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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 Fourth Quarter, 2020 Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over, to Julie LaFollette.
Good morning. And welcome to American Equity Investment Life Holding Company's conference call to discuss fourth quarter 2020 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. Presenting on today's call are, Anant Bhalla, Chief Executive Officer; Jim Hamalainen, Chief Investment Officer of Insurance; and Ted Johnson, Chief Financial Officer.
Some of the comments made during this call, may contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act. 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, in our most recent 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. We enter 2021 focused on being vigilant about realization of shareholder value. 2021 will be a transition year from the AEL 1.0 strategy to the AEL 2.0 business model.
It will be the execution year as we make demonstrable progress with closing of already announced the insurance transaction plan under our capital structure pillar and start our migration to alpha asset with investment management partnerships under our investment management pillar.
I'll share more on these partnerships in a few minutes. In my time with you this morning, I’d like to reference the AEL's 2.0 business model, virtuous flywheel of success that I've spoken up in the past including on December 9 as I shared how we are currently working to build and eventually speed up this flywheel to create superior shareholder value.
First, the virtuous flywheel builds on an industry leading at scale annuity funding origination platform. Second, adding in differentiated investment management capabilities and expertise in aligning the annuity liability funding with cross sector asset allocation now give us a competitive advantage over traditional asset managers as we leverage expertise to both sides of our balance sheet.
And third, demonstrable success over time on these first two using our own capital will attract third-party capital to our business and grow fee revenues for AEL. These fee revenues will be generated by growing third-party asset front of management in our investment management partnerships and from creation of additional side car reinsurance vehicles with new equity investors like the two we've announced to-date with Brookfield and Varde, Agam. These fees will diversify our earnings stream.
Fourth, leveraging third-party capital will transform AEL into a more capital light business. The combination of differentiated investment strategies and increased capital efficiency improves annuity product competitiveness, thereby enhancing new business growth potential and further strengthening the operating platform.
We believe that in the foreseeable market environment, I is imperative for most asset intensive insurance including American Equity to switch to source of earnings generation from traditional co fixed income investing to a blend of co fixed income and alpha generating private credit and real or physical assets.
And over the next few years, migrate to a combination of spread and capital light fee-based businesses. Regarding American Equity specific execution, the fourth quarter was the start of the turnaround of the go-to market pillar. Our strategy to enhance our ability to raise long-term client assets through annuity product sales.
We and our distribution partners consider American Equities marketing capabilities and franchise to be co-competitive strengths. The liabilities we originate result in stable, long-term attractive funding which is invested to earn a spread and return on the prudent level of risk capital.
In the fourth quarter, we reintroduced ourselves to our markets. We used the fourth quarter to tell distribution that we are back and in a big way. Driven by the introduction of competitive three and five year single premium differed annuity products at both American Equity and Eagle Live we saw substantial increase in sales with total deposits of $1.8 billion doubling from the prior year quarter and up 221% from the third quarter of 2020.
Fixed rate annuities was a major driver of fourth quarter sales increase while fixed index annuities also increased up 23% sequentially. Total sales at Eagle Live were up over six fold on a sequential basis and for the first time in its history Eagle Live surpassed American Equity Life in total sales. The competitive positioning we took in the fixed rate annuity market benefitted both the fixed index annuity sale and recruiting of new producers. RFI sales in the bank and broker dealer channel increased 76% sequentially.
New representative appointed with Eagle Live during the quarter increased by nearly 1200 to over 9300 at year-end. While not as dramatic, we saw growth in sales at American Equity Life as well. Total sales increased 103% from the third quarter while fixed index annuity sales climbed 16%.
The momentum that began in the fourth quarter has continued into the New Year. Pending applications as of this morning and American Equity were 3198 up from 2552 at year-end and fourth quarter average of 1998. Pending applications when we reported third quarter results stood at 1625.
For fixed index annuities, we will shortly launch a revamped asset shield product chassis to build to a broader market adding two new proprietary indices, the Credit Suisse Tech Edge Index and the Societe Generale Sentiment Index. In addition to the existing Bank of America Destinations Index, all of which we expect to illustrate extremely well with participation rates that cost well within our pricing budgets to meet our target pricing IRRs.
