American Equity Investment Life Holding Company (AEL) CEO Anant Bhalla on Q3 2021 Results - Earnings Call Transcript

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American Equity Investment Life Holding Company (NYSE:AEL) Q3 2021 Earnings Conference Call November 9, 2021 9:00 AM ET

Company Participants

Julie LaFollette - Investor Relations

Anant Bhalla - Chief Executive Officer

Axel André - Chief Financial Officer

Jim Hamalainen - Chief Investment Officer

Conference Call Participants

Ryan Krueger - KBW

Wilma Burdis - Credit Suisse

Erik Bass - Autonomous Research

John Barnidge - Piper Sandler

Mark Hughes - Truist

Operator

Welcome to American Equity Investment Life Holding Company’s Third Quarter 2021 Conference Call. At this time for opening remarks and introductions, I would like to turn the call over to Julie LaFollette, coordinator of Investor Relations.

Julie LaFollette

Good morning and welcome to American Equity Investment Life Holding Company’s conference call to discuss third quarter 2021 earnings. Our earnings release and financial supplement can be found on our website at www.american-equity.com. Non-GAAP financial measures discussed on today’s call and reconciliations of non-GAAP financial measures to the most comparable GAAP measures can be found in those documents or elsewhere on our Investor Relations portion of our website.

Presenting on today’s call are Anant Bhalla, Chief Executive Officer; Axel André, Chief Financial Officer; and Jim Hamalainen, Chief Investment Officer.

Some of our comments will contain forward-looking statements within indicated by terms such as anticipate, assuming, believe, continue, estimate, expect, forward, future, intend, likely, look to, may, need, over time, plan, potential, project, should, signal, strategy, target, then, to be, toward, trends, will and would, our actual results could significantly differ due to many risks, including the risk factors in our SEC filings. An audio replay will be made available on our website shortly after today’s call.

It is now my pleasure to introduce Anant Bhalla.

Anant Bhalla

Thank you, Julie. Good morning and thank you all for your interest in American Equity. Before we speak about third quarter results, I want to share with you about the progress made in each element of our AEL 2.0 strategy that was first unveiled around this time last year. We outlined the building blocks in order to execute the strategy, improve returns and migrate to the capital-efficient business model we envisioned. We introduced the virtuous fly-wheel of the dual AEL business model going forward. The virtuous fly-wheel starts with an industry-leading at scale, a new deorigination platform. We delivered a completely refresh of our general account product suite, regained relevance and growth in our IMO distribution channel and built additional distribution with Eagle Life while adding talent to improve productivity and product economics. Our fundraising abilities through our liability origination platforms allow us to be an investment manager with expertise in both liability-driven asset allocation and to manage an open architecture investment platform that can source a wide variety of differentiated investments.

Over the course of this year, we have established our investment management pillar capabilities necessary to be fully invested in core fixed income assets managed by BlackRock and Conning and private assets managed by American Equity or its strategically aligned investment managers. We now have 6 to 7 fleets of private asset sectors in which we have conviction, specifically commercial real estate, residential real estate, including mortgages and single-family rental homes as a landlord, infrastructure debt and infrastructure equity, middle-market loans to private companies and lending to recurring revenue, technology or software for an acronym called STARR, with 2 Rs, sector companies, all of which would allow AEL to deploy an additional couple of billion dollars each year in private assets, demonstrably moving us towards a goal of 30% to 40% in private assets. We now have access to the necessary investment capabilities and scaling to target allocation will allow AEL shareholders to realize the full potential of differentiated asset management, with a potentially lower risk profiles than other alternate business models.

Finally, we’ve got the capital structuring and reinsurance capabilities to then attract third-party risk-bearing capital to this business, either for accessing AEL at the liability origination or for access to both our differentiated asset allocations and our attractive cost of funding liabilities through reinsurance. The former is visible with our first such arrangement, being the Brookfield Reinsurance transaction completed this quarter with attractive fee like revenues that will drive an evolution of AEL to a higher return on equity, or ROE, business through building a capital-efficient return on assets, or ROA, earnings model thereby, both diversifying and improving the quality of earnings. The latter will be our focus with our AEL Bermuda Reinsurance entity that we expect to go live around the end of this year, with plans progressing well for it.

