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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to American Equity Investment Life Holding Company's First 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.
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. Presenting on today's call are Anant Bhalla, Chief Executive Officer; and Ted Johnson, Chief Financial Officer. Some of the comments made during this call may contain forward-looking statements within the meaning of Private Securities Litigation Reform Act, indicated by terms such as estimate, expect, intend, over time, plan, potential, should, strategy, targeting, will, would and working towards. There are a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied. Factors that could cause the actual results to differ materially are discussed in detail under Risk Factors in our filings with the SEC. An audio replay will be made available on our website shortly after today's call. It is now my pleasure to introduce Anant Bhalla.
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 1 of our 4 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 slow down 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 revise 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 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 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 through 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 origination. We are working in 2021 to execute our previously announced reinsurance partnerships with Brookfield and Värde/Agam, as they start to demonstrate the flywheel in motion, and we're in the process of building our own reinsurance platform in 2021 to further speed up the flywheel in future years with AEL directly accessing third-party capital, including potentially through sidecar light vehicles. I expect to share more on the execution of our reinsurance and asset management efforts in the second and third quarter earnings calls, while my focus today will be on the go-to-market pillar. As I communicated on our last earnings conference call, 2021 will be a transitional year for AEL's financial results as we migrate towards this new AEL 2.0 business model. We are migrating a fairly large $50-plus billion balance sheet from a legacy core fixed income strategy with relatively higher asset leverage to a new asset allocation approach, encompassing lower asset leverage, capital structure optimization through reinsurance and third-party capital; and utilization of alpha assets to both improve sustainability of investment results in a low interest rate environment and deliver superior loss adjusted net yield over time. The scaling of alpha assets is expected to be a multiyear journey with a couple of billion dollars of alpha assets added to our books each year. Like any strategy migration, there are short-term impacts for greater long-term gain. For AEL, this will manifest itself in running higher cash balances, somewhat accentuated by near-perfect timing of derisking existing assets in the fourth quarter of 2020 as we pursue the closing of the Brookfield and Värde/Agam reinsurance transactions. We expect 2021 financial results to bear a significant amount of the transitionary effects of our fundamental strategy shift for long-term unlock for both our shareholders and policyholders. This value unlock is what we are vigilantly focused on. Therefore, we expect 2022 to be the first full year for investors to start to see the incremental financial benefits from AEL's new business model. In a few minutes, Ted will provide more details on our financial results and how this migration affected operating results. Getting to execution in our go-to-market pillar. In the first quarter, we recorded all-time record sales of $2.4 billion, up 32% from the fourth quarter of 2020 and 245% year-over-year. First quarter sales topped the previous quarterly record of $2.1 billion, set in the fourth quarter of 2015, which we believe is an early indication of the potential from AEL's go-to-market franchise. We are targeting between $5 billion to $6 billion of sales for the total company this year, and we are well on our way. Although a majority of first quarter sales were in a multiyear fixed annuity products, we expect to focus our efforts for the rest of the year on the fixed index annuity product line, especially given our recent product refreshes in that area. At American Equity Life, quarterly sales of $1.3 billion were the highest level since the fourth quarter of 2015. Sales increased 46% sequentially and 122% compared to the first quarter of 2020. In February, we reintroduced a refreshed AssetShield product that has quickly gained momentum, leading to a sequential 13% increase in accumulation deposits after just the first month of sales. The refreshed AssetShield features 2 new proprietary indices, the Credit Suisse Tech Edge Index and the Société Générale Sentiment index. We also added the existing Bank of America Destinations Index to the refreshed product. We are now offering these strategies for both 1- and 2-year terms. We also added enhanced rate riders to AssetShield, allowing policyholders to earn a greater cap of participation rate for an optional fee. We have seen a strong initial reaction to the product refresh as sales of AssetShield more than doubled in March compared to February. In particular, the new indices have been well received as 50% of March deposits went into the new strategies added to AssetShield in February. While 1 month is not a trend, the outlook for fixed indexed annuity sales at American Equity Life is much stronger than even the prepandemic levels in early 2021. In essence, momentum is on our side. Total sales at Eagle Life of $1.1 billion represented a 19% increase versus the fourth quarter of 2020 and a tenfold increase compared to the year-ago quarter. Fixed index annuity sales were up 40%, both sequentially and compared to a year ago. Our overall product strategy resulted in positive benefits for both FIA sales and recruiting. Over the last 6 months, 1,400 representatives wrote their first piece of business with Eagle Life, increasing the number of current active bank and broker-dealer advisers that have sold Eagle Life products by 36%. FIA sales at Eagle Life trended higher throughout the first quarter with solid growth in both February and March. On April 7, we introduced our new Eagle Select Income Focus product, which will better address the growing demand for guaranteed lifetime income product in the bank and broker-dealer space. Eagle Life has recently been approved by PNC Bank on a combined entity basis. We have been at BBVA prior to its merger with PNC.