With the introduction of these multi-asset indices, we will offer clients a compelling single accumulation annuity product that covers traditional equity indices as well as multi-asset custom indices focused on U.S. risk parity, global risk-controlled asset allocation and sector specific allocations.
Following last year's refresh of income shield, we are very well situated for income. The level of income offered to retail clients dominates the market in almost all the important combinations of age and deferral periods and where we don’t we'll top three which is key to getting distribution partners’ attention.
I want to highlight management changes we made at Eagle Live to accomplish our goals. In September, we announced the hiring of Graham Day as President of Eagle Life. Graham has added quickly to his team from other leading annuity manufacturers including Greg Alberti as Head of National Accounts and Bryan Albert as Head of Sales.
Eagle Life is a key piece of our expansion into being a scale player in a new channel of distribution. Pending applications of this morning at Eagle Life was 1213 up from 1067 at year-end and fourth quarter average of 962.
Pending applications when we reported third quarter results were at 975. Moving on to the investments management pillar, in 2021 we intent to focus on ramping up our allocation to alpha assets. Our first foray in this area includes our partnership with [Vacuum] announced in the fourth quarter including an equity investment in the general partner.
With [Vacuum] we expect to expand our focus as both a lender and a landlord in the residential market. In each new alpha asset sub sector that we enter, we expect to partner with a proven industry manager with a lined economic incentives and risk management culture.
This allowed AEL to have an open architecture asset allocation approach which is other insurer that may have a more closed architecture approach to asset allocation. Our focus expansion sectors include middle market credit, real-estate, infrastructure debt and agricultural loans.
Yesterday, we announced plans to enter the middle market credit space with Adams Street Partners. American Equity and Adams Street will form a management company joint venture for co-developing insurer capital efficient assets with secured first lien middle market credit.
Our company will initially commit up to $2 billion of investment invested assets to build the joint venture and we expect to bring this capital efficient asset product to other insurers as well.
As this venture and other similar ventures in the future garner third-party assets, American Equity's mix of fee revenues will grow supporting the migration to a more sustainable higher return business profile.
The capital structure pillar is focused on greater use of reinsurance structuring to both optimized asset allocation for American Equity balance sheet and to enable American Equity to free up capital and become a capital light company over time.
We are working diligently to complete in 2021, they announced reinsurance partnerships with Varde Partners and Agam Capital Management as well as Brookfield Asset Management and the formation of our whole offshore reinsurance platform.
These transactions will enable American Equity to generate deployable capital in order to pivot towards a greater fee cash flow generative and a capital light or "ROA" Return on Assets business model.
Turning to financial results for the fourth quarter and full-year. For the fourth quarter of 2020, we reported non-GAAP operating income of $72 million or $0.77 per diluted common share.
Financial results were significantly affected by excess cash in the portfolio as we repositioned our investment portfolio by de-risking out of almost $2 billion of structured securities and $2.4 billion of corporate in the fourth quarter.
And build cash, we expect to redeploy by transferring to Varde, Agam and Brookfield reinsurance transactions. Overall, 2021 is a transition year for repositioning a significant portion of our balance sheet, enhance a reset year for American Equity.
Over this year, we will explain any transaction execution driven short-term or one-time notable impacts on financial results. For full-year 2020, we reported non-GAAP operating income of $69.1 million or $0.75 per share.
Excluding notable item, specifically the one-time effect of annual actuarial review in the third quarter and tax benefit from the enactment of CARES Act, and loss on extinguishment of debt, 2020 non-GAAP operating income was $381.4 million or $4.13 per share.
With that, I'll now turn the call over to Jim Hamalainen, Chief Investment Officer of Insurance. Jim, Tolga and Jeff are on this call for any questions.
Thank you, Anant. As part of our AEL 2.0 strategy work, we executed a series of trades designed to raise liquidity to fund the Varde, Agam, and Brookfield block reinsurance transactions and de-risk the investment portfolio.
As part of this de-risking, we sold nearly $2 billion of structured securities and an additional $2.4 billion of corporates where we generally focused on securities that we believed were at risk of future downgrades. The sales occurred before the recent ramp-up in interest rates, so our timing once were two with us.
