Q1 2023 American Equity Investment Life Holding Company Earnings Call
Okay.
Welcome to American equity investment life, holding company's first quarter 2023 conference call.
At this time for opening.
Remarks, and introductions I would like to turn the call over to Julie high demand.
Neither of the Investor Relations. Please go ahead.
Good morning, and welcome to American equity investment life, holding company's conference call to discuss first quarter 2023 earnings.
Our earnings release and financial supplement can be found on our website at www Dot American cash equity dotcom non.
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 portions of our website.
Presenting on today's call are not Bala Chief Executive Officer, Jim Hamilton, Chief Investment Officer, and axle Andre Chief Financial Officer.
As a reminder, our financial results reflect the adoption of accounting standard update 2018 dash one two more commonly known as long duration targeted improvements or L. D. T. I long duration targeted improvement accounting guidance was adopted at the beginning of the year and prior year results have been adjusted accordingly.
Some of our comments will contain forward looking statements, which you 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 our not Bala.
Thank you Julie good morning, and thank you all for your interest in American equity.
Positive changes in the way we go to market had begun to bear fruit.
In the first quarter of 2023, we had total sales of $1.4 billion driven by a 23% sequential quarter increase in fixed indexed annuity sales to $964 million.
At American equity life.
If I E sales increased 16% from the fourth quarter of 2022.
With solid gains in the sales of both income and accumulation products.
Eagle life sales increased 57% from the fourth quarter.
And 80% year over year.
Periods of sustained capital markets uncertainty artic tailwind for our go to market strategies as lifetime income.
And principal protected accumulation products become more appealing for advisers and agents to position with that client.
In particular the <unk>.
Income story, we've been telling over the past two years at both American equity life and Eagle life resonate at this point in the economic cycle.
In turn this supports our reinsurance strategy.
We had total income product sales of $528 million.
Up 12% from the fourth quarter of 2022.
50% five zero year over year.
Approximately 75% of which was reinsured.
At American equity life fields of income products were $427 million up 12% from the fourth quarter of 2022.
And 37% year over year.
Eagle life sold $100 million of select income focus.
Quarterly record for us in the bank and broker dealer channels.
Backed by our new flow reinsurance agreement with $26 three.
Which became effective February eight must be a fixed rate annuity sales totaled $404 million between American equity life and Eagle life.
In the quarter.
$228 million of these sales to $26 three.
While we exceeded 100% of multiyear fixed rate annuity sales to $26 three.
Up to $525 million annually, we do receive some fee income on the current value ceded but more importantly, it allows us to gain mindshare in the bank channel that can translate into greater FIA sales.
For 2023, we expect to meet or exceed our stated sales goal of $4 billion in sales.
Writing a meaningful amount of fixed rate annuities at attractive cost of funds in this market.
I'm pleased to share through May 5th this quarter.
Total enterprise FIA sales.
Approximately $600 million.
In investment management we.
We deployed another $1 $3 billion in private assets at an expected return of 789%.
Our total allocation of private assets to 24, 2%.
222% at the end of the year and 15, 5% at March 31 2022.
Across sectors.
We remain deliberate.
Focusing on underlying assets with resilient cash flows.
Even in a down cycle, where the majority of return.
Is delivered by underlying operating performance of the asset and not its terminal value.
Additionally, we see called private assets, where there is an inherent advantage for an insurance balance sheet to own the assets.
Competition with asset managers that used capital structures for private assets that rely on low cost leverage to justify buying lower yielding unlevered assets.
And on me assume multiple expansion on exit.
In the current market given the absence of low cost public financing securitization for managers Reits and private asset companies to fund real assets.
American equity has an asset sourcing advantage.
That is significant tailwind that allow us to be even more selective in making our risk selection underwriting decisions.
Okay.
In the first quarter, we emphasized residential mortgage loans and U S middle market corporate loans and put significant dollars to work in infrastructure debt.
I'll, let Jim cover more specific more specifics about the investment portfolio in just a few minutes.
In our capital reinsurance pillar.
Fee generating reinsured balances increased to $10.2 billion from $9 6 billion.
Driven by Florida reinsurance on 634 $10 of account values exceeding targets, we outlined when we embarked on a two point or at the end of 2020.
Okay.
During the quarter, we executed the repurchase of $7 3 million common shares for $253 million, which includes $160 million off the $200 million accelerated stock repurchase program or ASR that we announced on March 20th.
We expect to complete the ASR. This summer to be followed by the return of an additional $87 million to shareholders through share repurchases and common stock dividends by yearend effectively completing.
Ah promised capital return for both 2022 and 2023.
With this we will have repurchased $14 75 million shares or 16% of our common equity share count since January 1st 2022.
Including common stock dividends paid in the fourth quarter of 2021, and 2022, we will have returned $749 million or three quarters of a $1 billion to shareholders in excessive dilution from Brookfield equity tranche two offerings.
That represents 27, 4% of our market capitalization as of September 32021.
