Q2 2022 American Equity Investment Life Holding Co Earnings Call

Thank you Wendy.

Welcome to the American equity investment life, holding company's second quarter 2022 conference call.

At this time for opening remarks, and introductions I would like to turn the call over to Judy Hudson coordinator of Investor Relations is Hardiman. Please go ahead.

Good morning, and welcome to American equity investment life, holding company's conference call to discuss second quarter 2022 earnings.

Our earnings release and 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. The most comparable GAAP measures can be found in those documents or elsewhere on our investor relations portion of our website.

On today's call are not Bala Chief Executive Officer, Jim Hamalainen, Chief Investment Officer, Axel Andre Chief Financial Officer.

Some of our comments will contain forward looking statements you should refer to or relate to future results.

Of which we have identified in our earnings release.

Our actual results could significantly differ due to many risks, including the risk factors in our SEC filings.

An audio replay will be made available on our website. Shortly after todays call. It is now my pleasure to introduce.

Yeah.

Thank you Julie good morning, and thank you all for you.

Interest in American equity.

American equity continues to execute on all aspects of the flywheel of our business strategy.

The American equity ship can best be summed up as.

Steady as she goes.

Reflecting on the broader external environment.

As supply constraint impact the outlook for inflation.

And the fed remains steadfast in its result.

Balancing its dual mandate.

Our maximum employment and price stability.

We expect continued capital market volatility for the remainder of the year.

In this environment, we see opportunity and investment returns.

Driven by potential large changes in relative value across various private and public asset sectors.

The timing of which will vary depending on the sector.

Starting with both a substantial and a strong resilient balance sheet will give aes.

And then vantage.

I will let Jim and <unk> will walk you through specifics in a few moments.

But we continued to see meaningful opportunities to play offense.

And we'll continue to return capital to shareholders.

Including having repurchased 495 million shares in the second quarter at an average price of.

$38 26.

Total first half common stock repurchases were nine 4 million shares at an average price of $39 20.

With this we have fully repurchased the six.

$6 8 million shares issued to Brookfield in early January .

And Additionally, we repurchased $109 million of shares through the second quarter.

Even in these uncertain macro conditions.

We will remain active in our capital return plan.

We see great opportunity on the investing side.

In public and private assets as market reprice risk return attractiveness of various subsectors.

Relative value across asset is changing rapidly as different sector returns repriced at different speeds.

In the quarter, we put an additional one $4 billion to work in private assets, bringing our total allocation to private assets.

<unk> 16, 6% of the investment portfolio.

We remain bullish on residential real estate loans, where yields are now north of 6%.

That said the recent increase in rates on public assets will allow us to wait for certain private asset sectors like infrastructure equity to reprice further before we deploy.

Hence, we stay true to our more opportunistic bank and private assets investing versus traditional programmatic approaches.

More typical of insurance companies.

American Equity's private asset mindset is similar to an alternate asset manager seeking opportunistic investment returns to support a permanent fund base.

Therefore from time to time, we may be more measured in deploying in private assets, while still enhancing our investment spread.

In the go to market area, we saw a decline in sales of fixed index annuities of 12% compared to the first quarter.

We chose pricing discipline.

Over chasing the market as interest rates fluctuated.

With our focus on growing income product sales.

Taken equity life income shield sales rose, 2% from the first quarter and were basically flat with the comparable period a year earlier.

And Eagle life select income focus increased 14% sequentially.

In accumulation products, we saw sales decline driven by Commoditized rate based competition.

The sales climate remains deeply competitive.

In the income space, a number of competitors raise payout and deferral bonus rates during the quarter.

In the accumulation space, we are seeing levels of Commoditized price competition that strike us as extreme.

And as a disciplined player.

With already at scale.

We are more measured and price changes, particularly for shorter duration products.

As we see a true reset into higher rate investment deal regimes.

We have chosen to raise new money rates for longer duration less commoditized products.

While focusing on other areas of differentiation like our product design and the income space and continued loyalty from our core set of producers.

That provide ballots to.

To the steady state of a couple of billion dollars of origination year in and year out across market cycles.

In June we began making the following changes to longer duration products specifically.

Increase in guaranteed income on income shift to regain a top position in the guaranteed retirement income space.

Increase in guaranteed income on Eagle select income focus.

Each will become effective shortly.

Last Friday, we announced several actions to make <unk> more competitive, including increasing the benefit account value bonus payout factors and crediting rates on our strategies.

And increased GAAP and participation rates on both S&P and proprietary strategies to be reflective of a higher core fixed income return environment.

While sidestepping the more commoditized pure rate based competition areas.

Yes.

As equity markets experienced turbulence.

We believe that a more durable lifetime income product suite.

The index.

Participation rates, we'll see a revival of trend that reversed in the recent decade, plus bull market in equities.

When the singular focus on fixed income annuity growth was about accumulation only products.

This current macro economic environment based resetting of return expectations will be a longer term tailwind for our product solutions, especially for retail clients.

We believe that most if not all financial planning roadmap eventually needs to lead towards income replacement for clients for which FIA.

Core product solution, while equity market recovery story is the dialogue in FY accumulation towards participation rate strategies, which provide the consumer with the best chance to capture the rebound in the market beyond just standard F&B cap rates alone.

We are driving the education of the incoming participation rates stories with key partners and independent broker dealer distributors.

Moving on to earnings results.

We were generally pleased with the quarter reporting non-GAAP operating earnings per share of 98.

Driven by strong yields on the investment portfolio in line expenses and continued decline in checkout driven by a robust capital return execution.

Actually we will get into all the details in a bit but now I'll turn the call over to Jim.

A little deep dive into our investment portfolio.

Thank you <unk> and good morning, everyone.

I'm going to take you through some information today on our investment portfolio and put into a discussion about the progress we're making in transforming the investment portfolio mix.

As part of today's discussion.

The how we've used this transformation to reduce risk and segments of our core portfolio.

While redeploying funds into privately source investments that improve our poor quarter versus partition with a strong risk reward profile and greater control over investment structure and outcomes.

Speaking of future outcomes.

I'll talk to some of the scenario testing that we do on sectors of the portfolio to assess how our investments might perform under stresses such as an economic downturn and how that informs our portfolio construction and transformation decisions.

During the quarter, we increased the allocation to private assets.

Over 1%.

As we source private assets, primarily across real estate sectors.

With the fed continuing on our path of increasing short term rates in.

Inflation remaining high and slowing economic growth our focus has been the source assets, where we expect good long term returns that are able to weather a contractionary economic period.

Sure.

Residential real estate is area of the market, where we source the most assets this past quarter.

And while residential real estate has slowed quickly from a frenzied growth earlier this year with price increases slowing and transaction volume decline from the peak demand continues to remain strong by historical standards.

While the economic outlook is never certain we operate from a position of balance sheet strength.

Over the past two years, we have worked to reduce risk in those sectors and securities in the portfolio that we felt had the highest probability of principal losses, and an economic slowdown or a recessionary environment.

Our focus of that work has been a lower rated securities and the corporate credit and securitized asset sectors.

Starting with corporate credit.

Instructed a portfolio that is well diversified.

Holdings and Triple B rated securities are focused in sectors are more defensive and resilient like consumer cyclicals utilities Telecom insurance.

Through risk reduction trades over the past two years, we reduced exposure to triple B rated corporate securities by approximately three percentage points of the investment portfolio.

27, 9%.

In addition, we reduced our exposure to below investment grade corporate securities by over half and it now stands at under 1% of the investment portfolio.

The focus of these proactive changes over the past two years was on sectors, where we felt the fundamentals will be most at risk of deterioration in the slowdown.

And those securities, where we felt the risk of principal loss was not balanced with the return.

In addition to managing exposure to principal loss.

Also concentrated in our managing potential ratings migration in the portfolio, which limits the impact to capital from downgrades.

In the securitized asset portfolio over the past two years, we have reduced the overall exposure to see MBS and Cmos as well as improved the risk profile within those asset classes.

We will continue to migrate the portfolio up and quality through bulk purchase activity as well as risk reduction trades.