As of the fourth quarter, the fixed maturity securities portfolio had an average rating of single A minus with almost 97% rated NAIC one or two. In addition, almost 80% of our commercial margin loan portfolio was rated CM1 at year-end with 99.7% rated either CM1 or CM2.
All commercial margin loans in the portfolio were paid current as of year-end and in the fourth quarter of 2020 there were no additional forbearances granted. Back on our fourth quarter 2020 call, we laid out an estimate of our capital sensitivity to a 12 to 18 months adverse recessionary scenario modeled on the feds C cars stress test.
Three year end, the portfolio performed better than expectations. And the impact of ratings migrations totaled 23 RBC points compared for the projection of 50 RBC points in that 12 to 18 month economic stress scenario.
The impact of credit losses and impairments was 10 points which compared to a projection of 25 RBC points in the stress scenario. Following a de-risking activities in the fourth quarter, we would expect our capital sensitivity in an adverse economic environment to be truncated relative to our March 2020 estimates.
Looking forward, we expect to reposition the portfolio starting this year. With the completion of the reinsurance transactions with Varde, Agam and Brookfield, AEL will free up capital and then redeploy part of that capitals to support a move into alpha generating assets.
Going forward, we expect to operate at lower invested asset leverage than in the past. With that, I'll turn it over to Ted.
Thank you, Jim. As we reported yesterday afternoon, operating income for the fourth quarter of 2020 was $72 million or $0.70 per share compared to a $126 million or a $1.37 per share for the fourth quarter of 2019.
Fourth quarter 2019 results included a $2 million or $0.02 per share loss from the write off of unamortized debt issue cost for subordinated debentures that were redeemed during the period. Average yield on invested assets was 3.88% in the fourth quarter of 2020 compared to 4.10% in the third quarter of this year.
The decrease was attributable to a 22 basis point reduction from interest forgone due to an increase in the amount of cash held in the quarter. Cash in short-term investments in the investment portfolio averaged $4.4 billion over the fourth quarter up from $1.7 billion in the third quarter.
At year-end, we held $7.3 billion in cash in short-term investments in the life insurance company portfolios yielding roughly 7 basis points. The current point-in-time yield on the portfolio including excess cash is approximately 3.4%.
So the pressure on investment spread will continue in the first quarter. Excluding excess cash and invested assets to be transferred as part of the reinsurance transaction, we estimate the current point-in-time yield on the investment portfolio to be roughly 4%.
As we expect to close the reinsurance transaction in or after the second quarter starting in March we may partially pre-invest the assets for the reinsurance transaction thereby offsetting some cash drag.
We do not expect significant benefit in the first quarter from such pre-investing. On our future quarterly earnings calls, we will call out the effective excess cash if any related to the reinsurance transactions.
The aggregate cost of money for annuity liabilities was a 163 basis points down 3 basis points from the third quarter of 2020. The cost of money in the fourth quarter benefitted from 1 basis points of hedging gains compared to a 3 basis point gain in the third 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 225 basis points from 244 basis points in the third quarter.
Excluding non-trendable items, adjusted spread in the fourth quarter was 213 basis points compared to 231 basis points in the third quarter of 2020.
The average yield on long-term investments acquired in the quarter was 4.46% growth of fees compared to 3.59% growth of fees in the third quarter of the year.
We purchased a 152 million of fixed income securities at a rate of 3.32% originated a 142 million of commercial mortgage loans at a rate of 3.67% and purchased $224 million of residential mortgage loans at 5.63% growth of fees.
The cost of options declined slightly to a 139 basis points from a 142 basis points in the third quarter. All else equal, we would expect to continue to see the cost of money continue to decline throughout most of 2021 reflecting lower volatility and the actions taken in June of last year to reduce participation rate on $4.3 billion of policy holder funds in S&P annual point-to-point and monthly average strategies.
The cost of options for the hedge week ended February 9 was 143 basis points. Should the yields available to a decrease or the cost of money rise, we continue to have flexibility to reduce our rates if necessary, it could decrease our cost of money by roughly 62 basis points if we reduce current rates to guarantee minimums.
This is down slightly from the 63 basis points we cited on our third quarter call. The liability for lifetime Income Benefit Riders increased $79 million this quarter which included negative experience of $16 million relative to our modeled expectations.