On the Brookfield Reinsurance transaction, we executed both in-force and new business flow reinsurance effective July 1. We believe this is a good deal for both parties. For us, the weighted average fee of the first $5 billion ceded to Brookfield, including a $4 billion of in-force that was ceded effective July 1 was 97 basis points, better than the 90 basis points originally described last October. The forward flow reinsurance fees at 170 basis points for 6 to 7 years, is a meaningfully positive signal on the quality of our liability origination and the strength of our franchise.

In summary, late last year, we outlined the building blocks for AEL 2.0. And in 2021, we have executed all proof points for the fundamental building blocks. Going forward, we expect to reap the financial benefits from scaling, retained spread earning assets in private assets investments as well as through reinsuring liabilities into fee like ROA earnings from future reinsurance transactions or asset management allocation in both public and private assets. The Board and I are proud of the pace of execution. In some cases like investment management, we have accelerated execution from 2020 into 2021 to be able to exit 2021 with all the fundamental capabilities in place to restart our capital return. We have $236 million in share repurchase authorization remaining, and we expect to target the return of $250 million of capital to common shareholders for 2021, starting immediately with our next regularly scheduled dividend after Board approval later this quarter and then share repurchases after approval of Brookfield’s Form A to increase its ownership in AEL from 9.9% to as high as 19.9%. The Brookfield Form A regulatory hearing in Iowa is now scheduled for November 30. Once approval is granted to Brookfield, we intend to start repurchasing shares in the open market.

In terms of other capital initiatives, we expect the refinancing of redundant statutory reserves on our lifetime income benefit riders with an explicit fee to be completed this quarter with a transaction closing retroactive to October 1. With the closing of the refinancing, we will realize the capital savings, including, but not only limited to the capital savings we intended to achieve with the potential reinsurance of $5 billion of in-force only block of business to Varde and Agam. We are no longer pursuing a reinsurance business partnership with them, but expect to continue an ongoing dialogue around asset management.

Additionally, the new redundant reserve financing will save approximately $9 million pretax per quarter in financing costs once the transaction is closed relative to the prior facility. Third quarter operating costs already reflected $2 million of savings from the recapture of financed reserves that was them ceded to Brookfield. Therefore, we expect the refinancing of the remaining redundant reserves currently being financed to result in an additional $7 million of quarterly savings going forward. We have a strong excess capital position, generated by our reinsurance strategies and our business model evolution, thereby fueling the growth in both our new business sales or liability origination and further scaling our allocation into higher returning private assets, while returning capital to shareholders. We made major strides in the investment strategy pillar.

I will let Jim speak to this before touching on business results for the quarter.

Jim Hamalainen

Thanks, Anant. Good morning, everybody. With a number of recent announcements, we finished the last 12 months with a revitalized and reorganized investment department and the asset management relationships we need to respond with resilience to changing markets. Our promise to you was to develop the relationships necessary to transform our investment portfolio towards a 30% to 40% allocation to privately sourced assets. We’ve made good on this promise and have substantially completed the necessary build-out of our asset management partner relationships.

The biggest news was our announcement of the agreement to move our core investment portfolio management to BlackRock and Conning. In a time, when it’s become difficult to source good yields in core public investments, is extremely important to maximize effectiveness. Even with $45 billion in core public assets, American Equity can’t match both the breadth and depth of expertise of the large public fixed income asset manager.

Migrating our core public fixed income portfolio to BlackRock and Conning will help us attain better net yields in core fixed income, while allowing us to focus in areas where we can have an industry-leading expertise like private assets, derivative trading, differentiated strategic asset allocation and asset liability management. BlackRock took over management of $45 billion of assets in October and has already invested over $1.8 billion of company cash into long-term securities on our behalf.

