American Equity Investment Life Holding Company

Welcome to American Equity Investment Life Holding Company's fourth quarter 2022 conference call. At this time, for opening remarks and introductions, I would now like to turn the call over to Julie Heidemann, Coordinator of Investor Relations.

Good morning, and welcome to American Equity Investment Life Holding Company's conference call to discuss fourth quarter 2022 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 Anant Bala, Chief Executive Officer, and Axel Andre, Chief Financial Officer. Some of our comments will contain forward-looking statements which refer or relate to future results, many of which we have identified in our earnings release. Our actual results can 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.

Anat Bala Thank you, Julie. Good morning, and thank you all for your interest in American equity. The fourth quarter of 2022 caps a successful year for the ongoing advancement of our AEL 2.0 strategy as we continually execute against the four key pillars. In investment management, we originated $5 billion of privately sourced assets at an expected return greater than 6% and expanded our primary focus from residential real estate in 2021 to a more diversified portfolio in 2022, covering a variety of sectors, including infrastructure, middle market credit, and commercial real estate equity. Across sectors, we are being disciplined and deliberate, focusing on underlying assets with a resilient cash flow profile where the majority of the return is largely delivered by the underlying operating performance and where there is an advantage for an insurance balance sheet to own the assets. With fixed income spreads widening throughout most of the year, we seized this additional optionality to increase exposure in our core fixed income bucket while being more selective in our private asset strategies. In go-to markets, we substantially revamped our pricing procedures, affording us optionality to reprice products quickly as markets change. To put this in perspective, we have historically repriced new products once or twice per year. Thanks to the changes we made to improve these processes, we successfully delivered in excess of 50 product and rate changes in 2022. Our pricing has become more nimble, targeted, and responsive to market changes, which is important to generate growing sales while maintaining attractive double-digit IRRs on total sales volume. We also refreshed our distribution incentive and loyalty programs and continue to assess ways to further differentiate our service offerings to producers, building on our number one ranking for customer satisfaction for annuity providers by JD Power and Associates. In this area, we will be revamping our new business processes and technology to improve efficiency as we grow. In our capital and reinsurance pillar, we achieved $9.6 billion of fee-generating reinsured balances and generated over $50 million in revenues in 2022. This included new business seeded during the year of $1.3 billion to Brookfield and $3.8 billion of in-force to 26 North effective October 3rd. Additionally, the new reinsurance agreement with 26 North 3 resulted in a capital release of $260 million to fund the growth in excess capital that supports the continued migration to privately sourced assets and capital return to shareholders. As a result of this transaction, we also reduced the sensitivity of our GAAP financial results to equity index credit. We're also pleased to announce that we started flow reinsurance on traditional fixed rate annuities with 2603 effective February 8th. During the year, we repurchased 14.8 million shares more than offsetting the dilution for the follow-on offering to Brookfield, and returned an additional $307 million to shareholders. Combined with dividends paid in the fourth quarters of 2021 and 2022, we have returned $369 million of capital to shareholders in the last five quarters. In 2023, we intend to return at least $380 million to shareholders comprising of the $130 million remaining from our planned return in 2022 and at least $250 million for 2023. This is well within our remaining authorization of $569 million and a testament to the board and management's belief in our long-term potential to generate sustainable and growing value for shareholders. While it's not front and center, We continue to invest in enhancing our fourth pillar, the foundational capabilities, to support a higher trajectory of growth and widening of our liability aperture while maintaining expense discipline. We have implemented new investment accounting and investment management systems and are implementing a new general ledger system. Turning to the fourth quarter, In the investment area, we saw many unique opportunities in private assets during the fourth quarter as markets continued to reprice across most sectors. In the quarter, we put $1.4 billion to work in private assets. Total private assets at the end of the year were almost $11 billion, bringing our allocation to 22% of the investment portfolio at year end. Of this amount, approximately $7 billion, or close to two-thirds, is in real estate loans, comprising of $2.9 billion of residential loans, $3.4 billion of commercial mortgage loans, and $0.6 billion of agricultural loans. Beyond mortgage loans, the private asset portfolio consists of middle market private credit of $1.2 billion, or 2% of the portfolio. Middle market credit consists primarily of senior secured loans to small and medium-sized companies with strong lender protections. This portfolio is well diversified across borrower and markets, is mostly floating in nature, and offers better structure than high-yield public credit markets. Majority of this portfolio is managed by Adam Street Partners, and some more details on this were presented at our investor symposium in December. Additionally, Outside of credit, the single largest sector in our private asset portfolio is our approximate $1 billion portfolio of single-family residential rental homes. We've been a big believer in this asset class, and over the past two years have built a portfolio of homes that is geographically diversified in locations, seeing both strong growth in population and associated wage income growth. We look to benefit from both long-term appreciation of housing stock and rental growth. The macro dynamics for rental housing are strong, and partnering with the nation's leading platforms operated by our asset management partner, Pretium, is a compelling differentiator for AEF. Finally, our private assets portfolio comprises of a 1% allocation each to infrastructure debt and specialty credit, and a smaller allocation to commercial real estate equity, which along with infrastructure equity should grow over time. We have negligible exposure to traditional private equity and no exposure to hedge funds. During the quarter, we put over $800 million to work in the real estate sector, primarily residential non-qualified mortgages, residential transitional loans, and single-family real estate at an average expected return of over 6.4%. We remain bullish on rental housing as demand continues to significantly outpace supply. Residential real estate loans remain attractive and with underwriting standards tightening still produce expected returns north of 6%. In addition, we see attractive risk-adjusted yields in directly originated and middle-market credit, as well as in directly sourced opportunistic specialty credit and real assets. One of the real estate investments made in the quarter was our first equity investment in the ultra-luxury hospitality sector, partnering with a world-class hotel owner and operator. This is part of the hospitality sector that is proving to be more resilient through economic cycles, though it is still a newer and growing segment within the United States. Earlier this week, American Equity Life Insurance Company co-invested alongside an I-square capital fund in the Whistler Pipeline. The Whistler Pipeline is a leading U.S. core energy infrastructure system connecting the Parmesian Basin's growing natural gas supply to LNG, Mexico, and Gulf Coast demand. Whistler will have direct connections into LNG facilities in the Corpus Christi area. Nearly all current capacity is contracted under long-term fixed fee minimum volume commitments, primarily with investment-grade counterparties. We see increasing long-term demand for natural grass across the U.S. Gulf Coast due to the growth in LNG liquefaction capacity being constructed in the region, as well as growing demand from Mexico. I share this detail because it is an example of an asset that offers a rare combination of strong, free cash flow, high-quality contracts, and operating rights on highly strategic natural gas infrastructure. The management team of the asset, who retain a significant portion of equity in the business, has established a reputation for growing contracted cash flows through developing and operating greenfield projects, and have identified several initiatives to further grow this platform. We are also strategic and purposeful in seizing the opportunities arising from broader public market dislocation. For example, during the fourth quarter, we added over $1 billion of high-quality, almost entirely AAA and AA-rated structured securities with expected returns above 6%. All of this points to the value we have delivered through our investment management area where we are balanced from a risk-return point of view between public markets and private assets. In the go-to-market area, we saw a fourth quarter increase in sales of fixed index annuities of 7% compared to the third quarter. We saw very strong sales gains at Eagle Life in both accumulation and income products, which would be expected given the rapid response nature of the bank and broker dealer channels to pricing changes. At American Equity Life, we continue to see growing momentum for sales of income shields, which were up 8% from the third quarter and increased 29% from the comparable period a year ago. Accumulation product sales in the independent agents channel saw decline due to relative attractiveness of more commoditized S&P cap rates. With our latest pricing refresh effective November 30th, we are well positioned competitively and enter 2023 with strong momentum. Through February 15th, We have sold approximately $460 million of fixed index annuities and over $160 million of traditional fixed rate annuities for total annuity sales of approximately $620 million. We are very well positioned to continue to seize opportunities and be competitive in the marketplace and are confident in and energized about our plan to deliver superior value in the long term. Now I'll turn the call over to Axel to go over earnings results. Axel.