Coming out of the third quarter actuarial assumption review, we said we had expected for that quarter a $63 million increase in the GAAP LIBOR reserve based on our actuarial models. Well, actuarial and policy holder experience true up had added an additional 5 million of reserve increase.
We said that we thought expected plus or minus 10 million would seem reasonable. So, the fourth quarter 2020 was a little bit above that range.
There were pluses and minuses in the fourth quarter with the biggest differences due to a $6 million increase from lower than expected decrements on policies with lifetime income benefit riders and a $10 million increase as a result of lower caps and part rates due to renewal rate changes in policies having anniversary dates during the quarter. We will continue to experience the impact from a renewal rate changes made in the second quarter of 2020 in the first and second quarters of this year. Differed acquisition cost and differed sales inducement amortization totaled a $113 million, $16 million less than modeled expectations.
The biggest items driving the positive experience were lower than modeled interest and surrender margins, lower than expected utilization of lifetime income benefit riders and the second quarter of 2020 renewal rate changes I spoke about previously.
The benefit on the combined deferred acquisition cost and differed sales inducement amortization from the second quarter 2020 renewal rate changes was $10 million effectively offsetting the negative effect on the lifetime income benefit rider reserve.
Other operating cost and expenses increased to $55 million from $43 million in the third quarter. Notable items not likely to reoccur in the first quarter of 2021 primarily advisory fees related to the unsolicited offer for the company in September totaled approximately $3 million with much of the remaining increase associated with the implementation of AEL 2.0.
Post-closing of the announced reinsurance transactions with Varde, Agam and Brookfield and the creation of the affiliated reinsurance platform, we would expect the level of other operating cost and expenses to fall in the mid-to-high $40 million range.
We expect to complete the execution of the already announced accelerated share repurchase program in the first quarter. Based on current estimates, we expect an additional 520,000 shares to be delivered to us in addition to the initial 3.5 million shares delivered at the initiation.
Combined with the 1.9 million shares we repurchased in the open market prior to the initiation of the ASR program, we will have effectively reduced the share dilution resulting from the November 30 initial equity investment of 9.1 million shares from Brookfield Asset Management by approximately 2/3rds.
The risk based capital ratio for American Equity Life was 372% slapped with year-end 2019. Total debt to total capitalization excluding accumulated other comprehensive income was 12.2% compared to 17.7% at year-end 2019.
At year-end, cash in short-term investments at the holding company totaled $484 million. We expect to have over $300 million of cash at the holding company even after buying back additional shares after completion of the existing ASR to fully offset Brookfield issuance related dilution.
We are strongly capitalized as we look to execute AEL 2.0 with ample liquidity at the holding company. Low leverage ratio relative to our industry peers and robust capitalization at the Life Company.
Now, I'll turn the call over to the operator to begin Q&A.
Thank you. [Operator Instructions] Our first question will come from the line of Ryan Krueger from KBW. You may begin.
Hi, good morning. I have a question on the ROE outlook. I think last quarter you talked about an 11% to 14% intermediate term and below or end of that being likely in 2021.
Given the assets liquidity and some of the elevated expenses in 2021, I guess is the reason while we think that you probably come in below the 11% to 14% this year but then migrate back, back into it in 2022 once some of the reinsurance transactions are complete.
Hi Ryan, this is Ted. Yes, based upon the liquidity that we're holding right now I would expect is probably will come in a lower than the low end of that.
Now, obviously the determining fact off of where that ends up is going to be depending on whether or not in this part one on the timing of when the reinsurance transactions are executed and whether or not we invest any of that liquidity into securities prior to the execution.
Yes, Ryan. I just have one thing, hi good morning, to what Ted already said which is spot on. Is that we reel in 2021 or at least the first few quarters of it as a reset year. So, with focusing on '22 is probably the right way to think of matrix for us.
Thanks. And then separately, do you I guess my guess have not been a focused product in the past for -- yes, it seems like they are more borne now. I guess generally going forward, would you expect some of the more balanced mix between mig and FIA sales going forward.
I can take that and then Jim can add in. The mig is where our single premium deferred annuities were a good way for us to reintroduce into the market. We think that's compelling its price to our pricing return.
