American Equity Investment Life Holding Company (NYSE:AEL) Q4 2022 Earnings Call Transcript

American Equity Investment Life Holding Company (NYSE:AEL) Q4 2022 Earnings Call Transcript February 17, 2023

Operator: 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.

Julie Heidemann: 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 Bhalla, 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 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 Anant Bhalla.

Anant Bhalla: Thank you, Julie. Good morning and thank you all for your interest in American Equity. The fourth quarter of 2022 capped 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 see this additional optionality to increase exposure in our core fixed income bucket while being more selective in our private asset strategies. In go-to-market, we substantially revamped up 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 J.D. Power & 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 26North effective October 3. Additionally, the new reinsurance agreement with 26North Re 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 returned to shareholders.

As a result of these transactions, we are €“ as a result of this transaction, we also reduced the sensitivity of our GAAP financial results to equity index credit. We are also pleased to announce that we started flow reinsurance on traditional fixed rate annuities with 26North Re effective February 8. 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 continue 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 that 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 end 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 in 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 have been a big believer in this asset class and over the past 2 years, have built a portfolio of home 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 AEL.

Photo by Jason Dent on Unsplash

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 billion 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 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 Squared Capital Fund in the Whistler Pipeline. The Whistler Pipeline is a leading U.S core energy infrastructure system connecting the Permian Basin 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 liquification 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 will 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 return above 6%. All of this points to the value we have delivered to 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 change.

At American Equity Life, we continue to see growing momentum for sales of IncomeShield, which was 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 30, we are well positioned competitively and entered 2023 with strong momentum. Through February 15, we have sold approximately $460 million of fixed indexed 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 plan to deliver superior value in the long-term.

Now, I will turn the call over to Axel to go over earnings results. Axel?

Axel Andre: 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 $0.79 per diluted common share compared to non-GAAP operating income of $75.8 million or $0.81 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 notice that we changed the presentation in our financial supplement to show account values rather than cash spend values as we had previously done.

As cash surrender value is no longer a common metric for the calculation of fees on all account value ceded. Going forward, the change in account value line will include new business ceded offset by decrements in certain business ceded. 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 9 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 point benefit on the portfolio from the increase in short-term rates on our 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 9 basis points of yield less than the assumed rate 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 points more than the assumed rate of return in our investment process. In-force 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% included €“ 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 30. 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 31, the point-in-time yield on our investment portfolio was 4.44% compared to 4.22% as of September 30, 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 7 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 resets, traditional fixed annuity, offset in part by the slightly higher cost of money on account value seeded to 26North. 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 mark-to-market assets and a slight increase in customer.

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 changes. Fourth quarter amortization was $8 million greater than modeled expectation post the in-force 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 were $37 million more than modeled post the in-force reinsurance transaction.

due primarily to the near zero level of index credits, which increased the reserve by $18 million. Lower than model’s 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 reserves 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 that amortization and another $20 million to the SOP business. Outflows in the quarter totaled $1.2 billion, up from $1.1 billion in the third quarter, driven by increased surrenders.

What 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 pots, mostly out of and near the end of surrender charge periods. Other operating costs and expenses were $62 million in the fourth quarter, up to $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 31, 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. 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 living benefits or lifetime income benefits under the market risk benefit framework then under the SOP3-1 framework as well as more predictable pattern of back 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.

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Q&A Session

Operator: And our first question comes from Dan Bergman from Jefferies. Your line is now open

Dan Bergman: 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 used an assumption of about $4 billion for the 2023 sales. And if I heard the numbers in the prepared remarks correctly, it sounded like the first 6 weeks production would imply a run rate near that $4 billion level, but 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 of if you thought that $4 billion range is achievable for €˜23 or just how you’re thinking about it? Thanks.

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

Dan Bergman: Got it. That’s helpful. Thanks. And then it looked like surrenders and withdrawals saw another sequential increase, I think, to about $1.2 billion to $1.3 billion versus the closer to $1 billion quarterly range that have 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 the higher interest rate environment, should we expect this higher level of surrenders to remain in place for the foreseeable future?

Axel Andre: Yes. Thank you for your question. This is Axel. Yes, so we saw higher surrenders in the fourth quarter, so $1.2 billion above versus the $1.1 million 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 cementer that 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 behavior that we observed closely. And from a rate setting perspective, we look at that on a regular basis, and we take appropriate action as we see fit.

Anant Bhalla: And the thing I’ll add to that, thanks, Axel, is having a big book really helps. We are focused on in-force management to see how they stay around this area. They probably we expect it 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 liquidfiable. 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 IEOF not have a shrink, which is why our efforts are not just on sales, primarily sales but also in-force actions, as Axel mentioned.

Dan Bergman: Got it. That’s really helpful. Thank you.

Operator: And, thank you. And our next question comes from Ryan Krueger from KBW. Your line is now open.