Before I turn it over to Jim.
I'd like to say, how pleased I am with the quarter's results.
We reported operating earnings per share of $1 47.
<unk> per share, including one notable item of 11, despite the negative true up on our tax rate and some quarterly volatility and the returns on a mark to market investments.
We increased investments spread by 12 basis points.
267% up from two point.
Five 4% in the fourth quarter of last year, demonstrating that <unk> to a point or can deliver.
What our investment returns for an insurance balance sheet.
I'll now turn it over to Jim talk about the investment portfolio results and resilience Jim.
Thanks.
Within investments, we continue to successfully execute the transformation of the portfolio that we started almost three years ago.
The repricing in public markets over the past year has given us the opportunity to not only continue the private asset deployment strategy. We communicated when we began but also deploy money into core public assets with solid credit profiles attractive returns and good liquidity dipped.
Deployment into private assets remains the focus though with just over 60% of cash deployed going into private assets for the first quarter.
Markets have been volatile with new potential risks emerging but the strategy, we're executing benefits from opportunistic investing at given points in time and is rooted in the long term fundamental value.
The market today offers a wide range of opportunities that fit our risk return criteria meet the long term objectives set out as part of the company's strategy and support the sales of our suite of annuity products.
I'll take you through some of the key highlights and particularly cover some of the key market sectors that have been receiving a lot of attention recently.
Now before diving into our update on our portfolio performance details.
I'd like to mention that our recent portfolio stress testing and updated for the current market outlook produces results that are similar to those we presented in our December seven Investor Symposium.
We believe the disciplined underwriting and our private asset portfolio, we have built over the past two and a half years will help limit downside performance in a recessionary environment.
For example, our focus on pockets of residential real estate that are benefiting from significant housing supply shortages should help mitigate pressure from higher mortgage rates on this portfolio.
Similarly, we expect rental income to remain resilient, while it may not increase at historical rates market expectations for the geographies in which we hold real estate are for continued growth in rental income.
Our more recent vintages of private corporate credit are all post COVID-19 with robust debt service coverage ratios, even at current sulfur rates with over 50% equity collateral underneath them.
The relative size of the legacy <unk>, one all public structured assets portfolio to our balance sheet has been significantly reduced compared to three years ago.
As we sold close to $6 billion of core fixed bonds just over the past five quarters as part of continued repositioning of the portfolio into higher risk adjusted yields.
This proactive risk reduction of the portfolio resulted in less than a 1% realized loss more than offset by higher investment income on the redeployed assets.
This investment portfolio resilience speaks to the credit focus we maintain in our investment underwriting as we continue to execute the transformation of the portfolio.
Now some of the details.
First results.
In the quarter, we made total investments of $2 $1 billion at an expected return of seven 9%, including $1.26 billion of privately sourced assets and unexpected return of 789% as well as $805 million of core public assets at expected returns of 6.09%.
This brings our allocation is not mentioned to private assets to 24, 2% compared to 22% at the end of December and 15, 5% as of March 31 of 2022.
New investments were sourced across sectors, including $500 million in residential real estate and an expected return of six 9%.
$187 million in the infrastructure sector at unexpected return of 775% as well as investments in middle market credit commercial real estate and agriculture.
Across sectors, we remain focused on underlying assets with strong cash flows and good fundamentals through economic cycles.
Underlying long term fundamentals in the residential real estate market continued to be strong while there have been areas in the country warehouse prices have dropped there are other areas where prices have continued to rise through the cycle.
Rental rate change has also remained strong, particularly in the Sunbelt region, where we have made a substantial portion of our investments.
The continued lack of housing supply relative to demand should support the residential real estate market going forward.
We also remain constructive on the opportunities in middle market credit, where we're still scaling into this asset class.
Leveraging our best in class partners.
At this point in the cycle has been great timing for us as we are able to underwrite deals at lower leverage and wider spreads than pre COVID-19.
The underlying portfolio companies, we have underwritten are performing well and we remain focused on adding exposure only where both risk and spread per unit of risk is appropriate in the current environment.
Average yield on invested assets was 448% in the first quarter of 2023 compared to $4 three zero percent in the fourth quarter of 2022.
The sequential increase was primarily attributable to expected returns on new money substantially above portfolio rates and a seven basis point benefit to the portfolio from the increase in short term rates on our floating rate assets, which together more than offset a decline in investment income from partnerships and other mark to market assets.
<unk>.
Partnerships and other mark to market assets are reported primarily on a one quarter lag basis.
While they had a positive contribution to investment income that was well within the expected range of variance the contribution was $21 million or 17 basis points of yield less than the assumed rates of return used in our investment process for the first quarter.
While the return on partnerships and other mark to market assets was three 6% in the quarter compared to an expected return of seven 5%.
Our longer term experience continues to meet or exceed our assumptions.
The shortfall from expected was primarily driven by valuations of our single family real estate portfolio, which now totals just over $1 billion.
