Q3 2022 American Equity Investment Life Holding Co Earnings Call

November 8, 2022

Okay.

Welcome to American equity investment life, holding company's third quarter 2022 conference call at this time for opening remarks, and introductions I'd like to turn the call over to Julie Hineman coordinator of Investor Relations.

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

non-GAAP financial measures discussed on today's call and reconciliations of non-GAAP financial measures to 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, and axle 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.

Our 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.

We are now at Victoria anniversary of announcing the El to point on the strategy.

Even in tumultuous markets, we are witnessing the resilience in our business results due to the successful execution of the strategy.

Additionally, we are proud to share that American equity life has been ranked as number one.

Customer satisfaction.

Among our new deep providers in the J D. Power's 2022 U S individual annuity study.

This is a demonstration of our focus on winning through a combination of product competitiveness.

Policyholder focus.

Producer loyalty driven by our leading client service and value added marketing support provided to our distribution partners.

In the investments area.

Markets re price risk return attractiveness across asset classes, we continue to see unique opportunities in private assets.

In the quarter, we put an additional $1 $3 billion to work in private assets.

Bringing our total allocation to private assets to 18, 4% of the investment portfolio.

We put over $1 billion to work in the real estate sector, primarily in non qualified mortgages.

Residential transition loans.

And single family real estate.

At an average expected return of close to 6%.

We remain constructive on rental housing and housing affordability continues to remain difficult.

Residential real estate loans are also attractive with improved underwriting and yields that are now in the upper 6% to 7% range.

But as you suspect the supply of residential mortgages has slowed considerably with higher rates as well as the decision to tighten underwriting standards.

We are seeing attractive risk adjusted yields in directly originated middle market credit throughout Adam St partnership.

And increased origination of directly sourced opportunistic specialty credit.

And real assets.

In essence, our sourcing of unique cash flowing and yield oriented private assets is gaining momentum.

Beyond our real estate investments.

Our focus in the next six to 12 months is going to be on executing internal securitizations.

Our ratings efficient structuring of directly source assets in middle market credit speciality credit and cash flowing infrastructure equity.

Moving on capital return to shareholders remain robust given our strong capitalization position and having proactively reduce risk on a significant portion of the public fixed income structured assets portfolio prior to 2022.

We repurchased four 2 million shares in the third quarter for a total spend of $154 million and remain committed to our current capital return plans.

Total common stock repurchases through the first nine months of the year was $13 6 million shares.

On an average price of $38 37.

With this we are fully repurchased six 8 million shares issued to Brookfield.

On January 4th and Additionally, we repurchased 263 million shares through the third quarter.

At the end of September we had $202 million of remaining share repurchase authorization.

In the go to market area.

We saw a decline in sales of fixed index annuities or 6% compared to the second quarter.

As we chose pricing discipline over chasing the market as interest rates fluctuated.

Our focus.

On growing income product sales.

Continues.

We are very pleased to see American equity life income shield sales rise, 20% from the second quarter and increased 28% versus the comparable period a year earlier.

Eagle life select income focused sales were flat sequentially.

In accumulation products in the third quarter, we continued to see competitors raised product rates with cost of money potentially well in excess of 4%.

Thereby already pricing in a sustained level of higher interest rates in the future.

This compared with us choosing to take a more measured approach to the trajectory of future 10 year U S treasury rates.

Thereby using a lower option budget or cost of money to have resilient product profitability in case. The rise in interest rates is more fleeting and not sustained over the product lifecycle.

We saw total enterprise accumulation sales declined 21% compared to the second quarter driven by commoditize rate based competition in the S&P 500 based strategies.

The focus on sustained product profitability is a core tenant of our ABL to approach for a host of reasons.

First the basis of our go to market differentiation is a combination of product competitiveness customer service and the ease of doing business for the financial adviser with American equity.

Second being an at scale player with $52 billion of in force FIA as we are able to stay focused on product pricing discipline targeting double digit IRR.

Ours to be able to convert those sales to Ottawa herbal liabilities in future reinsurance safeguards.

Given the recent trajectory of fed rate actions likely guidance on terminal rates and overall outlook for our sustained interest rate level of 4% or higher.

In November we are raising our accumulation product option budgets to reflect new money asset returns that can be sustained around 6% or higher and therefore will be more competitive in terms of pricing.

We expect that these rate actions will be reflected in December sales and to set the momentum for FIA sales going into 2023, while also meeting our product pricing hurdles of double digit <unk> that can then be converted to our OE both liabilities in reinsurance side guys over time.

Additionally, we will likely enter the registered index annuity our railcar product market within the next 18 months.

As we implement our new policy administration system for new business.

And further upgrade our go to market approaches.

Moving on to earnings results.

We were generally pleased with the quarter reporting non-GAAP operating earnings per share of 99 cents. Excluding notable items.

Driven by strong yields on our investment portfolio.

In line expenses and a continued decline in share count driven by our capital return execution.

These are solid results in a quarter, where there was near zero benefit from equity market index credits, which implicitly reflects a 29 per share headwind versus a normal equity index credit quarter.

Now I'll turn the call over to Axel to get into the earning detailed Axel.

Thank you.

Let me start by extending my appreciation to all of you attending this call.

For the third quarter of 2022, we reported non-GAAP operating income of $114 million or $1 29 per diluted common share compared to non-GAAP operating income of $79 5 million.

Or <unk> 85 per diluted common share for the third quarter of 2021.

Excluding actuarial assumption updates, which was the first notable item this year and the single notable item for this quarter operating income for the third quarter of 2022 was $87 4 million or 99 per diluted common share compared with $136 3 million or $1 46.

<unk> per diluted common share in the year ago quarter.

Third quarter 2022, non-GAAP operating results were positively affected by $26 6 million or <unk> 30 per diluted common share from updates to actuarial assumptions.

Third quarter 2021, non-GAAP operating results were negatively affected by $56 8 million or <unk> 61 per diluted common share from such updates.

On a pre tax basis, the effect of the third quarter 2022 updates before the change to earnings better on our resulting from these updates increased amortization of deferred policy acquisition costs and deferred sales inducements by $19 million and decreased the liability for future payments under lifetime income benefit riders by 50.

$3 million for a total increase in pre tax operating income of $34 million.

The external adjustments to amortization of deferred policy acquisition costs and deferred sales inducements as well as a decrease in the liability for future payments under lifetime income benefit riders, primarily reflected changes in our assumptions regarding future interest margins lapsed Asian mortality and lifetime income.

Benefit provider utilization.

We have updated our assumption for aggregate spread at American equity life to remain steady at two 6% through the HCA reversion period with a near term discount rate through June 2024 of one 7% eventually grading to two 4% by the end of.

The eight year reversion period.

Last year, we set our assumptions for aggregate spread at American equity life to increase from $2 two 5% in the fourth quarter of 2021% to 240% by year end 2022, and then to move to two 5% at the end of the eight year reversion period.

