American Equity Investment Life Holding Company

First Quarter 2021 Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Julie LaFollette, Coordinator of Investor Relations.

Good morning, and welcome to American Equity Investment Life Holding Company's conference call to discuss First Quarter 2021 earnings. Our earnings release and financial supplement can be found on our website at www.american-equity.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 Anat Bala, Chief Executive Officer, and Ted Johnson, Chief Financial Officer. Some of the comments made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Indicated by terms such as estimate, expect, intend, over time, plan, potential, should, strategy, targeting, will, would, and working towards, there are a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied. Factors that could cause the actual results to differ materially are discussed in detail under risk factors in our filings with the SEC. An audio replay will be made available on our website shortly after today's call. It is now my pleasure to introduce Anat Bala.

Thank you, Julie. Good morning, and thank you all for your interest in American equity. Let me start with strategy execution. Today, we are delighted to report record progress in the execution in one of our four strategy pillars. Specifically, this pertains to our go-to-market area, which focuses on how we raise funding through general account annuity products sold to close to 700,000 retail clients. The AEL 2.0 business model, virtuous flywheel of success, starts with what has historically been an industry-leading, at-scale annuity funding origination platform. Over the past few years, this funding origination platform started to slow down in terms of growth in our core independent marketing organization channel. And we had limited success in penetrating the bank channel through our Eagle Life subsidiary. one of the focus areas in my first year as CEO was to revive origination capability and refresh how we go to market. This is critical for AEL to have a strategy flywheel that can spin faster with superior execution for shareholder value realization. It enables AEL to continue to be a growing franchise that originates long-term attractive funding for asset investing. We feel good about some of the retooling we have done in the go-to-market part of our business since last summer and continue to move forward to become a leading franchise in the general account annuity business in both IMO and and bank and broker-dealer distribution. This strength in go-to-market plus adding in access at scale to differentiated investment management capabilities over time as the second strategy pillar of the flywheel should enable American equity to be much more capital-light going forward. This capital-light outcome is enabled by the third strategy pillar, which is effective utilization of reinsurance to blend using both our own shareholder capital today with third-party capital through sidecar reinsurance vehicles to fund future growth of origination. We are working in 2021 to execute our previously announced reinsurance partnerships with Brookfield and Vardiyagam as they start to demonstrate the flywheel in motion. And we are in the process of building our own reinsurance platform in 2021 to further speed up the flywheel in future years with AEL directly accessing third-party capital, including potentially through sidecar-like vehicles. I expect to share more on the execution of our reinsurance and asset management efforts in the second and third quarter earnings calls, while my focus today will be on the go-to-market pillar. As I communicated on our last earnings conference call, 2021 will be a transitionary year for AEL's financial results as we migrate towards this new AEL 2.0 business model. We are migrating a fairly large plus billion dollar balance sheet from a legacy core fixed income strategy with relatively higher asset leverage to a new asset allocation approach encompassing lower asset leverage, capital structure optimization through reinsurance and third-party capital, and utilization of alpha assets to both improve sustainability of investment results in a low interest rate environment and delivers superior loss-adjusted net yield over time. The scaling of alpha assets is expected to be a multi-year journey with a couple of billion dollars of alpha assets added to our books each year. Like any strategy migration, there are short-term impacts for greater long-term gain. For AEL, This will manifest itself in running higher cash balances, somewhat accentuated by near-perfect timing of de-risking existing assets in the fourth quarter of 2020, as we pursue the closing of the Brookfield and Vardy Agam reinsurance transactions. We expect 2021 financial results to bear