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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 2022 Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Julie Heidemann, Coordinator of Investor Relations. Ma'am, please go ahead.
Thank you. Good morning, and welcome to American Equity Investment Life Holding Company's conference call to discuss first quarter 2022 earnings. Our earnings release and financial supplement can be found on our website at www.american-equity.com. Non-GAAP financial measures discussed on today's call and reconciliations of non-GAAP financial measures to the most comparable GAAP measures can be found in those documents or elsewhere on our Investor Relations portion of our website.
Presenting on today's call are Anant Bhalla, Chief Executive Officer; and Axel Andre, Chief Financial Officer. Some of our comments will contain forward-looking statements which refer or relate to future results, many of which we have identified in our earnings release. Our actual results could significantly differ due to many risks, including the risk factors in our SEC filings. An audio replay will be made available on our website shortly after today's call.
It is now my pleasure to introduce Anant Bhalla.
Thanks, Julie. Good morning, and welcome to American Equity Investment Life Holding Company's conference call to discuss first quarter 2022 earnings. Our earnings release and financial supplement can be found on our website. Non-GAAP financial measures that Julie mentioned that we're going to be covering are already – may have some forward-looking statements that Julie covered, so with that behind us, let's get into really talking about how we think about the quarter and the go-forward results.
As I completed my two year anniversary as CEO this past quarter, I'm pleased to see that we have achieved three core strategic outcomes. First, we've executed on all the critical building blocks that will unlock shareholder value from the AEL 2.0 business model across the strategy pillars we outlined, specifically go-to-market, investment management and capital structure.
Over the next 8 to 12 quarters, we expect to complete our scaling up in private assets and bringing in third-party capital to realize the full potential of migrating to our capital-efficient business model that delivers a sustained, superior ROE for our shareholders. Second, we delivered meaningful shareholder value creation, most notably in terms of more than doubling our market cap between March 31, 2020, and March 31, 2022.
Additionally, there is growing conviction among most investors in valuing American equity based on the summer parts metric that includes our investment spread earnings powered by private assets or our traditional ROE business and the fee-generating capital-light ROE business model. On the spread earnings side, we continue to scale in private assets towards our overall goal of 30% to 40% asset allocation by increasing our allocation to 15.4% at the end of the quarter compared to 14.7% at the end of the last quarter.
Third, we have strong affirmation from key business partner stakeholders in our industry value chain that being part of the new American equity ecosystem is a win-win formula. This should position AEL as a platform company that additional firms will want to join to accelerate their own business growth. This is visible in the multiple asset management partnerships we have entered into over the past two years. These partnerships may provide AEL shareholders economic upside from the asset managers growing non-AEL assets under management in addition to investment yield benefits from private assets. These should deliver hard to source private asset strategies for AEL's own balance sheet and for our reinsurance vehicles, thereby providing sustained, superior risk-adjusted returns compared to public fixed income securities.
More specifically, asset management partnerships we've entered into over the last two years cover sectors ranging from middle market credit with Adam Street Partners; lending to software and technology companies with recurring revenues with Monroe Capital; residential single-family real estate with Pretium, including co-owning asset origination and servicing platform companies; a new multifamily real estate investing joint venture with a leading player; and infrastructure assets and origination platforms with I Squared Capital.
Additionally, we are making progress with equity investors in reframing the general account annuity industry as a levered fund-to-fund business that can earn a more sustained double-digit return with a 30% to 40% allocation to private asset strategies with an overall asset leverage of 12 to 15x. As we earn 100 to 150 basis points of spread over the cost of funds on these assets, those earnings will get split between AEL ROA business fee earnings and reinsurance sidecar equity investor returns.
Looking forward, AEL over the next 8 to 12 quarters will execute on the three core metrics we outlined in the deck in our last earnings call, specifically scaling our liability origination, private asset sourcing and bringing in third-party capital for reinsurance vehicles. In parallel, to become the platform company we envisioned in both the insurance and asset management spaces, we are also significantly retooling the company on the inside, while prudently managing our expenses and continuing to return capital to shareholders.