As we indicated on our fourth quarter 2020 earnings call, our plan has been to reengage with distribution with a simpler multiyear fixed rate annuity products during COVID-19 and now pivot to driving growth through a revamped fixed index annuity product portfolio. We plan to continue to introduce innovative new products as we move through the AEL 2.0 transformation, which will help us compete effectively and grow our share of the annuity market. As the financial planning needs of Americans evolve, American Equity is focused on providing our clients the dignity of a paycheck for life. I believe our commitment to this core mission statement will become recognized and appreciate in the market over time. This will help grow AEL in both channels and open up other market access opportunities for us in the future. Now turning to financial results. For the first quarter of 2021, we reported non-GAAP operating income of $41 million or $0.43 per diluted common share. As expected, the first quarter results reflected many of the transitionary effects I mentioned earlier, in particular, the effect of cash in the portfolio in excess of the target range and the level of operating expenses. Now I'll turn the call over to Ted to give more detailed analysis on our first quarter financial results.
Thank you, Anant, and good morning, everyone. Prior to going over the results for the first quarter, I want to provide more context 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 reserve 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, this 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 ongoing operations. We present notable items to help investors better understand our results and to evaluate and forecast those results. Average yield on invested assets was 3.58% in the first quarter of 2021 compared to 3.88% in the fourth quarter of last year. The decrease was primarily attributable to a 34 basis point reduction from interest foregone due to an increase in the amount of cash held in the quarter as we prepare to execute the Brookfield and Värde/Agam reinsurance deals in which we will primarily transfer cash. Cash and short-term investments in the investment portfolio averaged $8.6 billion over the first quarter, up from $4.4 billion in the fourth quarter of last year. Compared to the prior quarter, partnership income contributed an additional 6 basis points to yield. At March 31, we held $10 billion of cash, yielding roughly 2 basis points. The current point-in-time yield on the portfolio, including excess cash, is approximately 3.3%. So the pressure on investment spread will continue into the second quarter. Excluding cash and invested assets to be transferred as part of the reinsurance transactions, and the redeployment of remaining cash in excess of target, we estimate that the current point-in-time yield on the investment portfolio to be roughly 4%. The aggregate cost of money for annuity liabilities was 158 basis points, down 5 basis points from the fourth quarter of 2020. The cost of money in the first quarter benefited from 2 basis points of hedging gains compared to a 1 basis point gain in the fourth quarter. Excluding hedging gains, the decline in the adjusted cost of money reflects a year-over-year decrease in option costs due to past renewal rate actions. Reflecting the decline in the portfolio yield, investment spread fell to 200 basis points from 225 basis points in the fourth quarter of last year. Excluding nontrendable items, adjusted spread in the first quarter was 187 basis points compared to 213 basis points in the fourth quarter of 2020. In line with yield, we would anticipate our investment spread to rise back to expected levels once the reinsurance transactions are completed. The average yield on long-term investments acquired in the quarter was 4.04% gross of fees compared to 4.46% gross of fees in the fourth quarter of last year. We purchased $625 million of fixed income securities at a rate of 3.92% and originated $77 million of commercial mortgage loans at a rate of 3.49% and and purchased $151 million of residential mortgage loans at 5.76% gross of fees. The cost of options increased to 145 basis points from 139 basis points from the fourth quarter of 2020, primarily reflecting mix shift within our S&P 500 strategies towards higher-cost participation rate strategies from cap strategies, and a slight increase in the cost of [ click ] options hedging our monthly point-to-point strategies due to the decrease in volatility over the quarter. All else equal, we expect to see the cost of money continue to decline over the next 2 quarters before stabilizing in the fourth quarter. Should the yields available to us decrease, or the cost of money rise, we have flexibility to reduce our rates, if necessary, and could decrease our cost of money by roughly 57 basis points if we reduce current rates to guaranteed minimums. This is down from 62 basis points we cited on our fourth quarter call. The liability for lifetime income benefit riders increased $73 million this quarter, which included negative experience of $11 million relative to our model expectations. There were pluses and minuses in the first quarter, with the biggest differences due to higher-than-modeled lifetime income benefit rider utilization and lower-than-expected decrements on policies with lifetime income benefit riders. Deferred acquisition costs and deferred sales inducements, amortization totaled $132 million, $5 million more than modeled expectations. The biggest is driving the negative experience were higher-than-expected decrements on the total book of business and the higher-than-expected lifetime income benefit rider utilization, of which I just spoke, partially offset by lower-than-expected adjusted gross profit. Other operating costs and expenses increased to $56 million from $55 million in the fourth quarter. We expect operating costs to trend higher over the coming quarters as we will build out the necessary infrastructure to continue execution of the AEL 2.0 strategy, but still expect the level