As I mentioned earlier underlying fundamentals remained solid with returns driven from strong real income offset by evaluation change that reflects higher discount rates lower initial three year average rent growth than in prior periods and an increase in expense assumptions.
The sharp increase in short term interest rates of 500 basis points over the last 15 months has created stress in parts of the financial system with a visible impact on certain regional banks.
Including activities in April and May we have reduced exposure to regional banks to $132 million from $247 million at year end.
This is a small portion of the total investment portfolio less than a third of 1%.
Which is predominantly invested in super regional banks.
We remain vigilant and continue to monitor the situation closely for potential Cajun contagion to other banks other financial companies in other sectors of the market, especially in the public bond portfolio and loan book.
Underwriting the funding profile of businesses is core to how we assess risks and our private asset portfolio.
Along with some idiosyncratic situations in banking with Super short funding models that are impacted by an inverted yield curve we.
We see sectors like non traditional consumer finance and tech enabled high velocity business models at greater risk of funding dislocation.
American equity has stayed completely away from these subsectors by choice.
Another area under the spotlight is the commercial real estate sector, particularly exposure to office properties.
The most acute stress is associated with high cost buildings in central business districts in certain markets that are experiencing the double headwinds of lower occupancy due to slower return to office post COVID-19 or hybrid work models and high barriers or cost to repurpose the assets to multi use given the required capex high refinancing.
Costs and other friction.
We have not been big lenders in the office sector of commercial real estate. So our exposure is low both on a relative and absolute basis.
Let's go through key details of our exposure to office properties first covering the direct commercial mortgage loan book and then the <unk> exposure in the portfolio.
Looking at the exposure to the office sector across the direct commercial mortgage loan book. The total exposure is $257 million across 55 loans, which is just 8% of the commercial mortgage loan book.
All of these are senior loans and almost all are amortizing.
There are no delinquencies in our portfolio and we have a very manageable maturity schedule over the next three years.
With $41 million of loans coming due through the end of 2025.
Nearly two thirds of the exposures were originated prior to 2020 and seasoned in line with expectations.
We continue to actively monitor the health of the portfolio through our internal assessments based on the underlying financials of the properties.
Loan to value and debt service coverage ratios remained strong.
Our average loan to value ratio for office loans is 55% and our average debt service coverage ratio is 186 times.
To generate the loan to value ratios, we use a third party appraisal process at the inception of each loan.
And use third party appraisals appraisals when a loan is refinanced or goes into foreclosure.
Otherwise, we internally evaluate each property at least once per year.
This is a typical practice used by many companies in the industry.
In addition.
Our commercial loan book has a low exposure to central business districts of only $65 million.
The rest of the commercial mortgage loan portfolio outside of the office sector is also performing well with no delinquencies.
We have 30% of our commercial mortgage loan exposure.
In multifamily housing.
And apartment rents are increasing at a slower rate than in past years, but they are absolute levels remain high by historical standards.
The strong demand for housing continues as there remains a shortage of vacant rental properties.
The industrial and warehouse sector makes up another 27% of the portfolio and this sector has been generally a recession resistant and is a part of the market that we like for both transition loans as well as equity investments.
In addition on another 25% of our commercial mortgage portfolio is in retail, 100% of which is grocery anchored or strip for service oriented strip malls.
We have no department store exposure.
In the portfolio.
Looking at some metrics across the entire commercial real estate book.
Almost all of the loans have a loan to value ratio of less than 80% and a significant majority of the loans have a debt service coverage ratio of greater than one five times.
Moving on now to see MBS holdings, we have done significant derisking in our book over the past two and a half years.
Our overall CMS exposure has gone from 10, 1% to eight 2% of the portfolio.
While migration up in quality has reduced exposures to rated triple b or look to exposures rated triple b or lower from going from 0.8% of the total investment portfolio to just 0.2% of the portfolio.
We have just over $1 billion of exposure to office through non agency MBS on our books. This is near the average level of office exposure within this the MBS market.
98, 1% of the total CMS portfolio is rated NTIC, one and 99% is rated NTIC one or two.
Additionally, the average credit enhancement in her office related CBS holdings is 29%, which is reflective of the seniority and most of the holdings.
Our office related exposure in SaaS B bonds is included in our totals and each underlying property has been underwritten.
Our internal team continues to partner with our external asset managers to review exposures to property types within our C. MBS book, the structural enhancements provide meaningful protection to our exposure to office.
As always we continue to focus on liquidity in the portfolio, we think of liquidity in many layers. The most readily available our cash and cash equivalents on the balance sheet.
At quarter end and the operating companies had $690 million of cash and cash equivalents that number is higher today with over $1 billion or approximately 2% of the portfolio and cash and cash equivalents.
The company's ability to draw on its <unk> line is another readily available source of liquidity and at quarter end. The company had just $100 million drawn.
Today, the full line is available as there are no outstanding borrowings.
