholders, and our industry value chain that being part of the new American equity ecosystem.
Win win Formula.
This should position <unk> as a platform company.
That additional firms will want to join to accelerated all business groups.
This is visible.
In the multiple asset management partnerships, we have entered into over the past two years <unk>.
These partnerships may provide a shareholder economic upside from the asset managers growing non <unk> assets under management. In addition to investments you'll benefit from private assets.
These should deliver hard to source private asset strategies for <unk> own balance sheet and for our reinsurance vehicles, thereby providing sustained superior risk adjusted returns compared to public fixed income securities.
More specifically asset management partnerships, we've entered into over the last two years.
Gaba sectors, ranging from middle market credit with Adam Street partners.
Lending to software and technology companies with recurring revenues with Monroe capital.
Residential single family real estate with Brachium, including co owning asset origination and servicing platform companies.
New multifamily real estate investing joint venture with a leading player in infrastructure assets and origination platforms with ice square capital.
Additionally, we are making progress with equity invested in re framing the general account annuity industry as a levered under funds business that get on a more sustained double digit return with a 30% to 40% allocation to private asset strategy.
With an overall asset leverage of 12 to 15 times.
And we.
100 to 150 basis points of spread over the cost of funds on these assets.
Those earnings will get split between Eagle Ottawa.
Business fee earnings.
And reinsurance sidecar equity investor returns.
Looking forward over the next eight to 12 quarters, we'll execute on the three core metrics, we outlined in the deck in our last earnings call.
Specifically scaling our liability origination.
Private asset sourcing.
And bringing in third party capital for reinsurance vehicles.
In parallel.
To become the platform company and we envision in both the insurance and asset management spaces. We.
We are also significantly retooling the company on the inside while prudently managing our expenses and continuing to return capital to shareholders.
This is a foundational capability, which over the next few years will meaningfully upgrade the company across every dimension of what we do.
This will entail changing the systems and processes across our go to market and customer service areas as well as core functional areas like finance with a new general ledger or technology with a migration from traditional mainframe to the cloud to just lift two examples.
Yeah.
Legacy at Yale One point, all what's ready for some upgrades, even before embarking on a year to zero.
And now that we are well underway of scaling aes <unk>, we are focusing some of our energy and resources on building the core of the company. So that it can grow to multiples of its current scope and scale in the long term.
On the people front E mail has been hiring talent across the country.
With some focus on our hub locations invest demoing.
Charlotte and New York City.
In order to attract and retain top talent has modified its compensation plans to be in line with the industry.
<unk> all management level employees to an annual cash bonus plan aligned with shareholder value realization metrics that drive our performance culture.
Even though the macro environment is Claudia now than even at the start of the pandemic.
We feel very good about a robust balance sheet position.
We remain we remain committed to our capital return plans for 2022.
Year to date through April 30th.
We have repurchased $253 million of stock.
At an average price of $39 89.
And we expect to repurchase in total approximately $700 million of stock for the full year meeting our promise Golub capital return and fully offsetting dilution from issuance of shares.
Brookfield reinsurance as it grew its taken American equity from nine 9% just about 16% in early January .
Moving onto business results in the first quarter investment results and new business sales were in line with the expectations, we set out on our last earnings call.
First quarter sales were $902 million.
Of which 98% or $883 million what in fixed indexed annuities.
This is in line with the company's focus strategy for 2022 sales.
Compared to the first quarter of 2021 total company sales increased 33%.
Sales at American equity life increased 46%.
While Eagle life sales declined by 15%.
On a sequential quarterly basis.
Our fixed index annuity sales decreased 10, 1% to $883 million, primarily due to lower sales in the bank and broker dealer channel, while maintaining our leading market position in the independent marketing organization are imo's space.
As noted in our press release, we agreed with northern re.
Salary of Brookfield reinsurance to expand the American equity products driving the momentum of flow business.
Under the 2021 reinsurance agreement to fulfill the 10 billion of capacity under that agreement.
The addition of these new products.
American equity life stage Shields, and Eagle life Eagle select income focus with accelerated the increase in fee like revenue streams for American equity.
The <unk> side of our business.
We continue to focus our efforts on growing the income annuities business in 2022.
To align with the tailwind of large unmet needs for Americans for income for life to provide them a sustained means for realizing financial dignity, well beyond the prime earning years.
Our investment management pillar.
Is making strides.
We successfully moved assets to a second partner.
For core fixed income.
Wessman conning asset management for our newly formed <unk>.
Re Bermuda entity.