With a near term discount rate through 2023 of 155% and eventually grating to 210% by the end of the each year reversion period.

The effect of this change was to decrease DAC and DSI amortization by $106 million pretax and to decrease the liability for guaranteed lifetime income benefit payments by $209 million pre tax.

Returning to our third quarter 2022 actual revisions in response to recent experience. We made changes to lifetime income benefit rider utilization assumptions, which resulted in a decrease in DAC and DSI amortization of $60 million pretax while increasing the reserves for guaranteed lifetime income benefit payments.

By $118 million.

The final major change was to increase our lapse assumptions on non utilized guaranteed retirement income policies.

Reduced lapse assumptions on utilized guaranteed retirement income policies and generally increase partial withdrawal assumptions on the total book of business.

Resulting in an increase in the reserve for lifetime income benefit payments of $20 million.

And an increase in DAC and DSI amortization of $200 million.

The quarter included $11 million of revenues from reinsurance stemming from our Brookfield reinsurance relationships up from $9 million in the second quarter of this year.

These revenues included the expansion of the relationship to include sales of estate Shield and Eagle select income focus effective July one 2021.

Account value in notional value of in force subject to recurring fees seeded for these two products reflected sales from July one 2021 through June 32022 of approximately $260 million and $235 million respectively.

Average yield on invested assets was $4 four 8% in the third quarter of 2022 compared to 433% in the second quarter.

The increase was primarily attributable to a 15 basis point benefit from the increase in short term rates on our floating rate assets.

The average adjusted yield excluding non terminable prepayments was $4 four 5% in the third quarter of 2022 compared to $4 two 8% in the second quarter of 2022.

Partnerships and other mark to market assets, which are reported on a one quarter lag basis contributed $29 $8 million to investment income or 22 basis points to yield in excess of assumed rates of return used in our investment process.

We invested $1 5 billion at a yield of 642%, including $1 3 billion of privately sourced assets at an expected return of six 5% in the third quarter.

Our allocation to privately sourced assets was 18, 4% of invested assets as of quarter end compared to 16, 6% as of June 30.

For the month of October we invested $735 million at an average yield of six 8%, reflecting a very high allocation to private assets, primarily residential real estate and private credit.

As of September 30, the points in time yield on our investment portfolio was four 2% compared to 4.05% on June 30.

Reflecting the benefits from the increasing floating rate indices and the further increasing our allocation to privately sourced assets, partly offset by higher expected expenses as we build out our investment platform.

For the fourth quarter, we expect an additional benefit of roughly 15 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 175% up from 169% in the second quarter.

The cost of money in the third quarter reflected a near zero hedge gain compared to two basis points of hedging gains in the second quarter.

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

And higher renewal rates on annual resets traditional fixed annuities.

Cost of options in the third quarter of 2022 averaged 158% compared to $1, 61% in the second quarter.

Investment spread in the third quarter was $2, 73% compared to $2, 64% in the previous quarter.

Excluding prepayment income and hedging gains adjusted spread was $2 seven to seven zero percent in the third quarter compared to $2 five 7% in the prior quarter, reflecting strong investment returns offset modestly by the increase in cost of money.

By delivering on our investment and returns that we expected to offset increased option costs.

Excluding the effects of assumption revisions.

Deferred acquisition costs, and deferred sales inducement amortization totaled $145 million compared.

Compared to $133 million in the second quarter.

Reflecting an $11 million increase in expected amortization following the assumption changes I detailed earlier and $8 million of additional expense due to actual higher surrenders than expected.

Third quarter amortization was $7 million greater than new modeled expectations, primarily due to higher interest margin lower than expected index credits and actual higher surrenders than expected offsetting thoughts by lowered and modeled option budget in crediting rates.

For the fourth quarter, our modeled expectation for DAC, and DSI amortization, either $138 million before adjustments associated with actual experience in the quarter based on enforced policies as of September 30th.

Excluding the effect of assumption revisions the liability for guaranteed lifetime income benefit payments increased $11 million this quarter.

Impaired to the second quarter, reflecting an $8 million increase in the expected increase in the reserve following the third quarter assumption changes.

An additional $10 million of expense associated with near Zero index credits relative to model, partially offset by a $10 million decline in expense associated with actual to expected LIBOR utilization labor utilization.

As well as other smaller variances.

The third quarter increase in the liability for guaranteed lifetime income payments was $37 million more than modeled due primarily to the near zero level of index credits, which increased the reserve by $23 million.

And small variances in labor utilization, which added $6 million to expense above expectations.

Labour experienced by election counts was actually better than expected in the quarter, but was more than offset by higher elections for younger attained ages and an increase in joint life labor elections, resulting in a higher present value of excess claims than modeled projections.

For the fourth quarter.

Our modeled expectation for the increase in the liability for guaranteed lifetime income benefit payments.

$72 million before adjustments associated with actual experience in the quarter based on enforced policies as of September 30.

Other operating costs and expenses were $59 6 million in the third quarter basically flat with the second quarter, we continue.

We expect other operating costs and expenses to be in the $240 million range for the full 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 September 30, and October 31, cash and equivalents at the holding company were $319 million and $310 million respectively.

We have a robust excess capital position at the life company and currently expect to take an ordinary dividend of approximately $300 million from the Iowa life company before year end 2022.

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

Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced we ask that you limit yourself to one question and one follow up then jump back in the queue. If you have additional questions. Please standby, while we compile the Q&A roster.

Our first question comes from John Barnidge from Piper Sandler. Please go ahead.

Thank you very much.

So the opportunity with the market highly competitive on the product side are there distribution expansion options that can serve could provide growth opportunities.

Hi, John Good morning, the short answer is most definitely.

And having been in this business for decades.

We see a lot of those around the corner and we will be doing things like that going forward.

And then my follow up question.

Can you talk about the Brookfield relationship.

Is there there seems to be maybe a changed view of AGL to point out by certain board members.

At least in some letters that have been filed thank you.

Now we have a very solid relationship with Brookfield, I don't know, what you're referring to but specifically.

They are appreciative.

The strategy supportive of the company and if you have any questions.

Direct you to them directly to ask those questions, but we are very happy about our relationship with Brookfield, including the reinsurance relationship and we saw that grow by $500 million this quarter.

Thanks, and best of luck.

Thank you one moment for our next question.

Our next question comes from Erik bass with Autonomous. Please go ahead.

Hi, Thank you.

First I was hoping you can provide an update on the fund raising process for third party sidecar capital given the level of sales you are generating do you feel like you have enough new business to contribute to a sidecar and still sustain the current level of spread earnings.

Hi, Yeah.

The.

The thing about site currency could you just say the question again, there once again.

Sure was this I guess first hoping for an update on just the fund raising process for.

For a side car, which I think you had indicated last call was sort of on track for 2023, and then just thinking about what sales levels being lower how much you could allocate.

Third party capital and still kind of sustained enough new business volume to.