Thank you, Anant. Let me extend my appreciation to all of you attending this call. For the fourth quarter of 2022, we reported non-GAAP operating income of $67.9 million, or 79 cents per diluted common share, compared to non-GAAP operating income of $75.8 million, or 81 cents per diluted common share, for the fourth quarter of 2021. Excluding notable items, operating income for the fourth quarter of 2021 was $97.1 million, or $1.04 per diluted common share. There were no notable items in the fourth quarter of 2022. The quarter included $21 million of revenues from reinsurance agreements, up from $11 million in the third quarter of 2022. You'll notice that we changed the presentation in our financial supplement. to show account values rather than cash surrender values, as we had previously done, as cash surrender value is no longer a common metric for the calculation of fees on all account values seeded. Going forward, the change in account value line will include new business seeded, offset by decrements in certain business seeded. Average yield on invested assets was 4.3 percent in the fourth quarter of 2022, compared to 4.48 percent in the third quarter. The sequential decrease was primarily attributable to returns on partnerships and other mark-to-market assets, which returned nine basis points less than expected returns in the fourth quarter compared to 22 basis points over expected returns in the third quarter, partly offset by a 15 basis points benefit on the portfolio from the increase in short-term rates on floating rate assets. The average adjusted yield, excluding non-trendable prepayments, was 4.29% in the fourth quarter compared to 4.45 percent in the third quarter of 2022. While partnerships and other aftermarket assets, which are reported primarily on a one-quarter lag basis, had a positive contribution to investment income, well within the expected range of variance, the contribution was $11 million, or nine basis points of yield, less than the assumed rates of returns used in our investment process for the fourth quarter of 2022. As for the context, The contribution of partnerships and mark-to-market assets to net investment income for 2022 was $200 million, which is $87 million, or 16 basis bonds more, than the assumed rate of return in our investment process. Enforce reinsurance reduced investments by $3.8 billion and reported net investment income by $45 million for the fourth quarter in 2022. We invested $2.5 billion at a yield of 6.81%, including $1.4 billion of privately sourced assets, at an expected return of 7.02% in the fourth quarter. Our allocation to privately sourced assets was 22% of invested assets as of quarter end, compared to 18.4% as of September 30th. Since quarter end, we have continued to put money to work in privately sourced asset sectors where we have conviction, as well as in core sectors where we have seen attractive opportunities to support our strategic initiatives. As of December 31st, the point-in-time yield on our investment portfolio was 4.44% compared to 4.22% as of September 30th, reflecting the benefit from the increase in floating rate indices, an increase in yield on our public asset portfolio reflecting portfolio management trades, and a further increase in our allocation to privately sourced assets. For the first quarter of 2023, we expect an additional benefit of roughly seven basis points in yield reflecting the increase in short-term rates on our $6 billion of floating-rate assets. The aggregate cost of money for annuity liabilities was 1.76% in the fourth quarter, up from 1.75% in the third quarter. The cost of money in both quarter reflected near zero hedge gains. The increase in the cost of money primarily reflects the higher cost of options purchased in the fourth quarter of 2022, compared to the runoff of the lower cost options purchased in the third quarter of 2021, and higher renewal rates on annual reset traditional fixed annuities. offset in part by the slightly higher cost of money on account value ceded to 2603. Cost of options in the fourth quarter of 2022 averaged 1.61% compared to 1.58% in the third quarter. Investment spread in the fourth quarter was 2.54% compared to 2.73% in the prior quarter. Excluding prepayment income and hedging gains, adjusted spread was 2.53% compared to 2.70% in the third quarter, reflecting the sequentially lower returns on partnerships and market assets and slight increase in custom money. Deferred acquisition costs and deferred sales inducement amortization totaled $139 million in the fourth quarter, compared to $145 million in the third quarter, excluding the effect of actual assumption change. Fourth quarter amortization was $8 million greater than modeled expectation post the enforced reinsurance transaction, primarily due to lower than modeled index credits and higher surrenders than expected, offset in part by lower than modeled option budget and crediting rates. The change in the liability for guaranteed lifetime income benefit payments decreased $5 million this quarter compared to the third quarter, excluding the effect of actual assumption changes. The fourth quarter increase in the liability for guaranteed lifetime income payments was $37 million more than modeled post the enforced reinsurance transaction, due primarily to the near-zero level of index credits, which increased the reserve by $18 million. Lower than modeled cost of money and other experience true-ups each added $8 million to expense above expectations. For the first quarter, We would expect amortization of the deferred acquisition costs and sales and usement assets under FAS 97 of $126 million and an increase in the SOP 03-1 reserve for guaranteed lifetime income benefit payments of $60 million on current in-force before adjusting for actual experience. As a reminder, the lack of index credits could add up to an additional $10 million to DAC amortization and another $20 million to the SOP reserve. Outflows in the quarter totaled $1.2 billion, up from $1.1 billion in the third quarter, driven by increased surrenders. While we have only limited information on how such disbursements are used, we have seen an increase in Section 1035 exchanges to other carriers of in-force policies, mostly out of and near the end of surrender charge period. Other operating costs and expenses were $62 million in the fourth quarter, up $2.5 million from the third quarter, bringing the full year right in line with expectations. For 2023, we expect other operating costs and expenses to be in the $250 million range for the full year. At December 31st, cash and equivalents at the holding company were $531 million, reflecting a $325 million dividend from American Equity Life to the holding company. As of year-end, the estimated risk-based capital ratio for American Equity Life was 413% compared to 400% at the end of 2021. Our internal estimates show that we have excess capital at year-end relative to rating agency models of approximately $650 million. The book value ex-AOCI at year-end 2022 was $54.52 per share on a pre-LDTI basis. Consistent with our prior messaging on the impact of LDTI, we would estimate book value ex-AOCI at year-end 2022 to be north of $60 per share on a post-LDTI basis. We will report our first quarter results in early May on a post-LDTI basis, and expect to publish a restated financial supplement prior to the call, presenting our results on a post-LDTI basis. Directionally, we expect our run rate operating income to be favorably impacted by the change to LDTI, primarily reflecting lower reserve accretion for lifetime income benefits under the market risk benefit framework than under the SOP03-1 framework. as well as more predictable pattern of DAC amortization going forward, due to it becoming not sensitive to actual to expected variance in investment spread under the new LDTI framework. With that, thank you for your attention, and I'll turn it over to the operator to begin Q&A.

And thank you. And as a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. We ask that you limit yourself to one question and one follow-up. If you have any additional questions, please jump back in the queue. And one moment for our first question. And our first question comes from Dan Bergman from Jefferies. Your line is now open.

Thanks. Good morning. I guess first I just wanted to see if there was any update you can give around the outlook for fixed index annuity sales in 2023. I think in the past you'd used an assumption of about $4 billion for the 2023 sales. And if I heard the numbers and the prepared remarks correctly, it sounded like the first six weeks production would imply a run right near that $4 billion level. But just given that would be a big step up from the $3.2 billion you did this past year, I just wanted to get a sense if you thought that $4 billion range is achievable for 2023 or just how you're thinking about it. Thanks.

I think you're thinking about it the right way, Dan. We've had a strong start to the year, and we feel good about what we said earlier.