With regards to privately sourced assets, we recently announced a strategic investment with Monroe Capital to scale a dedicated platform focused on software technology and recurring revenue, or STARR – the star acronym, middle-market businesses. As part of this agreement, we have committed to initially invest $1 billion from our general account in such loans. The strategy will focus on companies that offer mission-critical, high-return on investment, software or technology solutions, resulting in recession-resistant revenue streams and lower default rates.

Along with expected to generate returns higher than investments with a similar risk reward profile, our hope is to grow the STARR platform with third-party investors, including other insurance companies through structured products based on STARR platform’s loan origination. We have also provided financing to our residential real estate partner, Pretium, to help support its purchase of Anchor Loans, a specialist in short-term mortgage loans in the single-family housing market. In addition, we purchased over $1 billion of mortgage loans related to this transaction that are a particularly good asset liability match for shorter duration liabilities that we may issue.

In addition, we have initiated a partnership in infrastructure debt and are exploring opportunities in infrastructure equity. All of this is in addition to our existing relationships with Pretium and Adam Street. To date, we’ve done $327 million with Adam Street in middle-market loans. Since beginning our partnership with Pretium, we’ve invested $779 million in residential mortgages, and since this summer, $301 million in single-family rental homes. Including residential mortgage loans, single-family rental homes, commercial mortgage and agriculture loans and middle-market loans, to date, we’ve invested approximately $2.5 billion in privately sourced assets during 2021, exceeding our promise of investing $1 billion to $2 billion in privately sourced assets this year. Privately sourced assets currently account for approximately 15% of invested assets.

Looking at the state of current – the current of the portfolio, the overall credit quality remains strong with an overall rating of Single A minus for long-term investments. The net unrealized gain position at quarter end was $4.5 billion, down $327 million from the 3 months earlier as interest rates moved higher. There were minimal credit losses in the quarter and the performance of our commercial and agricultural mortgage loan portfolio remains strong, with no delinquencies or forbearances granted.

From a liquidity standpoint, we continue to hold cash in excess of our current target level of 2% of invested assets. At September 30, we had $7.6 billion of cash and equivalents in the investment company portfolios compared to $10 billion at June 30. The level of cash has since come down further with investments in private assets and as BlackRock has begun to redeploy cash and to core publicly traded securities. Currently, we have approximately $3 billion of uncommitted cash to deploy between now and early 2022 to be fully invested.

For the quarter, new investment asset purchases totaled approximately $400 million, almost entirely in privately sourced assets. The expected return on new money investments in the quarter was approximately 4.6% net of fees. The current point in time yield in the portfolio reflecting investment activities through October 31, was approximately 3.7%, so some pressure on investment spread will continue into the fourth quarter. After the redeployment of remaining cash that is in excess of our target, we continue to estimate the yield on our investment portfolio will be approximately 4%. With regards to redeployment, we expect to substantially redeploy the excess cash by year end. And as previously indicated, reach our cash target in early 2022.

With that, I’ll turn it back over to Anant.

Anant Bhalla

Thanks, Jim. Moving on to sales results for the third quarter. Total sales of $1.3 billion were up 11% versus the second quarter of this year. For the third quarter, FIA, or fixed index annuity sales increased 3% sequentially to $915 million. We believe this result will be generally in line with the overall market. Year-to-date, total sales of $4.9 billion positions us to end the year firmly towards the upper end of our 2021 sales goal of $5 billion to $6 billion outlined at the start of the year. This is a good indication of our ability to pivot in our business mix as and when we see asset side or capital optimization opportunities.

At American Equity Life, total sales through the IMO channel was $760 million. Of this, fixed index annuity sales increased 4% to $728 million from $703 million sequentially as the refreshed AssetShield series continues with its momentum and got a nice lift from the introduction of a EstateShield. FIA sales at Eagle Life of $188 million represents a 2% increase versus the second quarter of 2021 and a 210% increase compared to the year ago quarter. Within FIA sales at Eagle Life, the early signs of a mix shift towards income product sales, albeit of a small base is visible as Eagle’s income product sales were up 80% over the second quarter of this year.