To maintain your own kind of level of spread earnings.

Sure so.

The way, we sourcing assets as I mentioned, right now with rates going higher and Thats being able to source assets added in the 6% area for yields we will be able to hit our double digit IRR goals, which then support site guard the way I'm thinking about this and the team are thinking about this is probably the one side car every year.

And we will do one next year asset yield is what we've ring fenced for a sidecar we have a decent block in excess of $3 billion and it'll grow around $1 billion a year and so assets you will go into that first site, which we do in 2023 hopefully in the first half of 2023, but timing of deal execution do we determined.

And that's got the economics, where if you think of it will probably end this year with around $9 billion of reinsured liabilities. We've done one reinsurance deal in the fourth quarter, we're not going to talk about it today, we will disclose it in the Q and talk about it from an earnings point of view.

In the fourth quarter call.

But we're around $4 9 billion right now and reinsured liability that will grow to around $9 billion at the end of the year. We do the sidecar next year. So there's plenty of origination with our current sales volume weakened due to site cars. So we are leasing for 2025 sidecar, we're going to need to grow sales from current levels and actually one add to that.

These agreements with you in that process.

Okay. Thank you.

And then realizing it sounds like we may have more information on some of this thing we do at the moment.

But.

It looks like Pam Marie.

Asking for you to tender its shares I guess is there a contractual agreement with Banbury Ware.

They could require you to tender for all or a portion of its equity stake in ABL.

No not at this point in time.

Okay. Thank you.

Thank you your next question.

I'll do a follow on to Eric's question is to answer the question.

In the case of <unk> I would refer you back to our equity investment agreement with them in 2020.

In terms of the protections that are there.

And there was a five year standstill with respect to.

Any overtures towards the firm.

There are a very important partner for the firm.

We are committed to our reinsurance partnership and ongoing contractual obligations.

In terms of Eric your question.

There are two tranches of boundaries ownership in us.

And.

The first tranche they can sell at the end of November this year, but the second tranche they cannot sell for two years since they entered into it which was in January of 2022. Therefore, the end of 2024.

Whatever you guys are referring to once I have more I could comment I don't know what youre, referring to but I want you to have those facts because those are factual.

Great. Thank you one moment for our next question.

Our next question comes from Tom Gallagher with Evercore. Please go ahead.

Good morning.

Just a quick follow up on that so the November tranche that Bam or you can sell is at nine 9% of the shares I just wanted to make sure I'm thinking about that correctly.

That's correct.

That is correct I think it was exactly nine 7 million shares to be exact as well.

They cannot sell the other six seven.

7 million shares for <unk>, 2016, and change and we can get you the numbers the publicly available so they would not be able to sell.

If they are wondering if we're having a hypothetical conversation here so but to answer your question yet.

Okay. Thanks, and then.

Question on if I look at the flows this quarter. They ran you had net outflows of around $4 million to $500 million.

And not I heard your point.

Point, you made on pricing change in November .

Should we expect that to shrink the level of outflows, maybe even inflect.

Close after you give effect to the.

Change in product pricing do you think this quarter.

Just trying to get a sense for where you think the trend is likely to go here because I know that the market has gotten more competitive.

Clearly I'll start I'll, let axel jump in here.

The market is definitely got competitive we will look for as I said in my comments, you know rates to be sustained in this area. What if rates went all the way down we've seen this market Yo Yo many many times, we're feeling good about the origination we have there so.

We're going to be top tier top two tier in rates now.

And people come to us because we don't embarrass them, we've got J D powers at number one we've got distribution that is loyal to us.

This distribution will continue to be a struggle because it's highly commoditized and rate based and if youre not the top two or three you don't get much. If you were to rank late 15 companies will be in top five with what we're doing and distribution that wants to be with us there'll be with us I'll give you an analogy people will laugh at this analogy, but we use it internally.

If you were selling ice cream.

At <unk> like ice cream.

And you looked at like Vanilla chocolate and Strawberry on Neapolitan a gold fields like Nepal Thats on a combination of those three now we have the shield series vanilla or chocolate strawberry, but we're not a flavor of the month company.

So we have.

The level of sales this year, which is the bedrock of sales.

And then we're going to grow from there into that four 5 billion area and hopefully more overtime.

Gotcha.

That's helpful.

I guess my final question is just on <unk>.

To the extent that you continue to run with net outflows can you talk about.

Your sources of liquidity to meet those net outflows.

Your cash balances have changed or if you have other.

Parts of your general account that will not be trading at material losses that you'll be able to fund those outflows with.

Hi, This is Jim <unk>.

We do our asset allocation and we do our MLM.

I was looking at.

Great and assumptions and in this case looking at update assumptions for liabilities.

And so that's factored into everything that we do when we think about liquidity, it's a global view of liquidity.

And so while we're buying private assets that in lot of cases are less liquidity. We certainly are very conscious of our overall overall liquidity and we have multiple sources of liquidity.

Within the portfolio and beyond beyond the traditional securities that we hold.

With our membership in the <unk> for example, where we have significant access to a significant.

The amount of funding from from them.

Okay. Thanks.

Thank you one moment for our next question.

Our next question comes from Ryan Krueger with <unk>. Please go ahead.

Hi, Thanks, good morning.

I guess I had one more question on band Marina.

And a bit of an unusual situation but.

In the letter that they released publicly site.

Recent events that there has been a fundamental change in the strategic direction of the of the company and that change represents a material departure from the Aes pointed out strategy.

And then I guess I've heard that.

Suggest much of a change in your strategy.

I wanted to give you an opportunity to address back of it.

I guess I'm not I can't figure out what they might be referring to.

Hi, Ryan Good morning first of all thank you for summarizing.

What you guys know and I don't know so I appreciate that and I will respond to it now.

There is no fundamental change in ALC point in our strategy. Our strategy is about our flywheel. It's about the assets, we sourced through proprietary relationships with its Adam St. But its breakdown whether it's either.

What as part of continuing to execute that strategy and then we do reinsurance deal.

So I'm happy to inform you guys that as part of executing that strategy.

In.

September <unk> made an equity investment in a new asset manager founded and led by Josh Harris, The pharma co founder of Apollo Cal 'twenty six north.

<unk> hopes to source.

Future assets from this venture 26, north that is.

Got a lot of talent flocking to it a great pedigree in terms of Mr. Harris building businesses over time and being one of the foremost private equity investors and the generation.

So that is a.

Modest investment by Aes <unk>.

Similar to what we did with Brachium, we haven't done any I made the size yet therefore, frankly nothing to talk about but we are.

Going to evaluate.

Doing so miami's and growing that.

Hopefully over time.

<unk> interest in this entity will grow and therefore, our fee based earnings will grow. We think this is a we can build an asset manager from scratch ourselves partnering with Josh and his team at 26, North and talent there is.

A further validation of <unk> being the marquee insurance company understanding what <unk> is what <unk>.

Is and how we drive.