a significant amount of the transitionary effect of our fundamental strategy shift for long-term unlock for both our shareholders and policyholders. This value unlock is what we are vigilantly focused on. Therefore, we expect 2022 to be the first full year for investors to start to see the incremental financial benefits from AEL's new business model. In a few minutes, Ted will provide more details on our financial results and how this migration affected operating results. Getting to execution in our go-to-market pillar, in the first quarter, we recorded all-time record sales of $2.4 billion, up 32% from the fourth quarter of 2020 and 245% year-over-year. first quarter sales topped the previous quarterly record of $2.1 billion set in the fourth quarter of 2015, which we believe is an early indication of the potential from AEL's go-to-market franchise. We are targeting between $5 to $6 billion of sales for the total company this year, and we are well on our way. Although a majority of first quarter sales were in our multi-year fixed annuity products, we expect to focus our efforts for the rest of the year on the fixed index annuity product line, especially given our recent product refreshes in that area. At American Equity Life, quarterly sales of $1.3 billion were the highest level since the fourth quarter of 2015. Sales increased 46% sequentially and 122% compared to the first quarter of 2020. In February, we reintroduced a refreshed Acid Shield product that has quickly gained momentum, leading to a sequential 13% increase in accumulation deposits after just the first month of sales. The refreshed Acid Shield features two new proprietary indices, the Credit Suisse Tech Edge Index, and the Societe Generale Sentiment Index. We also added the existing Bank of America Destinations Index to the Refresh product. We are now offering these strategies for both one- and two-year terms. We also added enhanced rate riders to AssetShield, allowing policyholders to earn a greater cap of participation rate for an optional fee. we have seen a strong initial reaction to the product refresh as sales of AssetShield more than doubled in March compared to February. In particular, the new indices have been well received as 50% of March deposits went into the new strategies added to AssetShield in February. While one month is not a trend, the outlook for fixed index annuity sales at American Equity Life is much stronger and even the pre-pandemic levels in early 2021. In essence, momentum is on our side. Total sales at Eagle Life of $1.1 billion represented a 19% increase versus the fourth quarter of 2020 and a tenfold increase compared to the year-ago quarter. Fixed index annuity sales were up 40%, both sequentially and compared to a year ago. our overall product strategy resulted in positive benefits for both FIA sales and recruiting. Over the last six months, 1,400 representatives wrote their first piece of business with Eagle Life, increasing the number of current active bank and broker dealer advisors that have sold Eagle Life products by 36%. FIA sales at Eagle Life trended higher throughout the first quarter with solid growth in both February and March. On April 7th, we introduced our new Eagle Select Income Focus product, which will better address the growing demand for guaranteed lifetime income product in the bank and broker-dealer space. Eagle Life has recently been approved by PNC Bank on a combined entity basis. We have been at DPPVA prior to its merger with PNC. As we indicated on our fourth quarter 2020 earnings call, our plan has been to re-engage with distribution with a simpler multi-year fixed rate annuity product during COVID-19 and now pivot to driving growth through a revamped fixed index annuity product portfolio. We plan to continue to introduce innovative new products as we move through the AES 2.0 transformation, which will help us compete effectively, and grow our share of the annuity market. As the financial planning needs of Americans evolve, American equity is focused on providing our clients the dignity of a paycheck for life. I believe our commitment to this core mission statement will become recognized and appreciated in the market over time. This will help grow AEL in both channels and open up other market access opportunities for us in the future. Now turning to financial results. For the first quarter of 2021, we reported non-GAAP operating income of $41 million, or 43 cents per diluted common share. As expected, the first quarter results reflected many of the transitionary effects I mentioned earlier, in particular the effect of cash in the portfolio in excess of the target range. and the level of operating expenses. Now, I'll turn the call over to Ted to give more detailed analysis on a first quarter financial results.