Multiyear fixed rate annuity sales were up 37% over the second quarter, as we entered one of the largest banks in the country as part of our distribution footprint expansion and expect to shift mix to fixed index annuities in this bank in 2022. Excluding one notable item, we reported non-GAAP operating income of $136 million or $1.46 per share. As expected, results benefited from the completion of the in-force reinsurance transaction with Brookfield. In addition, we recorded historically high levels of income from partnerships and other investments accounted for at fair value, prepayments and other bond fees and hedge gains.

With that, I’m happy to give my short-lived role as Interim CFO to our new CFO, Axel André. We are very pleased that Axel joined the American Equity team and over to him to go deeper into the quarter’s numbers.

Axel André

Thank you, Anant. Let me extend my appreciation to all of you attending this call. For the third quarter of 2021, we reported non-GAAP operating income of $79.5 million or $0.85 per diluted common share compared to a loss of $249.8 million or $2.72 per diluted common share for the third quarter of 2020. Excluding actual assumption updates, which was the first notable item this year and the single notable item for this quarter, operating income for the third quarter of 2021 was $136.3 million or $1.46 per diluted common share compared with $91.1 million or $0.98 per diluted common share in the year ago quarter.

Third quarter 2021 non-GAAP operating results were negatively affected by $56.8 million or $0.61 per diluted common share from updates to actual assumptions. Third quarter 2020 non-GAAP operating results were negatively affected by $340.9 million or $3.70 per diluted common share from such updates.

On a pre-tax basis, the effect of the third quarter 2021 updates before the change to earnings pattern resulting from [indiscernible] decreased amortization of deferred policy acquisition costs and deferred sales investments by $161 million and increased the liability for future payments under lifetime income benefit riders by $233 million for a total decrease in pretax operating income of $72 million. The actual adjustments to amortization of deferred policy acquisition costs and deferred sales inducements as well as the increase in the liability for future payments under lifetime income benefit riders, primarily reflected changes in our assumptions regarding future interest margins, lapsation, mortality and lifetime income benefit rider utilization.

We have updated our assumptions for aggregate spread at American Equity Life to increase from 2.25% in the fourth quarter of 2021 to 2.4% by year end 2022. And then will modestly higher to 2.5% at the end of the 8-year reversion period. With a near-term discount rate through 2023 of 155 basis points and eventually grading to 210 basis points by the end of the 8-year reversion period. Last year, we had set our assumptions for aggregate spread to increase from 2.4% in the near-term to 2.6% at the end of the 8-year reversion period, with a discount rate of 1.6%, grading fairly nearly to an ultimate discount rate of 2.1%. The effect of this change was to increase back in DSI amortization by 70 – by $67 million pretax, while increasing the liability for guaranteed lifetime income benefit payments by $77 million pretax.

Our experience continues to emerge with slightly lowered lapsation, mortality and lifetime income benefit rather utilization assumptions. The combined net effect was a decrease in DAC and DSI amortization by $234 million pretax, while increasing the reserve for guaranteed lifetime income benefit payments by $169 million pretax. The quarter included $7.6 million of additional revenues from reinsurance, stemming from our Brookfield Reinsurance transaction. Included in revenues is $2.7 million of asset liability management fees, and $4.9 million, reflecting amortization of deferred gain on a GAAP basis. These are recurring type revenues, which are expected to grow over time as we migrate liabilities to the ROA business model.

Average yield on invested assets was 3.91% in the third quarter of 2021 compared to 3.51% in this year’s second quarter. The increase was attributable to an 18 basis points benefit from lower cash relative to invested assets, a 22 basis point increase from returns on partnerships and other investments accounted for at fair value and a 2 basis point increase from prepayments and other bond fee income. Reflecting the in-force reinsurance transaction with Brookfield, cash and equivalents in the investment portfolio averaged $7 billion over the third quarter, down from $10 million in this year’s second quarter.