Average investment yield for the quarter was 415%.
Driven by strong returns in mark to market assets, particularly <unk> related funds.
And increased yield as excess cash was fully deployed during the first quarter.
We ended the quarter with one 1% in cash and insurance companies portfolio with the portfolio book yield of 398% net.
With that I'll turn over to access to elaborate further and go over our financial results and associated drivers.
Thank you Anna.
Let me extend my appreciation to all of you attending this call.
For the first quarter of 2022, we reported non-GAAP operating income of $89 9 million.
Or 92 cents per diluted common share.
The quarter included $8 6 million of revenue from reinsurance stemming from our Brookfield reinsurance relationships.
From eight zero million in the fourth quarter of last year.
In the first quarter, we seeded $211 million of news flow of deposits with a notional value of $181 million.
These result in recurring revenues, which are expected to grow over time as we migrate liabilities to the ROE business model.
Yes.
Average yield on invested assets was four 5% in the first quarter of 2022.
Impaired to 380% in last year's fourth quarter.
The increase was attributable to very strong returns on partnership and other mark to market assets.
Lower cash balances and the ramp up in private assets, partly offset by lower prepayment income.
The average adjusted yield excluding non trend both prepayments was 412% in the first quarter of 2022 compared to 368% in the fourth quarter of 2021.
In the quarter yield increased 32 basis points from returns on partnerships and other mark to market assets and.
10 basis points due to the lower cash holdings.
Since partnership and other Mark to market asset returns can vary by quarter, excluding that benefit and the non tradable items average deals improved from 368% in the fourth quarter of 2021, two 380% in the first quarter of 2022.
Yes.
At quarter end cash and equivalents in the investment portfolio was $576 million towards the low end of our stated target portfolio allocation of one 2% and.
And down from $2 6 billion at year end.
Average cash and equivalents for the quarter was $1 7 billion down from $4 8 billion in the fourth quarter of last year.
During the quarter, we invested $4 7 billion at a yield of 358%, including $887 million of privately sourced assets at <unk>.
Expected return of five 1%.
Our allocation to privacy sourced assets was 15, 4% of invested assets as of quarter end.
Theres, a 14, 7% at year end.
For the month of April we invested $716 million at an average yield of 438%.
The effects of the increase in LIBOR, where short term rates during the quarter had a minimal effect on our reported yield as most of our floating rate assets reprice in the third full week of the quarter.
Before the substantial increases occurred in February and March.
For the second quarter, we expect to benefit from roughly eight basis points in yield reflecting the increase in LIBOR on our $5 3 billion of floating rate assets.
The aggregate cost of money for annuity liabilities was 164 basis points up from 151 basis points in the fourth quarter of 2021.
The cost of money in the first quarter benefited from three basis points of hedging gains compared to 14 basis points of hedging gains in the fourth quarter of last year.
The increase in the cost of money, excluding hedging gains reflect a higher cost of options in the fourth quarter of 2022 alright.
Alright.
A higher cost of options in the first quarter of 2022 compared to the run off of lower cost of options purchased in the fourth quarter of 2020.
Cost of options in the first quarter of 2022 average 160 per cent compared to $1 five 9% in the fourth quarter of 'twenty one.
Renewal rate actions beginning in January were offset by changes in market conditions.
Investment spread in the first quarter was $2 five 1% compared to $2 two 9% in the previous quarter.
Excluding prepayment income and hedging gains adjusted spread was 245% in the first quarter compared to 2.0% to 3% in the prior quarter, reflecting strong investment returns offset modestly by the increase of cost of money.
By delivering on our investment returns, we expect to offset increased option costs.
Deferred acquisition cost and deferred sales inducement amortization totaled $128 million for the quarter compared to $213 million, excluding an actual of adjustments in the fourth quarter of 2021.
Full quarter amortization was reduced by $14 million for higher than expected tax credits.
The liability for guaranteed lifetime income benefit payments increased $85 million this quarter compared to $56 million last quarter.
As our older block season, and we reprice living benefit rider fees as there are seven to 10 year reset periods, we're seeing some greater utilization of election.
We expected that in the second quarter, the increase in labor reserve or living benefit rider reserves will remain elevated without the benefit of higher than expected and tax credits.
Other operating costs and expenses were $58 million in the first quarter down from 50 from $66 million reported in the fourth quarter of last year or a comparable $59 million for the fourth quarter, excluding yearend items related to true ups and acceleration of execution of the ABL to our strategy.
Yeah.