Relative to total invested assets our total CLO exposure has decreased from nine 4% to six 7% over the past two years and our overall CNS exposure over that time.

Has decreased from 10, 1% to eight 2%.

In addition, the percentage of CLO holdings rated triple B or lower has decreased from five 9% to three 5% of the investment portfolio and.

And finally over that timeframe, we cut in half our <unk> holdings rated triple b or lower from 0.8% of the investment portfolio to 0.4%.

Sure.

To assess the risk in our current holdings, we run stress test estimate potential losses and downgrades across the economic scenarios.

This analysis gives insights into those securities that could deteriorate in a downturn or recession.

It helps define and shape our composition of the portfolio and the risks we take.

These stress tests have shown that our overall portfolio is well protected from losses and a moderate recession.

And both the CLO and the MBS portfolios, the triple B or lower rated securities show very manageable losses, even in stress scenarios that are similar in severity to.

The great financial crisis.

In that scenario, we project some downgrades, but the impact from the downgrades is manageable given our ability to generate organic capital through investment earnings on the rest of the portfolio and we do not expect would impact our capital plans for the business.

In addition to running stress tests, we have evolved and improved our strategic asset allocation models and processes and aim to be an industry leader in this area and to be as opportunistic asset allocator across sectors based on tactical market opportunities.

This is an important element in optimizing the portfolio and ensuring we are operating within the risk return characteristics of our risk management framework.

As we continue to optimize our portfolio toward a greater allocation to privately source investments. We also continue to evaluate the overall risk profile of the portfolio in order to support our product liabilities and to maintain our balance sheet strength.

And with that I'd like to turn the call over to Axel.

Thank you Jim.

Let me extend my appreciation to all of you attending this call.

For the second quarter of 2022, we reported non-GAAP operating income of $91 1 million or <unk> 98 per diluted common share.

The quarter included $9 2 million of revenue from reinsurance stemming from our Brookfield reinsurance relationship up from eight 6 million in the first quarter of this year.

The expansion of the relationship to include sales of estate Shield and Eagle select income focus will be included in third quarter results effective July one 2021.

The account value in notional value of in force subject to recurring fees. We will seed on these two products, reflecting savings from July one 2021 through June 32022, I expect it to be approximately $260 million and $235 million respectively.

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

Average yield on invested assets was 433% in the second quarter of 2022 compared to four 5% in the first quarter.

The increase was primarily attributable to lower average cash balances and a benefit from the increase in short term rates on our floating rate assets.

The average adjusted yield excluding non <unk> prepayments was $4 two 8% in the second quarter of 2022 compared to <unk>, one 2% in the first quarter of 2021.

In the quarter yield increased by eight basis points due to the increase in short term rates and nine basis points from a decrease in average cash balance.

While the benefit from partnership income was lower than the first quarter. This was mostly offset by stronger valuations on one single family rental properties.

Partnerships and other mark to market assets contributed $27 million to investment income in excess of assumed rate of return using our investment process.

At quarter end cash and equivalents in the investment portfolio was $544 million.

<unk> flat with March 31.

Average cash and equivalents for the quarter was 526 $526 million.

Down from $1 7 billion for the first quarter.

During the quarter, we invested $2 billion at a yield of 488%, including $1 $4 billion of privately sourced assets at an expected return of five <unk>.

One zero percent.

Our allocation to property sourced assets was 16, 6% of invested assets as of quarter end compared to 15, 4% at March 31.

For the month of July we invested $542 million at an average yield of seven 8%.

July rates on new money is probably a bit on the higher side as it was predominantly in private assets, primarily real estate and middle market loans.

That said, we would expect higher new money rates and in the past is we've historically had large amounts of core bond purchases that brought down the overall yield as we redeployed large amounts of cash and otherwise reduce portfolio risk.

As of June 32 points in time yield on our investment portfolio is four points or 5%, reflecting the benefits from the increase in LIBOR and further increasing our allocation to product we source assets, partly offset by higher expected expenses as we build out our investment platform.

For the third quarter, we expect an additional benefit of roughly 16 basis points in yield reflecting the increase in LIBOR on our $5 2 billion of floating rate assets.

Yes.

The aggregate cost of money for annuity liabilities was 169 basis points up from 164 basis points in the first quarter.

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

The increase in the cost of money, excluding hedging gains reflects a higher cost of options in the second quarter of 2022 compared to the run off of lower cost options purchased in the first quarter of 2021.

Cost of options in the second quarter of 2022 averaged 161% compared to 160% in the first quarter.

Investment spread in the second quarter was $2 six 4% compared to $2 five 1% in the previous quarter, excluding prepayment income and hedging gains adjusted spread was $2 five 7% in the second quarter compared to $2, 45% in the prior quarter, reflecting strong investment returns.

<unk> modestly by the increase in cost of money.

By delivering on our investment returns, we expect to offset increased option costs.

Deferred acquisition costs, and deferred sales inducement amortization totaled $133 million compared to 229 million in the first quarter.

Reflecting $8 million of additional expense due to lower index credits during the first quarter and partially offset by lower expense due to lower living benefit utilization during the first quarter.

Second quarter amortization was $6 million greater than the modeled expectations, primarily due to higher interest margin and lower than expected index credits.

Given the low level of projected index credits and projected increase in net investment spreads we would expect amortization of backend ESI to be in the in the $140 million to $145 million range in the third quarter under current best estimate actuarial assumptions.

The liability for guaranteed lifetime income benefit payments increased $96 million this quarter compared to $85 million last quarter, primarily due to lower index credits in the first quarter, and partially offset by lower labor utilization and higher lapses in in the first quarter.

Second quarter, LIFO reserve increase was $34 million higher than modeled expectations, primarily due to lower than expected index credits and higher labor utilization and modeling expectations.

Given the minimal level of expected index credits at current S&P 500 levels, we would expect the increase in labor reserve in the third quarter to be similar to the second point of change.

Other operating costs and expenses were $60 million in the second quarter compared to $58 million reported in the first quarter in line with previously stated expectations.

We continue to build out our teams with specialized expertise and invest in the systems infrastructure and other projects necessary to support our growth as the new ABL and still expect other operating costs and expenses to be in the $240 million range for the full year as project costs that had been capitalized we will begin to be amortized in the second half of the.

A year.

Over the long term, we expect to manage expenses at a certain level of basis points of policyholder funds under management and administration.

At June 30, and July 31, cash and equivalents at the holding company were $278 million and $562 million, respectively with the increase at July 31 <unk>.

<unk> $300 million of proceeds from the previously announced drawdown of a term loan facility.

This additional capital flexibility will be deployed for continued execution of investment management partnerships and other potential growth opportunities for long term value creation for our shareholders.

On January one 2023, MDT I will become effective for us.

American equity given our mix of business the impact to retained earnings will primarily be due to the change of reserves for liver benefits from the Sop <unk>, one framework to the market's risk benefit framework in.

In addition, there will be an impact to OCI due to the elimination of shadowed that ESI and S&P balances.

Our current estimated impact to retained earnings is expected to be less than $100 million.

As of January one 2021.

Including <unk>, our current estimated impact to total equity at January one 2021 is an increase between one 5 billion and $2 billion.

The majority of the impact to OCI is related to the elimination of the concept of shadowed that ESI and shadow S&P balances and the new methodology and secondly to the change in value of market risk benefit reserves due to changes in one credit on credit spread from time of policy issue to the transition date.

January one 2021.

Given our estimate of returned earnings as of January one 2021, and the beneficial increase in interest rates. Since then we view the adoption of <unk> at non significance.

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

Thank you Sir.

To ask a question you will need to press star one one on your phone.

Please limit yourself to one question and one follow up.

Standby as we compile the Q&A roster.

And one moment.

Okay.

Our first question will come from Pablo <unk> of.

J P Morgan.

Line is open.

Hi, Thank you the first one I had is for naught.

I'd be interested to hear how you see the current environment and you sort of described it Brian you referenced higher rates changes and real devaluation.

How do you feel that affecting your ability to attract third party capital.

I guess the question is with.

Interest rates higher across asset classes.

The appetite for private assets would be of Tronox before given that the economic spread there might not be quite as before.