We are focused on fixed index annuities and you would see the rest of they are really focusing on the fixed index annuity side. Now, given the pending numbers I gave earlier, you can see we're pretty robust in the first quarter as well.
But second quarter onwards you'd probably see us pivoting much more to a fixed index annuity, there's new product introductions come to market like AssetShield.
Got it. Thank you.
[Operator Instructions] Our next question will come from the line of Pablo Singzon from JPMorgan.
Hi, good morning. Hi. My first question is and thinking about the next several years, how much of your portfolio do you intent to allocate to alpha generating assets. I think you know most insurance that all be somewhere between 3% to 5% in an [indiscernible.]
Is you're thinking that you'll end up with a similar allocation longer term?
Hi Pablo, good morning, it's Anant. I think the definition of alpha generating is very important in this case. We believe yes we are in the markets right now and this is informed by leading partners as well.
Actually allocating to traditional private equity hedge funds publicly traded equities is more risky. And so, our allocation there is basically zero, or near to zero. So, the definition of alpha generating from our point-of-view is stable cash flow like traditional fixed income investing but in private markets.
Hence middle market credit for example is an alpha generating. It’s not equity. This broader definition of alpha generating there is basically anything that is not queue set in public markets.
Because anything that is queue set in public markets is grinding towards in a world of excess supply, excess demand for bonds is driving towards very low yields.
So, if you look at private credit, real-estate with contractual cash flows or infrastructure debt, all those are always going to have the flavor of a more traditional fixed asset which may have a residual equity sleeve as you structure it for capital efficiency.
That's one important point. As we think of that will probably put around 5% to 10% of the portfolio and it progressively each year and ultimately the target asset allocation, these private assets would be between 20% to 30% of the portfolio.
Understood, thanks Anant. And then the follow-up question I had is just regarding your ROE aspirations broader than the team's longer term. I know surely these but I was wondering if it's possible to give us a rough indication of how much of that expansion will be driven by higher earnings low versus the lower capital days whether through buybacks or leaning to third party capital, thanks.
I'll start, the others can chime in. I think probably bring up a very important point. They're few drivers of a high ROE overtime. First of all, one thing that we're very proud of this year which may go unnoticed is that the asset leverage of our business has gone down meaningfully.
If you do the math in page 9 and page 1 of the supplement, you'll see that asset leverage is going down on the GAAP basis from like 18 times to 12.5 times. So, it's actually applying to alpha assets which create greater earnings.
So, primary driver will be earnings and I would say that three drivers of that ROE expansion. First, alpha asset investment income growing. Second, fee income that's non-equity related because its fee income from like the asset management ventures or reinsurance growing.
So, those are two on the numerator of ROE. And then finally, equity will go down as we redeploy more of that cash earnings back in our ongoing share repurchase programs or capital return programs like the outlined.
Those items grow the numerator, one item reduces the denominator as we return cash to shareholders.
Okay. Thanks, Anant.
Thank you. Our next question comes from the line of Randy Binner from B. Riley. You may begin.
Hi, it's Randy Binner. So, I have a question just not the pending counts you mentioned currently on the call. I think it was kind of running something like 3500 at AEL and like about 1200 for Eagle Life. Are those the numbers generally for pending?
Yes, it's this morning, Randy. Hi, Happy New Year and nice to hear your voice again. That this morning --.
Hi.
Hi. I would expect that as we pivot from SPDA to more FIA, sorry if everyone [indiscernible]. If you will, it’s somewhat fixed in that annuities, that pending will probably trend down a little bit. It's at a high point is probably the way I put it.
Yes. So, that's I just wanted to confirm those numbers, so they would be the highest in history. I guess I'm curious just kind of can you characterize a little bit more where you're sitting kind of from a market competition perspective to get those numbers.
And just confirm that from an operational perspective. You're absorbing all that volume well. Just kind of curious how the sales and operations organization is dealing with that kind of flow.
It's a great question, it's nuancing on the point. It allowed us to actually understand our operations capabilities the strength. If you recall what the fourth pillar of our foundational capabilities of our strategy was foundational capability.
And it's been a great test kit for us to realize how be the operations. It's doing great. Do you get pushed? It did. It'll make us realize where will you make investments in our business, three year, two years from now, yes.