In addition to these sources of liquidity over the past three quarters. We have also purchased very high quality AAA and double a rated short duration structured assets that provide another readily available source of liquidity in the portfolios.
Currently there are $2 $3 billion of these securities on the balance sheet.
And in total we have $3 $7 billion.
A publicly traded bonds in an unrealized gain position.
We will continue to manage liquidity prudently, especially with the potential for a continued economic slowdown and the possibility that even in a slowing economy. The federal reserve may not cut rates as quickly as priced into current market expectations.
As we move through the year, our focus will be to continue on maintaining a fortress balance sheet, both from a capital and liquidity perspective.
While executing our long term strategy.
Our strategy remains on track and we continue to closely follow economic developments in the markets.
With that I'll turn it over to Axel.
Excellent. Thank you Jim.
Let me extend my appreciation to all of you attending this call.
Before I start I want to notify you all that we have updated the press release and financial supplement on our website.
To correct to narrowed that affected two lines on page nine of the financial supplement as originally reported in page three of the press release.
The lines are the net impact of fair value accounting for derivatives and embedded derivatives as well as the net capital market impact on the fair value of market risk benefits.
Notably total common stockholders' equity, excluding OCI as well as total common stockholders equity, excluding OCI and the net impact of fair value accounting for fixed annuities are both unchanged.
We will issue an amended 8-K shortly following this call reflecting those items I just mentioned.
All right.
For the first quarter of 2023, we reported non-GAAP operating income of $124 3 million or $1 47 per diluted common share compared to non-GAAP operating income of $107 1 million or $1 <unk> per diluted common share for the first quarter of 2022.
Sure.
Operating income for the first quarter of 2023 included one notable item of $9 $6 million or <unk> 11 per share after tax reflecting the special incentive compensation plan put in place in November of last year. There were no notable items in the first quarter of 2022.
The quarter included $22 4 million of operating revenues from reinsurance agreements up from $19 million in the fourth quarter of last year.
Included in revenues from reinsurance agreements this quarter was a positive $1 $2 million true up associated with the final settlement of the 26 north.
Insurance transaction.
Except for these nonrecurring benefits of the increase in revenues versus the fourth quarter, primarily reflected flow reinsurance of income products seeded to north Andrey.
As Jim mentioned average yield on invested assets was $4 four 8% in the fourth quarter of 2023 compared to 430% in the fourth quarter of 2022 <unk>.
Driven by strong new money yields and an increase in short term rates offsetting lower returns on the mark to market portfolio.
The average adjusted yield excluding non trend to bold prepayments was $4 four 8% in the first quarter of 2023 compared to 429% in the fourth quarter of 2022.
As of March 31, 2023, the point in time yield on our investment portfolio was 468% compared to $4 four 4% at year end <unk>.
For the second quarter, we expect an additional benefit of roughly six basis points in yield reflecting the increase in short term rates on our $6 2 billion floating rate portfolio.
The aggregate cost of money for annuity liabilities was one 181% in the first quarter of 2023 up from $1, 76% in the fourth quarter of 2022.
The cost of money in both quarters, reflecting reflected near zero hedge gains to sequential.
<unk> increase in the cost of money, primarily reflects a higher cost of options purchased in the first quarter of 2023 compared to the run off of lower cost options purchased in the fourth quarter of 2021.
Cost of options in the first quarter of 2023 averaged 179% compared to $1, 61% in the fourth quarter of 2022.
The increase reflected both market effects on the cost of options for renewals as well as higher option costs on new sales as we've raised caps and participation rates on our FIA products over time, consistent with the interest rates environment.
We estimate that roughly 20% of the increase in the cost of options was associated with new money rates.
Investment spread in the first quarter was $2, 67% compared to 254% in the previous quarter.
Excluding prepayment income and hedging gains adjusted spread was 267% compared to $2 five 3% in the fourth quarter, reflecting the higher effective yield on the investment portfolio offset in part by the increase in cost of money.
Deferred acquisition costs and deferred sales inducement amortization totaled $115 million in the first quarter of 2023 compared to $113 million in the fourth quarter of 2022.
First quarter expense included $1 million 1 million of amortization costs associated with new sales.
For the second quarter of 2023, we expect combined deferred acquisition cost and deferred sales inducement amortization of 114 million before the effect of new sales and experienced fragrances.
The change in market risk benefit liability increased to $47 million for the first quarter of 2023 from $31 million in the fourth quarter of 2022.
The $16 million increase in the change in the market risk benefit liability.
Primarily reflected a $4 million increase in expected.
A $7 million relative net negative variance in actual to expected results.
A decline of $3 million and to benefit from amortization of net deferred capital marketing backed and a $3 million model true up.
In the first quarter of 2023, the reported change in market risk benefits was approximately $8 million more than modeled expectation.
Insisting of $2 million of adverse behavior from already lifetime income benefit rider utilization.
$3 million from model true up and $3 million decrease in the benefit from the amortization of capital market impact on the fair value of market risk benefits.