The aggregate cost of money for annuity liabilities was 151 basis points, down from 156 basis points in the second quarter of this year. The cost of money in the third quarter benefited from 8 basis points of hedging gains compared to 4 basis points of gains in the second quarter. The slight decrease in the cost of money reflects the still relatively high cost of option purchases made in the second quarter of 2020 prior to renewal rate changes that became effective in late June and July of that year. Brookfield in-force reinsurance transaction lowered the absolute cost of money for deferred revenues in dollars by $12.9 million.

Investment spread in the third quarter was 240 basis points, up from 195 basis points from the second quarter. Excluding prepayment income and hedging gains, adjusted spreads in the third quarter was 220 basis points compared to 181 basis points for the second quarter. In line with years, we would anticipate our investment spread, excluding the high levels of prepayment income and hedge gains, to rise back to expected levels once remaining excess cash is redeployed. Should the yields available to us decrease or the cost of money rise, we have the flexibility to reduce our rates if necessary and could decrease our cost of money by roughly 58 basis points if we reduce current rates to guaranteed minimums, unchanged from our second quarter call.

Excluding the effect of assumption revisions, the liability for guaranteed lifetime income benefit payments increased $43 million this quarter after net positive experience and adjustments of $15 million relative to our modeled expectations. The better-than-expected results primarily reflected the benefit from continued high index credits in the quarter offset in part by lower lapsation in certain policy blocks and higher than modeled LIBR election or Lifetime Income Benefit Rider election in certain cohorts. The in-force reinsurance transaction with Brookfield lowered the expected accretion by $7 million, while assumption revisions increased expected accretion by $2 million for a net of $5 million. Deferred acquisition costs and deferred sales inducement amortization totaled $93 million for the quarter, $12 million less than modeled expectations due to strong index credits in the quarter, offset partly by higher than modeled interest margins. The in-force reinsurance transaction with Brookfield lowered the expected level of amortization expense by $7 million, while assumption revisions lowered expected amortization by an additional $21 million.

Other operating costs and expenses decreased to $57 million from $65 million in the second quarter. Operating costs in the second quarter included $5 million of expenses associated with talents transition, while third quarter operating costs reflecting – reflected $2 million of savings from the recapture of finance reserves that were then ceded to Brookfield. We expect the refinancing of the remaining redundant reserves to be effective as of October 1st, resulting in an additional $7 million of quarterly savings going forward.

At September 30th, cash and equivalents at the holding company were in excess of target by approximately $300 million. We expect to take an ordinary dividend from American Equity Life Insurance Company, the operating company this quarter, given the excess capital position in the life companies. Further growing holding company cash by year end 2021 to be able to largely support both our 2021 and 2022 capital return plans. This is a solid sign of the progress made just in the past 12 months in becoming AEL 2.0.

Now, I will turn the call over to the operator to begin Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question will come from Ryan Krueger with KBW.

Ryan Krueger

Hi, good morning. Could you give any detail on how much capital you expect to be freed up from the redundant reserve of our refinancing transaction?

Anant Bhalla

I will start, and then Axel can add in. Hi, Ryan. Good morning. We expect that to be – to free up capital, everything we expected from the Varde reinsurance transaction plus some additional amount of capital, so north of $400 million.

Axel André

That’s correct Anant. It’s close to $400 million.

Ryan Krueger

Okay, great. And there is no real cost of that, right? And you actually get savings along with the capital freed up?

Anant Bhalla

Correct. We see run rate expenses of $9 million a quarter, plus the capital free up of $400 million, plus from Brookfield, we have freed up around $230 million. So, if we add those up, north of $600 million, $650 million of capital save up.

Ryan Krueger

Thanks. And then on DAC and DSI amortization, it was $93 million in the quarter. And I know there are some moving parts with excess liquidity. Could you give us any sense of once you fully redeploy the excess cash, what a rough level of quarterly DAC and DSI amortization might be?