Thank you, Anat, and good morning, everyone. Prior to going over the results for the first quarter, I want to provide more context for a reclassification between certain balance sheet items as of December 31st, 2020, due to an immaterial error identified in our quarterly closed process, the net effect of which is a change in accumulated other comprehensive income. There is no impact on GAAP equity, ex-AOCI, net income, or operating income. Specifically, we should have been including the impact of unrealized gains and losses in the calculation for the lifetime income benefit reserve similar to the calculation of deferred acquisition costs and deferred sales inducements. We corrected this as of December 31, 2020, in the first quarter. The correction of the immaterial error was done through a reclassification between associated balance sheet line items for the period ended December 31, 2020, which can be found in our first quarter financial supplement. And as I stated before, this had no impact to reported net income or non-GAAP operating income. As we reported yesterday afternoon, operating income for the first quarter of 2021 was $41 million, or $0.43 per share, compared to $154 million, or $1.67 per share, for the first quarter of 2020. Notable items in the first quarter of last year included a $31 million or $0.33 per share tax benefit from the enactment of the CARES Act. Notable items reflect the positive or negative after-tax impact to non-GAAP operating income available to common shareholders for certain items, such as those that do not always reflect the company's expected ongoing operations. We present notable items to help investors better understand our results and to evaluate and forecast those results. Average yield on invested assets was 3.58 percent in the first quarter of 2021, compared to 3.88 percent in the fourth quarter of last year. The decrease was primarily attributable to a 34 basis point reduction from interest foregone due to an increase in the amount of cash held in the quarter as we prepare to execute the Brookfield and Varde Agam reinsurance deals in which we will primarily transfer cash. Cash and short-term investments in the investment portfolio averaged $8.6 billion over the first quarter, up from $4.4 billion in the fourth quarter of last year. Compared to the prior quarter, partnership income contributed an additional six basis points to yield. At March 31st, we held $10 billion of cash, yielding roughly two basis points. The current point-in-time yield on the portfolio, including excess cash, is approximately 3.3%, so the pressure on investment spread will continue into the second quarter. excluding cash and invested assets to be transferred as part of the reinsurance transactions and the redeployment of remaining cash in excess of target, we estimate that the current point-in-time yield on the investment portfolio to be roughly 4%. The aggregate cost of money for annuity liabilities was 158 basis points, down 5 basis points from the fourth quarter of 2020, The cost of money in the first quarter benefited from two basis points of hedging gains compared to a one basis point gain in the fourth quarter. Excluding hedging gains, the decline in the adjusted cost of money reflects a year-over-year decrease in option costs due to past renewal rate actions. Reflecting the decline in the portfolio yield, investment spread fell to 200 basis points from 225 basis points in the fourth quarter of last year. Excluding non-trendable items, adjusted spread in the first quarter was 187 basis points compared to 213 basis points in the fourth quarter of 2020. In line with yield, we would anticipate our investment spread to rise back to expected levels once the reinsurance transactions are completed. The average yield on long-term investments acquired in the quarter was 4.04% gross of fees compared to 4.46% gross of fees in the fourth quarter of last year. We purchased $625 million of fixed income securities at a rate of 3.92% and originated $77 million of commercial mortgage loans at a rate of 3.49% and purchased $151 million of residential mortgage loans at 5.76% gross of fees. The cost of options increased to 145 basis points from 139 basis points in the fourth quarter of 2020, primarily reflecting mixed shift within our S&P 500 strategies towards higher cost participation rate strategies from cap strategies and a slight increase in the cost of clique options hedging our monthly point-to-point strategies due to the decrease in volatility over the quarter. All else equal, we expect to see the cost of money continue to decline over the next two quarters before stabilizing in the fourth quarter. Should the yields available to us decrease or the cost of money rise, We have flexibility to reduce our rates if necessary and could decrease our cost of money by roughly 57 basis points if we reduce current rates to guaranteed minimums. This is down from 62 basis points we cited on our fourth quarter call. The liability for lifetime income benefit riders increased $73 million this quarter, which included negative experience of $11 million relative to our modeled expectations. There were pluses and minuses in the first quarter, with the biggest differences due to higher-than-modeled lifetime income benefit rider utilization and lower-than-expected decrements on policies with lifetime income benefit riders. Deferred acquisition costs and deferred sales inducements amortization totaled $132 million, $5 million more than modeled expectations. The biggest items driving the negative experience were higher than expected decrements on the total book of business and the higher than expected lifetime income benefit writer utilization, of which I just spoke, partially offset by lower than expected adjusted gross profit. Other operating costs and expenses increased to $56 million from $55 million in the fourth quarter. We expect operating costs to trend higher over the coming quarters as we will build out the necessary infrastructure to continue execution of the AEL 2.0 strategy, but still expect the level of other operating costs and expenses to fall into the high 40 million range post-refinancing our existing AG33 redundant reserve financing facilities in 2021. As expected, we completed the execution of our initial accelerated share repurchase program in March and received another 542,000 shares in addition to the initial 3.5 million shares delivered at the initiation. We also repurchased approximately 155,000 shares in the open market since the closing of the accelerated share repurchase to date. Combined with the 1.9 million shares we repurchased in the open market prior to the initiation of the ASR program, we effectively reduced the share dilution resulting from the November 30th initial equity investment of 9.1 million shares from Brookfield Asset Management by approximately two-thirds. Total debt to total capitalization excluding accumulated other comprehensive income at quarter end was 11.6% compared to 12.2% at year end and 14.9% in last year's comparable quarter. Invested assets at amortized cost was 12.6 times shareholders' equity excluding accumulated other comprehensive income. At March 31st, Cash and short-term investments at the holding company totaled approximately $490 million. We expect to have roughly $350 million of cash and excess of target at the holding company even after buying back the additional shares necessary to fully offset Brookfield Tranche 1 issuance-related dilutions. Now I'll turn the call over to the operator to begin the Q&A.