To point out.

In addition, after the quarter effective October one we closed the reinsurance deal.

With.

Our firm on our reinsurance company based out of Bermuda sponsored by.

26 Norton Mr. Harris.

Again, you may recall, we had explored a transaction called <unk> two years ago, and then we and then be abandoned those plans for capital release, we actually have executed. This is the fourth quarter transaction, we will disclose both of these items in the 10-Q. So you can read further about it I am doing. This example to that you have the information.

And there is really no financial impact on 2023 earnings from it, but we will free up capital in excess of $250 million.

And therefore.

Axles garments that we intend to take a $300 million.

Dividend later this year out of the life company reflects that we are now well on the path of having sustainable capital return through our two point strategy through generation of fee like earnings in the June $2 $50 million to $300 million a year its not about shrinking is up to <unk>.

<unk>. This is about growing this firm on this basis I cannot comment on Mr. Sharp letter because I havent frankly read it in its entirety and its context.

But I can definitely give you an update at the company and nothing has changed and I Hope you have the same view as we have on this transaction that this will help.

Preserve optionality and growth that was a mouthful so I'll stop.

No I appreciate that that's really helpful and that may explain.

Maybe what caused this.

Kent.

Can you give any perspective on is that an ongoing flow reinsurance deal that or.

It's just.

And in force block that you did.

We did an enforced block, which is like 2008, and 2010, FIA, which was $4 3 billion of GAAP reserves, we have a positive ceding commission on that group grew our.

Idaho, Abel, earning stream from there.

It's a very good trade for us it's a good trade for them.

It is at a lower cost of capital than ours. So we appreciate that it puts them into the business.

Again, exactly what we were looking to <unk>.

There is an option for AAM.

To do up to $525 million of Micah.

With them.

Fixed ceding commission that we've agreed to.

<unk>.

Again, it is an option and.

And we're not planning on any of it this year, but again opens up another pipe for us to originate and then reinsure and it has it has the protections of reinsurance structure that we like our regulator has seen us do before very similar to what we did frankly with Bam in.

But this is in Bermuda and we re.

Really like the Bermuda framework, we've got our own company. There we will do a sidecar most likely there and then you've got this company there so more in the 10-Q on the reinsurance structure at 75% funds withheld 25% co insurance so.

And that will be what the.

Mike go up to $5 $25 million will be it will be 100% ceded if we might go with that.

Thanks for that.

Thank you one moment for our next question.

Our next question comes from Dan Bergman with Jefferies. Please go ahead.

Alright, Thanks, Matt good morning.

I figured I'd start with something aside from Brookfield, So maybe just on surrenders and withdrawals and it looks like there is a little bit of a step up in the quarter relative to where that had been running.

Wanted to see if there's any more color you can give on.

What youre seeing there and whether you expect this to continue for example is this more just normal quarter quarterly volatility or maybe indicative of.

Some upward pressure on surrenders and the higher interest rate environment.

Yes, Thanks, Dan This is <unk>.

So we so if you look at our past past few quarters basically we saw about $1 billion of outflows every quarter.

Stepped up to $1 1 billion.

<unk> this quarter, so a little bit of a tick up if I look at that extra $100 million.

<unk>.

It's basically a mix of.

No fee labor.

Policies as well as some of the accumulation.

<unk>.

Kind of about evenly split.

I think it's too early to start drawing trends from there, but it's obviously something we are going to keep a close eye on and.

<unk>.

And be managing through but no.

No need for us at this point to be to be trending this.

Got it that's really helpful. Thanks, and then maybe just on.

The returns on partnerships and mark to market assets remain quite strong in the quarter. Despite the tough equity market backdrop, it sounded like residential real estate in the rental market are the big drivers of that strength, but just following up on your prepared remarks I wanted to see if there is a little more color you can give on what youre seeing and kind of the outlook going forward.

Mortgage rates spiking and talk of a potential recession next year.

How are you thinking about the risk of these investments turning on favorable as we move through 2023.

Sure. This is this is Jim again.

As we look at residential real estate divestments for example.

We think long term trends remain long term demand remains solid.

While there will certainly and there are certainly already has been some pricing.

Changes in the housing market, we've seen prices drop in select.

Most of the markets, but we're really more in some markets than others.

We still view, we still view that the long term value is there.

Think that they are they are good investments at the end of the day.

There is a lack of supply of housing stock in the U S.

For periods of time.

Certainly people we've seen some articles out there people are moving back in with their parents or moving in with roommates, but but over time. The number of household formations continues to grow and then I'll just.

Not growing.

Ben.

Demand will continue to.

Demand will continue to be there.

Certainly we won't see the types of peak.

Peak like a peak like we saw in the housing market earlier this year.

We don't expect it to return to anything like that.

But we expect we expect real estate to generate.

Very good long term returns.

Got it thanks, so much.

Thank you one moment for our next question.

Our next question comes from Pablo <unk> with Jpmorgan. Please go ahead.

Hi, Good morning first question I have is on buybacks.

Little bit lighter this quarter compared to the first half of this year and I believe.

Earlier in 2002, you had signaled that you intend to do about 700 million for the year right then numbers correct.

A pickup from what you did in the third quarter.

Am I thinking about the trajectory correctly.

Hi, Pablo this is XL.

Youre correct, we that we started the year with the target the target amount.

In terms of stock buyback.

We've been in the market all year, but at the same time, we've been opportunistic in terms of the trading levels relative to price points, where we're willing to buy and what volumes.

And so.

So I think we want to continue to do that so that we can not only return capital to shareholders, but doing.

Do it in such a way that so that's good for shareholders, so thinking about what.

What is the price.

Willing to buy.

So I think we'll continue to do that.

And it May mean that we it may mean that we continue to execute the buyback for this year into the early part of next year.

Understood and then the second question I had was about the.

Then you'd venture 26, Martha you talked about.

So I guess, just given that transaction. It seems like Youll have your free enough capital to cover at least another year of capital deployment, if I heard you correctly.

The question I had though was how much of the earnings that you are generating into the book now would you keep from that trade right.

And I guess longer term when do you expect to fund buybacks from ongoing earnings as opposed to more enforce our one off type deals. Thanks.

Can I start on the latter part of that question and.

Actually I think you hit it on the former part.

I think it's one very simple way to think about this is so we have.

Almost $5 billion right now, which is earning a 100 basis points of fees on it that's Green chart at the end of this quarter. So.

This isn't the Brookfield reinsurance that we've done.

And then there is 30 basis points of <unk> and then at the seed on that which comes in this over six to seven years.

So thats $50 million right there, okay and the last call I had said about getting at the end of this year getting to on a run rate of $100 million and growing from there No question. Eric asked me in the last call last earnings call.

And the way I get that is because when I looked at what we're getting right now in the seed we will get off the one we have out of this transaction, we will be well in excess of $100 million.

So how are we going to fight.