So, we will be bolstering what we do in operations but it's done well, it's held up well to answer your question. And it's been a great test kit for us to see both how we reengage with the market, bring in new producer, Eagle hits new highs and it's obviously the rate.
So that we can actually do which very few companies do. Dominate two channels, and then figure out other avenues for growth.
And then just can you characterize kind of where you're fitting in versus other competitors in the market. You obviously were very competitive at the end of last year. Can you give us any color of kind of where you're fitting in against key competitors so far in 2021?
We probably fit in to in the first core tile is the way to think about it. It'll be probably within the first half by the end of this year, at the end of this quarter. We're going to take some rate action on the SPDA side.
We have this accumulation product coming out you know this early next week actually launches Monday. So, we're gone from first core tile to middle of the pack by the end of the quarter. We're still pricing to meet a in a turn and we got the assets on the balance sheet and the returns on the balance sheet to make that work.
So, as long as your asset returns the mid threes, we're meeting a product price in return hurdles which are like in the 10% area unlevered. Now to assume Jim then. But that if you have any more questions, I'm sure Jim can add in.
I'll leave it there on the product side. Thanks so much for the answers.
Thank you, Randy.
Your next question comes from the line of Erik Bass from Autonomous Research. You may begin.
Hi, good morning. Thank you. Anant, your comments on focusing on 2022 I think make a lot of sense given all the moving keys is the near term. Is your expectation that you'll be a call it normalized level of cash and expenses by the end of 2021.
And then probably also executed some meaningful capital management by that time so that you'll enter '22 more of a normal run rate for earnings?
Hi Erik. Yes. You got it spot on right.
Great and then you also commented obviously part of the longer term strategy is to increase the level of the fee income for AEL and we've got good line of sight into the seating commissions you'll be getting from Brookfield but can you help us think about maybe the initial level of the income you expect from Varde and Agam in the asset management partnerships you've announced and how you see that building over time?
It's a fair question. I'd probably sequence it this way early to give you any exact views on that other than the fact that like the answer is giving Pablo earlier about ROE improvement over time right and how earnings change. The first driver of earnings growth will be actual spread income on Alpha assets because of higher yield. So sustaining 4 and growing from 4% yields that's one.
The second part will be actually constantly returning capital to shareholders from the earnings that are cash generated and some of the capital that's freed up which will then impact the denominator of all these calculations.
And then, the third part of it will be the ramping up of fee income as you mentioned reinsurance fee income will be greater than asset management fee income as it takes time to ramp it up so like in the case of a Brookfield transaction you can see we have 90 basis points between ALM fees and insurance fees. Those kind of transactions like we did with Brookfield obviously are more substantial you get 90 basis points of assets transfers and then when we do asset management deals I think it is fair to say you should expect us to earn from that asset management stream which is the third driver here around double-digit basis points on other people's money as we make insurance capital efficient products available for them and grow that.
So that's a slower ramp. I think that's a multi-year ramp, but it's a demonstrable ramp with these differentiated asset classes. Let me pause there because that was a mouthful. Does those three drivers make sense and then sort of my sequencing it out and if not I'm happy to add on to it because I didn't do about throw a mouthful there.
No. I think that makes sense. It's the one to clarify on the asset management deal you talked about earning double digit basis points on other people's money. So to clarify does that mean you're not earning any investment fee on the capital you're putting in, but it's if the platform grows and takes on other kind of third party money then that's where you're going to fee income?
No. It's a great question. I'm glad you have to clarify. We make it on our own too but that's all you could look at returns on a gross or net basis so yes we earn rev share or we earn economics in the ventures on our own money too but it really is additive to us. If I go through the construct because it comes with high yield net of fees in the first driver. You return capital the second driver but when you have other people's assets which was not in AEL 1.0 now you have third-party assets and we're making fees on that I think that's additive.
Got it. That's helpful and I can just sneak in one other. I think the Pretium acquisition is done in the general account is that where you expect most of the asset management partners to sit or would you hold any of them at the holding company so you don't have to kind of go through a dividend process to get fee income out?
We'll probably do more of the latter and we don't have to own equity in all the partnerships. The Pretium partnership and the [Adam Street] partnership which we haven't talked too much in great deal about are very different constructs. One's an equity investment the Pretium one, the [Adam Street] one is building something together maybe equity in the future but right now it’s more P&L l oriented. So that does not need equity. We expect the blueprint to be that we're not really making that many equity investments only. A lot of them are going to be forms of revenue shares or P&L sharing arrangements.