Ladies and gentlemen, if you have a question at this time, please press star, then the number one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Also, limit yourself to one question and one follow-up question, and then jump back in the queue if you have additional questions. Our first response is from Wilma Burtis with Credit Suisse. Please go ahead.

Hi, good morning. I guess just one question. Is AL still on track to repurchase the $250 to $300 million of stock? Looks like there was kind of $20 million in buybacks in 1Q and still almost $3 million of Brookfield dilution to offset. Just wondering what the outlook is for that.

Hi, Wilma. It's Ted. In regards to that, we are going to continue to look at, you know, aggressively repurchasing the remaining shares to offset the dilution from Brookfield and look towards doing that. And whether or not we get the 250 returned in addition to that, it's also somewhat predicated on the timing of the approval by the Iowa regulator and the New York regulator on the form A. because then Brookfield will then execute their right to buy additional shares under what we refer to as Equity Tranche 2. And at that point in time, we would then be able to buy those shares back and also return the $250. We could get time constrained as we go through the year, depending on the timing of the approval by the Iowa Insurance Department.

Well, Matt, I didn't want to think they'd covered it. But if the question gets to intent, yes, we intend to return $250 million of capital, as previously stated, this year to shareholders. It's a function of getting the timing right, keeping crunched, too, as Ted mentioned.

Okay, got it. Thanks. And then second question, I guess the new money yield of about 4% in the quarter, seems like that's come down to about 3.4%. I know you guys talked about the residential loans, but how did you guys hit that with given that most people Yields are kind of sub-3% right now.

So I'll have Jim Hammerlein, our Chief Investment Officer of the Insurance Entities, take that one.

Sure, thanks. This is Jim. You know, it's a function really of mix of assets. And so mix of, you know, core assets, which are lower yielding, as you indicated, plus some of the private asset strategies that we're employing that do have higher yields. And so it's really an asset mix answer to that question.

Okay, got it. And then just maybe a little bit of color on the liver utilization, I guess, because you maybe talked specifically about the underlying trend there in the quarter and where that's going.

Sure, I can do that one more. So we did see higher than modeled liver utilization this quarter. As we look at that, it did start to trail off in the quarter and come down. So we'll be watching that closely to see what kind of pattern emerges as we go through the remaining quarters. As we look back and look at last year, we also saw elevated utilization of liver in the first quarter, and then it trailed down and the remaining quarters, you know, they more matched what we had either modeled or went below. So we'll continue to monitor that, Wilma, and look at that and see if there's any adjustments we need to make for that kind of pattern in our models when we look at our annual assumption revision updates.

Okay, got it. Thank you guys very much. Thank you.

Please be mindful that you are to ask one question and one follow-up and then jump back in the queue for additional questions. Your next response is from Greg Peters with Raymond James. Please go ahead.

Good morning. I'm going to stick on the spread results table in your supplement. And I noted, Ted, your comments about the average yield being depressed by about 34 basis points because of the cash being held for the transactions. And then you also said you expect the investment spread to turn back to expected levels. So If I were to fast-forward this table, say Q421, how do you think the average yield on invested assets will look? How do you think aggregate cost of money will look, and how do you think aggregate investment spread will look?