This is the foundational capability, which over the next few years will meaningfully upgrade the company across every dimension of what we do. This will entail changing the systems and processes across our go-to-market and customer service areas as well as core functional areas like finance with a new general ledger or technology with a migration from traditional mainframes to the cloud to just list two examples.
Legacy AEL 1.0 was ready for some upgrades, even before embarking on AEL 2.0. And now that we are well on the way of scaling AEL 2.0, we are focusing some of our energy and resources on rebuilding the core of the company so that it can grow to multiples of its current scope and scale in the long-term. On the people front, AEL has been hiring talent across the country with some focus on our hub locations in West Des Moines, Charlotte and New York City. In order to attract and retain top talent, AEL has modified its compensation plans to be in line with the industry, migrating all management-level employees to an annual cash bonus plan aligned with shareholder value realization metrics that drive our performance culture.
Even though the macro-environment is cloudier now than even at the start of the pandemic, we feel very good about AEL's robust balance sheet position. We remain committed to our capital return plans for 2022. Year-to-date through April 30, we have repurchased $253 million of stock at an average price of $39.89 and we expect to repurchase in total approximately $700 million of stock for the full year, meeting our promised goal of capital return and fully offsetting dilution from issuance of shares for Brookfield reinsurance as it grew its stake in American equity from 9.9% to just about 16% in early January.
Moving on to business results in the first quarter. Investment results and new business sales were in line with expectations we set out on our last earnings call. First quarter sales were $902 million, of which 98% or $883 million were in fixed indexed annuities. This is in line with the company's focused strategy for 2022 sales. Compared to the first quarter of 2021, total company FIA sales increased 33%. FIA sales at American Equity Life increased 46%, while Eagle Life sales declined by 15%. On a sequential quarterly basis, FIA or fixed index annuity sales decreased 10.1% to $883 million, primarily due to lower sales in the bank and broker-dealer channel, while maintaining a leading market position in the independent marketing organization, or IMO space.
As noted in our press release, we agreed with North End RE, a subsidiary of Brookfield Reinsurance to expand the American Equity products driving the momentum of flow business under the 2021 reinsurance agreement to fulfill the $10 billion of capacity under that agreement. The addition of these new products, American Equity Life Estate Shield and Eagle Life Eagle Select Income Focus will accelerate the increase in fee like revenue streams for American Equity that drive the ROA side of our business.
We continue to focus our efforts on growing the income annuities business in 2022 to align with the tailwind of large unmet needs for Americans for income for life to provide them a sustained means for realizing financial dignity well beyond their prime earning years. Our investment management pillar is making strides. We successfully moved assets to our second partner for core fixed income investments, calling asset management for our newly formed AEL RE Bermuda entity.
Average investment yield for the quarter was 4.15%, driven by strong returns in mark-to-market assets, particularly for Pretium-related funds and increased yield as excess cash was fully redeployed during the first quarter. We ended the quarter with 1.1% in cash in the insurance company's portfolio with a portfolio book yield of 3.98% net.
With that, I'll turn over to Axel to elaborate further and go over our financial results and associated drivers.
Thank you, Anant. Let me extend my appreciation to all of you attending this call. For the first quarter of 2022, we reported non-GAAP operating income of $89.9 million or $0.92 per diluted common share. The quarter included $8.6 million of revenue from reinsurance stemming from our Brookfield reinsurance relationship, up from $8.0 million in the fourth quarter of last year. In the first quarter, we ceded $211 million of new flow deposits with a notional value of $181 million. This results in recurring revenues, which are expected to grow over time as we migrate liabilities to the ROA business model. Average yield on invested assets was 4.15% in the first quarter of 2022 compared to 3.80% in last year's fourth quarter.
The increase was attributable to very strong returns on partnership and other mark-to-market assets, lower cash balances and the ramp-up in private assets, partly offset by lower prepayment income. The average adjusted yield, excluding non-trendable prepayments was 4.12% in the first quarter of 2022 compared to 3.68% in the fourth quarter of 2021. In the quarter, yield increased 32 basis points on returns on partnerships and other mark-to-market assets and 10 basis points due to the lower cash holdings. Since partnership and other mark-to-market asset returns can vary by quarter, excluding that benefits and the non-trendable items, average yield improved from 3.68% in the fourth quarter of 2021 to 3.80% in the first quarter of 2022.