For the second quarter, we have a model expectation of $46 million, including unexpected benefit from the amortization of capital market impact on the fair value of market trades benefits of $15 million to $16 million per quarter.
The MLB or market risk benefit net deferred capital market impact decreased from $766 million at yearend two $629 million at the end of the quarter, reflecting amortization of $16 million and negative market impact of $121 million.
Negative market impact from already reflects a reduction of approximately $131 million.
Lower long term interest rates.
As of March 31, 2023, we estimate that a 100 basis sponge shift upward in the risk free yield curve would increase the mob net deferred capital market impact by approximately $416 million.
One 800 basis bond shifted downward across the yield curve would result in a $510 million decrease.
The amount of amortization, resulting from the increase or decrease in that deferred amount is approximately two 4% of that amount per quarter.
An increase in the equity markets of 10% would raise the market risk benefits net deferred capital market impact by roughly $24 million, while a decrease in equity markets of a like amount with resulting in a decline in the mob net deferred capital market impact of $28 million.
And lastly, zero index credits in the quarter would decrease the market risk <unk> net deferred capital market impacts by approximately $5 million.
Our effective tax rate for the quarter was 24, 4%, including a $6 million true up related to last year exclusive of this amount our effective tax rate was 21, 2%.
Gross outflows in the quarter, including income utilization in partial withdrawals totaled $1 2 billion.
This was basically flat with the fourth quarter or an annualized run rate of approximately 10% of annuity account balance.
The net account balance growth in the quarter was a negative $473 million.
<unk>, 1% of account values impacted by minimal index credits.
This was an improvement compared to a net account balance decrease of $598 million in the fourth quarter with similar index credits.
As of March 31, cash and equivalents at the holding company were $437 million compared to $534 million at yearend.
The decrease reflects $293 million of cash used for share repurchase offsets in thoughts by tax sharing payments from the insurance entities to the holding company.
Our internal estimates for rating agency excess capital stands at over $650 million at the end of the first quarter, while our financial leverage is relatively low at 13, 5%.
With that thank you for your attention and I'll turn it over to the operator to begin Q&A.
To ask a question. Please press star one one on your telephone and wait for your name to be announced.
To withdraw your question. Please press star one again please.
Please limit to one question and one follow up question and then go back into the queue. If you have additional questions. Please standby, while we compile the Q&A roster.
The first question comes from Erik bass with Autonomous Research. Your line is now open.
Hi, Thank you.
We had indicated at the December Investor Day, I think that a modest recession scenario could have about $350 million of impact on capital and it sounds like your outlook for that is still pretty similar today as I was hoping you can bryan a little bit more detail on the underlying assumptions.
The majority of the capital impact is expected to occur and then also how much the impact could go up if we were out of a more severe recession scenario.
Sure Eric This is <unk>.
Yes, Youre correct.
We run that's moderate recession scenario.
On a quarterly basis, the impact of that scenario continues to be approximately $350 million.
So in that scenario from a from a capital management perspective, we view that the excess capital position enables us to absorb that impact and continue with our planned.
Capital return to shareholders.
I would say that the majority of the impact.
In that scenario has to do with downgrades and the resulting increase in required capital.
And then a smaller fraction is comes from actual credit losses.
Debt.
Results from this scenario.
And with that ill pass it on to announce.
Adding to the color that Jim Jeff feel free to jump in as well we feel good about the $3 50, because its sort of a bottoms up view is as mentioned maybe I'll provide a perspective on how we think about the market going forward from here. We think rates are going to stay higher for longer. We think the curve is probably going to remain inverted so businesses structures that I expose.
As to financing risk either ones that could probably suffered those kind of downgrades you have to look at idiosyncratic risk and really not systemic risk.
Where we are right now our exposure to sectors that people are concerned about like office is very low as Jim mentioned, so even mention a very much bottoms up view that we don't feel very exposed in those sectors.
Rates are going to stay up for longer.
And youre going to see businesses see the trickling effect of that we feel really good about our private asset portfolio, especially middle market credit because it's like 50 points of equity cushion underneath us when we're doing these deals. We've got recent vintages, we like private middle market private credit over legacy CLO positions with Jim and team have derisk.
<unk>.
And that's the market, we're hunkering down for we're hunkering down for a prolonged period of uncertainty from the fed and the likely economic recession.
Jim.
No I totally agree I mean, I think we're thinking about in terms of looking for investment opportunities that will be resilient, even in a prolonged downturn. So obviously you've come up with a severe enough scenario that everything to get in trouble, but but we're thinking about it in terms of of the hierarchy around around the strength and stability of companies being able to withstand.
Higher rates for longer and a slower economy for longer.
And then lastly, I'll add that.
We also run severe recession type scenarios.
Now this is a scenario that's GSE like.
We're constantly in a process of refining those scenarios in particular.
Reflecting the particular of the type of environments that announced and Jim just mentioned.