Got it. That's helpful. Thanks. And then it looked like surrenders and withdrawals saw another sequential increase, I think, to about $1.2 to $1.3 billion versus the closer to $1 billion quarterly range it had been traveling in earlier in the year, even though I guess the enforced book was down somewhat due to the reinsurance. I just wanted to see if you can give an update on what you're seeing seeing there and whether those higher withdrawals have been concentrated in any particular product types or vintages. And if it is just driven by the higher interest rate environment, should we expect this higher level of surrenders to remain in place for the foreseeable future?

Yes, thank you for your question. This is Axel. Yes, so we saw higher surrenders in the fourth quarter, so $1.2 billion versus the 1.1 in Q3. We see that those surrenders primarily across vintages that are essentially reaching the end of the surrender charge period or that are either out of surrender or just reaching that end of surrender charge period. You know, we expect that with the stabilization of the interest rate environment that the The increase in surrenders is probably going to stabilize. But, of course, this is one of the behaviors that we observe closely. And from a rate-setting perspective, we look at that on a regular basis, and we take appropriate action as we see fit.

And leading on that, thanks, Axel, is having a big book really helps. We are focused on enforcement management. to see how they stay around this area. They'd probably be expected to stay in this area. But we also have a very liquid asset portfolio, and that's one of the reasons I provide that extra detail on the private assets. Our private assets are very high quality, some short-term in nature, very liquefiable. If you think about $7 billion of those are loans, real estate loans. We have access to liquidity facilities. So we feel very good about the liquidity profile of the portfolio. I want to make sure you all understood that because people don't always understand what private assets are. And we are going to grow our AUM, not have it shrink, which is why our assets are not just on sales, primarily sales, but also impulse actions, as Axel mentioned.

Got it. That's really helpful. Thank you.

And thank you. And one moment for our next question. And our next question comes from Ryan Kruger from KBW. Your line is now open.

Hi, thanks. Good morning. It looks like you've seen some higher volume from traditional fixed annuities in both the fourth quarter and what you've commented on in the early part of the year. Do you expect MYGUS to start to be – I know you're more focused on FIAs, but would you anticipate MYGUS to be a more regular contributor to sales going forward?

Hi, Ryan. Good morning. Yes. Short answer, yes. We really focus on our bread and butter, which is FIA. MIGA is competitively priced to deliver returns. We have the reinsurance arrangement in place now with our reinsurance partner there. And it will be because as we grow Eagle, it becomes reality, especially in the bank channel. We're making sure we're writing good IRRs in that business.

Got it. Thanks. And then, Axel, I believe you gave numbers for expected DAC amortization and LIBOR reserves. I think I missed the numbers. I was hoping you could repeat them. And then related to that, were those under the prior GAAP accounting or are those under LDCI?

Yes. Hi, Ryan. Let me go through the numbers again. They're on the pre-LDCI basis. I mentioned that DAC GSI amortization, the model expectation is $126 million, whereas for the SOP 03-1 reserve, the expectation is $60 million for next quarter. And I added as a reminder that both of those expectations include expected index credits, should index credits in fact be zero in the first quarter. it would add an additional $10 million to DAC DSI amortization and another $20 million to SOP reserve accretion.

Will they – under LDTI, will there still be that similar type of sensitivity from index credits, or will that be more limited?

So I'm going to comment on LDTI really on the next earnings call, but, you know, consistent Consistent with the rollout of the new framework, we are also adjusting our definition of operating income to reflect what we believe is the long-term underlying core operating earnings of the company. And so in that light, we aim to adjust for volatility that is expected to be non-recurring and non-directional. And so certainly some adjustment for the level of for market volatility, equity, or interest rate related would be part of that. Again, more to come on that in the future through our restated financial supplements as we come out ahead of the Q1 earnings goal and then the earnings goal itself.

Okay, great. Thank you.

And thank you. And one moment for our next question. And our next question comes from John Barnage from Piper Sandler. Your line is now open.

Thank you very much, and good morning. I appreciate the opportunity. My first question, the $250 million operating expense guidance, I know you previously talked about working to complete a sidecar in 23. Did that operating expense guidance include the assumption that that is completed this year?

Yes. Hi, John. Yes.

Great, thank you. And then the move to private assets to 22% from, I believe it was 18% last quarter. Do you anticipate hitting that low end of the 30% to 40% target in 23? I'll let Jim add to it.

The short answer is no, not in 23, but I'll let Jim add some more color to it, Jim.

Yeah, hi, this is Jim Hamelainen. I think that number is probably more likely out a little further than 2023. Our goal is to continually source assets through the cycles. And so, you know, that'll get us, you know, certainly be closer at the end of the year than we are now, but it probably takes us into a little bit into the next year.

Thank you very much. Ed, thank you. And one moment for our next question. And our next question comes from Eric Bass from Autonomous Research. Your line is now open.

Hi, thank you. Given the increase in surrenders that you're seeing, how are you thinking about renewal rate increases and whether it makes sense to give up some spread to retain more business? I guess related to that, how should we think about the cost of money going forward?

I can start and I'll let Axel add in there.

Good morning. We are looking at it. I think LDTI is an interesting consideration for us in that perspective as well as Axel said we'll talk more about LDTI going forward but it's net that really positive for the FIA business so if you think of do we redeploy some of those earnings into enforced rate management is the way I'm really thinking about it right now because candidly this is going to be a very very good year for us from a year and year profitability point of view post LDTI but you also see what bang for buck you get on it I go back to the liquidity profile of the balance sheet, and the private asset strategies are very liquefiable, and Jim and team are doing a good job managing that. So even though, you know, surrenders are modestly up, you're looking at which blocks you're losing and which blocks you want to keep and things like that, and we feel good about it. So it's a rather long-winded answer, but I try to give it in a framework sense. You know, we've got a balance sheet that can handle a little high elevated lapses we actually are okay with these lapses and we want to write newer business so that we can invest it in higher returns versus just give away the profitability.

And maybe I would just add to that, just reminding you, you know, when we talk about our third quarter 2022 assumptions in locking, so the assumptions, the spread assumptions that are embedded in our actual models, We talked about cost of money. The near-term cost of money being around 1.7%, ultimately growing to the long-term, so that's eight years out, long-term cost of money of 2.4%. So our models already kind of anticipate some of that increase. It's really a question of timing.

Thank you. That's helpful. And then switching gears, I was hoping you could comment a little bit on the NAIC's proposed changes to capital charges for CLOs and private credit funds. Maybe if they're adopted, what impact that could have on your portfolio and the capital requirements for your private credit assets?

Great question. As always, you're keenly tuned into what's going on in the market. It's less of an impact for us is the short answer because we didn't back up the truck on CLOs and things like that. We actually agree with the direction of travel with the NAIC there and frankly would prefer if everyone was super transparent when the source stuff and how the structure and what they do it. We've been in the middle of the fairway in the way we've approached private assets.

That's why I said like $7 billion of that is loans, even our private credit strategies.

Too early to say what their final proposals are, and they'll likely get implemented in 25 from what I'm hearing, not before 25. But we're not the firm that backed up the truck on CLOs and structured credit and got cute about it with respect to all of my competitors who did. So we feel pretty good about it.

Got it. Thank you.

And thank you. And one moment for our next question. And our next question comes from Wilma Burtis from Raymond James. Your line is now open.

Hey, good morning. I guess first, any updates on the sidecar? I know you mentioned it's kind of in the budget this year, but any updates?

Hi, Wilma. Morning. No new update. I think it's the last call I said we're looking at in the third quarter timeframe. Obviously, good progress on it. We're working with a banking partner. We're in the market talking to counterparties. We like the initial response we've got from really pristine counterparties that we've brought into this, the way I define them. And we're focused on executing it and moving forward. I am very much focused with the leadership team here on growing our AUM and having the right mix of spread and fee-related earnings. And so that will get executed over the course of the year. And then we really want to continue to focus on growing. So that BAU will get executed.

And then we're focused on growing sales and growing AUM and growing the mix of earnings.