As <unk> mentioned, while 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 CEO , we shouldn't expect other operating costs and expenses to run in the $60 million range per quarter for the foreseeable future and manage expenses at a certain level of basis points of policyholder funds under management.
At March 31, and April 30th cash and equivalents at the holding company were approximately $417 million and $461 million respectively.
In addition to a committed and yet undrawn $300 million term loan facility, providing capital flexibility as we return capital to shareholders and continue to execute our business strategies.
As <unk> mentioned, we repurchased year to date about $250 million worth of shares or $6 3 million shares in the first quarter, we repurchased four 6 million shares.
Now I'll turn the call over to the operator to begin Q&A.
Thank you Axel and as a reminder to ask a question you will need to press Star and then the number one on your telephone keypad.
You wish to remove yourself from the queue. Please press the pound key.
Given time constraints. Please limit yourself to one question and one follow up if you have additional questions you may jump back into the queue. Thank you, we'll pause for a moment, while we compile.
All of the Q&A roster.
Sure.
Your first question comes from the line of John Barnidge with Piper Sandler Your line is open.
Thank you very much.
The reinsurance announcement was that contemplated in the <unk> 21 commentary around directionality of reinsurance utilization in the near term believer with a third of sales from 22 moving to 50% thereafter.
John can you just repeat the last part you broke out a little bit.
Absolutely so.
You gave reinsurance.
Commentary last quarter expecting a third reinsurance support for sales in 'twenty to move into higher thereafter, the reinsurance announcement last night that expansion on north and read to include more products clearly increases the funnel.
Was that.
Expansion contemplated in the <unk> 21 commentary of a third of sales of 22 to reinsurance.
Yes, you've got it spot on right.
Okay.
And then the lower sales in the bank and broker dealer channel you called out can you talk maybe more about the competitive landscape there and maybe your expectations going forward. Thank you.
Sure.
So we are drawing Eagle life, we brought on strong talent from multiple companies, we've got really good people competitive product <unk>.
To be very disciplined with product profitability.
I'm going to sell a product and we think it's sustained across markets not just just bouncing around at rates bounce around and then so what we're being as we're being disciplined and that product is a political dry wet seals. We have it is a more competitive channel for sure, especially in the bank channel, which is why within Eagle, we redeemed with.
Broker dealers and still building relationships there.
And that's why we love the iron ore business and wanted to dominate it.
As long as possible.
Your next question comes from the line of Stan Bergman with Jefferies. Your line is open.
Mr. Dan Bergman. Your line is open you May proceed with your question sorry can you hear me.
Yes, hi, good morning, Hi, good morning.
Thanks for that.
I apologize if I missed it in the prepared remarks, but I wanted to see if you can give any more detail around how much the increase in the liver reserve deviated from your modeled expectations in the first quarter and how much of that is related to the impact from higher utilization versus any other factors and I know you guided for the reserve to remain elevated the increase in the second quarter, but just wanted to see if there's any more color on where we should expect in Atlanta.
For example above or below that first quarter level and maybe some of the drivers and then finally any impact you would expect post the second quarter.
Mainly a <unk> phenomenon.
Yeah sure Hi, Dan This is axel.
So like we said last quarter.
The modeled expectation for Libre reserve was around $62 million.
So the total.
Actual to expected differential about 2000 $24 million there.
Alphabet, Inc.
Indexed credits for the first quarter, we're still a marginal positive so so about a $4 million good guy, whereas the.
The higher utilization as well as some some slightly lower lapses.
Basically produced a balance of $28 million, so the $28 million minus before is the adjustment between the two.
As I said the higher utilization that we are that we've observed this quarter is really relates to certain specific cohorts as they reach.
The research period.
We're seeing a slight pickup in utilization over and above what's already anticipated. The model I think it is too early to be drawing a trend line from that but obviously.
This this particular actuarial assumption just like all of our assumption is one that we keep a close eye on.
It is one that will be part of our.
Experienced studies and into summer.
Including the summer and that's ultimately resulting to a usual potential update to actual assumptions.
That's really helpful. Thank you and then I was just hoping you could also provide some more color on the competitive environment in the fixed index annuity market.
Curious given the sharp increase in interest rates or any color on how other carriers have reacted in terms of product pricing and future there and maybe how those actions compare to any.
Changes that you've made recently or are contemplating.
Joe Happy to it's an upstart Axel can jump in as well.
I think fundamentally the EM platform as we call it now.
He is amazing.
Amazing mechanism of validation of what third party capital things.
Prudent pricing.