Buybacks on a sustained basis through not doing reinsurance deals that free up capital, which frankly is meant to invest back in growing and funding seaborne capital for high investment income on the spread business.

He is by getting a 100 basis points between <unk> fees.

And.

And our ceding Commission.

Every year going up by $3 5 billion on that number.

Alright.

But even if you get 100 basis points in gap on some of these deals like our sidecar deal what I expect us to get.

I'm not going to give away pricing, but to get multiples of that number as the upfront seed so more than half of our buyback will come from these capital of these ROE like liability ceding commissions and fees that we get and then from a spread earnings because we don't need more capital relative to gross spread.

<unk>.

Conversion ratio for traditional spread company. So we are not going to shrink ourselves to greatness. If I may use that term we are going to signing in 2024. After we do that we do offer psychiatry in 'twenty three just be able to fund it through spread spread earnings that we don't need for growth.

<unk>.

The fees that were coming off these balances that grow.

It's a mouthful so pablo does that help with regular to Axel.

Yes, it does.

Hi.

Okay, Yes.

<unk> on Watson on said, that's really the buildup of that sustainable capital return is building to fee related earnings over time like an onset through through the existing relationships. We have today plus adding <unk> in 2023, adding <unk> 2024, remembering that like an onset the cash convert.

<unk> ratio on those types of earnings is.

It really is greater than one right because of the the way the GAAP accounting works.

We have to amortize the cost of reinsurance over time and it effectively the cash earnings are in fact more than more than one time, one five sometimes too.

<unk> the.

The GAAP, earning signature of those deals so keeping.

Keeping layering on those transactions over time as well as the core spread earnings where the margin is expanding through the increasing increased allocation to private assets is is what gets us there.

Got it thank you.

Thank you I'm showing no further questions at this time I would now like to turn it back to Julian <unk> for closing remarks.

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

Thank you for your participation in today's conference. This concludes the program you may now disconnect.

[music].

Joining on today's call are not Bala, Chief Executive Officer, and axle 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.

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

We are now at Victoria anniversary of announcing the El to point on strategy.

Even in mature markets, we are witnessing the resilience in our business results due to the successful execution of the strategy.

Additionally, we are proud to share that at American equity life has been ranked as number one for customer satisfaction.

Annuity providers in the J D. Power's 2022 U S individual annuity study.

This is a demonstration of our focus on winning through a combination of product competitiveness.

We hold a focus.

Producer loyalty driven by our leading client service and value added marketing support provided to our distribution partners.

In the investments area as markets re price risk return attractiveness across asset classes, we continue to see unique opportunities in private assets.

In the quarter, we put an additional $1 $3 billion to work in private assets.

Bringing our total allocation to private assets to 18, 4% of the investment portfolio.

We put over $1 billion to work in the real estate sector, primarily in nonqualified mortgages.

Residential transition loans.

And single family real estate.

At an average expected return of close to 6%.

We remain constructive on rental housing and housing affordability continues to remain difficult.

Residential real estate loans are also attractive with improved underwriting and yields that are now in the upper 6% to 7% range.

But as you suspect the supply of residential mortgages has slowed considerably with higher rates as well as the decision to tighten underwriting standards.

We are seeing attractive risk adjusted yields in directly originated middle market credit throughout Adam St partnership.

And increased origination of directly sourced opportunistic specialty credit.

And real assets.

In essence, our sourcing of unique cash flowing and yield oriented private assets is gaining momentum.

Beyond our real estate investments.

Our focus in the next six to 12 months is going to be on executing internal securitization.

Our ratings efficient structuring of directly source assets in middle market credit speciality credit and cash flowing infrastructure equity.

Moving on capital return to shareholders remain robust given our strong capitalization position and having to actively reduce risk on a significant portion of the public fixed income structured assets portfolio prior to 2022.

We repurchased four 2 million shares in the third quarter for a total spend of $154 million.

And remain committed to our current capital return plans.

Total common stock repurchases through the first nine months of the year was $13 6 million shares.

On an average price of $38 37.

With this we have fully repurchased six 8 million shares issued to Brookfield.

On January 4th and Additionally, repurchased 263 million shares through the third quarter.

At the end of September we had $202 million of remaining share repurchase authorization.

In the go to market area.

We saw a decline in sales of fixed index annuities or 6% compared to the second quarter.

As we chose pricing discipline over chasing the market as interest rates fluctuated.

Our focus.

On growing income product sales.

Continues.

We are very pleased to see American equity life income shield sales rise, 20% from the second quarter and increased 28% versus the comparable period a year earlier.

Eagle life select income focused sales were flat sequentially.

In accumulation products in the third quarter, we continued to see competitors raise product rates with cost of money potentially well in excess of 4%.

Thereby already pricing in a sustained level of higher interest rates in the future.

This compared with us choosing to take a more measured approach to the trajectory of future tenure U S treasury rates.

Thereby using a lower option budget or cost of money to have resilient product profitability in case. The rise in interest rates is more fleeting and not sustained over the product lifecycle.

We saw total enterprise accumulation sales declined 21% compared to the second quarter driven by commoditize rate based competition in the S&P 500 based strategies.

The focus on sustained product profitability is a core tenant of our ABL to approach for a host of reasons.

First the basis of our go to market differentiation is a combination of product competitiveness customer service and the ease of doing business for the financial adviser with American equity.

Second being an at scale player with $52 billion of in force FIA as we are able to stay focused on product pricing discipline targeting double digit IRR ours to be able to convert those sales to Ottawa herbal.

<unk> in future reinsurance sidecar.

Given the recent trajectory of fed rate actions likely guidance on terminal rates and overall outlook for our sustained interest rate level of 4% or higher.

We expect that these rate actions will be reflected in December sales and to set the momentum for FIA sales going into 2023.

While also meeting our product pricing hurdles of double digit IRR that can then be converted to <unk> liabilities in reinsurance side guys overtime.

Additionally, we will likely enter the registered index annuity our railcar product market within the next 18 months.

We implemented a new policy administration system for new business.

And further upgrade our go to market approaches.

Yeah.

Moving onto earnings results.

We were generally pleased with the quarter reporting non-GAAP operating earnings per share of 99 cents. Excluding notable items.

Driven by strong yields on our investment portfolio.

In line expenses and a continued decline in share count driven by our capital return execution.

Now I'll turn the call over to Axel to get into the earning detailed actual thank.

Thank you.

Let me start by extending my appreciation to all of you attending this call.

For the third quarter of 2022, we reported non-GAAP operating income of $114 million or $1 29 per diluted common share compared to non-GAAP operating income of $79 5 million or <unk> 85 per diluted common share for the third quarter of 2021.

Compared with $136 3 million or $1 46 per diluted common share in the year ago quarter.

Third quarter 2022, non-GAAP operating results were positively affected by $26 6 million or <unk> 30 per diluted common share from updates to actuarial assumptions.

Third quarter 2021, non-GAAP operating results were negatively affected by $56 8 million or <unk> 61 per diluted common share from such updates.