Got it. Thank you. Appreciate the comments.
And our own next question come from the line of Wilma Burdis from Credit Susie. You may begin.
Hi, good morning. Do you still feel comfortable with targeted capital return of 250 million to 300 million in 2021 and I think that was above the buybacks required to offset the Brookfield deal?
Yes. Hi Wilma, good morning.
Hey good morning.
I mean Wilma, with the reinsurance transactions that we're executing and along with where we want to hold capital and remember in normal times we wouldn't want to hold capital around a 400% RBC or an excess of that. So when we look at that and the reinsurance transactions certainly we believe that this year potentially we should be able to return that 250 to 300 above of the buybacks and then as we go forward and as Anant talked about the creation of the AEL 2.0 model and the fee revenue generation, etc. we believe that's going to increase our cash generation profile to be able to hit those targets as we go forward.
Yes. If you think of it the cash we have the holding company is plentiful for us to offset the Brookfield valuation as well as meet the target we had for the year. So we only have the cash we need to put to work.
Got it. That makes sense. And then could you guys talk about the expected AEL 2.0 implementation cost especially in 2021? I mean, I know the costs were a little bit higher in 4Q. Just if you could give us maybe some idea what it would look like this year?
On the nature of the cost I mean the nature of the cost or _
No. The level. The outlook for 2021.
Certainly as we go through 2021 here we're going to see potentially elevated expenses. We were at 55 million of operating expenses. What we indicated is on a go forward basis post the transactions we probably would be somewhere in that mid 40s range, the high 40s range but I would say we're going to see expenses we called out 3 million in this quarter. So you're still in the low 50s for operating expenses as we go forward through 2021, which really represents additional expenses that we're incurring for advisory fees related to the transactions and the other work that's been doing.
Now the other part when we talk about run rate the reason why the run rate we're quoting that 45 or higher 40s is certainly staffing and creating the infrastructure for AEL 2.0 is different than what was there for AEL 1.0, but we have factored that into our modeling and our expense structure when we're quoting what ROEs we think we're going to be able to hit in the future.
Got it and then if there's just one more could you just provide any outlook for kind of 2021/2022 sales? I know the sales were very strong in the fourth quarter just and you talked about some of the trends for this early this year but just any thoughts on the outlook?
Well historically, we don't give any outlook on sales but beyond quoting the pending numbers that we currently have and I think Anant touched on those pending numbers and also talked about potentially how we would over the year move away from maybe to higher levels of sales to SPDA multi-year products to more of the fixed indexed annuity products.
Got it. Thank you.
And our next question will come from the line of Mark Hughes from Truist. You may begin.
Yes. Can you hear me?
Yes Mark we can hear you.
On the independent agent channel can you talk about how they are operating with still presumably some COVID related restrictions? What you might say capacity utilization on that channel just in general? Are they back up and going or still at reduced capacity?
Hi Mark its Anant. The channel is fairly active. I mean we've all adapted to this new way of working which is largely remote. We're not actively in the market face-to-face we're putting help first in that point of view in that channel but it's functional. It's doing well. It's easier to sell SPDA also as a product when you don't have face-to-face interaction with a client when you're not doing the way they go to market a lot of them have seminars, dinners but I would say the channel activity is good.
The IMO partners are helping the producers of the agents figure out how to sell and more importantly I think the kind of products we have with the product refresh we are launching income shield for example got refreshed that's doing well and actually income shield is one of the products that's reinsured to Brookfield so it's good we've got that working well. AssetShield with the revamp will make it a very simple compelling composition where flying for accumulation can grow that then we have some additional product ideas in mind working with distribution that we think are going to pivot things forward, but no one knows what the new normal is working but it's working fine.
On future deals, you've got the other asset managers or potential reinsurance deals is there anything unique about these transactions that contributes to the cash drag? The future deals also have kind of periods where you've got this buildup of capital?
