American Equity Investment Life Holding Company

Welcome to American Equity Investment Lifeholding Company's fourth quarter 2021 conference call. At this time, for opening remarks and introductions, I would like to turn the call over to Julie Heidemann, coordinator of investor relations.

Good morning, and welcome to American Equity Investment Lifeholding Company's conference call to discuss fourth quarter and full year 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 Axel Andre, Chief Financial Officer. Some of our comments will contain forward-looking statements indicated by terms such as anticipate, assuming, believe, calls for, can, continue, estimate, expect, forward, future, goal, intend, likely, look to, may need, on track, over time, plan, potential, project, ramp, should, signal, strategy, target, then, to be, towards, trends, will, and would. Our actual results could significantly differ due to many risks, including the risk factors in our SEC filings. An audio replay will be made available on our website shortly after 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. I want to share with you about the progress made in each element of the AEL 2.0 strategy as we have become what we now refer to internally as the new AEL. In the fourth quarter, we completed the building blocks of the AEL 2.0 strategy, setting the stage for us to scale in the coming years, thereby growing shareholder returns and value returns by migrating to the capital-efficient business model and more predictable fee-like earnings we envision as the new AEL As a reminder, the AEL 2.0 strategy begins with the virtuous flywheel to describe our business. The virtuous flywheel starts with an industry-leading at-skill and needy origination platform. Our fundraising abilities through our industry-leading liability origination platforms allow us to be an investment manager with expertise in both liability-driven asset allocation and to manage an open architecture investment platform that can source a wide variety of differentiated investments. Finally, the strategy calls for the build-out of capital structuring and reinsurance capabilities to then attract third-party risk-bearing capital to our business, either for access to AEL's at-scale liability origination or for access to both our differentiated asset allocations and our attractive cost of funding liabilities through the insurance vehicles. Our team worked extraordinarily hard throughout the year. And in 2021, we accomplished all the business building goals for the past year that we presented to you in October of 2020. For go-to-market, we delivered a complete refresh of our general account product suite, regained relevance and growth in our independent marketing organization or IMO distribution channel, and expanded further into banks and broker-dealers through Eagle Life while adding talent to enhance product innovation and economics. we added two new proprietary indices to our refreshed Asset Shield product and introduced two brand new products to our lineup, Estate Shield and Flex Shield at American Equity Life. At Eagle Life, we added new client crediting strategies and completely refreshed select income focus. As Eagle Life grows income product sales, In the independent broker dealer channel, this product is a prime candidate for accelerating the growth in new business transferred to reinsurance vehicles to fuel growth of fee-like capital efficient earnings in the coming years. I'll talk more about sales results for the fourth quarter in a bit, but through the first nine months of 2021, We moved back into the top five for FIA sales in the IMO channel and were just shy of the fourth spot for the third quarter sales while writing higher quality FIA or fixed index annuity business and measured by conversion from traditional spread return on equity or ROE earnings to a more capital light return on assets or ROA mix. More on this aspect in a few minutes. Our investment management pillar is built to the point that it will now deliver risk-adjusted yields and results as expected and on schedule. I'll share some more specifics on this before getting into investment results for the quarter. First, in the area of core fixed income, the migration of our existing portfolio to BlackRock has gone exceedingly well. We have in-sourced the broader capabilities of BlackRock, not only in core fixed income investment management, but also in strategic asset allocation and investment technology, and continue to find newer ways to partner with BlackRock through redefined insurance asset management. Our relationship is much more integrated and interactive than a purely traditional investment management agreement. In the fourth quarter, Jim Hamerlein and team delivered successfully as BlackRock took over management of over $45 billion of assets in October, including $7.6 billion of cash and equivalents. In the first half of 2022, we expect to move assets to our second partner for core fixed income investments, Corning Asset Management, especially focused on our newly formed Bermuda subsidiary. Migrating our core public fixed income portfolio to BlackRock and Corning will help us attain better net yields in core fixed income while allowing us to focus in areas where we can have industry-leading expertise like private assets, derivative trading, differentiated strategic asset allocation, and asset liability management. Second, in the areas of private asset investing, We now have seven sleeves of private asset sectors in which we have conviction, specifically as a landlord in both single-family rental and multi-family apartments, residential home loans for both individuals and professional investors, infrastructure debt, infrastructure equity with a priority around certain subsectors like energy transition, middle market loans to private companies, and annual recurring revenue-based lending to companies in the software and technology sector or STAR. As I approach my two-year anniversary as