Okay, I'll answer it this way, Greg. One, if you look at our portfolio currently, and exclude the securities and cash we expect to transfer as part of the execution of the reinsurance agreements, and the redeployment of the other cash above that, and at a conservative rate at approximately 3.5, I mean, we would hope to beat that, that gets you to a residual yield on the portfolio of 4%, where we sit at today. Cost of money-wise, You know, we could potentially, if all else equals, see some additional benefit to cost of money over the next few quarters. And then, as I said, see it stabilize in the fourth quarter.

Right. And you said the investment spread, you expect that to turn to expected levels. What are expected levels? Because, you know, it's obviously come down a lot from a year ago.

So I would say there is that we would go back to what our assumptions are in our model, which is a 240 spread, which we have disclosed before.

Yes. All right. Perfect. Was that my two questions, or was that a follow-up to my first question? Do I get a second question? I'll let you have one more, Greg. Go ahead. If you've got enough, I'll let you have one more. All right. I just don't want to violate any rules. Stephen's, you know, I'll get yelled at by Stephen later. No, that's okay. I wanted to pivot to just the sales outlook. I think you said, Anat, 5 to 6 billion of sales expected for this year. Given the strong results of the first quarter, that suggests that the remaining couple of quarters will be lower sequentially than the first quarter. It also might suggest that the fourth quarter could be down on a year-over-year basis. I understand there's a lot of moving pieces to what's going on between product mix, et cetera, but maybe you could give us some additional color there.

Happy to, and good morning. Two things at play over there. One is business mix, as you alluded to. We have been able to invigorate Eagle Life to a point that we have now a twin-engine approach to go to market, and in both Eagle Life and American equity, the focus is on FIA sales. And that's what's going to be driving the rest of the year. Fixed-rate annuities have pretty much come to a fairly slow-down pace. We're doing around $3.5 million a day, so under $100 million a month now. And so that's sort of the way we've got to think about it, and we're focusing on FIA. And the internal salespeople are basically compensated on more on FIA mix than MIGA. So Strategy is there. The product refresh is there. The compensation alignment is there to get that result. But you're spot on, right? We would expect sequential and year-on-year outcomes like you mentioned.

Got it. Thank you for the answers.

Thank you. Your next response is from Eric Bass with Autonomous Research. Please go ahead.

Hi, thank you. I was hoping for a little bit more color in terms of your expectations around the timing of getting some of the excess cash balances invested. And also, just if you could clarify, of the $10 billion that you had at the end of March, how much of that will be transferring to the reinsurers, and how much of that is excess cash that is staying with you that needs to be reinvested?

Hi, it's Jim Ameline, and thanks for the question. There are a number of parts there that the timing is dependent on, which includes closing of the reinsurance deals, also includes some of the investment partnerships that we have previously announced and that we're working on. So timing is hard to predict exactly, but our expectations are that about $5 billion of that cash will be used to fund the reinsurance transactions. Beyond that, our expectations are that we will use maybe $1 to $2 billion in private asset strategies this year, focused on some areas of the market that we really like, including residential real estate, primarily in the form of single-family housing rentals. We also like select sectors in the commercial mortgage loan market. We like agriculture loans. And lastly, we're starting to move into the ramp-up of our exposure to middle market credit through our partnership that we previously announced with Adam Street. So those are some of the primary areas that we'll be utilizing the cash that we have on the balance sheet today.

Got it. So if you're doing sort of $1 to $2 billion of kind of the five that's yours in private asset strategies, does that mean that the remainder is going into sort of more plain vanilla corporates and then I guess related to that, Anand had mentioned wanting to allocate a couple billion dollars a year to higher alpha strategies. So will that be raised from sort of shifting existing assets, or is that more putting to work new cash in the door from sales?

Sure. I mean, this year we have the cash to deploy for those strategies as we start to ramp those up. And as you mentioned, there is more cash there. You know, some core, core plus strategies, that we have employed in the past. We'll certainly look to select parts of the market for some of those investments also.

Got it. But I guess the intent is to invest the full $5 billion by year end.

Eric, I would add that, you know, we do have a target of holding cash somewhere between 1% to 2%. So you need to take that into consideration, that 1% to 2% of our investment portfolio we would hold in cash.