Sasha, thank you. And then maybe a little bit of color on the buybacks and 4Q, which seem, you know, we're a little bit lower.

So, in the fourth quarter, we repurchased a little bit over a million shares, close to $40 million. So, you know, we set a grade for buyback. We kind of reset the grade every quarter after the earnings call. Of course, we did not anticipate the events of middle of December, which resulted in the stock price kind of jumping up to $45 and above. It's just a function of really of how the grid was set ahead of that that we ended up being out in the market for a portion of the quarter. But as Anand said, we remain buyers of our stock and we intend to complete the 2022 share buyback program in 2023. So that's the $130 million that remains and at least $250 million for 2023. Yeah, maybe I'll just add a little.

There's a little noise around our name in the quarter, as you're well aware, so they've got a bit in the way of us being able to buy stock on a regular basis. We hope to refresh our buying grids and, you know, how those 10B51 plans and all those things work. So we should be back in the market pretty soon here.

Okay, thank you.

And thank you. And one moment for our next question. And our next question comes from Mark Whealy from RBC Capital Markets. Your line is now open.

Yeah, good morning. You mentioned the new flow reinsurance agreement with 26 North effective during February. Could you just comment a little bit more on sort of which assets are being seeded under that and if you have any kind of general targeted range of how much flow is expected to go across that?

Sure, yeah, happy to take it. For flow reinsurance, there are no assets transferred, right? What happens, it's new business that we issue, so the premium cash basically gets transferred to the reinsurer. There's no time for it to be invested and then transferred. So it's really the reinsurer assumes risk and invests as they see fit to back the liabilities they consume.

I misspoke. What I meant was premium, not assets, right?

Right, so with Flow Reinsurance, it's premium comes in, premium goes back out to the reinsurer just directly.

It's really that simple. And in terms of your other part of your question, I'll just add in, it's $525 million a year. I may have mentioned this in the last call. That's the size of the migrant treaty with them, and that's what we would expect it to be.

Got it. That's what I was really looking for. Okay. The second question that I had is with respect to the various real estate loans and private assets that you have, is there anything that you're doing from kind of a hedging standpoint? And is that a different cost or run rate than like what we're normally used to?

Hi, this is Jim again. You know, in terms of private assets, you know, if your question is are we putting them on the books and then hedging those assets, The answer to that is we are not doing that. From a private asset perspective, we're looking for long-term returns on these assets over time, both in terms of loans and in terms of equity investments. I think that answers what your question was, but let me know if it doesn't.

No, it does. I'm sure the qualities are very high, and you mentioned the liquidity, but at Historically, that's always been the case until it isn't, and that's why I was asking the question.

I see. When you think about liquidity, too, just a little stepping back just a bit on liquidity, our entire investment plan is focused around the liabilities, the characteristics, including projections of liability outflows. That's all built into what we're doing, and liquidity is part of the considerations that we make. So we're very much focused on thinking about liquidity and what our needs could be beyond our expectations even. Okay. You know, we don't put assets on the books assuming that we're going to have to liquefy those assets and draw liquidity. It is available in some cases, but we certainly don't buy private assets assuming that that's part of the base case assumption.

Okay. Thanks for the input. Thanks.

And thank you. And if you would like to ask a question, that is star 11. Again, if you would like to ask a question, that is star 11. And one moment for our next question. One moment. And our next question comes from Pablo Sinzon from JP Morgan. Your line is now open.

Hi. Thank you. Axel, just given your comment about interest rates stabilizing, do you think the competitive environment has stabilized as well or are insurers still trying to pass on higher rates to customers at this point? And I realize it's not one for one, right? I think in terms of making excess spread, but just want to get a sense of how rates are filtering into the competitive environment.

Hi, Pablo. Good morning. Thanks for your question. Yeah, I think we're starting to see that, starting to see some stabilization in the competitive environments as well. Even we saw some competitors take their rates down. So I think, yeah, there's stabilization, rationalization. I think, as Anant mentioned, looking at our fourth quarter sales, looking at the trajectory and the momentum of our first quarter to date sales, I think that all points to that, essentially. Stabilization, rationalization, and all good positioning within that.

Yeah, Pablo, I'll just add to it.

I'll just add to one thing. Historically, AEL is led with service. and an okay product. What we've sort of done with the product changes we've done, because we have the juice, if I may use that expression, on the asset side, there's no reason we can't have a top five product or a top three product in terms of rating features. It's a combination of service, ease of doing business, and compelling. Not the hottest, but a top five product. If we're not top five, we're not going to sell. That's the market reality, and we easily can be top five given our investment juice.

Yeah, got it. That makes sense. And thank you for that. The second question I had was a numbers question. So I'm curious, on average, how much capital do you have to hold against a dollar of private assets? And how does that compare against your typical public fixed income asset? Just trying to get a sense of the capital consumption against your capital generation. And I think the excess capital you have, which I think was 650, was you mentioned, but any color there?

Yeah, I'll start. It varies, right? I mean, not to give you a non-answer, but it varies because if you look at resi loans, it's less than BBB public corporate securities and fixed income. I think the RBC factor is like 0.6 versus NAIC2 is 1%. If you look at real estate equity, it's obviously 20% capital charge. When the team looks at our capital charge, the most important thing is we have a significant amount of excess capital and we're looking at what's the ROE that we're delivering on the private assets and is it well not of the ROE trajectory of our business and therefore it adds value. So having a portfolio of $11 billion of private assets where loans are a big portion of it and then buying real assets which you can finance between loans and equity gives us a capital charge which even though higher than public fixed income, is going to be in that range. Now, Axel and Jim, add in anything to that. Because I think what Pablo is looking for is what number to put in his model, and I don't know if we can give him that. Right. Yeah, exactly.

I don't think it's a straightforward number. But to Nat's point, the way we look at it is in the context of a financial plan and the excess capital that we have and putting that money to work, consuming some of that excess capital over time, ensuring that we are getting the return and we are delivering the returns for shareholders as we do that.

This is Jim again. One thing I would add is our investment plan, our long-term projections are fed into the corporate model to ensure that the capital consumption that we have still enables a company to deliver capital to shareholders. It's all integrated. It's all part of our process. We're thinking about that as we look at when we say 30% to 40% private assets. We've You know, we have actually made sure that that's feasible under the construct that we're making investments and allows us to return capital shareholders as we have indicated in the past.

A good way to think about that, Pablo, if you want, just to add to what the guys said, is we've always said this business is very much sustainable, also as you position our sidecars, with 15 is to 1 leverage, which has a mix of 30%, 40% private assets and the rest public. So you can back into the map that way. If you're levered 15 is up to 15 is to one, that auto capital charge basis means you're running the business at like 7% capital. If that helps.

Yep. Yep. That's helpful. Thanks Anant. And then the last one for me, uh, Just any high-level comments you can give on stat earnings for 22 and 23, which, you know, as you guys know, ultimately drive capital generation. And what I'm thinking about here is the drag from low-index credits, right, to debtor spreads and fee income offsets. I think in a past presentation you had mentioned distributable cash flows of about $150 to $175 per 22. Is that all funded by stat earnings, or is there some takedown of capital involved there? Thank you.

Yeah, thanks, Pablo, for the question. Yeah, I would refer back to in the investment symposium, we kind of laid that out, right? Essentially, what are the distributable earnings from spread-related business, and then adding on top of that fee-related earnings, which are basically, by definition, all distributable. Yeah, the number that you mentioned there are in line with what we talked about then. I would also point you to kind of the This year, we took, I just mentioned, we took a $325 million dividend from the operating company to the holding company at the end of the year.

Thank you for your answers.

And thank you. And I am shelving no further questions. I would now like to turn the call back to Julie Heidemann for closing remarks.