At quarter end, cash and equivalents in the investment portfolio was $576 million towards the low end of our stated target portfolio allocation of 1% to 2% and down from $2.6 billion at year-end. Average cash and equivalents for the quarter was $1.7 billion, down from $4.8 billion in the fourth quarter of last year. During the quarter, we invested $4.7 billion at a yield of 3.58%, including $887 million of privately sourced assets at an expected return of 5.41%. Our allocation to privately sourced assets was 15.4% of invested assets as of quarter end compared to 14.7% at year end. For the month of April, we invested $716 million at an average yield of 4.38%.
The effect of the increase in LIBOR or short-term rates during the quarter had a minimal effect on our reported yields as most of our floating rate assets re-priced in the third full week of the quarter before the substantial increases occurred in February and March. For the second quarter, we expect a benefit of roughly 8 basis points in yield, reflecting the increase in LIBOR on our $5.3 billion of floating rate assets.
The aggregate cost of money for annuity liabilities was 164 basis points, up from 151 basis points in the fourth quarter of 2021. The cost of money in the first quarter benefited from 3 basis points of hedging gains compared to 14 basis points of hedging gains in the fourth quarter of last year. The increase in the cost of money, excluding hedging gains, reflects a higher cost of options in the fourth quarter of 2022 – sorry, reflects the higher cost of options in the first quarter of 2022 compared to the runoff of lower cost of options purchased in the fourth quarter of 2020. Cost of options in the first quarter of 2022 averaged 1.60% compared to 1.59% in the fourth quarter of 2021. Renewal rate actions beginning in January were offset by changes in market relativity.
Investment spread in the first quarter was 2.51% compared to 2.29% in the previous quarter. Excluding prepayment income and hedging gains, adjusted spread was 2.45% in the first quarter compared to 2.03% in the prior quarter reflecting strong investment returns, offset modestly by the increase of cost of money. By delivering on our investment returns, we expect to offset increased option costs. Deferred acquisition costs and deferred sales inducement amortization totaled $128 million for the quarter compared to $113 million, excluding the natural adjustments in the fourth quarter of 2021. Fourth quarter amortization was reduced by $14 million for higher than expected index credits. The liability for guaranteed lifetime income benefit payments increased $85 million this quarter compared to $56 million last quarter.
As [ our own to block ] season and we re-priced living benefit rider fees at the 7 to 10-year reset period, we are seeing some greater utilization election. We expect that in the second quarter, the increase in labor reserve or living benefit rider reserves will remain elevated without the benefit of higher than expected index credits. Other operating costs and expenses were $58 million in the first quarter, down from $66 million reported in the fourth quarter of last year or a comparable $59 million for the fourth quarter, excluding the year end items related to true-ups and acceleration of execution of the AEL 2.0 strategy.
As Anant mentioned, while we continue to build out our teams with specialized expertise and invest in the systems infrastructure and other projects necessary to support our growth as the new AEL, we still expect other operating costs and expenses to run in the $60 million range per quarter for the foreseeable future and manage expenses at a certain level of basis points of policy order funds under management. At March 31 and April 30, cash and equivalents at the holding company were approximately $470 million and $461 million, respectively. In addition to a committed and yet undrawn $300 million term loan facility, providing capital flexibility as we return capital to shareholders and continue to execute our business strategies. As Anant mentioned, we repurchased year-to-date about $250 million worth of shares or 6.3 million shares. In the first quarter, we repurchased 4.6 million shares.
Now I'll turn the call over to the operator to begin Q&A.
Thank you, Axel. [Operator Instructions] Your first question comes from the line of John Barnidge with Piper Sandler. Your line is open.
Thank you very much. The reinsurance announcement, was that contemplated in the 4Q 2021 commentary around directionality of reinsurance utilization in the near term? I believe it was a third of sales in 2022 moving to 50% thereafter? Thank you.