Axel André

Sure. So – yes. So, as mentioned, as we redeploy cash and become fully invested, you would expect our yield to pick up, as a result our interest margins will pick up. And the impact of that on amortization is that the amortization rate will increase. Roughly speaking, we expect it to increase from the run rate of around $105 million, back up to about $120 million.

Ryan Krueger

Okay. Thanks.

Operator

Your next question will come from Wilma Burdis with Credit Suisse.

Wilma Burdis

Hi, good morning. Could you talk a little bit about being the life sales channel for a very strong fixed annuity sales. But I guess my question is, will that translate ultimately into FIA sales. And I know not you mentioned kind of 2022. But notice the FIA sales were only up, I think kind of 2% quarter-over-quarter, so just curious about that.

Anant Bhalla

Hi Wilma, good morning. Yes, it will translate because that’s how we intend to pay them. And I think performance alignment is very important with pay. Where jokes apart – FIA long duration products, that’s our sweet spot. That’s how we differentiate in investment allocation and then finding right assets. So, you enter a new channel, you enter a new relationship in the first quarter call on 6th of May, I mentioned PNC. That’s the financial institution we entered. We entered, therefore, MIGA sales were higher, our fixed rate annuity sales were higher. But eventually, the pivot has to happen to FIA, that’s how we measure success.

Jim Hamalainen

Yes. Wilma, this is Jim Hamalainen. One thing I will add to that is that we have spent the last year of building up the organization, the sales and distribution organization within the company. So, that’s been a process that’s taken the past year. And so we expect to see some impact from that going forward also.

Wilma Burdis

And I guess just – yes, one quick follow-up. Any concerns on the pricing for the MIGA since that’s been a big push?

Anant Bhalla

It’s a very good question. I think its gets bound to why we are focused on sourcing short duration assets, while we differentiate ourselves with long-term assets. We have also demonstrated, like you look at our acquisition of a $1 billion portfolio of anchor loans where yields are north of 5%. But we don’t pay north of 3% or all-in cost of funds in MIGA, where you are paying the 2s and your costing funds are high-2. So, you are making – if you back it up with short-term assets yielding north of 4% to 5%, you are making a very solid spread, but the key is to be opportunistic with your asset sourcing. So, I am sealing Jim’s thunder. I will let him – add him right after this. And then the second part is to be disciplined to make that mix shift from multiyear fixed annuities to FIA, both are key. Jim, do you want to add something?

Jim Hamalainen

Yes. No, that’s exactly right. And we have made the shift and are focusing on FIA now and that channel also in that particular bank.

Wilma Burdis

Okay, great. Thank you.

Operator

Our next question will come from Erik Bass with Autonomous Research.

Erik Bass

Hi. Thank you. So, you have a nice deployable capital cushion today, which will certainly support your near-term capital return plans. I was just hoping you could talk a little bit about where AEL sits today in terms of organic free cash flow generation and how that will build over time?

Anant Bhalla

Hi, Erik. Good morning. It’s Anant. I will start. I will let the others chime in. You are right. We have freed up a good amount of capital like in my answer to Ryan, north of $600 million with our reinsurance transactions and reserve financing. Going forward, what you will see is this migration to ROA assets. And you will see on Page 12 of the financial supplement, we have got an addition of notional value subject to recurring fees. As we grow that ROA business – I think a good question you will ask us over time is how do you make that $3.9 billion, $10 billion, $15 billion or bigger. And as that grows, that is lower earnings on a GAAP basis because you have to amortize the GAAP gain over the expected life of the policy of, let’s just say, 16 years, 17 years, 18 years, but your earning as cash earnings over 6% to 7%. So, a long midway of saying, earnings translation of ROA will be in excess of 100%, because cash earnings are higher than GAAP earnings in excess of 100%. And then we look to redeploy not only grew ROA, but write new business where a lot of the capital is coming from third-party sources. So, we keep 25% in the ROE side of the house, by private assets, on a nice spread revenue, put 75% in the ROA side of the house, on 100 basis points, 150 basis points, 170 basis points. By the way, the Brookfield deal is 170 basis points, as you can see. And that’s what will translate into very limited capital, if any needed from earnings, future earnings, 2023 onwards kind of earnings to fund growth of the liability origination and therefore, very high translation into cash generation. It’s a very long answer to your simple question, but I am going to pause and let you ask a follow-on and then do another one if you want.