CEO at the end of this month, I am proud of all the business building efforts we have accomplished as a team, especially in investment management. It has allowed us in 2021 to deploy 3.4 billion dollars in private assets well above our plan of 1 to 2 billion of private assets for the year with expected returns in the 5.1 to 5.2% range. In aggregate, we successfully repositioned the portfolio in 2021 with close to 10 billion of new asset purchases resulting in an estimated portfolio yield of 3.85% at the end of the year. We are on track to achieve close to or above 4% aggregate portfolio yields in 2022 as we further ramp our allocation in private assets from approximately 15% at year-end 2021 to 30% to 40% over time. With this, we will deliver earnings growth, allowing AEL shareholders to realize the full potential of differentiated asset management with potentially a lower risk profile than other alternate business models. Finally, in the fourth quarter, we worked with our residential real estate investment asset manager, Pretium, to close its acquisition of the Anchor Loans platform. This was an opportunistic extension of our macro investment thesis in residential real estate where there is a massive supply-demand gap created due to underbuilding since the great financial crisis over 12 years ago. Founded in 1998, Anchor Loans was one of the first institutional lending platforms built to serve the diverse financing needs of professional residential real estate investors. Over the last two decades, Anchor Loans has grown to become the nation's leading capital provider to experienced residential real estate sponsors through its bridge and construction products. Anchor Loans serves a professional customer base where 95% of loans have historically been made to established borrowers who have completed more than 40 projects. This platform serves the need for bridge and construction loans in the residential credit space, in which there are limited number of at-scale originators with a strong credit underwriting culture. It is a great example of how the capital of AEL, coupled with its new DNA for investment business building, can be supportive of others within the AEL ecosystem, in this case, Pretium. to further expand its asset management business while sourcing attractive assets for us. We were able to access residential mortgage loans to earn 200 to 300 basis points risk-adjusted spread premium to public investment-grade RMBS while also providing significant downside protection. We have an asset sourcing forward flow arrangement with Anchor for multiple years. We are actively looking to replicate such inorganic opportunities across all of our target private asset classes. The goal is to leverage our ability to offer flexible capital solutions for opportunities that have the potential for similar risk-adjusted returns. With this transaction, we have demonstrated an ability to move quickly for the right opportunity. We have numerous world-class investors reaching out to us in order to partner and be part of the AL ecosystem as they see the virtuous flywheel in action. We are considering exploring opportunities across real estate, infrastructure, private credit, and specialty finance where we can commit $250 million to over $1 billion of investment capital per transaction. Moving on to our capital structure strategy pillar, I'm pleased to announce that we achieved all of our stated goals in this area in 2021. I am happy to note that we received all necessary regulatory approvals, and more importantly, have built strong relationships with our regulators. We will continue to expand and explain the merits of AEL 2.0 business model especially when it comes to the use of reinsurance as a strategic differentiator for both risk control and to invite in third-party capital to partner with us, enabling the transformation of our business model into a capital-light operation as measured by the growth in ROA business with the increase in reinsured liabilities. Let me elaborate further in four specific categories. areas of achievement in 2021. First, our reinsurance partnership with Brookfield Reinsurance is working well. This will provide us capital support to grow new business in our core strength of originating long-duration fixed index annuities with lifetime income benefits and will transform those products from a return on equity through spread earnings to a return on assets through fees business model. Business ceded to Brookfield Reinsurance provides a stable, predictable, multi-year earning stream that should trade at a higher multiple for investors than traditional insurance. The notional value subject to recurring fees under the Brookfield Reinsurance Agreement grew by $183 million to a total of $4.1 billion as of year-end 2021. In 2022, we expect around one-third of new business flow to transform into ROA business through growth in reinsured liability. In the coming years, we plan to migrate a majority of new business flow to the ROA side. the Brookfield Reinsurance Partnership is a prime example of this ROE to ROE transformation in action. Second, in the fourth quarter, we completed the build-out of our reinsurance platform with the licensure of AEL RE Bermuda effective December 31st and the transfer of $4 billion of enforced business supported by approximately $300 billion of capital on a Bermuda regulatory basis. This accomplishment is significant because it is the first time American Equity has established an offshore reinsurance subsidiary, putting us on a level playing field with many of our largest competitors. The creation of AEL Reed Bermuda gives our company three important benefits. One, a presence in highly credible offshore regulatory jurisdictions that allow for greater asset liability matching flexibility, which will allow us to optimize our investment portfolio through a higher allocation to privately sourced assets. They will allow us to free up capital at the Iowa subsidiary on an NAIC statutory