John, could you just repeat the last part, you broke out a little bit?
Absolutely. So you gave reinsurance commentary last quarter, expecting a third reinsurance support for sales in 2022 moving higher thereafter, the reinsurance announcement last night that expansion on North End Re to include more products clearly increases the funnel. Was that expansion contemplated in the 4Q 2021 commentary of a third of sales of 2022 to reinsurance?
Yes, you've got it spot on right.
Okay. And then the lower sales in the bank and broker dealer channel you called out, can you talk maybe more about the competitive landscape there and maybe your expectations going forward? Thank you.
Sure. So we are growing Eagle Life. We brought on strong talent from multiple companies. We've got really good people, competitive product, but we're going to be very disciplined with product profitability. And when we sell a product that we think is sustained across markets, not just bounces around if rates bounce around. And then so what we're doing is we're being disciplined and our product discipline will drive what sales we have. It is a more competitive channel for sure, especially in the bank channel, which is why within Eagle, we are pivoting towards independent broker dealers and still building relationships there and that's why we love the IMO business and want to dominate it for as long as possible.
Your next question comes from the line of Dan Bergman with Jefferies. Your line is open. Mr. Dan Bergman, your line is open. You may proceed with your question.
Sorry. Can you hear me?
Yes. Hi, Dan. Good morning.
Hi. Good morning. Thanks. So I apologize if I missed it in the prepared remarks, but I wanted to see if you could give any more detail around how much the increase in the LIBR reserve deviated from your modeled expectations in the first quarter. And how much of this is related to the impact from higher utilization versus any other factors? And I know you guided for the reserve to remain elevated the increase in the second quarter, but just wanted to see if there's any more color on where – we should expect it to land, for example, above or below that first quarter level and maybe some of the drivers? And then finally, any impact you'd expect post the second quarter or is that mainly a 2Q phenomenon?
Yes, sure. Hi, Dan. This is Axel. So like we said last quarter, the model expectation for LIBR reserve was around $62 million so the total actual to expected differential about $24 million there. Of that index credits for the first quarter were still a marginal positive. So about a $4 million good guy, whereas the higher utilization as well as some slightly lower lapses, basically produced a balance of $28 million. So the $28 million minus the $4 million is the adjustment between the 2.
As I said, the higher utilization that we've observed this quarter is really related to certain specific cohorts as they reach the reset period. We're seeing a slight pickup in utilization over and above what's already anticipated in the model. I think it is too early to be drawing a trend line from there. But obviously, this particular actuarial assumptions just like all of our assumptions is one that we keep a close eye on. It is one that will be part of our experience studies. And in the summer, that concluding the summer and that ultimately result in the usual potential update to actual assumptions in the third quarter.
That's really helpful. Thank you. And then I was just hoping you could also provide some more color around the competitive environment in the fixed index annuity market. Just curious, given the sharp year-to-date increase in interest rates, any color on how other carriers have reacted in terms of product pricing and features and maybe how those actions compare to any changes that you've made or you're contemplating?
Sure. I'm happy to. It's Anant. I will start and Axel can jump in as well. I think fundamentally, the AEL platform as we call ourselves now is got this amazing mechanism of validation of what third-party capital thinks is prudent pricing. So like we talked about our reinsurance agreements, okay? We're selling products that our shareholders should back and third-party capital, smart money is willing to back it. So that's a big validation in the income space. We're very strong in the income space. We've got these reinsurance partnerships that we're going to build on. And yet the income space is less competitive because people are taking a long-term view. You have to think about interest rates, investment returns for decades. So that part, we feel good about.
The accumulation space, the longer duration accumulation space is also more resilient, but the shorter tenant accumulation space sort of blows with the wind we're not building a company that blows with the wind. So that part, I think, is getting a little competitive. I wouldn't say anything about competition. They're all very responsible and great. But we're just a bit measured, and we don't take sharp left to right turns. That doesn't mean we're not tuned with pricing in the market. What we are thinking is this sustainable? And yes, rates are going up. Rates are definitely going up, but the benefit of rates going up needs to be shared between all stakeholders, not just go to one. Long answer to your very simple question. Happy to elaborate further if you want.