Ryan Krueger: Hi, thanks. Good morning. Looks like you’ve seen some higher volume from traditional fixed annuities in both the fourth quarter and what you commented on in the early part of the year. Are you €“ do you expect MIGAs start to be €“ I know you’re more focused on FIA, but would you anticipate MIGAs to be a more regular contributor to sales going forward?

Anant Bhalla: 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, and we’re making sure we’re writing good IRRs in that business.

Ryan Krueger: Got it. Thanks. And then Axel, I believe you gave numbers for expected DAC amortization in liver reserve. 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 LDTI?

Axel Andre: Yes, hi, Ryan, let me go through the numbers again. They own a pre LDTI basis. The €“ I mentioned that that DAC, DSI amortization, the €“ the model expectations 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.

Ryan Krueger: Will it will €“ under LDTI, will there still be that similar type of sensitivity from index credits will that be more limited?

Axel Andre: So, I am going to comment on LDTI really on the next earnings call. But consistent with the rollout of the new framework, we are also adjusting our definition of operating income to reflect what we believe is a long-term underlying core operating earnings of the company. And so in that slide, we aim to adjust for volatility that is expected to be non-recurring and non-directional. And so certainly, some adjustments for the level of €“ or the market volatility, equity or interest rate related would be part of that, so again, more to come on that. In the future through our restated financial supplement that will come out ahead of the Q1 earnings call and in the earnings for itself.

Ryan Krueger: Okay. Great. Thank you.

Operator: Thank you. And one moment for our next question. And our next question comes from John Barnidge from Piper Sandler. Your line is now open.

John Barnidge: Thank you very much, and good morning, 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?

Anant Bhalla: Yes. Hi John, yes.

John Barnidge: 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?

Anant Bhalla: I will let Jim add to that. The short answer is no, not in €˜23, but I will let Jim add some more color to it. Jim?

Jim Hamalainen: Yes. Hi, this is Jim Hamalainen. 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 will get us €“ 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.

John Barnidge: Thank you very much.

Operator: Thank you. And one moment for our next question. And our next question comes from Erik Bass from Autonomous Research. Your line is now open.

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

Anant Bhalla: I can start, and I will 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 will talk more about LDTI going forward. But it met that really positive for the FIA business. So, if we think of do we redeploy some of those earnings into in-force rate management is the way I am 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 will 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 of managing that.

So, even though surrenders are modestly up, you are looking at which blocks you are 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 you in a framework sense. We have 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 then we can invest it in higher returns versus just give away the profitability.

Axel Andre: And maybe I would just add to that, just reminding you, 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 8 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.

Erik Bass: 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 are adopted, what impact that could have on your portfolio and the capital requirements for your private credit assets?

Anant Bhalla: Great question. As always, you are keenly tuned into what’s going on in the market. It’s less of an impact for us is a short answer, because we didn’t back up the truck on CLOs and the things like that. We actually agree with the direction of travel with the NAIC there. And frankly, would prefer everyone is super transparent when they source stuff and how it’s structured and what they do it. We have been in the middle of the fairway in the way we have approached private assets. That’s why I said like $7 billion of that is loans, even our private credit strategies, so too early to say what their final proposals are, and they will likely get implemented in €˜25 from what I am hearing, not before €˜25. But we are 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.

Erik Bass: Got it. Thank you.

Operator: Thank you. And one moment for our next question. And our next question comes from Wilma Burdis from Raymond James. Your line is now open.

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

Anant Bhalla: Hi Wilma, good morning. No new update. I think at the last call, I said we are looking at in the third quarter timeframe. Obviously, good progress on it. We are working with a banking partner. We are in the market talking to counterparties. We like the initial response we have got from really pristine counterparties that we brought into this as we have defined them. And we are 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 want to continue to focus on growing because that BAU will get executed. And then we are focused on growing sales and growing AUM and growing the mix of earnings.

Wilma Burdis: Got it. Thank you. And then maybe a little bit of color on the buyback in 4Q, which seems were a little bit lower.

Axel Andre: Yes. Hi Wilma, this is Axel. So, in the fourth quarter, we repurchased a little bit to over 1 million shares, close to $40 million. So, 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. So, 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 Anant 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.

Anant Bhalla: Yes. Maybe I will just add a little €“ there is a little noise around our name in the quarter, as you are well aware. So, they can fit in the way of us being able to buy stock on a regular basis. We hope to refresh our buying grids and how those 10b5-1 plans and all those things work well so that we should be back in the market pretty soon here.

Wilma Burdis: Okay. Thank you.

Operator: Thank you. And one moment for our next question. And our next question comes from Mark Dwelle from RBC Capital Markets. Your line is now open.

Mark Dwelle: Yes. Good morning. You mentioned the new flow reinsurance agreement with 26North effective during February. Could you just comment a little bit more on sort of which assets are being ceded under that? And if you have any kind of general targeted range of how much flow is expected to go across that?