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

The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 11. you Thank you. Thank you. Thank you.

Welcome to American Equity Investment Life Holding Company's fourth quarter 2022 conference call. At this time, for opening remarks and introductions, I would now like to turn the call over to Julie Heideman, Coordinator of Investor Relations.

Good morning, and welcome to American Equity Investment Life Holding Company's conference call to discuss fourth quarter 2022 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 Anant Bala, Chief Executive Officer, and Axel Andre, Chief Financial Officer. Some of our comments will contain forward-looking statements which refer or relate to future results, many of which we have identified in our earnings release. Our actual results can 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.

Anat Bala Thank you, Julie. Good morning, and thank you all for your interest in American equity. The fourth quarter of 2022 caps a successful year for the ongoing advancement of our AEL 2.0 strategy as we continually execute against the four key pillars. In investment management, we originated $5 billion of privately sourced assets at an expected return greater than 6% and expanded our primary focus from residential real estate in 2021 to a more diversified portfolio in 2022, covering a variety of sectors, including infrastructure, middle market credit, and commercial real estate equity. Across sectors, we have been disciplined and deliberate, focusing on underlying assets with a resilient cash flow profile, where the majority of the return is largely delivered by the underlying operating performance and where there is an advantage for an insurance balance sheet to own the assets. With fixed income spreads widening throughout most of the year, we seized this additional optionality to increase exposure in our core fixed income bucket while being more selective in our private asset strategies. In go-to markets, we substantially revamped our pricing procedures, affording us optionality to reprice products quickly as markets change. To put this in perspective, we have historically repriced new products once or twice per year. Thanks to the changes we made to improve these processes, we successfully delivered in excess of 50 product and rate changes in 2022. Our pricing has become more nimble, targeted, and responsive to market changes, which is important to generate growing sales while maintaining attractive double-digit IRRs on total sales volume. We also refreshed our distribution incentive and loyalty programs and continue to assess ways to further differentiate our service offerings to producers, building on our number one ranking for customer satisfaction for annuity providers by JD Power and Associates. In this area, we will be revamping our new business processes and technology to improve efficiency as we grow. In our capital and reinsurance pillar, we achieved $9.6 billion of fee-generating reinsured balances and generated over $50 million in revenues in 2022. This included new business seeded during the year of $1.3 billion to Brookfield and $3.8 billion of in-force to 26 North effective October 3rd. Additionally, the new reinsurance agreement with 26 North 3 resulted in a capital release of $260 million to fund the growth in excess capital that supports the continued migration to privately sourced assets and capital return to shareholders. As a result of this transaction, we also reduced the sensitivity of our GAAP financial results to equity index credit. We're also pleased to announce that we started flow reinsurance on traditional fixed rate annuities with 2603 effective February 8th. During the year, we repurchased 14.8 million shares more than offsetting the dilution for the follow-on offering to Brookfield, and returned an additional $307 million to shareholders. Combined with dividends paid in the fourth quarters of 2021 and 2022, we have returned $369 million of capital to shareholders in the last five quarters. In 2023, we intend to return at least $380 million to shareholders comprising of the $130 million remaining from our planned return in 2022 and at least $250 million for 2023. This is well within our remaining authorization of $569 million and a testament to the board and management's belief in our long-term potential to generate sustainable and growing value for shareholders. While it's not front and center, We continue to invest in enhancing our fourth pillar, the foundational capabilities, to support a higher trajectory of growth and widening of our liability aperture while maintaining expense discipline. We have implemented new investment accounting and investment management systems and are implementing a new general ledger system. Turning to the fourth quarter, In the investment area, we saw many unique opportunities in private assets during the fourth quarter as markets continued to reprice across most sectors. In the quarter, we put $1.4 billion to work in private assets. Total private assets at the end of the year were almost $11 billion, bringing our allocation to 22% of the investment portfolio at year end. Of this amount, approximately $7 billion, or close to two-thirds, is in real estate loans, comprising of $2.9 billion of residential loans, $3.4 billion of commercial mortgage loans, and $0.6 billion of agricultural loans. Beyond mortgage loans, the private asset portfolio consists of middle market private credit of $1.2 billion, or 2% of the portfolio. Middle market credit consists primarily of senior secured loans to small and medium-sized companies with strong lender protections. This portfolio is well diversified across borrower and markets, is mostly floating in nature, and offers better structure than high-yield public credit markets. Majority of this portfolio is managed by Adam Street Partners, and some more details on this were presented at our investor symposium in December. Additionally, Outside of credit, the single largest sector in our private asset portfolio is our approximate $1 billion portfolio of single-family residential rental homes. We've been a big believer in this asset class, and over the past two years have built a portfolio of homes that is geographically diversified in locations, seeing both strong growth in population and associated wage income growth. We look to benefit from both long-term appreciation of housing stock and rental growth. The macro dynamics for rental housing are strong, and partnering with the nation's leading platforms operated by our asset management partner, Pretium, is a compelling differentiator for AEF. Finally, our private assets portfolio comprises of a 1% allocation each to infrastructure debt and specialty credit, and a smaller allocation to commercial real estate equity, which along with infrastructure equity should grow over time. We have negligible exposure to traditional private equity and no exposure to hedge funds. During the quarter, we put over $800 million to work in the real estate sector, primarily residential non-qualified mortgages, residential transitional loans, and single-family real estate at an average expected return of over 6.4%. We remain bullish on rental housing as demand continues to significantly outpace supply. Residential real estate loans remain attractive and with underwriting standards tightening still produce expected returns north of 6%. In addition, we see attractive risk-adjusted yields indirectly originated in middle-market credit, as well as indirectly sourced opportunistic specialty credit and real assets. One of the real estate investments made in the quarter was our first equity investment in the ultra-luxury hospitality sector, partnering with a world-class hotel owner and operator. This is part of the hospitality sector that is proving to be more resilient through economic cycles, though it is still a newer and growing segment within the United States. Earlier this week, American Equity Life Insurance Company co-invested alongside an I-square capital fund in the Whistler Pipeline. The Whistler Pipeline is a leading U.S. core energy infrastructure system connecting the Parmesian Basin's growing natural gas supply to LNG, Mexico, and Gulf Coast demand. Whistler will have direct connections into LNG facilities in the Corpus Christi area. Nearly all current capacity is contracted under long-term fixed fee minimum volume commitments, primarily with investment-grade counterparties. We see increasing long-term demand for natural gas across the U.S. Gulf Coast due to the growth in LNG liquefaction capacity being constructed in the region, as well as growing demand from Mexico. I share this detail because it is an example of an asset that offers the rare combination of strong, free cash flow, high-quality contracts, and operating rights on highly strategic natural gas infrastructure. The management team of the asset, who retain a significant portion of equity in the business, has established a reputation for growing contracted cash flows through developing and operating greenfield projects, and have identified several initiatives to further grow this platform. We are also strategic and purposeful in seizing the opportunities arising from broader public market dislocation. For example, during the fourth quarter, we added over $1 billion of high-quality, almost entirely AAA and AA-rated structured securities with expected returns above 6%. All of this points to the value we have delivered through our investment management area where we are balanced from a risk-return point of view between public markets and private assets. In the go-to-market area, we saw a fourth quarter increase in sales of fixed index annuities of 7% compared to the third quarter. We saw very strong sales gains at Eagle Life in both accumulation and income products, which would be expected given the rapid response nature of the bank and broker dealer channels to pricing changes. At American Equity Life, we continue to see growing momentum for sales of income shield, which were up 8% from the third quarter and increased 29% from the comparable period a year ago. Accumulation product sales in the independent agents channel saw decline due to relative attractiveness of more commoditized S&P cap rates. With our latest pricing refresh effective November 30th, we are well positioned competitively and enter 2023 with strong momentum. Through February 15th, We have sold approximately $460 million of fixed index annuities and over $160 million of traditional fixed rate annuities for total annuity sales of approximately $620 million. We are very well positioned to continue to seize opportunities and be competitive in the marketplace and are confident in and energized about our plan to deliver superior value in the long term. Now I'll turn the call over to Axel to go over earnings results.