Our next question comes from the line of Erik Bass with Autonomous. Your line is open.
Hi. Thank you. Can you talk about the level of sales currently being generated by the products that are being added to the Brookfield reinsurance agreement and the amount of in-force business that will transfer in the second quarter? And is the fee agreement the same for the new products as it is for the ones previously in there?
Hi, Erik. Good morning. On the – on your question, so we added in Estate Shield and the Select Income Focus product in Eagle in addition to our existing income product that's there, Income Shield. That in aggregate, you're talking about net of what we retain on flow insurance, we retained 25% on our balance sheet for alignment and 75% goes over to them. So on a net basis you could think about $1 billion transferring over each year. And I think that's pretty sustainable. We may grow it a little bit over time. But between Estate Shield, Select Income Focus and Income Shield, we're going to have the new products probably add in this year, $300 million of sales rounding a bit there, rounding down a bit there, but that's sort of in aggregate between the existing Income Shield in those, they'll transfer on a net basis $1 billion.
And so we'll keep around $300 million, $400 million, and we'll transfer on $1 billion to them. And on pricing, the pricing is attractive, as you would recall, on our new business pricing was around 170 basis points when we looked at all the different moving components for asset management fees as well as for ceding commission over six to seven years of around 140 basis points. So that continues on the new products we've added in. It's consistent with that. And that's why our pricing discipline comes across, as you see over here, we're connecting permanent capital with permanent solutions for our clients on the income space, and that's why this model really works. And this year, as we do other reinsurance deals on the asset accumulation products with other parties in our own sidecar, you'll see another manifestation of that as we execute that over this year or early next year.
Thank you. And can you provide any sensitivity for the LIBR reserve and DAC on the DSI amortization to changes in index credits – so if we were to have a period of zero credits, how much would those costs increase?
Hi, Erik. It's Axel. Happy to take that one. Yes, so – right, so if we take a hypothetical scenario of zero index credits relative to what's embedded in our model, which is what we call normal index credit, which, by the way, corresponds to a fairly modest long-term equity return expectation of 6% annual return. On the SOP reserve, you're looking at an increase relative to expectation of $20 million to $25 million per quarter. So that's the difference between normal index credit and zero index credit. And then on the DAC and DSI side, about $10 million for that difference between normal index credits and zero index credit. So if we were to take - it to a hypothetical scenario of a full year with zero index credits, adding up those two components, you're looking at an impact of potentially $1 of EPS, right, $1 per share. So conceptually, think of that as about 25% of our EPS, EPS expectation or ROE expectation has some level of exposure to equity markets.
Our next question comes from the line of Pablo Singzon with JPMorgan. Your line is open.
Hi, thanks. How much partnership assets did you have in the quarter? And how much income did you generate against us? I just want to get a sense of how this part of your portfolio could perform over time?
Hi, Pablo. I'll start. I'll let Jim or Axel jump in. But we're – we have around $1 billion of partnership assets is the way I would think about it, as Jim we'll give you more specifics.
A little bit under $1 billion.
A little under $1 billion, great that's the number, we're still ramping into those. And so I would say, stabilize, you have pretty – it will take time before we can actually give a number. Obviously, it's going to be where you would think alternative investment returns are but these are more safer variety. So we have to just see how they go. The high single digit is the best way to think about it, but it's too early to give numbers out on that.
Got it. And Anant just wanted to follow-up on the reinsurance question here. Did you say how much will be transferred upfront or were your comments more about the flow piece of it because I think there is a retro – so the retro right and then flow. But were your comments more about flow or do they include the retro piece?
Yes, I'll take that Pablo. It's Axel. Yes so maybe let me give you some specific numbers. So for the – so Estate Shield and Eagle select income focus so if you look at the piece of business that's been issued since July 1 last year through to the end of this quarter. It's about $288 million of deposits. So 75% of that is what's going to be ceded into the reinsurance agreement, so $216 million around that. And like Anant said, from a kind of run rate perspective across those two products, you're looking at about $80 million to $100 million per quarter, that's being written currently. And so - in the past that announced was doing, that's how we get to essentially net ceded of about $1 billion for the year.