basis, consistent with a more principle-based regulatory regime in Bermuda. And three, most importantly, we will develop the infrastructure, oversight, personnel, local management, finance, IT, and the like, which can be leveraged to create newer entities similar to AEL ReBermuda with which we will attract third-party capital. We expect to set up multiple offshore reinsurance entities, commonly referred to as sidecars, to invite third-party capital to partner with us. AL will manage these vehicles, controlling the risks involved versus traditional third-party reinsurance that is prevalent in industry, and earn ROA fees. So the creation of sidecars We will customize the asset allocation and liability mix to match the risk-return appetite for reinsurer equity investors, thereby connecting long-term equity capital with long-term insurance liabilities, further powered by the differentiating elements of AEL's three strategic pillars. Third, we completed the refinancing of redundant statutory reserves on our lifetime income benefit riders with an explicit fee this quarter, with the transaction closing retroactive to October 1st. With the closing of the refinancing, we realized positive capital impacts of an estimated 23 points of risk-based capital and saved approximately $9 million per quarter pre-tax compared to the prior financing arrangements. the completion of the refinancing did lead to an actuarial assumption revision on a gap basis, which Axel will address in his remarks. Finally, a strategic cornerstone relationship with Brookfield Reinsurance continues to grow stronger. Brookfield received formal approval to increase its equity stake in the company in December and subsequently in early January executed on the second tranche of the equity investment in AEL, by purchasing 6.775 million shares at $37.33, bringing its ownership to 16% as of the time of the purchase. With the necessary regulatory approvals completed for Brookfield, we have restarted our share repurchase program in 2022, and through February 15th, have purchased $100 million worth of shares at an average price of $41.90 and expect to remain active buyers of our stock in 2022. We have a strong capital position generated by our reinsurance strategies and business model evolution and substantial cash at the holding company and access to available capital at the holding company. This will allow us to further scale our allocation into higher returning private assets to grow earnings, opportunistically explore inorganic opportunities to accelerate asset origination while returning capital to shareholders. In summary, 15 months ago, we outlined the AEL 2.0 strategy, and in 2021, we have executed all the proof points for the fundamentals fundamental building blocks. The new AEL is now built, and the next few years, our strategic focus is on three key elements. First, scaling our allocation to private assets, including through inorganic block deals. Second, growing the amount of reinsured liabilities to AEL-established reinsurance sidecars to grow ROA earnings, and finally, writing new business that converts from traditional spread ROE model to a fee-like ROA earnings model through reinsurance. Hence, AEL has established the building blocks to turbocharge the right kind of growth to be the leading franchise in the asset-intensive insurance business. Going forward, we expect to reach the financial benefits from this further scaling of the strategy. Moving on to business results for the quarter, we continue to see positive momentum in both new business sales and investment results. Sales results were strong in fixed index annuities. Although total sales of $1.04 billion were down 20% versus the third quarter of 2021, FIA sales increased 7% sequentially to $982 million. We expect this result will be better than the overall market. For the year, our FIA sales increased 48% to $3.5 billion, reflecting the success of our go-to-market initiatives within the context of an improving sales environment. Total sales of $6 billion for the year were at the high end of our guidance. At American Equity Life, total sales through the IMO channel were $828 million in the quarter. Of this, fixed index annuity sales increased 11% sequentially to $806 million from $728 million as the refreshed asset shield series continues to gain momentum. Income Shield sales rose 7% sequentially. FII sales at Eagle Life of $176 million represented a 6% decrease versus the third quarter of 2021, but a 66% increase compared to the year-ago quarter. Although FII sales at Eagle Life were down sequentially, we continue to see improved income product sales, albeit of a small base, as sales of Eagle Select Focus income were up approximately 18% over the third quarter of this year and accounted for about 22% of total FIA sales. As planned, single premium deferred fixed annuity or SPDA sales were down 89% compared to the third quarter as we cut crediting rates on new business in the quarter in order to focus our pivot in Eagle Life to our cold bread and butter long-duration FIA products. We believe these products align well with the transformation of AEL from a spread ROE insurer to more of a fee-based ROE company with respect to new business. Investment yields for the quarter were 3.8%. The new money investment yield in the quarter was 3.51%. but it is weighed down by the large amount of core fixed-income investments that were made on behalf of us by BlackRock, restructuring the portfolio and putting excess cash to work. However, during the fourth quarter, we invested $2.3 billion in privately sourced assets at an expected return of 5.29%. These investments included $1.1 billion of short-term residential mortgages to our new relationship with Anchor. Excluding notable items associated with actual resumption revisions, we reported non-GAAP operating income of $97.1 million, or $1.04 per share. Financials benefited from solid investment results. With that, I'll turn the call over to Axel.