Hi, Pablo good morning.

Short answer is yes, we still see a lot of appetite increasing appetite from third party capital because at the end of the day what is.

What business sidecar or reinsurance vehicle allow upper body.

Plenty of capital to get it allowed third party capital to get a permanent structure and accessing.

Reinsured liabilities as a form of leverage to have 12 is two one <unk> to $1 15 to one leverage structure. So it's a permanent fund replacement we're in it for delivering investment return.

Comes through the 60 40 mix between public and private.

Private asset returns will be at a premium.

Two public market returns.

And so we still see it bigger in the holding structure in joining permanent structure towards third party capital I think any following if you have any other question.

That was here thanks.

When I had this for actual.

So I appreciate your comments on index credits.

I was wondering if could comment on how index credits.

<unk> capital generation and deployment. This year next given that index credits to feed into statutory income. Thank you.

Yes, I think the impact of index credits.

It's really a bunch of them.

Abuse.

Sure a lower rate of growth in account value in overall.

Assets under management.

But as far as the impact that that would have on long term capital generation, it's really minimal.

So we like.

Like we said at the beginning of the call we remain committed to our capital return plans.

And I'll leave it at that.

Alright, thank you.

Thank you.

One moment please for our next question.

Our next question will come from Erik bass of Autonomous Research. Your line is open.

Hi, Thank you.

Don't disclose an interim RBC ratio, but was hoping you could discuss how you're thinking about <unk> overall capital position, including Holdco liquidity and also how youre thinking about leverage and the decision to draw down the term loan in July .

Hi.

I'll start I'll, let Axel agnostic remains a strategically how we think about the things you mentioned was you're spot on right RBC becomes a lot less relevant for us.

We run as a solid eight financial from the different rating agencies. So if you look at our our capitalization on our consolidated balance sheet basis.

Where we want to be a strong a rated company.

From S&P and best for example, so that becomes relevant.

On the concept of using.

Proceeds that we just brought it from debt as <unk> mentioned, we're thinking strategically.

This business is one where we're like a merchant bank, we will bring in the liabilities will keep them for ourselves will put some into a sidecar, which is third party capital.

So we're not really looking to be a high financial leverage institution. We're looking to we're looking to have a modest amount of financial leverage which I would say is we have we have low leverage right now and commensurate with our rating could be easily north of 20% and you would still be moderate but that gives us a lot of dry powder.

We have a lot of dry powder from a leverage point of view make strategic moves and for now building our investment partnerships is where we will deploy some capital in addition to returning to shareholders.

Excellent. Thank.

Thank you and Thats, great and just to add some some some numbers beyond what you said in terms of leverage so even post the draw on the term loan facility. Our leverage ratios are in the mid teens, which provides us with ample capacity consistent with a solid a rating that.

And as mentioned.

Got it.

Clearly heard the message on capital return for this year, but how are you thinking about capital return plans post 2022 and is the $250 million to $300 million you talked about at the time of the APL two point of rollout is that still the right baseline to think about.

Early days to give you a baseline for the future I think as we execute our sidecar will talk about it more I would point you to page 11 of the supplement Greg, but we're making around.

95 basis points on reinsured liabilities.

So that's like $45 million.

Earning much higher multiple of that in the ceding commission that is coming in each year, because we have to amortize those ceding commissions over the expected life footprint realizing them over seven years.

Very high free cash flow conversion over that which is all going to go to shareholders and if it doesn't even look at the balance sheet as of now we have if you do the math there in excess of $100 million.

Cash on the auto business, which could easily be return to shareholders as we ramp that's a source of sustainable capital return to shareholders.

And we'll come out with more guidance on that our forward looking views on that as we execute our sidecar, but that the pack.

Capital return not just from freed up capital and we're going to have plenty of freed up capital as we go forward as well.

Very well said enough.

<unk> have anything to add.

Thank you Joe aspect.

Sorry go ahead sorry.

You're going to see the <unk>.

<unk> that gap.

GAAP earnings.

Roy are more muted and cash generation is one that I would just reemphasize a multiple of cash generation to GAAP earnings on a row site is well north of 100%. So thats why we can return much more capital.

Okay Brian .

Got it and I just want to make sure I heard you right did you say that kind of the cash generation from fee earnings is running at about $100 million and then the other thing it sounds like from your comments to Pablo debt.

You are still confident in getting a third party sidecar capital raised is that something you still expect to have in place by year end.

Yes to the first answer the second one will be next year.

Okay. Thank you.

Thank you.

One moment please for our next question.

Our next question will come from John Barnidge of Piper Sandler Your line is open.

Thank you very much and good morning.

Could you maybe talk you added $1 4 billion into private assets in the quarter can you maybe talk about what the plan was entering the quarter how market changes impacted that because it does sound like.

Youre going to wait out through repricing before deploy further I think infrastructure was called out so maybe volume for the second half. Thank you.

Sure John This is Jim <unk>.

As far as the $1 4 billion relative to plan.

Some of the sources of private assets. We have are steady our study sources, where we're sourcing a set amount each month some of them really come in.

And deal size, where you might put on two or $300 million are at a point in time.

The $1 $4 million is a little higher than than we had expected, but it really is really dependent on what we see for flows.

We see opportunities out in the market. So we continue to source private assets.

And size in those areas that we feel make the most sense.

To put on today, where we get the returns that we want but also field.

There is a level of protection for an economic downturn, which we expect at some point in time in the future and so we expect to continue to source private assets at are at are at a good clip.

Okay. Thank you and maybe my follow up Marc benefited I think it was about 20 basis points.

The yield.

Can you talk about how we should be thinking about a reversal of that a little bit.

Given more markets.

Thanks.

Several of these reporters did you say or what was that alright, no that wasn't related to the 20 basis point benefit from partnership marks and other mark to market assets.

Sure.

The Genesis of the question. Thank you.

Yes, sure I mean, some of that the valuations on those are done on a lag and so.

It's not always necessarily clear when you look at what actually happened in the quarter, but.

And some of the valuations are done at different times of the year or so.

Certainly we're happy with all of our partnerships and the Mark to market assets that we have and expect that we'll continue to get strong returns from those the exact level of losses is pretty hard to predict though.

Great. Thanks, very much for the answers and best of luck in the quarter ahead.

Thank you one moment please for our next question.

Our next question will come from Ryan Krueger of <unk>. Your line is open.

Hi, Thanks, good morning.

The comment on that.

That moves you've made on repositioning the ratings within the asset portfolio.

Yes.

Firstly could you just give us the what the rating profile is of the existing CLO and ABS portfolio. Please.

Sure I mean, the ratings jumped.

Generally.

CLO portfolio.

Vast majority of it is investment grade, we do hold some below investment grade there and a lot of its triple BS on the investment grade side, and the and the <unk> portfolio that is.

Almost almost entirely investment grade and single a or higher.

Super single in higher ratings for <unk>, we are much smaller holdings in the asset backed and the RMB.

Portfolios.

Those generally tend to be tend to be skewed portable higher higher ratings.

I'd just add one thing.

Other that lumping, Ryan next year, whereas to Jim's comments.

When Jim and I got just two years ago, we look through the <unk> book in the CLO book in great detail and good if you'll recall back at the end of 2020 and early 'twenty. One we did a lot of de risking on the triple B stuff.

And frankly it came to the conclusion that we wanted to bring in Blackrock and opt to go next coming to help us figure out ahead of a down cycle. So we feel relatively good about the actions we did including.

Including pretty heavy selling just to give you a data point.

We actually have seen some upgrades on the one of the Triple B.

The double B this quarter, which is a very small portion of the giulia and understanding that.

We have seen some positive action there and even within if you think about ultra <unk> of course, our creator to like you look within the portfolio. We've been we've been very diligent in digging through and also work with our partners Blackrock <unk> on making sure that within even those categories that we are focused on on reducing risk in those securities.

That we feel.

Hold the most risk and where the risk return profile doesn't make sense and so.

Really the things that we hold our securities where we feel.

Commensurate with the risks that we have.

Thanks.

The statistic.

92% of the CLO portfolio was rated <unk>, one or two and that's that's been stable for quite some time.