Aside from that <unk> type scenario, we would see about twice the amount of <unk>.
Capital impact that I mentioned for a moderate scenario, which again, we feel we're able to absorb from an excess capital perspective.
And.
And Thats, what im going to say about it.
Perfect. Thank you that's very helpful color and then maybe secondly, I was hoping you could talk a little bit more about your expectations for the cost of money going forward and I know you gave some numbers in the script, but I mean should we sort of think of this sequential increase from the fourth quarter is a reasonable estimate or how I guess.
Should we think about modeling that going forward.
For cost of money first.
Cost of money is a function of cost of options like we've talked about in the past, it's kind of that trading average of cost of auctions and so for cost of options as I mentioned two components. One is the impact of new business new business.
<unk> to our profitability targets.
As you know the raw ingredients. The starting point is the new money yield if new money yields are higher we're able to offer higher rates higher cost of options. Therefore, while meeting our profitability profitability hurdles. So in a in an environment, where like we just mentioned, we're able to invest at 6% and above.
You would also you would expect the cost of options that we're able to offer it to be higher.
And then second components of.
Of the increase is what we reached renewal actions on the in force, which are all going to depend on the environment, they're going to be supported by the overall book yield so as that book yield.
The increase in theory, we we may be able to offer higher rates on in force.
Those decisions are very tactical and based on the.
Specific book of business that comes up for renewal as.
What is the current state of the investment book yield.
I would add to access comments is that even though we have a very matured and <unk> book.
As it comes off surrender charge protection, we see lapses will be manageable, even if slightly elevated versus history, but manageable because a lot of our book has lifetime income benefits on it including without fees. So the key is in us reminding people.
Clients and advisors that they have a benefit and they should not walk away from it, especially as they get older.
Got it.
Putting it all together you would still expect to at this point to see spreads incur.
Increase and get to kind of at a level that you had talked about at the Investor day.
Yes, yes, that's right.
Correct.
Thank you.
Please standby for the next question.
The next question comes from John Barnidge with Piper Sandler Your line is open.
Thank you very much and good morning.
The level of private asset asset allocation higher in the quarter.
It's your revised thinking on where the company ultimately lands in that targeted range.
Seem pretty pleased with how it's performed so well thank you.
Hi, John This is Jim.
We are still sticking with our long term, 30% to 40% targeted allocation, we think that that's the right place to be from a long term perspective.
And being very careful of course with underwriting we think that we can continue to ramp.
Into that range.
John I'll add one thing you had asked US last quarter did we expect to get to the lower end of that range in 'twenty three and Jim's answer was no I think the answer remains the same.
We have a lot more opportunity not to get ahead on your question, but I remember from last time, there's a lot of opportunity as Jim mentioned for us to be even more selective.
And frankly public assets have great returns right now as well so that's why Jim and team are balancing if you would agree with that Jim totally agree.
Thank you very much for that appreciate it.
Follow up utilized more.
Reinsurance in the quarter for sales.
Should we be thinking about this ramping prospectively as well.
As your target maybe exiting 'twenty three thank you.
And basically the question back John Correct me, if I get any part of it wrong, you're seeing how should we think about the use of reinsurance as we're ramping sales for.
Exiting 'twenty three.
So if I were to look at the amount of.
Coinsurance seeded as a percent of gross sales.
It can be used to increase.
Where do you see that trending towards exiting 2003.
Do you think it's 50%.
That's a great question I think we're trying to drive gross sales first and we have solid momentum on FIA. So in the case of FIA received 75%.
Our American equity life income sales to Bam and we've got the fixed annuity sales that go to.
$26 three up to $525 million, we probably will see retention from us increase on that as we do want to manage our retained assets under management too, but as we execute our sidecar asset yields would start to go into the sidecar a portion of asset sales will go into that so it depends on mix would we be at 50%.
We will be run rate 50%.
Once we execute the sidecar, but not for the year.
That's helpful. Thank you very much.
Please standby for the next question.
The next question comes from Ryan Krueger with <unk>. Your line is open.
Hi, Good morning, I had a question on investment spreads. So if I take what you did in the quarter and I normalized for your expected Mark to market asset returns. Thank you.
Youre at about 284% for the investment spread and you had targeted getting up to 290% by 2025. So it seems like you are pretty far ahead of plan I guess I'm just.
Do you think it's going to start to level out more or do you think at this point in time, you may have upside to what you had been contemplating at the December Investor Day.
Hey, Ryan this is Ed.
I think the.
The investment environment has been great, but you look at this quarter, we have been able to put $2 $1 billion to work.
At very attractive yields I think thats, probably relative to the plan relative to what we had in mind.
When we spoke at the investments in <unk>, that's probably upside relative to that so we've been certainly very pleased with that.
So a big portion of it is going to be.
Hard to forecast OSB as good as any forecast is which is that its environment wrong.
And based on where we are able to put new money to work.
Got it makes sense and can you give us an update on your progress towards establishing.