Axel. Thank you, Anant. Let me extend my appreciation to all of you attending this call. For the fourth quarter of 2022, we reported non-GAAP operating income of $67.9 million, or 79 cents per diluted common share, compared to non-GAAP operating income of $75.8 million, or 81 cents per diluted common share, for the fourth quarter of 2021. Excluding notable items, operating income for the fourth quarter of 2021 was $97.1 million, or $1.04 per diluted common share. There were no notable items in the fourth quarter of 2022. The quarter included $21 million of revenues from reinsurance agreements, up from $11 million in the third quarter of 2022. You'll notice that we changed the presentation in our financial supplement. to show account values rather than cash surrender values, as we had previously done, as cash surrender value is no longer a common metric for the calculation of fees on all account values seeded. Going forward, the change in account value line will include new business seeded, offset by decrements in certain business seeded. Average yield on invested assets was 4.3% in the fourth quarter of 2022, compared to 4.48% in the third quarter. The sequential decrease was primarily attributable to returns on partnerships and other mark-to-market assets, which returned nine basis points less than expected returns in the fourth quarter compared to 22 basis points over expected returns in the third quarter, partly offset by a 15 basis points benefit on the portfolio from the increase in short-term rates on floating rate assets. The average adjusted yield, excluding non-trendable prepayments, was 4.29% in the fourth quarter of 2022, compared to 4.45% in the third quarter of 2022. While partnerships and other mark-to-market assets, which are reported primarily on a one-quarter lag basis, had a positive contribution to investment income, well within the expected range of variance, the contribution was $11 million, or nine basis points of yield, less than the assumed rates of returns used in our investment process for the fourth quarter of 2022. As broader context, the contribution of partnerships and mark-to-market assets to net investment income for 2022 was $200 million, which is $87 million or 16 basis bonds more than the assumed rate of return in our investment process. Enforced reinsurance reduced investments by $3.8 billion and reported net investment income by $45 million for the fourth quarter in 2022. We invested $2.5 billion at a yield of 6.81%, including $1.4 billion of privately sourced assets, at an expected return of 7.02% in the fourth quarter. Our allocation to privately sourced assets was 22% of invested assets as of quarter end, compared to 18.4% as of September 30th. Since quarter end, we have continued to put money to work in privately sourced asset sectors, where we have conviction, as well as in core sectors, where we have seen attractive opportunities to support our strategic initiatives. As of December 31st, the point-in-time yield on our investment portfolio was 4.44% compared to 4.22% as of September 30th, reflecting the benefit from the increase in floating rate indices, an increase in yield on our public asset portfolio reflecting portfolio management trades, and a further increase in our allocation to privately sourced assets. For the first quarter of 2023, We expect an additional benefit of roughly seven basis points in yield, reflecting the increase in short-term rates on our $6 billion of floating rate assets. The aggregate cost of money for annuity liabilities was 1.76% in the fourth quarter, up from 1.75% in the third quarter. The cost of money in both quarters reflected near zero hedge gain. The increase in the cost of money primarily reflects the higher cost of options purchased in the fourth quarter of 2022 compared to the runoff of the lower cost options purchased in the third quarter of 2021, and higher renewal rates on annual reset traditional fixed annuities, offset in part by the slightly higher cost of money on account value ceded to 2603. Cost of options in the fourth quarter of 2022 averaged 1.61% compared to 1.58% in the third quarter. Investment spread in the fourth quarter was 2.54% compared to 2.73% in the prior quarter. Excluding prepayment income and hedging gains, adjusted spread was 2.53% compared to 2.70% in the third quarter reflecting the sequentially lower returns on partnerships and market assets and slight increase in custom money. Deferred acquisition cost and deferred sales inducement amortization totaled $139 million in the fourth quarter compared to $145 million in the third quarter, excluding the effect of actual assumption changes. Fourth quarter amortization was $8 million greater than modeled expectation post the enforced reinsurance transaction, primarily due to lower-than-modeled index credits and higher surrenders than expected, offset in part by lower-than-modeled option budgets and crediting rates. The change in the liability for guaranteed lifetime income benefit payments decreased $5 million this quarter compared to the third quarter, excluding the effect of actual assumption changes. The fourth quarter increase in the liability for guaranteed lifetime income payments was $37 million more than modeled, post the enforced reinsurance transaction, due primarily to the near-zero level of index credits, which increased the reserve by $18 million. Lower-than-modeled cost of money and other experience true-ups each added $8 million to expense above expectations. For the first quarter, we would expect amortization of the deferred acquisition costs and sales inducement assets under FAS-97. of $126 million and an increase in the SOP 03-1 reserve for guaranteed lifetime income benefit payments of $60 million on current in-force before adjusting for actual experience. As a reminder, the lack of index credits could add up to an additional $10 million to DAC amortization and another $20 million to the SOP reserve. Outflows in the quarter totaled $1.2 billion, up from $1.1 billion in the third quarter, driven by increased surrenders. While we have only limited information on how such disbursements are used, we have seen an increase in Section 1035 exchanges to other carriers of enforced policies, mostly out of and near the end of surrender charge period. Other operating costs and expenses were $62 million in the fourth quarter, up $2.5 million from the third quarter, bringing the full year right in line with expectations. For 2023, we expect other operating costs and expenses to be in the $250 million range for the full year. At December 31st, cash and equivalents at the holding company were $531 million, reflecting a $325 million dividend from American Equity Life to the holding company. As of year-end, the estimated risk-based capital ratio for American Equity Life was 413% compared to 400% at the end of 2021. Our internal estimates show that we have excess capital at year-end relative to rating agency models of approximately $650 million. The book value ex-AOCI at year-end 2022 was $54.52 per share on a pre-LDTI basis. Consistent with our prior messaging on the impact of LDTI, we would estimate book value ex-AOCI at year-end 2022 to be north of $60 per share on a post-LDTI basis. We will report our first quarter results in early May on a post-LDTI basis, and expect to publish a restated financial supplement prior to the call, presenting our results on a post-LDTI basis. Directionally, we expect our run rate operating income to be favorably impacted by the change to LDTI, primarily reflecting lower reserve accretion for lifetime income benefits under the market risk benefit framework than under the SOP03-1 framework. as well as more predictable pattern of DAC amortization going forward, due to it becoming not sensitive to actual to expected variance in investment spread under the new LDTI framework. With that, thank you for your attention, and I'll turn it over to the operator to begin Q&A.

And thank you. And as a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. We ask that you limit yourself to one question and one follow-up. If you have any additional questions, please jump back in the queue. And one moment for our first question. And our first question comes from Dan Bergman from Jefferies. Your line is now open.

Thanks. Good morning. I guess first I just wanted to see if there was any update you can give around the outlook for fixed index annuity sales in 2023. I think in the past you'd used an assumption of about $4 billion for the 2023 sales. And if I heard the numbers and the prepared remarks correctly, it sounded like the first six weeks production would imply a run right near that $4 billion level. But just given that would be a big step up from the $3.2 billion you did this past year, I just wanted to get a sense if you thought that $4 billion range is achievable for 2023 or just how you're thinking about it. Thanks.

I think you're thinking about it the right way, Dan. We've had a strong start to the year, and we feel good about what we said earlier.