On a pre tax basis, the effect of the third quarter 2022 updates before the change to earnings better on the resulting from these updates increased amortization of deferred policy acquisition costs and deferred sales inducements by $19 million and decreased the liability for future payments under lifetime income benefit riders by 53.

$3 million for a total increase in pre tax operating income of $34 million.

The external adjustments amortization of deferred policy acquisition costs and deferred sales inducements as well as a decrease in the liability for future payments under lifetime income benefit riders, primarily reflected changes in our assumptions regarding future interest margins lapsed Asian mortality and lifetime income.

<unk> fried or utilization.

<unk> reversion period.

With a near term discount rate through 2023 of 155% and eventually grating to two points one zero percent by the end of the H year reversion period.

The effect of this change was to decrease DAC and DSI amortization by $106 million pretax and to decrease the liability for guaranteed lifetime income benefit payments by $209 million pre tax.

By $118 million.

The final major change was to increase our lapse assumptions on non utilized guaranteed retirement income policies.

Reduced lapse assumptions on utilized guaranteed retirement income pretty CES in January increased partial withdrawal assumptions on the total book of business.

Resulting in an increase in the reserve for lifetime income benefit payments of $20 million.

And an increase in DAC and DSI amortization of $200 million.

The quarter included $11 million of revenues from reinsurance stemming from our Brookfield reinsurance relationship up from $9 million in the second quarter of this year.

These revenues included the expansion of the relationship to include sales of estate Shield and Eagle select income focus effective July one 2021.

Average yield on invested assets was $4 four 8% in the third quarter of 2022 compared to 433% in the second quarter.

The increase was primarily attributable to a 15 basis point benefit from the increase in short term rates on our floating rate assets.

The average adjusted yield excluding non tradable prepayments was $4 four 5% in the third quarter of 2022 compared to $4 two 8% in the second quarter of 2022.

We invested $1 $5 billion at a yield of 642%, including $1 3 billion of privately sourced assets at an expected return of six 5% in the third quarter.

Our allocation to privately sourced assets was 18, 4% of invested assets as of quarter end compared to 16, 6% as of June 30.

For the month of October we invested $735 million at an average yield of six 8%, reflecting a very high allocation to private assets, primarily residential real estate and private credit.

As of September 30, the points in time yield on our investment portfolio was four 2% compared to 405% on June 30.

Reflecting the benefits from the increasing floating rate indices and the further increasing our allocation to property sourced assets, partly offset by higher expected expenses as we build out our investment platform.

For the fourth quarter, we expect an additional benefit of roughly 15 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 175% up from $1 six 9% in the second quarter.

The cost of money in the third quarter reflected a near zero hedge gain compared to two basis points of hedging gains in the second quarter.

And higher renewal rates on annual resets traditional fixed annuities.

The cost of options in the third quarter of 2022 averaged $1 five 8% compared to $1, 61% in the second quarter.

Investment spread in the third quarter was 273% compared to $2, 64% in the previous quarter.

Excluding prepayment income and hedging gains adjusted spread was $2 seven $2 seven zero percent in the third quarter compared to $2 five 7% in the prior quarter, reflecting strong investment returns offset modestly by the increase in cost of money.

By delivering on our investment returns that we expected to offset increased option costs.

Excluding the effects of assumption revisions.

Deferred acquisition costs, and deferred sales inducement amortization totaled $145 million compared.

Compared to $133 million in the second quarter.

Reflecting an $11 million increase in expected amortization following the assumption changes I detailed earlier and $8 million of additional expense due to actual higher surrenders than expected.

For the fourth quarter, our modeled expectation for DAC and DSI amortization is $138 million before adjustments associated with actual experience in the quarter based on enforced policies as of September 30th.

Excluding the effect of assumption revisions the liability for guaranteed lifetime income benefit payments increased $11 million this quarter.

Impaired to the second quarter, reflecting an $8 million increase in the expected increase in the reserve following the third quarter assumption changes.

And small variances in labor utilization, which added $6 million to expense above expectations.

Libra experienced by election counts was actually better than expected in the quarter, but was more than offset by higher elections for younger attained ages and an increase in joint life labor elections, resulting in a higher present value of excess claims then model to projections.

For the fourth quarter.

Modeled expectation for the increase in the liability for guaranteed lifetime income benefit payments is $72 million before adjustments associated with actual experience in the quarter based on enforced policies as of September 30.

Other operating costs and expenses were $59 6 million in the third quarter basically flat with the second quarter.

We continue to expect other operating costs and expenses to be in the $240 million range for the full 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 September 30, and October 31, cash and equivalents at the holding company were $319 million and $310 million respectively.

We have a robust excess capital position at the life company and currently expect to take an ordinary dividend of approximately $300 million from the Iowa life company before year end 2022.

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

Our first question comes from John Barnidge from Piper Sandler. Please go ahead.

Thank you very much.

So the opportunity with the market highly competitive on the product side are there distribution expansion options that can serve to provide growth opportunities.

Hi, John Good morning, the short answer is most definitely.

And having been in this business for decades.

We see a lot of those around the corner and we will be doing things like that going forward.

And then my follow up question.

Can you talk about the Brookfield relationship.

Is there there seems to be maybe a changed view of AGL to point out by certain board members.

At least in some letters that have been filed thank you.

Now we have a very solid relationship with Brookfield, I don't know, what you're referring to but specifically.

They are appreciative of.

If the strategy is supportive of the company and if you have any questions.

Thank you to them directly to ask those questions, but we are very happy about our relationship with Brookfield, including the reinsurance relationship and we saw that grow by $500 million this quarter.

Thanks, and best of luck.

Thank you one moment for our next question.

Our next question comes from Erik bass with Autonomous. Please go ahead.

Hi, Thank you.

First I was hoping you could provide an update on the fund raising process for third party sidecar capital given the level of sales you are generating do you feel like you have enough new business to contribute to a sidecar and still sustain the current level of spread earnings.

Hi, Yeah.

The.

The thing about sidecar and say if we just had a question again there once again.

So or was this I guess first hoping for an update on just the fund raising process for.

First sidecar, which I think you had indicated last call was sort of on track for 2023, and then just thinking about what sales levels being lower how much you could allocate.

Third party capital and still kind of sustained enough new business volume to.

To maintain your own kind of level of spread earnings.

Sure so.

The way, we are sourcing assets as I mentioned, right now with rates going higher and Thats being able to source assets added in the 6% area for yields we will be able to hit our double digit IRR goals, which then support site guard the way I'm thinking about this and the team are thinking about that says, we'll probably do one sidecar every year.

In the fourth quarter call.

We're around $4 9 billion right now and reinsured liability that will grow to around $9 billion at the end of the year. We do the sidecar next year. So there's plenty of origination with our current sales volume weakened due to site cars. So we are leasing for 2025 sidecar, we're going to need to grow sales from current levels and actually want to add to that.