Got it, okay. I will requeue. Thank you.
Yes, I think I'd ask, Pablo, is that if you look at our ceded on Page 10 of the supplement as you look at our details, as you see the notional amount on which we earn ROA fees, that should with our Brookfield partnership, Brookfield reinsurance partnership be growing at around $1 billion a year just on that partnership. That's the simplest way to think about it. And there may be more upside to that growth.
Thank you. [Operator Instructions] Our next question comes from the line of Mark Cuban [ph] with Truist. Your line is open.
Yes. It's Mark Hughes. There was some indication, the LIMRA industry data, the preliminary data suggested that the March sales of FIAs were quite strong as interest rates have gone up, attractiveness of the product has improved. Did you see that in your results any particular strength at the end of the quarter and any commentary about how 2Q is shaping up so far?
Hi, Mark, good to hear your voice again. Rates have backed up a lot, right, in the right direction for our industry and our players. Some people lean into it. Some people will be balanced. On average, I think what we're seeing yes there's tremendous demand for FIAs. And let me give you what I think personally, this is an amazing tailwind for us. It's not just the tailwind of need for retirement income what a company like us can provide certainty of income. But it's also the fact that advisers' producers are waking up and realizing that a 60-40, 70-30 equity bond portfolio doesn't work anymore. Why don't you all replace all of your bonds with fixed index annuities where you have principal protection and still have market upside.
That tailwind story when we discuss that, when you – people need to sell these concepts, that concept is a new tailwind. So staying disciplined on pricing, but selling these stories and concepts will be an enormous tailwind for everyone, and I hope all of our competitors just be responsible with pricing because we don't need to give away the store. You have great tailwinds strategically. Now so to answer your question specifically, it's a very competitive market out there. I don't think everybody subscribes to what I just said to you, some are going for market share...
I'm sorry, Anant, are you still there?
I'm here. That's it. I was done.
Okay. Oh, I'm sorry. Yes. Appreciate that.
So do you have a follow-on for me, Mark?
Yes, I would have one other question. You had talked about some of those internal changes, the changing system processes, shift to the cloud, the making sure you're compensating people appropriately. I assume all that is contemplated in the $60 million expense run rate. Is that the case and then is there some potential that some of those things are shorter term in nature. And so therefore, you've got more visibility for tapering on the expenses?
The answer to the question is yes, it's all in the $60 million range, and we think about basis points as we grow, obviously, that dollars of 60 will grow, but the profitability will be therefore to grow in basis points of assets. In terms of tapering down from that level, I wouldn't expect it. We've got a lot to do, and we need to build a foundation that can be multiple times what we are today. So this is going to continue, as I mentioned, it will continue for a couple of years.
Your next question comes from the line of Ryan Krueger with KBW. Your line is open.
Hi. Thanks. Good morning. I had a question on the investment yield. I believe you said it was 3.98% at the end of the quarter. First, I just wanted to confirm, does that include a normalized expectation of returns on the limited partnership investments?
Hi, Ryan. It's Axel. That's correct. The 3.98% effectively embeds our expectation – expected return on those assets.
Thanks. And then can you help us think – I appreciate the 8 basis point positive impact from LIBR in the second quarter. Can you help us think about the sensitivity to further increases in LIBR beyond that?
Yes, I think, the floating rate assets we have about $5.3 billion of floating rate assets in our portfolio. Like I said, most of the resets occurred in the – occur in the third week of the quarter. So I think with that, using day counts, be careful about day counts, I think you can probably back into what a hypothetical 10 basis points increase in LIBR would produce for full quarter or partial quarter how it's helps.
Got it. Thank you.
Thank you. And we have an additional question from Pablo Singzon with JPMorgan. Please proceed with your question.
Hi. Thanks. So for Axle, is the same above-average utilization in LIBR persists and putting aside the impact of index credits, would you expect the same magnitude of variance against model expectations in the second quarter and even in the third quarter? Just want to get a sense if that's a bigger driver or yes, like if you – if that's a reasonable way to think about how that line could develop over the next couple of quarters?