Got it. That's awful. Thanks. And then it looked like surrenders and withdrawals saw another sequential increase, I think, to about $1.2 to $1.3 billion versus the closer to $1 billion quarterly range it had been traveling in earlier in the year, even though I guess the in-force book was down somewhat due to the reinsurance. I just wanted to see if you can give an update on what you're seeing seeing there and whether those higher withdrawals have been concentrated in any particular product types or vintages? And if it is just driven by, you know, the higher interest rate environment, should we expect this, you know, higher level of surrenders to remain in place for the foreseeable future?

Yes, thank you for your question. This is Axel. Yes, so we saw higher surrenders in the fourth quarter, so $1.2 billion of flow versus the 1.1 in Q3. We see that those surrenders primarily across vintages that are essentially reaching the end of the surrender charge period or that are either out of surrender or just reaching that end of surrender charge period. We expect that with the stabilization of the interest rate environment that the increase in surrenders is probably going to stabilize. But, of course, this is one of the behaviors that we observe closely, and from a rate-setting perspective, we look at that on a regular basis, and we take appropriate action as we see fit.

And leading on that to that, thanks, Axel, is having a big book really helps. We are focused on enforcement management to see how they stay around this area. They probably would be expected to stay in this area. But we also have a very liquid asset portfolio, and that's one of the reasons I provide that extra detail on the private assets. Our private assets are very high quality, some short-term in nature, very liquefiable. If you think about $7 billion of those are loans, real estate loans. We have access to liquidity facilities. So we feel very good about the liquidity profile of the portfolio. I want to make sure you all understood that because people don't always understand what private assets are. And we are going to grow our AUM. not have it shrink, which is why our efforts are not just on sales, primarily sales, but also in-force actions, as Axel mentioned.

Got it. That's really helpful. Thank you.

And thank you. And one moment for our next question. And our next question comes from Ryan Kruger from KBW. Your line is now open.

Hi, thanks. Good morning. Looks like you've seen some higher volumes from traditional fixed annuities in both the fourth quarter and what you commented on in the early part of the year. Do you expect MAGAS to start to be – I know you're more focused on FIAs, but would you anticipate MAGAS to be a more regular contributor to sales going forward?

Hi, Ryan. Good morning. Yes. Short answer, yes. we really focus on our bread and butter, which is FIA. MIGA is competitively priced to deliver returns. We have the reinsurance arrangement in place now with our reinsurance partner there. And it will be because as we grow Eagle, it becomes reality, especially in the bank channel. We're making sure we're writing good IRRs in that business.

Got it. Thanks. And then I believe you gave numbers for expected DAC amortization and LIBOR reserves. I think I missed the numbers. I was hoping you could repeat them and then related to that, were those under the prior GAAP accounting or are those under LDCI?

Yes. Hi, Ryan. Let me go through the numbers again. They're on the pre-LDCI basis. I mentioned that DAC DSI amortization The model expectation is $126 million, whereas for the SOP 03-1 reserve, the expectation is $60 million for the next quarter. And I added as a reminder that both of those expectations include expected index credits. Should index credits in fact be zero in the first quarter, it would add an additional $10 million to DAC DSI amortization and another $20 million to SOP reserve accretion.

Will under LDTI, will there still be that similar type of sensitivity from index credits, or will that be more limited?

So I'm going to comment on LDTI, really on the next earnings goal. But consistent with the rollout of the new framework, we are also adjusting our definition of operating income. to reflect what we believe is the long-term underlying core operating earnings of the company. And so in that light, we aim to adjust for volatility that is expected to be non-recurring and non-directional. And so certainly some adjustment for the level of market volatility, equity, or interest rate related would be part of that. Again, more to come on that. in the future through our restated financial supplements as we come out ahead of the Q1 earnings goal and then the earnings goal itself.

Okay, great. Thank you.

And thank you. And one moment for our next question. And our next question comes from John Barnage from Piper Sandler. Your line is now open. Thank you very much and good morning.

I appreciate the opportunity. my first question uh the 250 million operating expense guidance i know you previously talked about working to complete a sidecar in 23 did that operating expense guidance uh include the assumption that that is completed this year yes hi john yes great thank you and then uh the move to private assets to 22 from i believe it was 18 last quarter Do you anticipate hitting that low end of the 30% to 40% target in 2023? I'll let Jim add to it.

The short answer is no, not in 2023, but I'll let Jim add some more color to it, Jim.

Yeah, hi, this is Jim Hamelin. I think that number is probably more likely out a little further than 2023. Our goal is to continually source assets through the cycles, and so that'll get us certainly be closer at the end of the year than we are now, but... probably takes us into a little bit into next year.

Thank you very much. Ed, thank you. And one moment for our next question. And our next question comes from Eric Bass from Autonomous Research. Your line is now open.

Hi, thank you. Given the increase in surrenders that you're seeing, how are you thinking about renewal rate increases and whether it makes sense to give up some spread to retain more business? I guess related to that, how should we think about the cost of money going forward?

I can start and I'll let Axel add in there. Good morning. We are looking at it. I think LDTI is an interesting consideration for us in that perspective as well as Axel said. We'll talk more about LDTI going forward, but it's net debt really positive for the FIA business. So if you think of, do we redeploy some of those earnings into enforced rate management is the way I'm really thinking about it right now. Because candidly, this is going to be a very, very good year for us from a year-on-year profitability point of view post-LDTI. But you also see what bang for buck you get on it. I go back to the liquidity profile of the balance sheet, and the private asset strategies are very liquefiable, and Jim and team are doing a good job managing that. So even though, you know, surrenders are modestly up, you're looking at which blocks you're losing and which blocks you want to keep and things like that, and we feel good about it. So it's a rather long-winded answer, but I try to give it in a framework sense. You know, we've got a balance sheet that can handle a little high elevated lapses, we actually are okay with these lapses and we want to write newer business so that we can invest it in higher returns versus just give away the profitability.

And maybe I would just add to that, just reminding you, you know, when we talk about our third quarter 2022 assumptions in locking, so the assumptions, the spread assumptions that are embedded in our actual models, We talked about cost of money. The near-term cost of money being around 1.7%, ultimately growing to the long-term, so that's eight years out, long-term cost of money of 2.4%. So our models already kind of anticipate some of that increase. It's really a question of timing.

Thank you. That's helpful. And then switching gears, I was hoping you could comment a little bit on the NAIC's proposed changes to capital charges for CLOs and private credit funds. Maybe if they're adopted, what impact that could have on your portfolio and the capital requirements for your private credit assets?

Great question. As always, you're keenly tuned into what's going on in the market. It's less of an impact for us is the short answer because we didn't back up the truck on CLOs and things like that. We actually agree with the direction of travel with the NAIC there and frankly would prefer if everyone was super transparent when they sourced stuff and how they structure and what they do it. We've been in the middle of the fairway in the way we've approached private assets. That's why I said like $7 billion of that is loans, even our private credit strategies. Too early to say what their final proposals are, and they'll likely get implemented in 25 from what I'm hearing, not before 25. But we're not the firm that backed up the truck on CLOs and structured credit and got cute about it with respect to all of my competitors who did. So we feel pretty good about it.

Got it. Thank you.

And thank you. And one moment for our next question. And our next question comes from Wilma Burtis from Raymond James. Your line is now open.

Hey, good morning. I guess first, any updates on the sidecar? I know you mentioned it's kind of in the budget this year, but any updates?

Hi, Wilma. Morning. No new update. I think it's the last call I said we're looking at in the third quarter timeframe. Obviously, good progress on it. We're working with a banking partner. We're in the market talking to counterparties. We like the initial response we've got from really pristine counterparties that we brought into this, the way I define them. And we're focused on executing it and moving forward. I am very much focused with the leadership team here on growing our AUM and having the right mix of spread and fee-related earnings. And so that will get executed over the course of the year. And then we really want to continue to focus on growing. So that BAU will get executed.

And then we're focused on growing sales and growing AUM and growing the mix of earnings.