These agreements with you and that's been through a process.

Okay. Thank you and then realizing it sounds like we may have more information on some of these things you do at the moment.

But.

It looks like Bam Murray is.

Asking for you to tender its shares I guess is there a contractual agreement with Banbury Ware.

They could require you to tender for all or a portion of its equity stake in <unk>.

No not at this point in time.

Okay. Thank you.

Thank you and our.

Next question.

A follow on to Eric's question just to answer the question.

In the case of <unk> I would refer you back to our equity investment agreement with them in 2020 in terms of the protections that are there.

And there was a five year standstill with respect to.

Any overtures towards the firm.

There are a very important partner for the firm.

We are committed to our reinsurance partnership and ongoing contractual obligations.

In terms of Eric your question.

We have two tranches of <unk> ownership in us.

And.

The first tranche they can sell at the end of November this year, but the second tranche they cannot sell for two years since they entered into it which was in January of 2020 do that for the end of 2024.

Whenever you guys are referring to once I have more I could comment I don't know what youre, referring to but I wanted you to have those facts because those are factual.

Great. Thank you one moment for our next question.

Our next question comes from Tom Gallagher with Evercore. Please go ahead.

Good morning.

Just a quick follow up on that so the November tranche.

Bam or you can sell is at nine 9% of the shares I just wanted to make sure I'm thinking about that correctly.

That's correct.

That is correct I think it was exactly nine 7 million shares to be exact as well.

They cannot sell the other six seven.

7 million shares for they totaled 16 in change and we can get you the numbers they publicly available so they would not be able to sell.

If they're wondering if having a hypothetical conversation here so but to answer your question yet.

Okay. Thanks, and then.

Question on if I look at the flows this quarter. They ran you had net outflows of around 4% to $500 million.

And non I heard your point.

Point, you made on pricing change in November .

Should we expect that to shrink the level of outflows, maybe even inflect.

Flows after you give effect to the.

Change in product pricing do you think this quarter.

Just trying to get a sense for where you think the trend is likely to go here because I know that the market has gotten more competitive.

Clearly I'll start I'll, let axel jump in here.

The market is definitely got competitive we will look for as I said in my comments in our rates to be sustained in this area. What if rates went all the way down we've seen this market yoyo. Many many times, we're feeling good about the origination we have there so.

We're going to be top tier top two tier in rates now.

People come to us because we don't embarrass them, we've got J D powers at number one we've got distribution that is loyal to us.

If you were selling ice cream.

At <unk> like ice cream.

And you looked at like Vanilla chocolate and strawberry on the peloton, our gold fields like Nepal Thats on a combination of those three now we have this shield series vanilla chocolate strawberry, but we're not a flavor of the month company.

So we have.

Our level of sales this year, which I think is at the bedrock of sales and then we're going to grow from there into that four 5 billion area and hopefully more overtime.

Got you that's.

That's helpful. The I guess my final question is just on Lamb.

To the extent that you continue to run with net outflows can you talk about.

Your sources of liquidity to meet those net outflows your how your cash balances have changed or if you have other parts of your general account that will not be trading at material losses that you'd be able to fund those outflows with.

Hi, This is Jim Hammer line is when we do our asset allocation and we do our MLM, we're always looking at.

Updating assumptions.

In this case looking at updated assumptions for liabilities.

And so that's factored into everything that we do when we think about liquidity, it's a global view of liquidity.

And so while we're buying private assets that in lot of cases have less liquidity. We certainly are very conscious of our overall overall liquidity and we have multiple sources of liquidity.

Within the portfolio and beyond beyond the traditional securities that we hold.

With our membership in the <unk> for example, where we have significant access to a significant.

Amount of funding from from them.

Okay. Thanks.

Thank you one moment for our next question.

Our next question comes from Ryan Krueger with <unk>. Please go ahead.

Hi, Thanks, good morning.

I guess I had one more question on Banbury in Ireland and a bit of.

The unusual situation, but.

In the letter that they released publicly.

Right.

Recent events that there has been a fundamental change in the strategic direction of the company and that change represents a material departure from Aes pointed out strategy nothing I guess I've heard that some.

Much of a change in your strategy I guess I just wanted to give you an opportunity to address back of it I.

I guess I'm not I can't figure out what they might be referring to.

Hi, Ryan Good morning first of all thank you for summarizing.

What you guys know and I don't know so I appreciate that and I'll respond to it now.

What as part of continuing to execute that strategy and then we do reinsurance deal.

So I'm happy to inform you guys that as part of executing that strategy.

In.

September <unk> made an equity investment in a new asset manager founded and led by Josh Harris, the Pharmacopeia under a Apollo called 26 North.

<unk> hopes to source.

Future assets from this venture 26, north that is.

Got a lot of talent flocking to it a great pedigree in terms of Mr. Harris building businesses over time and being one of the foremost private equity investors in a generation.

So that is a.

Modest investment by Aes <unk>.

Similar to what we did with <unk>, we haven't done any IME the size, yet therefore, frankly nothing to talk about but we are.

Going to evaluate.

Doing some <unk> and growing that.

Hopefully over time.

A further validation of <unk> being the Mark key insurance company understanding what <unk> is what <unk>.

Is and how we drive.

To point out.

In addition at <unk>.

After the quarter effective October one we closed the reinsurance deal with.

Our firm on our reinsurance company based out of Bermuda sponsored by.

26 Norton Mr. Harris.

You may recall, we had explored a transaction called Verde again, two years ago, and then we and then we abandoned those plans for capital release, we actually have executed. This is the fourth quarter transaction, we will disclose both of these items in the 10-Q. So you can read further about it I'm doing. This example to that you have the information.

And there is really no financial impact on 2023 earnings from it, but we will free up capital in excess of $250 million.

And therefore.

<unk> comments that we intend to take a $300 million.

Dividend later this year out of the life company reflects that we are now well on the path of having sustainable capital return through our two point on strategy.

<unk> generation of fee like earnings in the June of $2 $50 million to $300 million a year its not about shrinking to greatness. This is about growing this firm on this basis I cannot comment on Mr. <unk> letter, because I Havent frankly read it in its entirety and its context.

But I can definitely give you an update of the company and nothing has changed and I Hope you have the same view as we have on this transaction that this will help.

Preserve optionality and growth that was a mouthful so I'll stop.

No I appreciate that that's really helpful that may explain.

Maybe what caused this.

Ken.

Can you give any perspective on that is this an ongoing flow reinsurance deal that or.

It's just.

And in force block that you did.

We did an enforced block, which is like 2008, and 2010 and Fi, which was $4 3 billion of GAAP reserves, we have a positive ceding commission on that so it will grow our.

Idaho, Abel, earning stream from there.

It's a very good trade for us it's a good trade for them.

It is at a lower cost of capital than ours. So we appreciate that it puts them into the business.

Again, exactly what we were looking at with <unk>.

