Good morning and welcome to American Equity Investment Life Holding Company's conference call to discuss first quarter 2021 earnings. Our earnings release and financial supplement can be found on our website at www.american-equity.com.

Non-GAAP financial measures discussed on today's call and reconciliations of non-GAAP financial measures to the most comparable GAAP measures can be found in those documents or elsewhere on our Investor Relations portion of our website.

Thank you, Julie. Good morning.

And thank you all for your interest in American Equity. Let me start with strategy execution.

Today, we are delighted to report record progress in the execution in one of four strategy pillars. Specifically, this pertains to our go-to-market area, which focuses on how we raise funding through general account annuity products sold to close to 700,000 retail clients.

The AEL 2.0 business model, virtuous flywheel success starts with what has historically been an industry leading at scale, annuity funding origination platform. Over the past few years, this funding origination platform started to slowdown in terms of growth in our core independent marketing organization channel.

And we had limited success in penetrating the bank channel through our Eagle Life subsidiary. One of the focus areas in my first year as CEO was to revive origination capability and refresh how we go-to-market.

This is critical for AEL to have a strategy flywheel that can spin faster with superior execution for shareholder value realization. It enables AEL to continue to be a growing franchise that originates long term attractive funding for asset invest – investing.

We feel good about some of the retooling we have done in the go-to-market part of our business since last summer, and we continue to move forward to become a leading franchise in the general account annuity business in both IMO and bank broker dealer distribution, this strength in go-to-market plus adding in access at scale to differentiated investment management capabilities over time. And the second strategy pillar of the flywheel should enable American Equity to be much more capital light going forward.

This capital-light outcome is enabled by the third strategy pillar, which is effective utilization of reinsurance to blend using both our own shareholder capital today with third-party capital through sidecar reinsurance vehicles to fund future growth of origination.

Thank you, Anant, and good morning, everyone. Prior to going over the results for the first quarter, I want to provide more contexts for a reclassification between certain balance sheet items as of December 31 2020, due to an immaterial error identified in our quarterly close process.

The net effect of which is a change in accumulated other comprehensive income. There is no impact on GAAP equity ex-AOCI, net income or operating income.

Specifically, we should have been including the impact of unrealized gains and losses in the calculation for the lifetime income benefit reserved, similar to the calculation of deferred acquisition costs and deferred sales inducements. We corrected this as of December 31, 2020 in the first quarter.

The correction of the immaterial error was done through a reclassification between associated balance sheet line items for the period ended December 31 2020, which can be found in our first quarter financial supplement. And as I stated before, that had no impact to reported net income or non-GAAP operating income.

As we reported yesterday afternoon, operating income for the first quarter of 2021 was $41 million, or $0.43 per share, compared to $154 million, or $1.67 per share for the first quarter of 2020. Notable items in the first quarter of last year included a $31 million or $0.33 per share tax benefit from the enactment of the CARES Act.

Notable items reflect the positive or negative after tax impact to non-GAAP operating income available to common shareholders for certain items, such as those that do not always reflect the company's expected ongoing operations.

Hi, good morning. I do have just one question.

Just, is AEL still on track to repurchase the $250 million to $300 million of stock? Looks like there was, kind of $20 million in buybacks in 1Q and still almost $3 million of Brookfield dilution to offset, just wondering what the outlook is for that?

Hi, Wilma, it’s Ted. In regards to that, I know we are going to continue to look at aggressively repurchasing the remaining shares to offset the dilution from Brookfield and look toward doing that, and whether or not we get the $250 million returned in addition to that, it's also somewhat predicated on the timing of the approval by the Iowa regulator and the New York regulator on the Form A, because then Brookfield will then execute their right to buy additional shares under what we refer to as equity tranche two.

And at that point in time, we would then be able to buy those shares back and also return the $250 million. We could get time constrained as we go through the year, depending on the timing of the approval by the Iowa insurance department.

Wilma, I’d one thing, Ted covered it. But if your question gets too intense, yes, we intend to return $250 million of capital, as previously stated this year to shareholders, it's a function of getting the timing right, given tranche 2, as Ted mentioned.

Okay, got it. Thanks.

And then second question. I guess the new money yield of about 4% in the quarter, seems like that's come down to about 3.4%?

I know you guys talked about the residential loans. But how did you guys hit that with given the most yields are kind of sub 3% right now?