Erik Bass

That’s helpful. So basically, it sounds like you are expecting free cash flow to really ramp-up in 2023 onwards, and that will be somewhat contingent on kind of diversifying the funding sources. Am I summarizing that correctly?

Anant Bhalla

Correct. That is correct. Both growing capital to grow the ROA side, plus we are going to have a higher level of earnings. We are going to – as Jim mentioned, we are going to be at 4% once we are fully deployed in terms of portfolio yield. And then we grow from there. If we grow the next $10 billion in private assets and portfolio yield goes north of 4%, that’s also going to be higher earnings power coming in. We don’t think we are going to need much capital from retained earnings to fund sales growth when you look at 2023 and 2024. And that is very powerful because the earnings power of private assets plus the earnings power of ROA through recurring fees, which is a very high quality of earnings because that balance number – by the way, that you see on Page 12, that’s not market sensitive. That’s not decrement sensitive. That’s locked and loaded for the next 6 years to 7 years, right. That, frankly, should have a double-digit, significant double-digit multiple on it. So, that earnings power will drive the capital return.

Erik Bass

Thank you. That’s very helpful. And then just a quick follow-up, can you talk about how you expect the flow reinsurance agreement with Brookfield to build, or how do you expect volumes to build on that over time?

Anant Bhalla

We expect that to be sort of IncomeShield right now. It’s what’s flowing through there. We are focused on growing income products with the launch of a Estate Shield, with the launch of Eagle Select income focus in the Eagle side. It’s all incremental right now. We would expect income products like IncomeShield to be around $1 billion of sales a year. Frankly, I would like it to be larger. We are repositioning this company. 2.0 is coming together. We are going to scale that over the next couple of years. I am really focused with this management team to make this the financial dignity company that provides people income or other means of solutions for dignity for life. As we do that, Brookfield Reinsurance could grow. But right now, let’s just say, a $1 billion a year. We keep 25% back for our balance sheet, 75% goes to that.

Erik Bass

Great. Thank you very much.

Operator

Your next question will come from John Barnidge with Piper Sandler.

John Barnidge

Thank you, Can you talk maybe about run rate operating expenses as we should be thinking about it into the fourth quarter? And I asked this in light of the Conning and BlackRock announcement. Are there any anticipated severance expenses to be incurred in the fourth quarter?

Axel André

Sure. I will take that. This is Axel. So, as I mentioned, operating expenses were $57 million for the third quarter. We mentioned the reserve financing transaction, which is expected to result in a $7 million save relative to that into the fourth quarter. So, you are already coming down for 57% to 50%. I think we have talked in the past that high-40%s to 50% as being our normalized run rate of operating expenses. In terms of the severance, that is already baked in the Q3 number, and it actually flows through the NII line.

John Barnidge

Great. Thank you very much. And if I could ask a follow-up, you previously talked about a servicing tech platform being part of AEL 3.0. Now, that we have migrated to AEL 2.0 fully. How should we think about that again and maybe revisit it? Thank you.

Anant Bhalla

Happy John. You broke out, you said servicing tech platform?

John Barnidge

A servicing platform built around technology is something – I believe you talked about previously as part of AEL 3.0.