There is an option for AAM.

To do up to $525 million of Micah.

With them.

Fixed ceding commission that we've agreed to.

Again, it's an option.

And we're not planning on any of it this year, but again opens up another bite for us to originate and then reinsure and it has it has the protections of reinsurance structure that we like our regulator has seen us do before very similar to what we did frankly with Bam in.

But this is in Bermuda, and we really like the Bermuda framework, we've got our own company. There we will do a sidecar most likely there and then you've got this company back so more in the 10-Q on the reinsurance structure at 75% funds withheld 25% co insurance so.

And that'll be what.

Mike go up to $525 million will be it will be 100% ceded if we do go with that.

Thanks for that.

Thank you one moment for our next question.

Our next question comes from Dan Bergman with Jefferies. Please go ahead.

Thanks, Good morning.

I'd start with something aside from Brookfield, So maybe just on surrenders and withdrawals and it looks like there is a little bit of a step up in the quarter relative to where that had been running so I wanted to see if there's any more color you can give on.

What youre seeing there and whether you would expect US to continue for example is this more just normal quarterly volatility or maybe indicative of.

Some upward pressure on surrenders from the higher interest rate environment.

Yes, Thanks, Dan This is <unk>.

So we so if you look at our past past few quarters basically we saw about $1 billion of outflows every quarter.

Stepped up to $1 1 billion.

<unk> this quarter, so a little bit of a tick up if I look at that extra $100 million.

<unk>.

It's basically a mix of.

No fee labor.

Policies as well as some of the accumulation.

<unk>.

Kind of are about evenly split.

I think it's too early to start drawing trends from there, but it's obviously something we were going to keep a close eye on and.

<unk>.

And be managing through but no no need for us at this point to be to be trending this.

Got it that's really helpful. Thanks, and then maybe just on.

The returns on partnerships and mark to market assets remain quite strong in the quarter. Despite the tough equity market backdrop, it sounded like residential real estate in the rental market.

The big drivers of that strength, but just following up on your prepared remarks I wanted to see if there is a little more color you can give on what youre seeing and kind of the outlook going forward I mean with mortgage rates spiking and talk about potential recession next year.

How are you thinking about the risk of these investments turning unfavorable as we move through 2023.

Sure. This is this is Jim again.

As we look at residential real estate divestments for example.

We think long term trends remain long term demand remains solid.

While there will certainly and there are certainly already has been some pricing.

Changes in the housing market, we've seen prices drop in select.

Most of the markets, but we're really more in some markets than others.

We still view, we still view that the long term value is there.

Think that they are they are good investments at the end of the day.

There is a lack of supply of housing stock in the U S.

For periods of time.

Certainly people we've seen some articles out there people are moving back in with their parents or moving in with roommates, but but over time. The number of household formation continues to grow and then I'll just not growing with it.

Ben <unk>.

Demand will continue to do.

Demand will continue to be there.

Certainly we won't see the types of peak.

Peak like a peak like we saw in the housing market earlier this year.

We don't expect it to return to anything like that.

But we expect we expect real estate to generate.

Very good long term returns.

Got it thanks, so much.

Thank you one moment for our next question.

Our next question comes from Pablo <unk> with JP Morgan. Please go ahead.

Hi, Good morning first question I have is on buybacks.

Little bit lighter this quarter compared to the first half of this year and I believe.

Earlier in 2002, you had signaled that you intended to about 700 million from the year right then that number is correct.

A pickup from what you did in the third quarter.

Am I thinking about the trajectory correctly.

Hi, Pablo this is <unk>.

Youre correct, we that we started the year with the target the target amount.

Look in terms of stock buyback.

We've been in the market all year, but at the same time, we've been opportunistic in terms of the trading levels relative to price points, where we're willing to buy at what volumes.

And so.

So I think we want to continue to do that so that we can not only returned capital to shareholders, but doing.

Do it in such a way that so that's good for shareholders, so thinking about what.

What is the price that we're willing to buy.

So I think we'll continue to do that.

And it May mean that we may mean that we continue to execute the buyback for this year into the early part of.

Next year.

Understood.

The second question I had was about the.

Then you'd venture 26, North you talked about.

So.

I guess, just given that transaction it seems like you'll have you'll free enough capital to cover at least another year of capital deployment, if I heard you correctly.

The question I had though was how much of the earnings that you are generating into the book now would you keep from the trade right.

And I guess longer term when do you expect to fund buybacks from ongoing earnings as opposed to more enforce our one off type deals.

Can I start on the latter part of that question and.

Actually I think you hit it on the former part.

I think it's one very simple way to think about this is so we have.

Almost $5 billion right now, which is earning a 100 basis points of fees on it that's Green chart at the end of this quarter. So.

This isn't the Brookfield reinsurance that we've done.

And then there is 30 basis points of <unk> and then the seed on that which comes in this over six to seven years.

The way I get there is because and I looked at what we're getting right now in the seed will get off the one we have out of this transaction will be well in excess of $100 million.

So how are we going to find.

Buybacks on a sustained basis to not doing reinsurance deals that free up capital, which frankly is meant to invest back in growing and funding Steve on capital for high investment income on the spread business.

He is by getting a 100 basis points between <unk> fees.

And.

And our ceding Commission.

Every year going up by $345 billion in that number.

Alright.

But even if you get 100 basis points in gap on some of these deals like our sites are doing what I expect us to get I'm, not going to give away pricing, but to get multiples of that number as the upfront seat so more than half of our buyback will come from these capital of these ROE like liability ceding commissions in A&M fees.

We get and then from a spread earnings because we don't need more capital relative to gross spread earnings.

Conversion ratio for traditional spread company.

So we are not going to shrink ourselves to greatness. If I may use that term we are going to signing in 2024. After we do that we do offer a psychiatry in 'twenty three just to be able to fund it through spread spread earnings that we don't need for growth.

And.

The fees that were coming off these balances that grow.

That's a mouthful so pablo does that help the fragrance to OXXO.

Yes, it does.

Okay, Yes.

Building on Watson said, that's really the buildup of that sustainable capital return is building to fee related earnings over time, and I can answer it through through the existing relationships. We have to date plus adding <unk> in 2023, adding <unk> in 2024, remembering that like an onset.

The cash conversion ratio on those types of earnings is.

He's really is greater than one right because of the the way the GAAP accounting works.

We have to amortize the cost of reinsurance over time and it effectively the cash earnings are in fact more than more than one time, one five sometimes too.

<unk>.

The GAAP, earning signature of those deals so keeping.

Keeping layering on those transactions over time as well as the core spread earnings where the margin is expanding through the increasing increased allocation to private assets is what gets us there.

Got it thank you.

Thank you I'm showing no further questions at this time I would now like to turn it back to Julie <unk> for closing remarks.

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

Thank you for your participation in today's conference. This concludes the program you may now disconnect.

Q3 2022 American Equity Investment Life Holding Co Earnings Call

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