of other operating costs and expenses to fall into the high $40 million range post refinancing our existing AG 33 redundant reserve financing facilities in 2021. As expected, we completed the execution of our initial accelerated share repurchase program in March and received another 542,000 shares in addition to the initial 3.5 million shares delivered at the initiation. We also repurchased approximately 155,000 shares in the open market since the closing of the accelerated share repurchase to date. Combined with the 1.9 million shares we repurchased in the open market prior to the initiation of the [ AFR ] program, we effectively reduced a share dilution resulting from the November 30 initial equity investment of 9.1 million shares from Brookfield Asset Management by approximately 2/3. Total debt to total capitalization, excluding accumulated other comprehensive income at quarter end, was 11.6% compared to 12.2% at year-end and 14.9% in last year's comparable quarter. Invested assets at amortized costs was 12.6x shareholders' equity, excluding accumulated other comprehensive income. At March 31, cash and short-term investments at the holding company totaled approximately $490 million. We expect to have roughly $350 million of cash in excess of target at the holding company, even after buying back the additional shares necessary to fully offset Brookfield tranche 1 issuance-related dilution. Now I'll turn the call over to the operator to begin the Q&A.
[Operator Instructions] Our first response is from Wilma Burdis with Crédit Suisse.
I guess, just one question. Just, is AEL still on track to repurchase the $250 million to $300 million of stock? It 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?
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 towards 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 2. 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 approval by the Iowa Insurance Department.
Wilma, I'd one thing, Ted covered it. But if your question is to intent, 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. And then, second question just, I guess, the new money yield is about 4% in the quarter. It 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 that most yields are kind of sub 3% right now?
So I'll have Jim Hamalainen, our Chief Investment Officer of Insurance Entities, take that one.
Sure. Thanks. This is Jim. It's a function really a mix of assets. And 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 answer to that question.
Okay. Got it. And then, just maybe a little bit of color on the LIBR utilization. I guess, could you maybe talk specifically about the underlying trend there in the quarter and where that's going?
Sure. I can do that, Wilma. 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 saw elevated utilization of LIBR in the first quarter, and then it trailed down and the remaining quarters stayed more matched what we had 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.
[Operator Instructions] Your next response is from Greg Peters with Raymond James.
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 levels. So if I were to fast forward this table, say, Q4 '21, how do you think the average yield on invested assets would look? How do you think the aggregate cost of money will look? And how do you think aggregate investment spread will look?
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 at a conservative rate at approximately 3.5%, I mean we would hope to beat that, that gets you to a residual yield on the portfolio of 4%, where we sit at today. Cost of money-wise, we could potentially, if all else equal, see some additional benefit to cost of money over the next few quarters and then, as I said, see it stabilize in the fourth quarter.
Right. You said the investment spreads, 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 2 questions? Or if that was 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 -- Steven's -- I'll get yelled at by Steven later. I wanted to pivot to the -- just the sales outlook. I think you said $5 billion to $6 billion of sales expected for this year. Given the strong results of the first quarter, that suggests that the remaining couple of quarters will be lower sequentially than the first quarter. It 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. The -- 2 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, so under $100 million a month now. And so, that's sort of the way we've got to think about it. We're focusing on FIA. And the internal salespeople 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 is spot on right, we would expect sequential and year-on-year outcomes like you mentioned.
Your next response is from Erik Bass with Autonomous Research.
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 of March, how much of 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, thanks for the question. A number of parts there that the timing is dependent on, which includes closing of 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 the 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 agriculture loans. And lastly, we're starting to move into the ramp-up of our exposure to mill 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 you are 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 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. I mean, 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 are some core plus strategies that we have employed in the past. We'll 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?
Erik, 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. That 1% to 2% of our investment portfolio, we would hold in cash.
Exactly. So if I -- 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, to just add a little color to Jim's point, if we did $1 billion to $2 billion done in private alpha assets this year, that would be success. North of $1 billion of what we're targeting. In future years, yes, new business flow is going to largely go to private assets, so we ramp that a couple of billion a year. Is that fair, Jim?