We talked about our reinsurance agreements.
We're selling product at our shareholder should back out of third party capital Smart money is willing to back. So that's a great validation in the income space, we're very strong in the income space.
Copies reinsurance partnerships that we're going to build on.
And yes, the income space is less competitive because people are taking a long term view you ought to think about interest rates investment returns for decades.
So that part we feel good about.
The accumulation space.
The longer duration accumulation space is also more resilient, but the shorter tenet accumulation space sort of blows with the wind.
We're not building a company that goes with the wind.
So that part I think is getting a little competitive I won't say anything about competition, they're all very responsible and great, but we're just a bit measured and we don't take sharp left or right turns that doesn't mean, we're not in tune with pricing in the market, but we're thinking is this sustainable and yes rates are going up rates are definitely going up.
But the benefit of rates going up needs to be shared between all stakeholders not just go to one.
Long answer Germain simple question happy to elaborate but if you want.
Our next question comes from the line of Erik bass with Autonomous your line is open.
Hi, Thank you can you talk about the level of sales currently being generated by the products that are being added to the Brookfield reinsurance agreement in the amount of in force business that will transfer in the second quarter.
And it's a fee agreement at the same for the new products as it is for the.
<unk> previously in there.
Hi, good morning.
On the on your question.
So we added an estate shield and the select income focused product and Eagle in addition to.
Oh.
Our existing income product that's there in compute.
That in aggregate Youre talking about net of what we retain on for insurance, we retained 25% on our balance sheet for alignment and 75% goes over to them. So on a net basis, you could think about $1 billion transferring over each year.
And I think thats pretty sustainable we make fluid a little bit over time, but between escape shoot that can focus.
And income shield.
Gonna have a new products, probably add in this year $300 million of sales.
Rounding a bit there.
Rounding down a bit there but.
So in aggregate between.
The existing income shield and those they will transfer on a net basis 1 billion and so we'll keep around <unk> 400 million and we'll transfer around 1 billion to that.
And on pricing the pricing is attractive as you would recall on our new business pricing was around 170 basis points. When you look at targeted for moving components.
Management fees as well as for ceding commission over six to seven years of around 140 basis points.
No.
That continues on the new products, we've added in its consistent with that and that's why our pricing discipline comes across as you see over here.
Next thing.
<unk> capital with <unk>.
<unk> solutions for our clients on the income space and that's why this model really works.
We do other reinsurance deal in the future.
Cumulation products without the parties and our own sidecar, you'll see another manifestation of that as we as we execute that over this year or early next year.
Thank you.
And can you provide any sensitivity for the Liberal reserve and DAC DSI amortization to changes of index credits. So if we were to have a period of zero credit how much would those costs to increase.
I am so happy to take that one.
Yes.
All right. So if we take a hypothetical scenario of zero index credits relative to what's embedded in our model, which is what we call normal index credits.
Which by the way corresponds to.
A fairly modest long term equity return expectation of 6% annual return.
On the ESOP reserve Youre looking at in.
An increase relative to expectation of $20 million to $25 million a quarter.
Quarter, So thats the difference between normal index credit and zero index credit.
And then on the DAC and DSI side about $10 million for the difference between normal index credits and zero tax credits.
So if we were to take take into a hypothetical scenario of a full year with zero index credits.
Adding up those two components you are looking at an impact of potentially $1 of EPS dollar doughnuts.
<unk> per share.
So conceptually.
Think of that as.
About 25% of all of our EPS.
EPS expectation of ROE expectation has some level of exposure to equity markets.
Sure.
Our next question comes from the line of Pablo <unk> with Jpmorgan. Your line is open.
Hi, Thanks.
How much partnership assets that you have in the quarter and how much income that you generate against US I just wanted to get a sense of how this partner for your portfolio could perform over time.
Hi, Pablo I'll start and I'll, let Jim or Axel jump in but we are.
We have around $1 billion of partnership assets and the way I would think about it Jim could give you more specifics a little bit under $1 billion under $1 billion. That's the number we're still ramping into those and so I would say stabilized you have pretty they'll.
Take time before we can actually give a number obviously, it's going to be.
You would think alternative investment returns are but these are more safer variety. So we have to just see how they go to a high single digit is the best way to think about it.
It's too early to give numbers out on that.
Okay.
Got it.
And I just wanted to follow up on the reinsurance question here.
Did you say, how much will be centered upfront or were your comments more about the flow piece of it because I think there is there.
Retro.
He was a retro right and then flow but.
Where were your comments more about floor with a retrofit.