So, I have Jim Hamalainen, our Chief Investment Officer of Insurance Entity to take that one.

Sure, thanks. This is Jim.

It's a function of really a mix of assets. So mix of core assets, which are lower yielding, as you indicated, plus some of the private asset strategies that we're employing that do have higher yields.

And so it's really an asset mix. And asset mix, answer to that question.

Okay, got it. And then just maybe a little bit of color on the LIBR utilization.

I guess, because you maybe talk specifically about the underlying trend there in the quarter and where that's going?

Sure, I can do that one. So we did see higher than modeled LIBR utilization this quarter.

As we look at that it did start to trail off in the quarter and come down. So we'll be watching that closely to see what kind of pattern emerges as we go through the remaining quarters.

As we look back and look at last year, we also thought elevated utilization of LIBR in the first quarter, and then it trailed down and the remaining quarters stayed more matched what we have either modeled or went below. So we'll continue to monitor that Wilma and look at that and see if there's any adjustments we need to make for that kind of pattern in our models, when we look at our annual assumption revision updates.

Okay, got it. Thank you guys very much.

Good morning. I'm going to stick on the spread results table in your supplement.

And I noted Ted, your comments about the average yield being depressed by about 34 basis points because of the cash being held for the transactions. And then you also said you expect the investment spread to turn back to expected level.

So if I were to fast forward this table to say Q4 2021, how do you think the average yield on invested assets would look? How do you think aggregate cost of money will work?

And how do you think aggregate investment spread will work?

Okay. I'll answer it this way, Greg.

One, if you look at our portfolio currently, and exclude the securities and cash we expect to transfer as part of the execution of the reinsurance agreements, and the redeployment of the other cash above that and add a conservative rate at approximately 3.5%. I mean, we would hope to beat that.

That gets you to residual yield on the portfolio of 4%, where we sit at today. Cost of money wise, we could potentially if all else equal sees some additional benefit to cost the money over the next few quarters.

And then as I said, see it's stabilize in the fourth quarter.

But you said the investment spread you expect that to turn to expected levels, what are expected levels, because, it's obviously come down a lot from a year ago?

So I would say there is that, we would go back to what our assumptions are in our model, which is a 2.40% spread, which we have disclosed before.

Yes. All right.

Perfect. Was that my two questions?

Or is that a follow-up to my first question? Do I get a second question?

I'll let you have one more, Greg. Go ahead.

You've got enough. I'll let you have one more.

All right, I just – I don't want to violate any rules. And Steven's – I'll get yelled at by Steven later.

I wanted to pivot to the just the sales outlook, I think you said, Anant, $5 billion to $6 billion of sales expected for this year. Given the strong results of the first quarter, is that suggests that the remaining couple quarters, will be lower sequentially than the first quarter.

And also might suggest that the fourth quarter could be down on a year-over-year basis. And so I understand there's a lot of moving pieces to what's going on between product mix, et cetera.

But maybe you could give us some additional color there.

Happy to, and good morning. The two things that play over there, one is business mix, as you alluded to.

We have been able to invigorate Eagle Life to a point that we have now a twin engine approach to go-to-market. And in both Eagle Life and American Equity, the focus is on FIA sales.

And that's what's going to be driving the rest of the year. Fixed rate annuities have pretty much come to a fairly slowdown pace.

We're doing around $3.5 million a day to under $100 million a month now. And so that's sort of the way we got to think about it.

We're focusing on FIA. And the internal sales people are basically compensated on more an FIA mix than MYGA.

So strategy is there, the product refresh is there. The compensation alignment is there to get that result, which you're spot on right.

We would expect sequential on year-on-year outcomes, like you mentioned.

Got it. Thank you for the answers.

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

And how much of that is excess cash that is staying with you, that needs to be reinvested?

It's Jim Hamalainen and thanks for the question. A number of parts there that the timing is dependent on which includes closer to the reinsurance deals also includes some of the investment partnerships that we have previously announced and that we're working on.

So timing is hard to predict exactly. But our expectations are that about $5 billion of that cash will be used to fund the reinsurance transactions.

Beyond that, our expectations are that we will use maybe $1 billion to $2 billion in private asset strategies this year, focused on some areas of market that we really like, including residential real estate primarily in the form of single-family housing rentals. We also like select sectors in the commercial mortgage loan market.