That's fair.
Your next response is from John Barnidge of Piper Sandler.
Sticking with the sales question. MYGA clearly drove the record sales in the quarter, over 70% of the composition. It's definitely going to shift to FIAs. But as we go forward in the year, how should we expect -- not go forward necessarily just this year, but MYGA has never been a huge composition of sales for AEL, but where do you think it seasons out in this AEL 2.0 thought process?
Great question. MYGA will be relevant to us. In the past, we originated MYGA and reinsured it off to other parties sort of as a capital play in some regards, so we did 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 3- to 5-year assets that fits 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 when we refreshed 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 a trend. The burden of the value unlock, I think, was the phrase. Does this mean like sidecars is going to be more of a '22 event since Iowa regulatory approval keeps getting pushed out?
First of all, Iowa -- 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, a 2023 financial results impact executed in 2022. You see with our Brookfield transaction a real demonstration of what that looks like, and that happens this year. In terms of the Iowa regulatory approvals, you know as well as others, these things take the natural course of time. We don't think it's pushed out. We just can only move at the pace that everyone else can go move at. So our focus is, to summarize here, get Brookfield done. But that is actually progressing very well, and we expect to talk to you about on 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, the fourth quarter of this year, you should really start to see what is the run rate going into 2022.
Your next response is from Ryan Krueger of KBW.
First question is on cash flow generation. I know you've guided for $250 million plus of annual capital return. Can you help us think about, to 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, 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 model to be able to return that annual target of that $250 million.
I guess, related to that, on -- 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 available alternatives and things of 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 isn't that we skip a year. It's just the timing of exactly when that gets done.
[Operator Instructions] Your next response is from Bob Huang with Morgan Stanley.
Actually, my question has been answered.
Your next response is from Pablo Singzon with JPMorgan.
Can you hear me?
Yes, we can, Pablo.
Perfect. So I just wanted to follow up on Ryan's question about free cash flow generation that you sort of normalize for the current benefits of all these reinsurance deals you have in the pipeline. I guess, I'll approach the question this way. So most reinsurers have anywhere across the 60% to 80% free cash flow conversion ratio. I guess, if we look maybe 3, 4 years out, where do you think AEL falls in that range?
Pablo, it's a little difficult to look 3 to 5 years down by the line. I think the way to think about it is we look to transform from being just an insurer to being a broader firm that's got an ROE spread business and an ROA fee business. The fee business -- so you could see us 2 years from now, since you ask me to look forward, resegment our balance -- resegment our financials along that fee business and the spread business, and the fee 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've probably covered for the next 3 years anyway, but 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 on reshare losses. Does AEL have something similar? Or maybe you're thinking around the same lines? Or would you rather retain capital for potential C1 changes? Or perhaps a ramp-up in alpha assets that you're executing on?
Yes. So we will consume capital for ramping up into alpha assets. We feel very good about the derisking efforts we did in the fourth quarter. Jim, Jeff and team did a great job there. And 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 in some of the reinsurance capital we free up will be used to fund greater C1 for ramping, and we feel confident about the $250 million this year and $250 million to $300 million in future years.
We have a response from the line of Ryan Krueger of KBW.
I just had 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 pick up on an EPS basis first, too. So we're focused on EPS growth into next year. You've seen 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.
We do have a response from Pablo Singzon of JPMorgan.
I just wanted -- I had 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 yield, 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 [ attaching ]. Is that correct?
Thanks so much for that, Pablo. It's Jim Hamalainen. The -- depends on the asset class. There can be a ramp-up period in some asset classes that come through some of our asset classes. Clearly, the ramp-up is very quick, and you get the deal right away.
A good example to add to that, to Jim's answer, which is spot on, is like look at middle market credit. We probably will allocate between $1 billion, $1.5 billion to middle market credit. We're ready to go tomorrow, but it takes around a year to get there. So to ramp $1 billion, $1.5 billion in middle market credit, it takes a year.
Right, right. My question on that was more about the yield attachment to your actual investment. I understand you won't be able to allocate 100% from day 1, right? But whatever you're able to allocate, that will start earning the higher yield right away, correct?
Correct. I get your question, it's not like a committed but not drawn down facility that happens at all. So it's not like that, you're right.
I am showing no further questions at this time. I would now like to turn the conference back to Julie for final remarks.
Thank you for your interest in American Equity and for participating in today's call. Should you have any follow-up questions, please feel free to contact us.
Thank you. This concludes today's conference call. You may now disconnect.