Exactly. If I just summarize what Ted and Jim just said, right? Your question is the $10 billion. Five goes to reinsurance transactions. We hold around a billion in cash because we're holding 2% in cash, as Jim outlined. And then specifically, just add a little color to Jim's point. If you get a billion to $2 billion done in private alpha assets this year, that would be success. North of a billion is what we're targeting. In future years, yes, new business flow. is going to largely go to private assets, so we ramped that a couple of billion a year. Is that fair, Jim? That's fair.

Got it. Thank you.

Thank you. Your next response is from John Barnage of Piper Sandler. Please go ahead.

Thank you. Sticking with the sales question, MIGA clearly drove the record sales on the quarter over 70% of the composition. It's definitely going to shift to FIAs. But as we go forward in the year, how should we expect, you know, not go forward necessarily just this year, but MIGAs have never been a huge composition of sales for AEL, but where do you think it seasons out in this AEL 2.0 thought process?

Hi, John. Good to hear your voice. Great question. MIGAs will be relevant to us. In the past, we originated MIGA and reinsured it off to other parties as a capital play in some regards to not have to consume capital for it. If you've got a strong middle market credit and a non-QM mortgage business, you're really talking about three to five-year assets that fit very nicely with the MIGA. So we'll be opportunistic on MIGA. it's opportunistic to both build your go-to-market franchise, which is what we did when we refreshed the FIA platform. But we are an FIA shop. We actually really do believe in the dignity of a paycheck for life, and the FIA platform allows a lot of that. And we'll opportunistically dial Myga up and down. But it's really around having the assets now to support Myga.

Okay, that's helpful. And then my other question is, You talk about 2021 being the burden of the value unlock, I think was the phrase. Does this mean like Sidecars is going to be more of a 22 event since Iowa regulatory approval keeps getting pushed out?

First of all, Iowa, yeah, Sidecars was always planned to be through permanent re, the concept that we introduced. So we built Ray Re, our own platform, demonstrated an action, and then permanent re ends up being Frankly, a 2023 financial results impact executed in 2022, you see with our Brookfield transaction a real demonstration of what that looks like. And that happens this year. In terms of the Iowa regulatory approvals, you know as well as others, these things take their natural course of time. We don't think it's pushed out. We just can only move at the pace that everyone else can move at. So our focus is to summarize. Get Brookfield done. By the way, that is actually progressing very well, and we expect to talk to you about it on the next earnings call about it. And I would just allude to the point to what we said back in late fall. We're expecting actually that to come out better than that in terms of financial impacts going forward. So I'm feeling very good about where that ends up happening. The other insurance efforts we'll continue to work through and build our own platform. We also are bringing in the talent necessary to do this. So this is the build here. the reset year for financials, and then the fourth quarter of this year, you should really start to see what is the run rate going into 2022.

Thank you very much for the answers.

Thank you. Your next response is from Ryan Kruger of KBW. Please go ahead.

Hi, good morning. First question is on cash flow generation. I know you've guided to 250 plus of annual capital return. Can you help us think about to what extent is that consistent with the amount of annual cash flow you expect the company to generate going forward versus, I guess, some utilization of freed up capital related to the enforced reinsurance deals you did?

Ryan, I'll start here. I think, first of all, in these early years when we're doing the $250 million of return of capital to shareholders, certainly some of that is going to be coming from the reinsurance deals that we're executing. to execute AEL 2.0 and to what exactly Anat was saying as we move into permanent re-SICAR reinsurance vehicles and the mix of our revenues is generated, a bigger mix of that is generated from fee revenues that we generate off of managing the liabilities and managing the investments. That's where, you know, that $250,000 ultimately will be It's all about the capital efficient and the capital light model to be able to return that annual target of that 250.

Thanks. I guess related to that, in terms of the potential timing constraint on buybacks this year, should we just think about that as if you're unable to complete all of the buybacks in this calendar year that you had previously guided to, you would ultimately make up for it next year. It just might be a timing issue.

Exactly. It's just a timing issue. And, again, we will look at all the available alternatives and things of what we can do to be able to fully offset the shares that will ultimately be issued to Brookfield of the ones that are outstanding and then also see on the timing of returning the 250. But, yeah, it isn't that we skip a year. It's just the timing of exactly when that gets done. Thank you.