Hapag Lloyd so yes.
Yeah. So maybe let me give you some specific numbers so.
So if I stayed shield and Eagle select income focus so if you look at the piece of business.
Yes, you should have been issued since July 1st last year through the end of this quarter, it's about $288 million of deposits. So 75% of that is when it's going to be seeded into internal reinsurance agreements of $216 million.
And then I can answer that from a from a kind of run rate perspective across those two products, you're looking at about $80 million to $100 million per quarter, that's being that's being written currently.
So.
<unk> Blinked Thats announced was doing that's how we get to be essentially a niche.
You did about $1 billion.
For the year.
Got it okay I'll re queue. Thank you.
Yes, maybe I'll ask Pablo is that if you look at our ceded.
On page 10 of the supplement as you look at our details you'll see that.
The notional amount on which we earn fees that should without Brookfield partnership Brookfield reinsurance partnership be growing at around $1 billion a year just on that partnership.
Simplest way to think about it.
And there may be more upside to that growth.
Thank you once again as a reminder to ask a question just press Star and then the number one on your telephone keypad. Our next question comes from the line of Mark Cuban with <unk>. Your line is open.
Thank you Mark Hughes.
There was some indication the libera industry data the preliminary data that suggested that the March sales of Fas are quite strong as interest rates have gone up.
Attractiveness of the product has improved did you see that in your results any particular strength at the end of the quarter.
Any commentary about how <unk> is shaping up so far.
Hi, Mark.
Scott's area wise again.
Rates have backed up a lot right in the right direction for our industry and our players.
Some people leaning into it some people will be balanced.
On average I think what we're seeing tremendous demand for <unk> and let me give you what I think personally.
This is an amazing tailwind for us it's not just the tailwind.
Our need for retirement income would a company like us can provide.
The certainty of income.
But it's also the fact that advisors producers are waking up and realizing that a 60 40 70 30 equity bond portfolio doesn't work anymore.
Why don't you all or replace all of your bonds with fixed index annuities, where your principal protection.
Still have market upset.
<unk> tailwind story.
When we discuss that when your.
People need to sell these concepts that concept is a new tailwind.
Staying disciplined on pricing.
But selling these stories and concepts will be an enormous tailwind for everyone and I hope all of our competitors just be responsible with pricing.
Because we don't need to give away the store.
You have great tailwind strategically now too.
To answer your question specifically.
It's a very competitive market out there I don't think everybody subscribes to what I just said to you some are going for market share.
I'm, sorry, you still there.
I think I was done okay, Oh Im sorry, yeah.
I appreciate it.
Yes.
I have one other question you had talked about some of those internal changes the changing system processes shift to the cloud.
Making sure you're compensating people appropriately.
I assume all of that is contemplated in the $60 million expense run rate.
Sure.
Is that the case and then.
Is there some potential that some of those things are shorter term in nature and so therefore, you've got.
No more visibility for tapering on the expenses.
The answer to your question is yes, it's all in the $60 million range, and we think about basis points. So as we grow obviously that dollars of 60 will grow but the profitability will be the effort to grow in basis points of assets.
In terms of tampering down from that level I won't expect it we've got a lot to do and we need to build a foundation that can be multiple times. What we are today. So this is going to continue as I mentioned it will continue for a couple of years.
Your next question comes from the line of Ryan Krueger with <unk> Delta here. Your line is open.
Hi, Thanks, Good morning, I had.
Question on the investment yield I believe you said it was 398% at the end of the.
Quarter first led by the confirm does that include a norm.
Normalized expectation of return on the limited partnership in vessel.
Hey, Ryan its XO, that's correct the $3 nine 8%.
Effectively embeds our expectation.
I expected return on those assets.
Thanks, and then can you help us think I appreciate the eight basis point positive impact from LIBOR in the second quarter can you help us think about the sensitivity.
To further increases in library, yes, Matt.
Yes, I think the.
The floating rate assets, we have about $5 3 billion of floating rate assets.
Portfolio.
Like I said.
Most of the most of the resets occurred in that occur in the third week of the quarter. So I think with that using using day counts.
Be careful about the accounts I think you can probably back into what's what a hypothetical 10 basis points increase in LIBOR, which we produce.
For full quarter.
Auctions for that helps.
Got it thank you.
Thank you and we have an additional question from Pablo <unk> with Jpmorgan. Please proceed with your question.
Oh, hi, Thanks, So correct.
The theme above average utilization and labor persist and putting aside the impact of index credits.