Establishing <unk>.
I'd card this year.
Happy to do so hi, Ryan good morning.
The site continues to progress very well, we see interest from.
I mentioned in the last call or the call before over the last call.
We will probably look to execute in the third quarter.
And.
We have solid interest from.
A couple of Burstein Counterparties frankly, the interest is to get more of the flow and thats sort of what we're negotiating whether we how much we keep for our own balance sheet, how much of flow, we commit to and Thats really important for us to as we manage earnings going forward, but that's the value of having a franchise like AML where people want these liabilities.
Great. Thank you.
Please standby for the next question.
The next question comes from Tom Gallagher with Evercore. Your line is open.
Hey, good morning, just just wanted to.
Level set how we should think about.
Go forward GAAP earnings here.
Just looking at the pieces of that versus alternative returns. The unusual expenses I would normalize to $1 77 earnings just wanted to see if theres anything.
Unusual on that actual I tried to follow the pieces of the market risk benefits plus the DAC amortization. It didn't sound like to me like there was anything that was going to be a big trend change into to Q.
But just wanted to double check if that's kind of a good starting point.
I think it is.
It's a reasonable way to think about it right now of course.
Okay.
I'll take normalized returns on the mark to market assets.
As much as much as you would as well.
And thats going to be a source of variability is going to be quarters like this quarter, where it's less in quarters like in prior quarters, where its maturity more.
But in terms of forming a kind of a normalized view I think that's a reasonable starting point on the mark to market assets.
I think Rick.
Moving nonrecurring items to the extent that we're able to identify them as also.
A good starting point so yes.
Don't see anything.
Unreasonable with that.
What you just mentioned.
Okay, and then I guess you are also.
More mechanical but you're also going to get a I think a big uplift given that I think you did a lot of your share repurchase towards the end of Q1. So I think youll get most of the benefit of that into <unk>. Because it was such a large number looks to me like your share count should be going down by 8% to 10% sequentially.
So that I think is going to be another big near term driver does that.
Does that sound right to you in terms of the.
I know when when there was a net loss. There's also lack of dilution in the current quarter I wanted to make sure there I'm not I'm not.
Missing some pieces piece that might show up in diluted share count that wasn't in the share count this quarter.
No you're right.
The the <unk>.
ASR that we announced on March 20th we took.
Typically you take 80% of the <unk>.
Shares delivered upfront.
And yes, given that twice on March 20th.
Be in full effect that reduced check on it's going to be in full effect for the for the second quarter and you're right the share count went.
Went down like $7 1 million shares to 77.7% page nine of the supplement so the share count did go down materially.
Gotcha.
And then.
Thinking about your excess capital.
Can you can you just flesh that out a little bit.
$650 million or so.
What it is.
As the vast majority of that at the holding company. What is the just remind me what the RBC threshold, you're using to calculate that and it looks like you have a lot of that capacity does that include any of the debt capacity as well.
Sure. So I think so first from a rating agency excess capital perspective.
<unk> agency models only take into account the capital and the operating companies. So that's what we do here with the $650 million between.
Mentioned, so it does not factor in.
Cash at the holding company or potentially any excess cash.
I'm, sorry could you repeat the second part of your question.
I'll add interacts sourcing and then we bought it.
Some people count debt capacity, plus Holdco cash plus life company excess in excess Idaho.
Recognition of excess is only above rating agency thresholds and operating companies, we keep the cash at the Holdco and debt capacity as additional levers.
Actual would you change any of that absolutely right.
Okay.
And what's the.
What's a reasonable base case to think about and again I'm just trying to level set you versus peers in the way.
Linda Mike might.
Might define it.
We're running low to mid teens and leverage and Ferrari ratings, you could easily run mid twenties.
As a point of we are positioning our balance sheet as I mentioned earlier, we've hunkered down we've got a lot of financials. If you look at excess capital in the life companies and the operating insurance companies plus the financial flexibility, we view the lactic do cash at Holdco and leverage capacity or additional financial flexibility. So if you level set us with Prs <unk>.
Approaching.
That makes sense. Thanks.
Please standby for the next question.
The next question comes from Dan Bergman with Jefferies. Your line is open.
Okay. Thanks, Good morning, I guess first you saw pretty meaningful sequential lift and that trend will yield I think it was up 19 basis points quarter over quarter.
In the first quarter. Despite some pressure from the lower Mark to market returns I know you gave a little bit of color on the prepared remarks, but I just wanted to see if you can give some more granular detail on the components of drivers of that 19 basis point rise, including any quarter quarter over quarter impact from Florida, as higher purchase yield mark to market assets or other items.
Yes happy to do that then this is an excellent start and see if Jim has anything to add to that but.
Yeah in terms of the work.
So first we've got purchase yields right. So we just we just talked about.
Very attractive new money yields and what we've been able to during the quarter. So purchased yield added about nine basis points too.
Taking fourth quarter yield and walking into first quarter to nine basis points from there.