Got it and then my follow up is then AIC continue to seemingly.

Seemingly spending quite a bit of time looking at CLO, then what the right capital charges are against them in some preliminary proposal to require more capital against CLO can you provide any any commentary on how you're thinking about that and what the potential risk could be.

Yes, I can start we spent a lot of time thinking about that I think one core part of our business is that we're not as structured asset shop, we have stayed clear of the fact that.

Clo's and particularly Triple Bcf close.

We just don't see that the right way to play the game and the spread business. Maybe there are others, who are far better than us and figuring it out God bless them wished among the best but that's where you've seen a lot of the commoditized right.

<unk> also on the product sales side.

Those who have more conviction in playing in triple bead Clo's and figuring out the.

And level of optimization, there, which is to NTIC point, we just think life's too short for that.

Yes.

Okay.

We have looked at.

A wide range of proposals.

Ideas out there for capital for <unk>, So, it's really hard to pin it down right now just there's so many unknowns and so very it's a pretty extraordinarily wide range of proposals that we're seeing.

Understood appreciate it.

Thank you one moment for our next question. Please.

Our next question will come from Mark Hughes of <unk>. Your line is open.

Yes. Thank you good morning, I think you touched on this a bit but.

Pointed about the commoditization of the accumulation of the product.

Is that.

Kind of a function of the volatility in the interest rate environment everybody.

<unk> gaming proposition on making assumptions or is there some other structural driver there.

Hi, Mark and I'm here, yes.

Parts of that there is commodity deflation driven by those who are willing to play the more structured product arena.

Using those rates.

Case in point.

Chipotle double Acos right now very very attractive, we're not really backing up the truck amount, but using that.

Those who use a singular and triple <unk> to price that business are really driving commoditization.

In short duration products. The other part that we do see as an opportunity is to your point about rate volatility and rates ran up a lot in the quarter. Then they came back some in the quarter, we have to take a more resilient view because renewal rate integrity is a big part of what <unk> was built on and we don't want to might have.

The rate for one year and haven't meaningfully changed in the second year.

No.

We've been measured in raising rates frankly at the fed gave us some 75 basis points moves and we've been studying with others.

Is it really different this time in terms of rates.

So that clearly is a structural regime change in the dump premium outlet, we expect that rates are going to be higher for a bit longer maybe not forever and so we're taking that forward view in and had been more measured and avoided the commoditized parts of the space, We've got more competitive at the end of the.

Quarter end.

I think we're going to really grow much more than the income space and find the pockets to growing accumulation.

We can make that move.

<unk> digit returns a key is you have to make double digit returns without being on the asset side.

Understood. Thank you.

Sensitive are the result is going to be too.

The residential real estate portfolio to home price fluctuation.

Yes.

Sure on residential real estate number of different areas that we invest.

Certainly on the loan side.

The prices prices are not a big impact on the single family rental side.

There are multiple avenues for return there, but the actual rent collected as a big part of that so you may see some based on pricing.

<unk> you may see some some noise in valuations, but it's not it is not the key and not the only driver of returns there and so we fully expect that you've seen it already.

A backing off of the.

Of the frenzy residential most of their market that we had earlier this year, but if you take if you look at almost any chart. We take 2020 in 2021 out of the chart you look at today and say. This is this is the hottest market ever from residential real estate and so it will continue.

<unk> slow down from here, but the rental our rental market is just driven by such a supply demand imbalance right now.

Supply been millions of houses short by anybody's measure.

That well, we will not expect to see the increases in rental rates going forward that we have in the past couple of years.

Still expect that market to hold up to hold up nicely.

Strategic points to add to what Jim said, one is price.

Exposure versus rent growth exposure, we're more sensitive to rents Bedford.

Right, so and we like the rental business because the effected strategic finance, we have an equity investment in <unk> on one of our asset managers that is a specialist in this space.

Our relationship with them is really deepened meaningfully we play ready with them. We did the anchor loan transaction with them. So we've got a super specialist manager.

With whom we're picking the spots to play just to add strategic overlay to what Jim just said.

Thank you.

Thank you one moment please for the next question.

Our next question will come from Russell Haug.

Evercore ISI your line is open.

Hey, good morning, I, just wanted to come back to the Liberty utilization I think you mentioned that it came down from Q, but just curious if that was still elevated versus.

Typical quarter.

Utilization assumption is something you'd look harder at as we approached the <unk> balance sheet review.

Yes, Hi, Russell Thanks for the question Zack So yes.

Yes, so for the for the quarter.

Liberty utilization.

What was higher than expectations again in specific.

The very specific segments of the block and we talked about that last quarter in particular.

<unk> system.

Certain policy that they reach an anniversary.

There is a reset in the products.

That's kind of a point in time into specific vintages.

Which we observed as higher utilization and Thats whats driving the numbers.

It was.

Less than the prior quarter in terms of the dollar impact.

For the Sop reserve the higher utilization this quarter was responsible for $16 million of.

Sop reserve higher than expectation.

And again, it's part of that that particular piece of data of experienced and policyholder behavior is part of.

The data, we collect throughout the year and as we analyze and Thats ultimately.

Results aimed at the potential revision of assumptions in the third quarter.

Got you that's helpful.

Second one I had was I appreciate the color on the quantification on the portfolio impacts melt ATI, just hoping you could.

Different thoughts on maybe the earnings impacts as we approach transition directionally or otherwise.

Yes. Thanks, Russell look I think we're not going to address that at this point in time I think as we approach.

As we approach next year 2023 will be we'll be getting at yacht.

But it's not at this point in time.

Got it thanks very much.

Thank you for.

One moment please for the next question.

The next question will come from Dan Bergman of Jefferies. Your line is open.

Thanks, Good morning.

I guess to start following up on your commentary related to marks first question I wanted to see if you could provide some more thoughts around the outlook for FIA sales are you still looking for low to mid single digit growth growth off of last year's base, which I think would imply a step up in the pace of sales in the second half just based on what Youre currently seeing in terms of competition and the recent and planned product changes.

You discussed any updated thoughts or color on these dynamics would be great.

Hi back.

I think youre right that that still remains the plan and the key is finding pockets.

The accumulation phase.

<unk> space, where we can.

Right double digit Unlevered, IRR business and not getting sucked into the Commoditization game, we have areas of focus over that and then the income area will do very well for the changes we're implementing.

Right now so we expect that to drive it.

That's the plan the plan is to deliver those type of volumes. This year, but the key is not to change I think you're looking at dollars for 95, that's right I mean, thats, what we don't make about a commoditized space.

Got it that makes sense. Thanks, and then I apologize if I missed it but can you give an update on the level of partnership and Mark to market assets that you currently have in the portfolio as of the end of the second quarter and is there any high level breakdown you can give in terms of the mix of what you are holding for example, how much of it is real estate versus other asset classes.

Sure.

The total of partnerships, a mark to market assets was $166 billion.

It's across if you think about the the <unk>.

The mark to market assets. The good majority of that is in residential real estate and single family rentals and in partnerships, it's across a number of number of different investments.

Got it thank you.

Thank you.

One moment for our next question.

Our next question is a follow up from Pablo <unk> of Jpmorgan. Your line is open.

Hi, Thanks, I was just wondering if you could quantify for us how much of a benefit you expect from short term interest rates just given that they have continued to run up and I guess, if you start to look forward, even maybe until next year and your own modeling surf assuming what the forward curve.

Curtis thing, where LIBOR could go as high as maybe three 5%.

I'm curious about your thoughts there thanks.

Yes, Hi Fi Blue pixel.

I think I may have mentioned earlier.

For the third quarter, we expect the impact of the rising in LIBOR to be about 16 basis points.

Benefits too to investment yields.

And Thats obviously.

Behind us we've already seen the LIBOR and it's in <unk>.

Most of our floating rate assets reset in kind of the third week of the first month or quarter.

As far as long term planning assumptions.

We really look at the range of assumptions. Some of them include the forward curve. Some include holding rates flat.

Yes.

Got it thanks Heiko.

Thank you.

I see no further questions in the queue I will now like to turn the conference back to MS. Jenny <unk> for closing 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.