Related to the cash drag the asset managers those are not those transactions aren't going to create cash drag for us. The cash drag is much more related to reinsurance transactions and if we would do another reinsurance transaction outside of the ones we said and it wasn't a transfer of securities or it was a transfer of cash yes we could see cash built up but really our current cash that we have on the balance sheet is specifically related to the couple reinsurance transactions that we're currently working on.
Yes and I just add in Mark is that we feel very good about actually the strengthening of the balance sheet as we did in the, which we did last year and the fact that the asset leverage is down, financial leverage is down from 17.7% to 12.2% asset averages down from 18 times around 12 times, 12 to 13 times and so the cash drag is actually a part of implementing a new business model that's actually less risky and with the balance sheet being strong and capitalizations being at the highest levels in our history and staying in those levels as on a go forward basis allows us to execute.
So we really do the cash impacts of holding liquidity to being a transitionary nature related to the two insurance transactions because we are transforming 20 of the balance sheet with these reinsurance transactions and the rest of the balance sheet moving to where they're going. Having de-risked out of it's good to be smart if you can be smart and lucky we'll take it and I think our timing was really good. The team did a good job. Jeff, Jim -- on de-risking some of the structured securities and frankly it's better because it worked out. It's the part of being lucky. Rates are up 40 basis points in the last one month.
So it's actually been good to be in cash but it will be a short term impact on results and we expect first quarter to be impacted by that because we have more cash in first quarter than we had on average in the fourth quarter. Another long answer to a very simple question. I apologize for that but happy to take any further follow up on it.
Thank you.
Next question comes from the line of John Barnidge from Piper Sandler. You may begin.
Thank you and good morning. AEL. Apologies if I missed it in your prepared remarks but what was the yield on securities purchased during the quarter?
Hi, Mark its Ted. I said those in my remarks. The average yield on investments acquired this quarter was 446 gross of fees. Now it's compared to, was compared to 359 last quarter.
Thank you very much and then maybe as part of AEL 2.0 have you looked into building maybe like a third-party claims and policy administration platform that could generate additional servicing revenue?
You hang out in our strategy sessions.
No. I guess I am asking the right questions though.
You're asking exactly the right questions. I think it's an element of that foundational capability pillar the fourth pillar of, this year we are really focused on investment management and capital structure and you're spot on right, but it's too early to talk about that fourth pillar and what that could be but as I said I think you hang out in our strategy sessions. So jokes apart. That's a stretch it's doable but it'll require some more investments. That's not reflected in anything we've shared with you it's sort of upside over the long term.
You certainly recognize that there's an opportunity in the marketplace out there to do that but it's an onset that's not on our near term plan but certainly it is something we are looking at long term.
Great. Thank you for your answers and best of luck.
Thank you and our last question will be from Pablo Singzon from JPMorgan. You may begin.
Hi, thanks for checking my follow-up. So Anant and Ted I just wanted to follow up under capital deployment comments but to your point if you consider the next maybe two to three years your capital appointment is already covered by the insurance transactions and available capital in the balance sheet.
At what point though would you need to start allowing more earnings to support capital deployment and I guess to relate to that how should we think about the context of operating needs to support fields and buybacks and the context of that question is that I think in the past most of the capital was used to fund sales. Thanks.
Hi Pablo happy to take to follow on. Yes so your spot on right. We expect to free up capital. If I go back to my the three building blocks that I started our articulatory earlier question earnings will go up as investment income goes up with Alpha assets being a greater portion of the investment portfolio. If it goes up from 10% this year to 15% to 20% next year 25% to 30% the following year that's how earnings will grow. Those earnings including our reinsurance platform that's created so that in our a lot of those earnings are coming out of the reinsurance platform will be able to be returned to shareholders as will capital freed up as we'll then fee income from investment management partnerships or transactions that we talk about but it will be, we will not need capital to fund growth. We will be more than self-sufficient to fund growth.
The devil will be in the details as we work through all the execution but I think the priority order that I just gave you with the existing capital we free up that goes back to shareholders and then with the growth of the earnings that sustainable earnings including out of the reinsurance platform and the investment management partnerships will be free cash flow up to shareholders.
Thanks Anant.
Thank you. I'm not showing any further questions. I'd like to turn the call back over to the speakers for any closing remarks.
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Ladies and gentlemen, this concludes today’s conference call. Thank you for your participating.