As I said, I think it's too early to be drawing a trend from there. So I'm not going to tend to forecast what utilization is going to be in the second quarter. But if utilization were to be again higher relative to expected to our expectations, and I would expect that to have an impact on the development of the living benefit reserve consistent with what we observed in the first quarter.
Understood. And then second one for Anant. On this reinsurance deal, I just wanted to get a sense of - the impact on your reported earnings, right? So you're going to earn fees, you would have given up some spread income. But net-net, where does that leave your reported GAAP earnings? Thanks.
Right, if we grow it by – Pablo, if you grow by $1 billion a year just in this treaty, and we make pricing levels that we have, that's I could set a 170 basis points, that $17 million of earnings, which zero, zero requires capital. And then you've got another – you've got another 25% you return on which your earnings spread and you're putting up capital. So the ROE of the business for us is significantly high because you're making – in this example, right. You're making $17 million with no capital. And on the retail business, you're running your target spreads and you're earning your solid returns. So you have a very high ROE business. And that's how we think of the flow on a go-forward basis and look to position the firm.
On your earlier question to Axel about utilization and index credits, I think the other point that Axel - we didn't answer but I'll answer for it probably and Axel jump in. Is like index credits are good it's a good part in our business is, it resets every year. This year if equities are weak that has an impact of the two items you asked him about – and you should bake that into your modeling as you think about our returns going forward because our expectations are to have normal index right, just to complete both the answers. But on reinsurance so that you have follow-on, we're happy to take it.
Your next question comes from the line of Erik Bass with Autonomous. Your line is open.
Hi. Thank you for taking my follow up. I just want to – I should follow-up on Ryan's question. Should we think of the 3.98% portfolio yield and then add the 8 basis points of higher floating rate income, so call it, 406 basis points. Is that really the starting yield we should think about for the second quarter?
Yes, this is Jim Hamalainen. Yes, that's a fair way to think about it. Most of that change occurred early in the quarter. And so obviously a lot of other moving parts on private assets investment yields on public assets, of course, are a fair amount higher. So there are a number of moving parts there that will impact it further on in the quarter, but that's a reasonable starting point.
Yes, I'll just add to a point, Erik if that could up three months LIBOR at re-prices like in the third week of every quarter, so like the 20th of April. And as rates keep going up, what Jim just outlined is a great tailwind. Obviously, rates going up for this industry is a great tailwind and that will – and there will be some offset in the short-term equities are flat and don't give us index credit. So I think we've got some upside on the investment portfolio. And we've got some short-term this year modest headwind with limited index credit if things don't accelerate from here on. Is that fair...
This is way of rating interest.
Got it. And maybe on to that last point, given the rise in interest rates and wider credit spreads, does this enable you to earn the target spreads you're looking for using a lower allocation to private? And if so would that actually allow you to accelerate sales volumes?
Most definitely, most definitely. As long as we can see prudent pricing in the market, you hit the nail on the head. I think I read the write up in the morning you hit everything on the head that's spot on right up. But the – yes, we have less need for private assets. We love investing in private assets that meet our needs, but core fixed income is getting there, unless competition gives it all the way, which we're not going to.
And our last question comes from the line of Ryan Krueger with KBW. Please go ahead.
Thanks for the follow up. I just had a question on the utilization impact on the LIBR reserve. If that did continue, I understand it would have a potential impact on GAAP LIBR reserves when you do your assumption update. Can you help us think about if they would also have any potential impact on statutory capital and reserves, given the differences between the two regimes and the assumptions that matters.
Hi, Ryan. It's Axel. Yes no, the short is that it would not right. I mean, the statutory impact only plays out over time, right. But it's not like there's a one-time impact because assumption unlocking would not – does not happen from a statutory perspective.
Ryan, we think of stack and ROA internal economic view is pretty aligned as we think of our managing reserves and building things in our reinsurance company. So this just is a gap phenomenon which more in line at the end of this year, which is great.
Got it. Thank you.
Ladies and gentlemen, this concludes our question-and-answer session. I will now turn the call over to Julie for any remarks.
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