Axel Andre: Sure. Yes, happy to take it. For flow reinsurance, there are no assets transferred, right. What happens, it’s a new business that we issue. So, the premium cash basically gets transferred to the reinsurer there. There is no time for HP invested in that transfer. So, it’s really the reinsurers use risk and invest at this pace to back the liabilities to assume.

Mark Dwelle: I missed, I meant was premium, not assets.

Axel Andre: Right. So, we flow €“ with flow reinsurance, it’s premium comes in, premium goes back out to the reinsurer just directly. It’s really that simple.

Anant Bhalla: And in terms of your other part of your question, I will start in. It’s $525 million a year. I may have mentioned this in the last call, that’s the size of the treaty with them, and that’s what we would expect it to be.

Mark Dwelle: 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 are doing from kind of a hedging standpoint? And is that a different cost or run rate than like what we are normally used to?

Jim Hamalainen: 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. So, the answer to that is we are not doing that. And so from a private assets perspective, we are 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.

Mark Dwelle: No, it does. It’s €“ I mean I am sure the quality of these are very high and you mentioned the liquidity, but historically, that’s always been the case until it isn’t, and that’s why I was asking the question.

Jim Hamalainen: I see. When we 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 are doing and liquidity is part of the considerations that we make. And so we are very much focused on thinking about liquidity and what our needs could be beyond our expectations even. So, we don’t put assets on the books assuming that we are going to have to liquefy those assets and draw liquidity. They are €“ it is available in some cases, but we certainly don’t buy private assets, assuming that that’s part of the base case assumption.

Mark Dwelle: Okay. Thanks for your input. Thanks.

Operator: And one moment for our next question. And our next question comes from Pablo Singzon from JPMorgan. Your line is now open.

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

Axel Andre: Hi, Pablo. Good morning. Thanks for your question. Yes, I think we are starting to see that, starting to see some stabilization in the competitive environment as well. Even we saw some competitors take the rates down. So, I think yes, there is stabilization and rationalization. I think as enough mentioned, looking at all fourth quarter sales, looking at the trajectory and the momentum of first quarter to-date sales, I think that all points to the €“ that points to that essentially stabilization and rationalization of good positioning within that.

Anant Bhalla: Yes. Pablo, I will just add to one thing is that look, historically, AEL is led with service and an okay product. What we sort of done with the product changes, we have done because we have the juice, if I may use that expression on the asset side. There is no reason we can’t have a top five products or a top three products in terms of rating features. So, it’s a combination of service, ease of doing business and compelling, not the hottest but a top five product. If you are not top five, we are not going to sell. That’s the market reality, and easy to meet top five in our investment use.

Pablo Singzon: Yes. Got it. That makes sense. Thank you for that. The second question I had was a numbers question. So, I am curious, on average, how much capital do you have to hold against the dollar of private assets? And how does that compare against your public fixed income assets? 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 as you mentioned, but any color there?

Anant Bhalla: Yes. I will 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 in fixed income, like I think the RBC factors like 0.6 versus NAIC 2 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 are looking at what’s the ROE that we are delivering on the private assets. And is it well not of the ROE trajectory of our business and therefore it adds value. So, in 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 the 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 was looking for is what number to put in this model, and I don’t know if we can give him that.

Axel Andre: Right. Yes, exactly. I don’t think it’s a stretch forward number. But June’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.

Jim Hamalainen: And this is Jim again. One thing I would add is our investment plan, our long-term projections are based €“ are fed into the corporate model to ensure the capital consumption that we have still enables the company to deliver shareholder €“ capital to shareholders. And so it’s all integrated, it’s all part of our process. So, we are thinking about that as we look at. When we say 30% to 40% private assets, we have actually made sure that that’s feasible under the construct that we are making investments and allows us to return capital to shareholders as we have indicated in the past.

Anant Bhalla: A good way to think about that, Pablo, if you want just to add to what the guy has said is we have always had this business, it’s very much sustainable as we €“ also as we position our sidecars with 15:1 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 are levered up to 15:1. Net on a capital charge basis means you are running the business at like 7% capital, if that helps.

Pablo Singzon: Yes. That’s helpful. Thanks on that. And then the last one for me, just any high-level comments you can give on start earnings for €˜22 and €˜23, which as you guys ultimately drive capital generation? And what I am thinking about here is the drag from low index credits, right, with better spreads and fee income as offsets. I think on the past presentation, you had mentioned the distributable cash flow of about $150 million to $175 million for €˜22. Is that all funded by stat earnings, or is there something down if cat was involved there? Thank you.

Axel Andre: Yes. Thanks Pablo for the question. Yes, I would €“ exactly, 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. The other 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.

Pablo Singzon: Thank you for your answers.

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

Julie Heidemann: 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.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.