Sasha, thank you. And then maybe a little bit of color on the buybacks and 4Q, which seem, you know, we're a little bit lower.

So, in the fourth quarter, we repurchased a little bit over a million shares, close to $40 million. So, you know, we set a grid for buyback. We kind of reset the grid every quarter after the earnings call. Of course, we did not anticipate the events of middle of December, which resulted in the stock price kind of jumping up to $45 and above. It's just a function of really of how the grid was set ahead of that that we ended up being out in the market for a portion of the quarter. But as Anand said, we remain buyers of our stock and we intend to complete the 2022 share buyback program in 2023. So that's the $130 million that remains and at least $250 million for 2023. Yeah, maybe I'll just add a little.

There's a little noise around our name in the quarter, as you're well aware, so they've got a bit in the way of us being able to buy stock on a regular basis. We hope to refresh our buying grids and, you know, how those 10B5 plans and all those things work. So we should be back in the market pretty soon here.

Okay, thank you.

And thank you. And one moment for our next question. And our next question comes from Mark Whealy from RBC Capital Markets. Your line is now open.

Yeah, good morning. You mentioned the new flow reinsurance agreement with 26 North effective during February. Could you just comment a little bit more on sort of which assets are being seeded under that and if you have any kind of general targeted range of how much flow is expected to go across that?

Sure, yeah, happy to take it. For flow reinsurance, there are no assets transferred, right? What happens, it's new business that we issue, so the premium cash basically gets transferred to the reinsurer. There's no time for it to be invested and then transferred. So it's really the reinsurer assumes risk and invests as they see fit to back the liabilities they consume.

I misspoke. What I meant was premium, not assets.

Right, so with flow reinsurance, it's premium comes in, premium goes back out to the reinsurer just directly. It's really that simple.

And in terms of your other part of your question, I'll stand in. It's $525 million a year. I may have mentioned this in the last call. That's the size of the migrant treaty with them, and that's what we would expect it to be.

Got it. That's what I was really looking for. Okay. The second question that I had is with respect to the various real estate loans and private assets that you have, is there anything that you're doing from kind of a hedging standpoint, and is that a different cost or run rate than what we're normally used to?

Hi, this is Jim again. In terms of private assets, if your question is are we putting them on the books and then hedging those assets, And the answer to that is we are not doing that. And so from a private asset perspective, we're looking for long-term returns on these assets over time, both in terms of loans and in terms of equity investments. So I think that answers what your question was, but let me know if it doesn't.

No, it does. I mean, I'm sure the qualities are very high, and you mentioned the liquidity, but at Historically, that's always been the case until it isn't, and that's why I was asking the question.

I see. When you think about liquidity, too, just a little stepping back just a bit on liquidity, our entire investment plan is focused around the liabilities, the characteristics, including projections of liability outflows. That's all built into what we're doing, and liquidity is part of the considerations that we make. So we're very much focused on thinking about liquidity and what our needs could be beyond our expectations even. You know, we don't put assets on the books assuming that we're going to have to liquefy those assets and draw liquidity. It is available in some cases, but we certainly don't buy private assets assuming that that's part of the base case assumption.

Okay. Thanks for the input. Thanks.

And thank you. And if you would like to ask a question, that is star 11. Again, if you would like to ask a question, that is star 11. And one moment for our next question. One moment. And our next question comes from Pablo Sinzon from JP Morgan. Your line is now open.

Hi. Thank you. Axel, just given your comment about interest rates stabilizing, do you think the competitive environment has stabilized as well are insurers still trying to pass on higher rates to customers at this point? And I realize it's not one for one, right? I think in terms of making excess spread, but just want to get a sense of, you know, how rates are filtering into the competitive environment.

Hi, Pablo. Good morning. Thanks for your question. Yeah, I think we're starting to see that, starting to see some stabilization in the competitive environment as well. You know, even we saw some competitors take their rates down So I think, yeah, there's stabilization, rationalization. I think, as Anant mentioned, looking at our full quarter sales, looking at the trajectory and the momentum of our first quarter to date sales, I think that all points to that, essentially. Stabilization, rationalization, and all good positioning within that.

Yeah, Pablo, I'll just add to it. I'll just add to one thing. Historically, AEL is led with service.

and an okay product. What we've sort of done with the product changes we've done, because we have the juice, if I may use that expression, on the asset side, there's no reason we can't have a top five product or a top three product in terms of rating features. It's a combination of service, ease of doing business, and compelling. Not the hottest, but a top five product. If we're not top five, we're not going to sell. That's the market reality, and we easily can be top five given our investment juice.

Yeah, got it. That makes sense. And thank you for that. The second question I had was a numbers question. So I'm curious, on average, how much capital do you have to hold against a dollar of private assets? And how does that compare against your typical public fixed income asset? Just trying to get a sense of the capital consumption against your capital generation. And I think the excess capital you have, which I think was 650, was you mentioned, but any color there?

Yeah, I'll start. It varies, right? I mean, not to give you a non-answer, but it varies because if you look at resi loans, it's less than BBB public corporate securities and fixed income. I think the RBC factor is like 0.6 versus NAIC2 is 1%. If you look at real estate equity, it's obviously 20% capital charge. When the team looks at our capital charge, the most important thing is we have a significant amount of excess capital, and we're looking at what's the ROE that we're delivering on the private assets, and is it well not of the ROE trajectory of our business, and therefore it adds value. So having a portfolio of $11 billion of private assets where loans are a big portion of it, and then buying real assets, which you can finance between loans and equity, gives us a capital charge which, even though higher than public fixed income, is going to be in that range. Now, Axel and Jim, add in anything to that, because I think what Pablo is looking for is what number to put in his model, and I don't know if we can give him that. Right. Yeah, exactly.

I don't think it's a straightforward number, but to that point, the way we look at it is in the context of a financial plan and the excess capital that we have and putting that money to work, consuming some of that excess capital over time, ensuring that we are getting the return and we are delivering the returns for shareholders as we do that.

This is Jim again. One thing I would have is our investment plan, our long-term projections are fed into the corporate model to ensure that the capital consumption that we have still enables a company to deliver capital to shareholders. It's all integrated. It's all part of our process. We're thinking about that as we look at when we say 30% to 40% private assets. We've You know, we have actually made sure that that's feasible under the construct that we're making investments and allows us to return capital shareholders as we have indicated in the past.

A good way to think about that, Pablo, if you want, just to add to what the guys said, is we've always said this business is very much sustainable, also as you position our sidecars, with 15 into 1 leverage, which has a mix of 30%, 40% private assets and the rest public. So you can back into the math that way. If you're levered 15 is up to 15 is to one, that auto capital charge basis means you're running the business at like 7% capital. If that helps.

Yep. Yep. That's helpful. Thanks Anant. And then the last one for me, uh, Just any high-level comments you can give on stat earnings for 22 and 23, which, you know, as you guys ultimately drive capital generation. And what I'm thinking about here is the drag from low-index credits, right, to debtor spreads and fee income offsets. I think in a past presentation you had mentioned distributable cash flow of about $150 to $175 per 22. Is that all funded by stat earnings, or is there some takedown of capital involved there? Thank you.

Yeah, thanks, Pablo, for the question. Yeah, I would refer back to in the investment symposium, we kind of laid that out, right? Essentially, what are the distributable earnings from spread-related business and then adding on top of that fee-related earnings, which are basically, by definition, all distributable. Yeah, the number that you mentioned there are in line with what we talked about then. I would also point you to kind of the proof is in the pudding. So this year we took, I just mentioned, we took a $325 million dividend from the operating company to the holding company at the end of the year.

Thank you for your answers.

And thank you. And I am shelving no further questions. I would now like to turn the call back to Julie Heidemann 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.