Seven basis points from the increase in short term rates on floating rate assets.
Yes.
And then next.
And then net about three basis, another three basis points of other stuff, which includes the negative on mark to market assets and.
And then some of the amortization of investment expenses, given given some of the projects that have now been completed there.
Got it that's really helpful. Thanks, and then.
Also assuming I heard it correctly I think in the prepared remarks your commentary on quarter to date sales implied step up in the run rate of.
Fixed index annuity sales are all that where they've been running so I just wanted to see if you could provide any more color on the drivers of the sales momentum is it concentrated in any particular products or driven by.
Particular pricing actions, you've taken and just Relatedly also wanted to see if there's any update you could give on the competitive environment for <unk>.
I know it had been Alex and elevated competition earlier last year, and then maybe it kind of rationalized more recently, so just want to see if there's any update you have there.
Yes happy to do that then the.
Youre right.
Through may 5th sales or $600 million in the second quarter for <unk>.
We launched an asset should bonus product at the end of the quarter and the end of somewhere in the later half of the quarter in which has done very well the receptivity to that has been very strong. It was a small hole in our segment of product portfolio that has done well we're pushing on all its Linda. This is a this is I've always said that this is a business of <unk>.
<unk> non yards or miles and you have to win it by inches hand to hand combat and then frankly getting the <unk> story out day minute advisers get it. We then move them through the sales funnel.
You get them hooked after three tickets and then you move them to six tickets and then you make $2 million produces and larger.
It's the ability to ramp that maybe.
It requires disciplined execution and depot, knowing that profitability focus, but there's enough to go around for everybody.
Got it that's helpful. Thanks, and just in terms of competition any change you're seeing from competitors actions.
Some competitors have scaled back on rates I think the 12% cap rates have gone which is nice.
We are in the 10 to 11 range now so you've seen some cap rates come away. They don't wanted to very irrational competitors with 15% cap rates, which I don't understand it and it will not try to understand but sort of.
Is this pockets of irrationality, but more rationality and all of the established ones that we actually combatants themselves with a great competitors to be with so I think the top five six drive everything and there is some.
Marginal new players that were very cautious about.
Distribution and wants to go to the module players God bless them and the others. We focus on the ones that want to be with us growing our advisors are agents that write multimillion.
With us and stay with us because of the time it takes for them to write an EEO ticket as far as a fraction of the time. It takes them to write someone else's ticket is what got us the J D. Power's number one rating ease of doing business got as the Newsweek number one rank of trusted insurance. This year. So there's a lot of positive momentum, but you have to.
You have to think for yourself by someone smarter than me once said that you really have to do that.
That's really helpful. Thanks.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced please limit to one question and one follow up question.
Please standby for our next question.
The next question comes from Pablo's, Susan with J P. Morgan Your line is open.
Hi, Good morning first question I, just wanted to follow up on the answer given by Exelon the benefit from purchase yields in the first quarter.
Is there any kind of seasonality to think about with respect to purchase yields about their types of our Monza facets, you end up buying in any given quarter I guess more directly any reason why that 90 bps of benefit.
The first quarter, I can or should not be extrapolated in future quarters.
I don't know I think Jim sure sure Robert This is Jim.
It's a function of.
<unk> different <unk> in different markets at different points in time, we'll have different levels of attractiveness sometime.
Sometimes we source assets in box, so we'll buy blocks of assets.
But but maybe.
May be week to week or month to month. It is it is certainly more volatile, but when you start thinking quarter to quarter.
Over a three months period generally as markets move it's fairly fluid and we do have the opportunity across sectors to source assets and so whereas we.
We look forward, we see markets with great opportunities here now what those numbers will be I don't know, but but certainly certainly we expect to source assets across.
Both both some equity and debt and debt investments across commercial real estate across some across residential real estate infrastructure middle market credit agriculture, we see all those sectors.
As attractive, but we're being very diligent in and we've been very careful in the actual assets that were sourcing to make sure that we are buying assets that we'll be able to perform well through a cycle Pablo I'll add one thing everything Jim said is spot on and I'll add one simple way of thinking.
As we go to internal investment committee and look at our private deals.
That deals are getting done at equity levels from a couple of years ago and equity deals are very very selective at this point that's the way we're thinking about it you can buy debt at equity levels and you should.
Thank you that makes sense and then my second question.
This one that I'm sure it's for anchor.
Just a quick follow up on that so you can sense a notable item. This quarter was it mostly cash base or was there an equity component there that we should expect to recur in subsequent periods.
So both both components were.
We're in that number for this quarter in both both components would continue to be in subsequent quarters.
But two different two different expense and again as I mentioned and one component of the equity components of smoke essentially mark to market. So.
It will be.
At a time that the expense associated with us would be one at a time based on stock price performance.
Okay. Thank you.
I show no further questions at this time I would now like to turn the call back to Julie 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.
This concludes today's conference call. Thank you for participating you may now disconnect.
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