We like agricultural loans. And lastly, we're starting to move into the ramp up of our exposure to middle market credit through our partnership that we previously announced with Adam Street.

So those are some of the primary – those are the primary areas that we'll be utilizing the cash that we have on the balance sheet today.

Got it. So if you're doing sort of $1 billion to $2 billion of kind of the $5 billion that yours in private asset strategies, does that mean that the remainder is going into sort of more plain vanilla corporates?

And then just related to that Anant had mentioned wanting to allocate a couple billion dollars a year to higher output strategies. So will that be raised from sort of shifting existing assets or is that more putting to work new cash in the door for the sales?

Sure. This year we have the cash to deploy for those strategies as we start to ramp those up.

And as you mentioned, there is some – there is more cash there some core plus strategies that we have employed in the past will certainly look to select parts of the market for some of those investments also.

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

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

Now 1% to 2% of our investment portfolio we would hold in cash.

Exactly, if I just summarize what Ted and Jim just said, right, your question is the $10 billion. $5 billion goes to reinsurance transactions, we hold around $1 billion in cash because we’re holding 2% in cash, as Jim outlined.

And then specifically just add a little color to Jim's point; if we did a $1 billion to $2 billion done in private alpha assets this year. That would be success.

North of a $1 billion is what we're targeting. In future years, yes, new business flow is going to largely go to private assets.

So we ramped that a couple of billion a year. Is that right, Jim?

That’s fair.

Got it. Thank you.

Thank you. Sticking with the sales question, MYGA clearly drove the record sales in the quarter over 70% of the composition, is definitely going to shift to FIAs.

But as we go forward in the year, how should we expect must not go forward necessarily just this year, but MYGA have never been a huge composition of sales for AEL, but where do you think it season's out in this AEL 2.0 thought process?

Hi John. Good to hear your voice.

Great question. MYGA will be relevant to us.

In the past, we originated MYGA and reinsured off to other parties sort of as a capital play in some regards to not have to consume capital for it. If you've got a strong middle market credit, and a non-QM mortgage business, there's no – you're really talking about three to five year assets that fit very nicely with the MYGA.

So we'll be opportunistic on MYGA. We – it's opportunistic to both build your go-to-market franchise, which is what we did we refresh the FIA platform.

But we are an FIA shop, we actually really do believe in the dignity of a paycheck for Life. And the FIA platform allows a lot of that.

And we'll opportunistically plan MYGA up and down, but it's really around having the assets now to support MYGA.

Okay. That's helpful.

And then my other question, you talk about 2021, being that transit, the burden of the value unlock, I think was the phrase, does this mean like sidecars is going to be more of 2022 events and Iowa regulatory approval keeps getting pushed out.

Yes, sidecars was always planned to be through permanent re the concept that we introduced. So we build Ray Re, our own platform, demonstrated in action, and then permanent re ends up being, frankly, 2023 financial results, in fact, executed in 2022.

You see with our Brookfield transaction, a real demonstration of what that looks like, in and that happens this year. In terms of the Iowa regulatory approval, as well as others, these things take their natural course of time, we don't think it's pushed out, we just can only move at the pace that everyone else can move it.

So our focus is to summarize again. Get Brookfield done, by the way that is actually progressing very well.

And we expect to talk to you about in the next earnings call about it. I would just allude to the point to what we said in – back in late fall, we're expecting actually that to come out better than that in terms of financial impacts going forward.

So I'm feeling very good about where that ends up happening. The other reinsurance efforts will continue more effort, more work through and build our own platform.

We also are bringing in the talent necessary to do this. So this is the build year, the reset year for financials.

And then in the fourth quarter of this year, you should really start to see, what is the run rate going into 2022?

Thank you very much for the answers.

Hi, good morning. First question is on cash flow generation.

I know you've guided it to $250 million plus of annual capital return. Can you help us think about what extent is that consistent with the amount of annual cash flow, you expect the company to generate going forward versus, I guess some utilization of freed up capital related to the in-force reinsurance deals you did?

Ryan, I'll start here. I think first of all, in these early years when we're doing the $250 million of return of capital to shareholders, certainly some of that is going to be coming from the reinsurance deals that we're executing, and where it over time, as we continue to execute AEL 2.0, and to what exactly Anant was saying, as we move into permanent re, sidecar reinsurance vehicles, and the mix of our revenues is generated, a bigger mix of that is generated from fee revenues that we generate off of managing the liabilities and managing the investments.