Thank you. As a reminder, if you have a question at this time, please press start and the number one on your touchtone telephone. Please limit yourself to one question and one follow-up and then jump back into the queue for additional questions. Your next response is from Bob Huang with Morgan Stanley. Please go ahead.

Actually, my question has been answered. Thank you very much, though.

Thank you. Your next response is from Pablo Singzong with J.P. Morgan. Please go ahead.

Hi. Can you hear me? Yes, we can, Pablo. Perfect. So I just wanted to follow up on Ryan's question about free cash flow generation after you sort of normalized for the apparent benefits of all these reinsurance deals you have in the pipeline. So, you know, I guess I'll approach the question this way. So most insurers have anywhere from a 60% to 80% free cash flow conversion ratio. I guess if you look, you know, maybe three, four years out, where do you think AEL falls in that range?

It's a little difficult to look three to five years down, but it's very nice to hear your voice. Good morning. I think the way to think about it is we look to transform from being just an insurer to being a broader firm that's got an ROE spread business and an ROA fee business. The fee business, so you could see us two years from now, since you asked me to look forward, resegment our balance, resegment our financials along that fee business and the spread business, and the fee business is 100% free cash flow.

Yep, understood or not. And I guess the reason I sort of offered that range is because I think with all the deals you have, you're probably covered for the next three years anyway. But I appreciate the response. And then the next question I had was... You know, other companies are starting to talk about releasing capital that I guess was previously budgeted as a buffer for credit downgrade share losses. You know, does AEI have something similar or, you know, maybe you're thinking along the same lines or would you rather retain capital for potential C1 changes or perhaps ramp up an alpha asset that you're, you know, executing on?

Yeah, so we will consume capital for ramping up into alpha assets. We feel very good about the de-risking efforts we did in the fourth quarter. Jim, Jeff, and team did a great job there. And our C1 consumption will increase, but with the creation of our reinsurance platform, we're going to be managing to our rating agency capital requirements, and we have strong excess capital positions going forward. So some of the reinsurance capital we free up will be used to fund greater C1 for ramping, And we feel confident about the 250 this year and 250 to 300 in future years. Okay. Thank you for your answers.

Thank you. We have a response from the line of Ryan Kruger of KBW. Please go ahead.

Hey, I just have one more. If we go back to the 11th of 14%, ROE guidance, would you expect to get into that range, at least the low end in 2022?

Ryan, I think we're going to be focusing on ROEs and outcome. We're going to be focused on capital return, cash return on a sustained basis. And you're probably going to see the earnings pick up on an EPS basis first too. So we're focused on EPS growth into next year. You're seeing a run rate at the end of the fourth quarter of this year, which is a strong double-digit EPS growth for next year, and capital return, ROE to follow. Got it. Thank you.

Okay. We do have a response from Pablo Singzong of J.P. Morgan.

Hi. So I just want to add a follow-up question about the alpha-generating assets. I think I know the answer, but I just wanted to confirm with you. So when you allocate to these assets, we shouldn't assume sort of a G curve or a ramp or, you know, sort of a bid to get to the run rate yield, right? Because it's not the investment or similar vehicle. It's essentially fixed income. So as soon as you invest in it, you know, the higher yield begins attaching. Is that correct?

Hi, it's Jim Hamelainen. Depending on the asset class, there can be a wrap-up period. In some asset classes, that's true. In some other asset classes, clearly the wrap-up is very quick and you can deal right away.

A good example to add to that, which is spot on, is look at middle market credit. We probably will allocate between $1 billion, $1.5 billion to middle market credit. We're ready to go tomorrow, but it takes around a year to get there. So to ramp up billion, billion, five in little market credit, it takes a year.

All right, right. My question was more about the yield attaching to your actual investment. I understand you won't be able to allocate 100% from day one, right? But whatever you're able to allocate, that will start earning the higher yield right away, correct? Correct.

Okay, that was it. I get your question. It's not like a committed but not drawn down facility that happens in all. It's not like that. You're right.

Exactly, exactly. Okay, thank you.

I am showing no further questions at this time. I would now like to turn the conference back to Julie for final remarks.

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

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