Do you have any follow up questions. Please.

The conference will begin shortly.

As Johan during Q&A, you can dial star one one.

[music].

Yeah.

[music].

Okay.

Okay.

[music].

Okay.

Okay.

Yes.

[music].

Yes.

[music].

[music].

[music].

Welcome to the American equity investment life, holding company's second quarter 2022 conference call. At this time for opening remarks, and introductions I would like to turn the call over to Julie Hudson coordinator of Investor Relations. There's heightened min. Please go ahead.

Good morning, and welcome to American equity investment life, holding company's conference call to discuss second quarter 2022 earnings our earnings release and financial supplement can be found on our website at www Dot American cash equity Dot com.

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 not Bala Chief Executive Officer, Jim Hamilton, Chief Investment Officer, Axel Andre Chief Financial Officer.

Some of our comments will contain forward looking statements, which refer to or relate to future results many of which we have identified in our earnings release.

Actual results could significantly differ due to many risks, including 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 <unk>.

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

American equity continues to execute on all aspects of the flywheel of our business strategy.

The American equity ship can best be summed up.

Steady as she goes.

Reflecting on the broader external environment.

As supply constraint impact the outlook for inflation.

And the fed remains steadfast in its result of balancing its dual mandate of maximum employment and price stability.

We expect continued capital market volatility for the remainder of the year.

In this environment, we see opportunity and investment returns.

Driven by potential large changes in relative value across various private and public asset sectors.

The timing of which will vary depending on the sector.

Starting with both a substantial <unk>.

Our strong resilient balance sheet will give aes and advantage.

I will let Jim <unk> will walk you through specifics in a few moments.

But we continued to see meaningful opportunities to play offense.

And we'll continue to return capital to shareholders.

Including having repurchased four points to 95 million shares in the second quarter at an average price of.

$38 27.

Total first half common stock repurchases were nine 4 million shares at an average price of $39 in 2000.

With this we have fully repurchased the six.

$6 8 million shares issued to Brookfield in early January .

And Additionally, we repurchased $109 million of shares through the second quarter.

Even in these uncertain macro conditions.

We will remain active in our capital return plan.

We see great opportunity on the investing side.

In public and private assets as market reprice risk return attractiveness of various sub sectors.

Relative value across asset it is changing rapidly as different sector returns repriced at different speeds.

In the quarter, we put an additional one $4 billion to work in private assets, bringing our total allocation to private assets.

To 16, 6% of the investment portfolio.

We remain bullish on residential real estate loans, where yields are now north of 6%.

That said the recent increase in rates on public assets will allow us to wait for certain private asset sectors like infrastructure equity to reprice further before we deploy.

Hence, we stay true to our more opportunistic bank and private assets investing versus traditional programmatic approaches that are more typical of insurance companies.

American Equity's private asset mindset is similar to an alternative asset manager seeking opportunistic investment returns to support the permanent fund base.

Therefore from time to time, we may be more measured in deploying in private assets, while still enhancing our investment spread.

In the go to market area, we saw a decline in sales of fixed index annuities of 12% compared to the first quarter as we chose pricing discipline.

We are chasing the market and interest rates fluctuated.

With our focus on growing income product sales.

Second equity life income shield sales rose, 2% from the first quarter and were basically flat with the comparable period a year earlier.

And Eagle life select income focus increased 14% sequentially.

Yeah.

In accumulation products, we saw sales decline driven by Commoditized rate based competition.

The sales climate remains deeply competitive.

In the income space, a number of competitors raise payout and deferral bonus rates during the quarter.

In the accumulation space, we are seeing levels of Commoditized price competition that strike us as extreme.

And as a disciplined player.

With already at scale.

We are more measured and price changes, particularly for shorter duration products.

As we see a true reset into higher rate investment yield regimes.

We have chosen to raise new money rates for longer duration less commoditized products.

While focusing on other areas of differentiation like our product design and the income space and continued loyalty from our core set of producers.

That provide ballots to.

To the steady state of a couple of billion dollars of origination year in India across market cycles.

In June we began making the following changes to longer duration products specifically.

Increase in guaranteed income on income shield to regain a top position in the guaranteed retirement income space.

Increase in guaranteed income on Eagle select income focus.

Which will become effective shortly.

Last Friday, we announced several actions to make <unk> more competitive, including increasing the benefit account value bonus.

Factors and crediting rates on our strategies.

And increased GAAP and participation rates on both S&P and proprietary strategies to be reflective of a higher core fixed income return environment.

While sidestepping the more commoditized pure rate based competition areas.

Okay.

As equity markets experienced turbulence.

We believe that a more durable lifetime income product suite.

With index.

Participation rates, we'll see a revival of trend that reversed in the recent decade, plus bull market in equities.

When the singular focus on fixed income annuity growth was about accumulation only products.

This current macro economic environment based resetting of return expectations will be a longer term tailwind for our product solutions, especially for retail clients.

We believe that most if not all financial planning roadmap eventually needs to lead towards income replacement for clients for which FIA atom core product solution, while equity market recovery story is the dialogue in FY accumulation towards participation rate strategies, which.

Provide the consumer with the best chance to capture a rebound in the market beyond just standard S&P cap rates alone.

We are driving the education of the incoming participation rates stories with key partners and independent broker dealer distributors.

Moving on to earnings results.

We're generally pleased with the quarter reporting non-GAAP operating earnings per share of 98.

Driven by strong yields on the investment portfolio in line expenses and continued decline in share count driven by a robust capital return execution.

Actually we will get into all the details in a bit but now I'll turn the call over to Jim to private a little deep dive into our investment portfolio.

Thank you <unk> and good morning, everyone.

I'm going to take you through some information today on our investment portfolio and put into a discussion about the progress we're making in transforming the investment portfolio mix.

As part of today's discussion I'll speak to how we have used this transformation to reduce risk and segments of our core portfolio, while redeploying funds into privately source investments that improve our poor quarter versus location with a strong risk reward profile and greater control over investment structure.

Sure and outcomes.

Speaking of future outcomes.

I'll talk to some of the scenario testing that we do on sectors of the portfolio to assess how our investments might perform under stresses such as an economic downturn and how that informs our portfolio construction and transformation decisions.

During the quarter, we increased the allocation to private assets by over 1%.

As we source private assets, primarily across real estate sectors.

With the fed continuing our path of increasing short term rates.

Inflation remaining high and slowing economic growth our focus has been the source assets, where we expect good long term returns that are able to weather a contractionary economic period.

Residential real estate is area of the market, where we source the most assets this past quarter.

And while residential real estate has slowed quickly from a frenzied growth earlier this year with price increases slowing and transaction volume decline from the peak demand continues to remain strong by historical standards.

While the economic outlook is never certain we operate from a position of balance sheet strength.

Over the past two years, we have worked to reduce risk in those sectors and securities in the portfolio that we felt had the highest probability of principal losses, and an economic slowdown or a recessionary environment.

Our focus of that work has been a lower rated securities and the corporate credit and securitized asset sectors.

Starting with corporate credit.

Perhaps in a portfolio that is well diversified.

Holdings and Triple B rated securities are focused in sectors are more defensive and resilient like consumer cyclicals utilities Telecom insurance.

Through risk reduction trades over the past two years, we reduced exposure to triple B rated corporate securities by approximately three percentage points of the investment portfolio.

27, 9%.

In addition, we reduced our exposure to below investment grade corporate securities by over half and it now stands at under 1% of the investment portfolio.

The focus of these proactive changes over the past two years was on sectors, where we felt the fundamentals will be most at risk of deterioration in a slowdown.

Those securities, where we felt a risk of principal loss was not balanced with the return.

In addition to managing exposure to principal loss.

We also concentrate on are managing potential ratings migration in the portfolio, which limits the impact to capital from downgrades.

In the securitized asset portfolio over the past two years, we have reduced the overall exposure to <unk> as well as improved the risk profile within those asset classes.

We will continue to migrate the portfolio up and quality through bulk purchase activity as well as risk reduction trades.