Anant Bhalla

Yes. Thank you for that clarification. Yes. So, how to think about it is if you look at the virtuous fly-wheel of our strategy, all those have come together between go-to-market, investment management and capital structure. Now, you look at the foundational capabilities of the company. We have always been known as a company that took care of customer service, both the distributor as well as the end paying client. And as we look to reposition ourselves, this is not a branding exercise, what I am calling this financial dignity company. It’s a re-imagination of this company, reframing of it as a company that takes care of clients working with intermediaries, maybe working directly with clients in certain cases. And that will require using technology in the way we service people and delight clients to be a way we operate. We will make some investments of that over the next coming years. If we decide to redeploy some capital in that retooling, it will happen. It’s something we are looking at how to leapfrog just like what we have done in assets, but it’s not something that’s going to give you financial results. It’s just going to re-imagine this company. Did it – if you look at the FIA business, it’s $80 billion in transfer every year. The FIA business is $80 billion. And some of you will ask me, why are you not in other annuities, and we can get into other annuities, and we will grow. But it’s not just annuities. There is a trillion dollars of assets in movement in the retirement space. And you can provide financial dignity for retirements and other needs. So, we are reframing ourselves to work with the producer, with the agent, with the adviser to go after the trillion dollar market for originating liabilities, not just the $80 billion FIA market. And then Jim is going after the multi-trillion dollar market. On the asset side, that’s not serviced by banks or available of Wall Street as structured products through publicly traded securities. So, that’s where the thing. We are bringing together a much bigger market on the liability side and the asset side together. And technology is a key enabler over there. So, nothing that you can build into the models, but come 2023, come 2024, this company is going to be fishing in a much bigger pond.

John Barnidge

Thank you very much. Best of luck.

Operator

[Operator Instructions] We have a question from Mark Hughes with Truist.

Mark Hughes

Yes. Thank you. Good morning. Have you laid out – or can you share 2022 sales target?

Anant Bhalla

Nice try Mark. Good morning by the way. 2022 sales target, you are going to make my sales guys all get angry if I start giving you their numbers before them. But I would say the key point is what Jim and I both mentioned, which is grow fixed index annuity sales and align it with the asset side opportunities. We have proven through two things. One is revitalizing go-to-market that we are very relevant, not only in one channel IMO, but also Eagle Life. So, we have got multi engines on this plane, if I may use that meta for that analogy to do it. So go-to-market, we have got at scale origination platform, that’s good. The second is, you can see with our new business reinsurance transaction, not only we are seeing the returns are good, but you have third-parties validating that through reinsurance when our floor arrangement with Brookfield. And that translates into this ROA platform. We will look at the market opportunities and manage sales accordingly, but I am not looking to grow sales beyond $6 billion next year. If the opportunity is there between the asset side and the returns on the liability side, so we will do it. We have the capital for it. But if we think the better return for capital is to rivet to shareholders or invest in private assets and sell a little less, 7 in the range where we remain very relevant to core partners, that’s what we will do. We like where we are. We really like where we are. Hopefully, that answers your question.

Mark Hughes

It does. Yes. Thank you. And when you have relationships with PNC and you initiate those with MIGA, is there a contractual follow-on related FIAs or your experience is that once you get in the door, you are able to widen up that relationship?

Anant Bhalla

We have plans to be in that particular distributor with FIAs shortly scaling in 2022, but we are ready to go with an FIA is probably the way I can tell you. And then you will see the results in 2022.

Mark Hughes

Thank you very much.

Operator

And you have a follow-up from Ryan Krueger with KBW.

Ryan Krueger

Okay. Thanks for taking the follow-up. A couple of quick ones. Just on buybacks, is the goal to complete the $250 million for 2021 and the $250 million for ‘22 by the end of 2022?

Anant Bhalla

Yes.

Ryan Krueger

And then on the yield, the 4% yield in the spread targets that you laid out, do both of those – do they assume a normal level of yield on the alternative assets and prepays, or is that just like a book yield?

Axel André

Yes. Ryan, I can take the investment question and the asset side question. That will be a normalized level of any unusual income like prepays, for example. So, that would be the core yield on the portfolio and we talk about 4%.

Ryan Krueger

Got it. Thank you.

Operator

There are no further questions at this time. I would now like to turn the call back to Julie for any closing remarks.

Julie LaFollette

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

Thank you for your participation. This does conclude today’s conference. You may now disconnect.

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