That's where that $250 million ultimately will be coming from as we continue to execute AEL 2.0. It's all about the capital efficient and the capital light map model to be able to return that annual target of that $250 million.

Thanks. I guess related to that.

Anant, should we just – in terms of like the potential timing constraint on buybacks this year, should we just think about that as – if you're unable to complete all of the buybacks in this calendar year that you had previously guided to? You would ultimately make up for it next year?

It just might be a timing issue?

Exactly. It's just a timing issue.

And again, we will look at all the available alternatives and things and what we can do to be able to fully offset the shares that will ultimately be issued to Brookfield, of the ones that are outstanding. And then also see on the timing of returning the $250 million.

But yes, it doesn't that we skip a year. It's just the timing of exactly when that gets done.

Thank you.

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

Hi, can you hear me?

Yes, we can Pablo.

Perfect. So I just wanted to follow-up in Ryan's question about free cash flow generation that you sort of normalize for the benefits of all these reinsurance deals you have in the pipeline.

So I guess, my approach to the question this way. So most reinsurers have anywhere across the 60% to 80% free cash flow conversion ratio.

I guess if you look, maybe three, four years out, where do you think AEL falls in that range?

Pablo, its little difficult to look three to five years down, by the way, I actually hear your voice, good morning. I think the way to think about is, we look to transform from being just an insurer to being a broader firm that's got a ROE spread business, and then ROA fee business, the fee business.

So you could see us two years from now, since you asked me to look forward, resegment our balance – resegment our financials along that fee business and the spread business. And the business is 100% free cash flow.

Yes. Understood, Anant.

And I guess the reason I sort of offer that range because I think with all the deals you have, you're probably covered for the next three years anyway. I appreciate the response.

And then the next question I had was other companies are starting to talk about releasing capital that, I guess was previously budgeted as a buffer for credit downgrades or losses? This AEL something similar, or maybe you able to thinking along the same lines, or would you rather retain capital for potential C1 changes?

Or perhaps a ramp up in alpha assets as you're executing on?

Yes. So we will consume capitals for ramping up into alpha assets.

We feel very good about the de-risking efforts we did in the fourth quarter. Jim, Jeff and team did a great job there.

Our C1 consumption will increase but with the creation of our reinsurance platform. We're going to be managing to our rating agency capital requirements and we have strong excess capital positions going forward.

So if some of the reinsurance capital we free up will be used to fund greater C1 for ramping and we do confident about the $250 million this year and $250 million to $300 million in future years.

Okay. Thank you for your answers.

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

Ryan, I think we're going to be focusing on ROEs and outcome. We're going to be focused on capital return, cash return on a sustained basis.

And you're probably going to see the earnings pickup on an EPS basis first, too. So we're focused on EPS growth into next year.

You're seeing a run rate at the end of the fourth quarter of this year, which is a strong double digit EPS growth for next year and capital return, ROE to follow.

Got it. Thank you.

I just wanted – I have a follow-up question about the alpha generating assets. I think I know the answer but I just want to confirm with you.

So when you allocate to these assets so we shouldn't assume a sort of a cover or ramp or sales upgrade to get to the run rate yields, right? Because it's not fee investment or similar vehicle, it's actually fixed income.

So as soon as you invest in it, the higher yield begins to attaching. Is that correct?

Thanks so much for that, Pablo. It's Jim Hamalainen.

The – it depend on the asset class. There can be a ramp up period.

In some asset classes that's true and some of asset classes clearly the ramp up is very quick, and you get the deal right away.

A good example to add to that, Jim's answer, which is spot on, is like look at middle credit, we probably will allocate between $1 billion, $1.5 billion in terms of market credit. We're ready to go tomorrow.

But it takes around a year to get them. So to ramp a $1 billion, $1.5 million in middle market credit, it takes a year.

Right, right. My question was more about the yield attaching to your actual investment.

I understand you won't be able to allocate 100% from day one, right. But whatever you're able to allocate that will start earning the higher yield right away, correct?

Correct.

Okay. That was it.

Yes. I get your question.

It's not like a committed but not drawn down facility that happens in order. So it's not like that directly.

Exactly, exactly. Okay, thank you.

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.