Relative to total invested assets our total CLO exposure has decreased from nine 4% to six 7% over the past two years and our overall <unk> exposure over that time has decreased from 10, 1% to eight 2%.

In addition, the percentage of CLO holdings rated triple B or lower has decreased from five 9% to three 5% of the investment portfolio.

And finally over that timeframe, we cut in half our <unk> holdings rated triple b or lower from 0.8% of the investment portfolio to 0.4%.

Sure.

To assess the risks in our current holdings, we run stress test estimate potential losses and downgrades across economic scenarios.

This analysis gives insights into those securities that could deteriorate in a downturn or recession.

And it helps define and shape our composition of the portfolio and the risks we take.

These stress tests have shown that our overall portfolio is well protected from losses and a moderate recession.

And both the CLO and <unk> MBS portfolios, the triple B or lower rated securities show very manageable losses, even in stress scenarios that are similar in severity to the great financial crisis.

In that scenario, we project some downgrades, but the impact from the downgrades is manageable given our ability to generate organic capital through investment earnings on the rest of the portfolio and we do not expect would impact our capital plans for the business.

In addition to running stress tests, we have evolved and improved our strategic asset allocation models and processes and aim to be an industry leader in this area and to be an opportunistic asset allocator across sectors based on tactical market opportunities.

This is an important element in optimizing the portfolio and ensuring we are operating within the risk return characteristics of our risk management framework.

As we continue to optimize our portfolio toward a greater allocation to privately source investments. We also continue to evaluate the overall risk profile of the portfolio in order to support our product liabilities and to maintain our balance sheet strength.

And with that I'd like to turn the call over to Axel.

Yes.

Thank you Jim.

Let me extend my appreciation to all of you attending this call.

For the second quarter of 2022, we reported non-GAAP operating income of 91 1 million or <unk> 98 per diluted common share.

The quarter included $9 2 million of revenue from reinsurance stemming from our Brookfield reinsurance relationship up from eight 6 million in the first quarter of this year.

The expansion of the relationship to include sales of estate Shield and Eagle select income focus will be included in third quarter results effective July one 2021.

The account value in notional value of in force subject to recurring fees. We will seed on these two products, reflecting sales from July one 2021 through June 32022, I expect it to be approximately $260 million and $235 million respectively.

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

Average yield on invested assets was 33% in the second quarter of 2022 compared to four 5% in the first quarter the.

The increase was primarily attributable to lower average cash balances and a benefit from the increase in short term rates on our floating rate assets.

The average adjusted yield excluding non technical prepayments was $4 two 8% in the second quarter of 2022 compared to <unk>, one 2% in the first quarter of 2021.

In the quarter yield increased by eight basis points due to the increase in short term rates and nine basis points from a decrease in average cash balance.

While the benefit from partnership income was lower than the first quarter. This was mostly offset by stronger evaluations on all of the single family rental property.

Partnerships and other mark to market FX contributed $27 million to investment income in excess of assumed rate of return using our investment process.

At quarter end cash and equivalents in the investment portfolio was 544 million basically flat with March 31.

Average cash and equivalents for the quarter was 526 $526 million.

Down from $1 7 billion for the first quarter.

During the quarter, we invested $2 billion at a yield of 488%, including $1 4 billion with privately sourced assets at an expected return of five.

One zero percent.

Our allocation to property sourced assets was 16, 6% of invested assets as of quarter end compared to 15, 4% at March 31.

For the month of July we invested $542 million at an average yield of seven 8%.

The July rate on pneumonia is probably a bit on the higher side as it was predominantly in private assets, primarily real estate and middle market loans.

That said, we would expect higher new money rates and in the past is we historically had large amounts of core bond purchases that brought down the overall yield as we redeployed large amounts of cash and otherwise reduce portfolio risk.

As of June 32 points in time yield on our investment portfolio is four points or 5%, reflecting the benefit from the increase in LIBOR and further increasing our allocation to privacy source assets, partly offset by higher expected expenses as we build out our investment platform.

For the third quarter, we expect an additional benefit of roughly 16 basis points in yield reflecting the increase in LIBOR on our $5 2 billion of floating rate assets.

The aggregate cost of money for annuity liabilities was 169 basis points up from 164 basis points in the first quarter the cost of money in the second quarter benefited from two basis points of hedging gains compared to three basis points of hedging gains in the first quarter.

The increase in the cost of money, excluding hedging gains reflect a higher cost of options in the second quarter of 2022 compared to the run off of lower cost options purchased in the first quarter of 2021.

Cost of options in the second quarter of 2022 averaged 161% compared to 160% in the first quarter.

Investment spread in the second quarter was $2 six 4% compared to $2 five 1% in the previous quarter, excluding prepayment income and hedging gains adjusted spread was 257% in the second quarter compared to $2, 45% in the prior quarter, reflecting strong investment returns offsets.

Modestly by the increase in cost of money.

By delivering on our investment returns, we expect to offset increased option costs.

Deferred acquisition costs and deferred sales inducement amortization totaled $133 million.

Compared to $229 million in the first quarter.

Reflecting $8 million of additional expense due to lower index credits in the first quarter and partially offset by lower expense due to lower living benefit utilization in the first quarter.

Second quarter amortization was $6 million greater than the modeled expectations, primarily due to higher interest margin and lower than expected index credits.

Given the lower level of projected index credits and projected increase in net investment spreads. We would expect amortization of back end DSI to be in the in the $140 million to $145 million range in the third quarter under current best estimate actuarial assumptions.

The liability for guaranteed lifetime income benefit payments increased $96 million this quarter compared to $85 million last quarter, primarily due to lower index credits in the first quarter, and partially offset by lower labor utilization and higher lapses in in the first quarter.

Second quarter, LIFO reserve increase was $34 million higher than modeled expectations, primarily due to lower than expected index credits and higher labor utilization and modeled expectations.

Given the minimal level of expected index credits at current S&P 500 levels, we would expect the increase in labor reserve in the third quarter to be similar to the second one change.

Other operating costs and expenses were $60 million in the second quarter compared to $58 million reported in the first quarter in line with previously stated expectations.

We continue to build out our teams with specialized expertise and invest in the systems infrastructure and other projects necessary to support our growth as the new ABL and still expect other operating costs and expenses to be in the $240 million range for the full year as project costs that had been capitalized we will begin to be amortized in the second half of the.

Year.

Over the long term, we expect to manage expenses at a certain level of basis points of policyholder funds under management and administration.

At June 30, and July 31, cash and equivalents at the holding company were $278 million and $562 million, respectively. With the increase at July 31, reflecting $300 million of proceeds from the previously announced drawdown of a term loan facility.

This additional capital flexibility will be deployed for continued execution of investment management partnerships and other potential growth opportunities for long term value creation for our shareholders.

On January one 2023, L DTI will become effective.

For American equity given our mix of business the impact to retained earnings were primarily be due to the change in reserves for labor benefits from the Sop <unk>, one framework to the market risk benefit framework.

In addition, there will be an impact to OCI due to the elimination of shadow DAC DSI and S&P balances.

Our current estimated impact to retained earnings is expected to be less than $100 million.

As of January one 2021.

Including <unk>, our current estimated impact to total equity at January one 2021 is an increase between 145 billion and $2 billion.

The majority of the impact to OCI is related to the elimination of the concept of shadowed that ESI and shadow S&P balances in the new methodology, and secondly to the change in value of market risk benefit reserves due to changes in one credit on credit spread from time of policy issue to the transition date.

January one 2021.

Given our estimated retained earnings as of January one 2021, and the beneficial increase in interest rates. Since then we view the adoption of <unk> at non significance.

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

Thank you Sir.

To ask a question you will need to press star one one on your phone.

Please limit yourself to one question and one follow up.

Standby as we compile the Q&A roster.

And one moment.

Our first question will come from Pablo <unk> of.

Jpmorgan your.

Your line is open.

Hi, Thank you the first one I had is for not I'd.

I'd be interested to hear how you see the current environment and you sort of described it Brian you referenced higher rates changes in the real devaluation.

How do you feel that affecting your ability to attract third party capital.

I guess the question is with interest rates higher across asset classes.

Do you think the appetite for private assets would be of Tronox before given that the economic spread there might not be as wide as before.