What would you expect the same magnitude variance against modest expectations in the second quarter and even the third quarter when I get a sense of.
That's a bigger driver.
Like if you if that's a reasonable way to think about how that like a developer in the next couple of quarters.
And as I said I think it's too early to be drawing a trend from there.
But.
I'm not going to attempt to forecast what utilization is going to be.
In the second quarter, but.
Utilization were to be again higher relative to expect it to our expectations and I would expect that to have an impact on the development of the living benefit reserve.
Consistent with what we've what we've observed in the first quarter.
Understood.
And then second one for a non answer.
The reinsurance deal I, just wanted to get a sense of it.
The impact on your reported earnings right. So you're going to earn fees you would have given up some spread income, but net net where that where does that leave your reported GAAP earnings.
Right.
No. It by our did grow by $1 billion a year just in this treaty and we make pricing levels that we have.
770 basis points at $17 million of earnings which requires zero.
Zero capital.
And then you've got another two you've got another 25% of your return on with journey spread and you're putting up capital so the ROE up.
The business for us.
It is significantly high.
You are making in this example, right you are making.
$70 million with no capital and on the retained business Youre running a target spreads.
These solid returns. So you have a very high ROE business and that's how we think of the flow on a go forward basis and look to positioning the firm.
On your earlier question two axle about utilization and index credits I think the other point is that actually we didn't answer but I'll answer for it probably will jump in.
Index credits are good it's a good part in our businesses. It resets every year they serve equities a week.
That has an impact of the two items you asked him about.
You should bake that into your modeling as you think about our returns going forward because our expectation is that were abnormal in Mexico.
Just to complete up both the answers, but reinsurance so that you have a follow on we're happy to take it.
Yes.
Your next question comes from the line of Erik bass with Autonomous your line is open.
Hi, Thank you for taking my follow up I just wanted to.
As a follow up on Ryan's question should we think of the 398% portfolio yield and then add the eight basis points. So higher floating rate income so call. It 406 basis points is that really the starting yield we should think about for the second quarter.
Yes. This is Bob.
Eric This is Jim <unk> and yes, that's a fair way to think about it most of that change occurred early in the quarter and so obviously about other moving parts were from our private assets.
Investment yields on public assets of course are a fair amount higher. So there are a number of moving parts there that will impact that further on in the quarter, but that's a reasonable starting point.
And I'll just add.
Is that kind of three month, LIBOR and pre prices, making the third week of every quarter. So like the 20th of April and as rates keep going up but what Jim just outlined.
Is a great tailwind.
Obviously rates going up for this industry is a great tailwind.
And there'll be some offset in the short term equities are flat and don't give us index bags.
So I think we've got some upside on the investment portfolio and.
And we've got some short term this year.
Modest headwind with limited index credits if things don't.
Accelerate from here onwards.
That's fair.
I guess the way of framing it.
Got it thank you and maybe a nod to that last point given the rise in interest rates and wider credit spreads. That's enabled you to earn the target spreads you're looking for using a lower allocation to private.
And if so does that actually allow you to accelerate sales volumes.
Most definitely.
Most definitely as long as we can see prudent pricing in the market you had been eliminated by did I read that right up in the morning, you had everything on the spot on right up.
But.
Yes, we have less need for private assets, we love investing in private assets that meet our needs, but core fixed income is getting there unless competition gives it all the way, which we're not going to.
And our last question comes from the line of Ryan Krueger with <unk>. Please go ahead.
Yeah.
Thanks for the follow up.
Just had a question on the <unk>.
They shouldn't impact.
The liver.
Or if that did continue.
I understand it would have.
A potential impact on GAAP Liber reserves when you beat your assumption update can you help us think about if they would also have been a substantial impact.
Statutory capital in reserves given the differences between the two regimes.
So that is.
Hey, Ryan it's Axel.
The shortage.
It would not Friday.
The statutory impact only plays out.
Overtime right.
I think there is a one time impacts because.
Assumption unlocking would not.
No it.
It does not happen from a statutory perspective.
Brian we think of stack and our own internal economic view is pretty aligned as we as we think of our.
Managing reserves and building things in our reinsurance companies, though this is a GAAP phenomenon.
Which.
The earnings per share, which is great.
Got it thank you.
Ladies and gentlemen, this concludes our question and answer session I will now turn the call over to Julie for any remarks.
Thank you for your interest in American equity and participating in today's call should you have any follow up questions. Please feel free to contact us.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Okay.
Yes.
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Okay.
Okay.
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Yes.
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