Hi, Pablo good morning.

Short answer is yes, we still see a lot of appetite increasing appetite from third party capital because at the end of the day what is.

What is a sidecar or reinsurance vehicle allow upward third party capital to get it allows third party capital to get a permanent structure and accessing.

Reinsured liabilities as a form of leverage to have a 12 to one <unk> to $1 52, unlevered structure. So it's a permanent fund replacement.

And it for delivering investment return.

Up to the 60 40 mix between public and private prior.

Private asset returns will be at a premium to.

<unk> public market returns and so we still see it.

In the ordering structure in joining permanent.

Structure towards third party capital I'll take any following if you haven't borrowing any other question.

That was here thanks, and the second one I had this for actual.

So I appreciate your comments on index credits.

I was wondering if you could comment on how index credits might impact capital generation and deployment. This year next given that index spreads feed into statutory income. Thank you.

Yes, I think the impact of index credits.

It was really a wow.

Abuse.

A lower rate of growth in account value in overall.

Assets under management.

But as far as the impact that that's going to have on long term capital generation is really minimal so.

Like we said at the beginning of the call we remain committed to our capital return plans.

And I'll leave it at that.

Alright, thank you.

Thank you.

One moment please for our next question.

Yes.

Our next question will come from Erik bass of Autonomous Research. Your line is open.

Hi, Thank you I know you don't disclose an interim RBC ratio, but was hoping you could discuss how you're thinking about <unk> overall capital position, including Holdco liquidity and also how youre thinking about leverage and the decision to draw down the term loan in July .

It's an advanced Scott I'll, let Axel agnostic remains a strategically how we think about the things you mentioned was youre spot on right RBC becomes a lot less relevant for us.

We run as a solid 80 financial from the different rating agencies. So we look at our our capitalization on our consolidated balance sheet basis.

Where we want to be a strong E rated company.

From S&P and best for example, and so that becomes relevant.

On the concept of using.

Proceeds that we just brought in from that as <unk> mentioned, we're thinking strategically.

This business is one where we're like a merchant bank, we will bring in the liabilities will keep some for ourselves will put some into a sidecar, which is third party capital.

We're not really looking to be a high financial leverage institution. We're looking to we're looking to have a modest amount of financial leverage which I would say we are.

Low leverage right now.

And commensurate with our rating could be easily north of 20% and you would still be moderate but that gives us a lot of dry powder, we have a lot of dry powder from a leverage point of view make strategic moves and we're now building our investment partnerships, where we will deploy some capital in addition to returning to shareholders.

No. Thank.

Thank you and Thats, great and just to add some some some numbers behind what <unk> said in terms of leverage so even post the draw on the term loan facility. Our leverage ratios are in the mid teens, which provides us with ample capacity consistent with a solid a rating that and as mentioned.

Got it.

And clearly heard the message on capital return for this year, but how are you thinking about capital return plans post 2022 and is the $250 million to $300 million you talked about at the time of the AGL to rollout is that still the right baseline to think about.

Early days to give you a baseline for the future.

As we execute our sidecar will talk about it more I would point you to page 11 of the supplement Greg, but we're making around nine.

95 basis points on reinsured liabilities.

So that's like $45 million.

Earning much higher multiple of that in the ceding commission that is coming in each year, because we have to amortize those ceding commissions over the expected life quickly realizing them over seven years.

Very high free cash flow conversion over that which is all going to go to shareholders and if it doesn't even look at the balance sheet as of now we have you can do the math there in excess of $100 million of cash.

Cash on the <unk> business, which could easily be return to shareholders as we ramp that's a source of sustainable capital returned to shareholders.

And we'll come out with more guidance on that our forward looking views on that as we execute our sidecar that pack.

Capital return not just from freed up capital and we're going to have plenty of freed up capital as we go forward as well.

Very well said enough.

<unk> have anything to add.

Thank you and just last thing.

Sorry go ahead.

I was just going to see the dynamic back.

GAAP earnings.

<unk> are more muted and cash generation is one that I would just reemphasize a multiple of cash generation to GAAP earnings on our OE side is well north of 100%. So thats why we can return much more capital.

Okay Brian .

Got it I just want to make sure I heard you right did you say that kind of the cash generation from fee earnings is running at about $100 million and then the other thing it sounds like from your comments to Pablo debt.

Youre still confident in getting third party sidecar capital raised is that something you still expect to have in place by year end.

Yes to the first answer the second one will be next year.

Okay. Thank you.

Thank you.

One moment please for our next question.

Our next question will come from John Barnidge of Piper Sandler Your line is open.

Thank you very much and good morning.

Could you maybe talk you added $1 4 billion into private assets in the quarter can you maybe talk about what the plan was entering the quarter how market changes impacted that because it does sound like.

Youre going to wait out through your re pricing before the point further I think infrastructure was called out.

Volume for the second half two thank you.

Sure John This is Jim <unk>.

As far as the one 4 billion relative to plan.

Some of the sources of our private assets. We have are steady our study sources, where we're sourcing a set amount each month some of them really come in.

And the deal size, where you might put on two or $300 million are at a point in time.

The $1 4 million is a little higher than than we had expected, but it really is really dependent on what we see for flows.

We see opportunities out in the market. So we continue to source private assets.

And size in those areas that we feel make the most sense.

To put on today, where we get the returns that we want but also field.

There is a level of protection for an economic downturn, which we expect at some point in time in the future. So we expect to continue to source private assets that are at.

At a good clip.

Okay. Thank you and maybe my follow up Marc benefited by 20 basis points to.

The yield.

Can you talk about how we should be thinking about a reversal of that a little bit.

Given more markets.

Thanks.

Is that related reporters did you say or what was that alright, no that was it related to the 20 basis point benefit from partnership marks and other mark to market.

That was the Genesis of the question. Thank you.

Yes, sure I mean some of that.

Uhm when those are done on a lag and so.

It's not always necessarily clear when you look at what actually happened in the quarter, but.

And some of the valuations are done at different times of the year. So.

Certainly we're happy with all of our partnerships and the Mark to market assets that we have and expect that we'll continue to get strong returns from those the exact level of losses is pretty hard to predict though.

Great. Thank you very much for the answers and best of luck in the quarter head.

Thank you one moment please for our next question.

Our next question will come from Ryan Krueger of K B W. Your line is open.

Hi, Thanks, good morning.

The comment on that moves you've made on repositioning the ratings within the asset portfolios I guess FERC.

First could you just give us what the rating profile is of the existing CLO and ABS portfolio. Please.

Yes.

Yes.

Sure I mean, the ratings jumped.

Generally.

CLO portfolio.

Vast majority of its investment grade, we do hold some below investment grade there and a lot of its triple BS on the investment grade side, and the and the <unk> portfolio that is.

Almost almost entirely investment grade and single a or higher.

Super Incidentally in higher ratings for CMV.

We are a much smaller holdings in the asset backed and the RMB.

Portfolios with those generally tend to be tend to be skewed portable higher higher ratings.

I'd just add one thing.

Other that lumping, Ryan next year West to Jim's comments is that when when Jim and I got just two years ago, we look to the MBS book in the CLO book in great detail and good if you'll recall back at the end of 2020 and early 'twenty. One we did a lot of de risking on the triple B stuff.

And frankly it came to the conclusion that we wanted to bring in Blackrock and opt to go next coming to help us figure out ahead of a down cycle. So we feel relatively good about the actions we did including.

Including pretty heavy selling just to give you a data point.

We actually have seen some upgrades on the one of the triple B or the.

<unk> this quarter, which is a very small portion of the Giulia and understanding that I mean, we have seen some positive action there and even within if you think about ultra believes of course, our creator to like you look within the portfolio. We've been we've been very diligent at digging through and also work with our partners Blackrock economy on.

I'm, making sure that within even those categories that we are focused on on reducing risk in those securities that we feel.

Hold the most risk and where the risk return profile doesn't make sense and so.

Really the things that we hold our securities where we feel the returns are commensurate with the risks that we have.

Thanks.

I was just going to add to provide that statistic.

Statistic.

92% of the CLO portfolio is rated a nasty one or two and that's that's been stable for quite some time.

And that's that's been stable for quite some time.

Got it and then my follow up is then AIC continue to seemingly spending quite a bit of time looking at.

And what the right capital targets are against them in there.

The preliminary proposal to require more capital against CLO can you provide any any commentary on how you're thinking about that and what the potential risk could be.

Yes, I can start we spent a lot of time thinking about that I think one core part of our business is that we're not as structured asset shop right. We've stayed clear of the fact that.

Clo's and particularly Triple B Clo's.

We just don't see that the right way to play the game and the spread business. Maybe there are others, who are far better than Austin figuring it out God bless them wished them on the web, but that's where you've seen a lot of the commoditized rate action also on the product sales side.

Those are those who have more conviction in playing in triple B CLO.

And figuring out that level of optimization, there, which is do NTIC point, we just think life's too short for that.

Yes.

Okay.

We have looked at.

There's a wide range of proposals.

Ideas out there for capital for <unk>, So, it's really hard to pin it down right now just there's so many unknowns and so very it's a.

The extraordinary wide range of proposals that we're seeing.

Understood appreciate it.

Thank you one moment for our next question. Please.

Our next question will come from Mark Hughes of <unk>. Your line is open.

Yes. Thank you. Good morning, I think you touched on this a bit but your point about the commoditization of the accumulation of the product.

Is that.

Kind of a function of the volatility in the interest rate environment, everybody jockeying for position are making assumptions or is there some other structural driver there.

Hi, Mark.

Yes, they're both parts of that there is commodity deflation driven by those who are willing to play the more structured product arena.

Using those rates.

Case in point.

AAA double AA CLO right now very very attractive, we're not really backing up the truck amount, but using that.

Those who used bike senior land triple B CLO to price that business are really driving commoditization.

In short duration products. The other part that we do see as an opportunity is to your point about rate volatility and rates ran up a lot in the quarter than the give back some in the quarter, we have to take a more resilient view because renewal rate integrity is a big part of what <unk> was built on.

And we don't want to like have a rate for one year and haven't meaningfully changed in the second year.

So.

We've been measured in raising rates frankly at the fed gave us some 75 basis points moves and we've been studying with others.

Is it really different this time in terms of rates is so there clearly is a structural regime change in the dump premium outlet, we expect that rates are going to be higher for a bit longer maybe not forever and so we're taking that forward viewing and had been more measured and.

Avoided the commoditized parts of the space, we've got more competitive at the end of the quarter.

I think we're going to really grow much more than the income space and find the pockets to growing accumulation.

We can make now.

All digit returns a key is you have to make double digit app without being on the appetite.

Understood. Thank you.

Sensitive are the results going to be too.

The residential real estate portfolio to home price fluctuation.

Residential real estate, a number of different areas that we invest.

Certainly on the loan side.

The prices prices are not a big impact on the single family rental side.

There are multiple avenues will return there, but the actual rent collected as a big part of that so you may see some based on pricing.

<unk> you may see some some noise in valuations, but it's not it is not the key and not the only driver of returns there and so we fully expect that you've seen it already.

A backing off of the.

The friendly's residential most of your markets that we had earlier this year, but if you take if you look at almost any chart. We take 2020 in 2021 out of the chart you would look at today and say. This is this is the hottest market ever from residential real estate and so it will continue.

To the to slow down from here, but the rental our rental market is just driven by such a supply demand imbalance right now.

Supply been millions of houses short by anybody's measure.

That well, we will not expect to see the increases in rental rates going forward that we have in the past couple of years.

We'll expect that market to holdup to hold up nicely.

<unk> strategic points to add to what Jim said, one is price.

Exposure versus rent growth exposure were more.

To rent.

Right, so and we like the rental business because the effected strategic finance.

We have an equity investment in practice on one of our asset manager that is a specialist in this space.

Our relationship with them is really deepened meaningfully deployed Ramsey with them. We did the actual loan transaction with them. So we've got a super specialist manager.

With whom we're picking the spots to play just to add strategic overlay to what Jim just said.

Thank you.

Thank you one moment please for the next question.

Our next question will come from Russell Haug of Evercore ISI. Your line is open.

Hey, good morning, just wanted to come back to the labor utilization I think you mentioned that it came down from <unk>, but just curious if that was still elevated versus.

Quarter end utilization assumption is it's something you'd look harder at as we approached the <unk> balance sheet review.

Yes, Hi, Russell Thanks for the questions as XL.

Yes, so for the for the quarter.

Libra utilization.

What was higher than expectations again in specific.

The very specific segments of the block and we talked about that last quarter in particular is the.

Certain policy that they reach an anniversary.

There is a reset in the products.

That's kind of the point in time into specific vintages.

Which we observed as higher utilization and Thats whats driving the numbers.

It was.

Less than the prior quarter in terms of the dollar impact.

For the S&P reserve the higher utilization this quarter was responsible for $16 million of.

Sop reserve higher than expectation.

And again, it's part of that.

That particular piece of data of experiencing in policyholder behavior is part of.

The data we connect throughout the year and as we analyze and vessels minutely.

Results aimed at the potential revision of assumptions in the third quarter.

Got you that's helpful and then.

Second one I had was I appreciate the color on the quantification on the book value impacts mill DTI, just hoping you could.

Give us some thoughts on maybe the earnings impacts as we approach transition directionally or otherwise.

Yeah. Thanks, Ross So look I think we're not going to address that at this point in time I think as we approach.

As we approach next year 2023 will be we'll be getting into that.

But but not at this point in time.

Okay.

Got it thanks very much.

Thank you.

One moment please for the next question.

The next question will come from Dan Bergman of Jefferies. Your line is open.

Thanks, Good morning.

I guess to start.

Going up on your commentary related to marks first question I wanted to see if you could provide some more thoughts around the outlook for FIA sales are you still looking for low to mid single digit growth growth off of last year's base, which I think would imply a step up in the pace of sales in the second half just based on what Youre currently seeing in terms of competition and the recent and planned product changes you discussed any updated thoughts or color.

On these dynamics would be great.

Hi, Dan.

I think youre right that that still remains the plan and the key is finding pockets.

In the accumulation phase space.

Space, where we can.

Double digit Unlevered, IRR business and not getting sucked into the Commoditization game, we have areas of focus over that and then the income area will do very well, but the changes we are implementing.

Right now so we expect that to drive it.

Thats the plan the plan is to deliver those type of volumes. This year, but the key is not to change I think it would be a $1 95 packs right I mean, thats, what we don't make about the Commoditized space.

Got it that makes sense. Thanks, and then I apologize if I missed it but can you give an update on the level of partnership and Mark to market assets that you currently have in the portfolio as of the end of the second quarter and is there any high level breakdown you can give in terms of the mix of what you are holding for example, how much is real estate versus other asset classes.

Sure.

Total of partnerships and mark to market assets was $166 billion.

It's across if you think about the the.

The mark to market assets. The good majority of that is in residential real estate and single family rentals and in partnerships, it's across a number of number of different investments.

Got it thank you.

Thank you.

One moment for our next question.

Our next question is a follow up from Pablo <unk> of Jpmorgan. Your line is open.

Hi, Thanks, I was just wondering if you could quantify for us how much of a benefit you expect from short term interest rates just given that they have continued to run up and I guess, if you start to look for it even maybe until next year and your own modeling.

With <unk> with the poor weather.

<unk> curve is saying we're library could go as high as maybe.

<unk>, 5%.

Curious about your thoughts there thanks.

Yes, Hi, <unk>.

I think I may have mentioned earlier.

For the third quarter, we expect the effect of the rising in LIBOR to be about 16 basis points.

Benefits to two investment yields.

And Thats obviously.

Behind us we've already seen the LIBOR that's in <unk>.

Most of our floating rate assets reset in kind of that third week of the first month of the quarter.

As far as long term planning assumptions.

We really look at the range of assumptions. Some of them include a forward curve. Some include holding rates flat.

Got it thanks guys.

Thank you.

I see no further questions in the queue I will now like to turn the conference back to MS. Jodi <unk> for closing remarks.

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